Posted by: Robert Horwitz | May 3, 2021

Taxpayer’s Can’t File Petitions to Quash IRS Criminal Investigations Summonses to Third PartiesBY: ROBERT HORWITZ and TENZING TUNDEN

Richard and Kimberly Gaetano owned marijuana dispensaries.  After a falling out with their legal advisor/business partner, he apparently ratted them out to IRS Criminal Investigations (“CI”).  In 2017, they sued to bar CI from discussing attorney-client matters with their former legal advisor.  That case was dismissed. Gaetano v United States, 942 F.3d 727 (6th Cir. 2019). 

While that case was pending before the Sixth Circuit, the Gaetanos filed a petition to quash a summons issued by a CI Special Agent to a company, Portal 42, that made point of sale software featuring the capacity for businesses to track customer sales data or delete the data remotely with a “kill switch.”  They asserted the summons was issued in “bad faith.”  The Government moved to dismiss for lack of standing but in reply to the Gaetanos’ opposition it argued that the court lacked subject matter jurisdiction.  The magistrate judge recommended that the case be dismissed for lack of standing and that the summons be enforced.  The district court ordered that the case be dismissed for lack of jurisdiction but did not enforce the summons because it lacked jurisdiction and because Portal 42 had already complied.  The Sixth Circuit Court of Appeals affirmed. Gaetano v U.S. 2021 WL 1326825 (6th Cir. 2021). 

Before we get to a discussion of the Sixth Circuit’s reasoning, a brief overview of third-party summonses.  One of the investigative tools that the Government has for, among other things, “ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax” and “inquiring into any offense connected with the administration or enforcement of the internal revenue laws” is the administrative summons.  Internal Revenue Code (“IRC”) §7602(a), (b).  That section authorizes the IRS to:

(1) Examine any books, papers, records or other data which may be relevant or material to such inquiry;

(2) To summon the person liable for tax or required to perform the act, or any officer or employee of such person, or any person having possession, care, custody of books of accounts containing entries relating to the business of the taxpayer to give testimony  under oath or produce books, papers, records, or other data; and

(3) To take testimony of the person concerned, under oath, as may be relevant or material to such inquiry.

There are special procedures for summonses served on third parties.  IRC §7609(a)(1) provides that when an IRS summons is served on a third party requiring production of records, “any person (other than the person summoned) who is identified in the summons” is entitled to notice of the summons.   A person entitled to notice can intervene in any proceeding to enforce the summons and may file a petition to quash the summons.  §7609(b)(1), (2).

IRC §7609(c)(2) contains several exceptions to the notice and petition to quash provisions of §7609, including a summons by an IRS criminal investigator in connection with the investigation of an offense connected with the administration or enforcement of the revenue laws and served on someone who is not a “third-party recordkeeper” as defined in IRC §7603(b).  IRC §7609(c)(2)(E).

The summons issued to Portal 42 sought records for the period January 1, 2015 to September 1, 2019.  The Gaetanos petition alleged that the summons was issued in bad faith and that the IRS should have notified them about the summons.  The government moved to dismiss for lack of standing and attached a declaration of the special agent who stated that he was conducting a criminal investigation to determine if the Gaetanos understated their tax liability in violation of the IRC and that the summoned records were relevant and necessary to the investigation. 

In their opposition to the motion, the Gaetanos conceded that Portal 42 was not a “third-party recordkeeper” as defined in §7603(b) but argued that the summons was issued in bad faith because the special agent did not state the tax years being investigated and there could be no criminal investigation for 2019 because when the summons was issued the 2019 return was yet due.  In its reply, the Government argued that §7609(c)(2)(E) is an exception to the United States’ waiver of sovereign immunity for petitions to quash, that the special agent was an IRS criminal investigator and Portal 42 was not a third-party recordkeeper.  It also filed a supplemental declaration of the special agent, who testified that he was investigating income and employment tax returns for 2015 through 2018 and quarterly filings for 2019.  

The Sixth Circuit first addressed the issue of subject matter jurisdiction.  The Government cannot be sued unless there is an express statutory waiver of sovereign immunity.  If sovereign immunity is not waived, the courts lack subject matter jurisdiction over the proceeding. 

IRC §7609(h) vests district courts with jurisdiction over actions to quash summonses for which notice is required under IRC §7609(a).  The question confronting the Sixth Circuit was whether the exceptions contained in IRC §7609(c)(2) were limitations on standing or exceptions to the waiver of sovereign immunity.  The Ninth Circuit has held that an exception in §7609(c)(2) meant the plaintiff lacked statutory standing, Viewtech, Inc. v. United States, 653 F.3d 1102 (9th Cir. 2011), while other courts have held that a §7609(c)(2) exception deprives the court of subject matter jurisdiction, since there has been no waiver of sovereign immunity.  Haber v. United States, 823 F.3d 746 (2nd Cir. 2016). 

