Two recent decisions confirmed the broad administrative summons authority of the Internal Revenue Service (IRS). In the first, the US Supreme Court resolved a circuit conflict regarding notice requirements for third-party IRS summonses. In the second, the US Court of Appeals for the Third Circuit confirmed the primacy of the Internal Revenue Code (IRC) over state law insurance and privacy laws.

Polselli v. Internal Revenue Service[1]

Mr. Polselli owed over $2 million to the IRS, was not forthcoming with payment and, moreover, appeared to be hiding assets with accommodating parties. The IRS assigned a revenue officer to track down where his assets might be. The investigation pointed to several potential repositories of relevant financial information, including a law firm, the taxpayer’s wife and a company through which Mr. Polselli had made one tax payment of $300,000. The officer issued summonses under the authority of IRC section 7602 to three banks where the law firm, the wife and the company had accounts. The officer did not give notice to any of the third parties prior to issuing the summons. After learning of the summonses from the banks, the third parties moved to quash.

The precise question was whether the third parties were entitled to notice under IRC section 7609(a)(1) and thereby had standing to move to quash the summonses or whether the exception to the notice requirement under IRC section 7609(c)(2)(D)(i), where a summons is “issued in aid of the collection of an assessment made [against the delinquent taxpayer],” applied, thus resulting in lack of standing and ultimately lack of jurisdiction. The petitioners relied upon a Ninth Circuit decision that narrowed the scope of the IRC section 7609(c)(2)(D)(i) exception to those circumstances where the delinquent taxpayer had proprietary interest in the information sought by the summons. The Sixth, Seventh and Tenth Circuits found no such limitation on the exception in part because the statute did not contain one.

The Supreme Court unanimously rejected the Ninth Circuit’s application of IRC section 77609(c)(2)(D)(i) and found the petitioners had no standing to quash. At the risk of oversimplification, the Supreme Court opened the American Heritage Dictionary of 1969, looked up the word “aid” and determined, consistent with other relevant parts of the statute, that Congress intended to use the ordinary meaning of the word “aid,” i.e., help or assist. Was the effort to locate the taxpayer’s financial connections and maneuvers through the petitioners’ bank records intended to “help” in the goal of collecting the $2 million? Yes. Implicit in this conclusion is a requirement that there is some evidence that third parties have a financial connection with the taxpayer, as opposed to the IRS randomly picking bank accounts. However, the Court declined to opine on any such requirement as that question was not specifically argued. It did note the Government’s admission that some financial connection must exist to establish “aid” in the collection of the assessment.

United States v. State of Delaware Dept. of Insurance [2]

This case centers on the intersection [...]

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