Note: In Viewtech, Inc., the Government moved to dismiss solely on the ground that the petitioner lacked standing while in Haber, the Government moved to dismiss solely on the ground that sovereign immunity had not been waived and, therefore, the court lacked subject matter jurisdiction.

Why is this question important?  The Sixth Circuit explained: first, statutory standing is not jurisdictional, so it would not implicate the court’s power to adjudicate the case.  While one person may lack standing to bring an action, there may be someone else who can bring a valid action.  If it is jurisdictional, then a valid action could not be brought.

Second, sovereign immunity cannot be waived by an attorney or agent of the Government, can be raised at any stage of the proceedings and can even be the basis for a collateral attack on a judgment.  Thus, if the exception was a limitation on standing, rather than on jurisdiction, and the Government did not raise it early in the proceeding, it could be deemed waived and the court would have the power to address the question of whether the summons was issued in bad faith.

Because the language of §7609(c)(2) was similar to the language in other statutes where the Supreme Court held that an exception was a limitation on the waiver of the United States’ sovereign immunity, the Sixth Circuit held the exceptions in 7609(c)(2) were jurisdictional.

The Sixth Circuit then turned to who had the burden of proving that the exception applied.  Since the Gaetanos’ petition did not, on its face, show that an exception applied, the burden was on the Government to prove that an exception applied.  The summons was issued by IRS CI and the special agent’s declaration established that he was a criminal investigator with CI and that he was investigating offenses connected to the administration and enforcement of the internal revenue laws.  Thus, the exception in IRC §7609(c)(2)(E) applied. 

Next up was the Gaetanos’ assertion that the summons could not have been issued “in connection with a criminal investigation” because the “periods” listed on the summons were January 1, 2015 to September 1, 2019 and there is no period ending September 1, 2019.  There is nothing in the statute that requires the summons to identify the tax periods under investigation, the special agent’s declaration stated what periods he was investigating, and as the Supreme Court pointed out in United States v. Powell, 379 U.S. 48 (1964), the elements needed to enforce a summons are normally established by affidavit.  More importantly, the Gaetanos’ argument went to the merits of the case.  Given the lack of subject matter jurisdiction, whether the summons was issued in bad faith was something that a court could not decide.  

The discussion of whether the exceptions contained in 7609(c)(2) are limits on standing or subject matter jurisdiction may seem esoteric.  It is nonetheless an important issue in tax procedure since it goes to the question of the court’s power to rule on the merits of a case.  Traditionally, the federal courts had interpreted rules relating to waivers of the United States’ sovereign immunity, including deadlines, as being jurisdictional.  Recent Supreme Court jurisprudence requires that for a statutory condition to be jurisdictional, it must be clearly stated in the statute.  Irwin v. Dep’t of Veteran’s Affairs, 498 U.S. 89 (1990); United States v. Kwai Fun Wong, 575 U.S. 402 (2015).  Presently pending before the Supreme Court are several certiorari petitions raising the issue of whether the 90-day period for filing a petition with the United States Tax Court is jurisdictional.  See Organic Cannabis Foundation v. Commissioner, Supreme Court Docket No. 20-1014.  If it is not jurisdictional, it would mean the time period for filing a Tax Court petition would be subject to equitable tolling.

NOTE:  Even though there is a split in the Circuits on whether the exceptions contained in IRC §7609(c)(2) are limitations to standing or to the waiver of sovereign immunity, Gaetano is unlikely to be the type of case in which the Supreme Court would grant certiorari, since a decision by the Supreme Court that IRC §7609(c)(2) limits standing would not change the result: either way, the Gaetanos’ petition to quash would be dismissed.

Robert S. Horwitz is a Principal at Hochman Salkin Toscher & Perez P.C., former Chair of the Taxation Section, California Lawyers’ Association, a Fellow of the American College of Tax Counsel, a former Assistant United States Attorney and a former Trial Attorney, United States Department of Justice Tax Division.  He represents clients throughout the United States and elsewhere involving federal and state administrative civil tax disputes and tax litigation as well as defending criminal tax investigations and prosecutions. Additional information is available at http://www.taxlitigator.com.

Tenzing Tunden is a Tax Associate at Hochman Salkin Toscher Perez P.C.


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