Thursday, May 1, 2014

What Does Shall Mean? Herein of Slippery Mandatory Language and Summons Enforcement (5/1/14)

In Jewell v. United States, 2014 U.S. App. LEXIS 7899 (10th Cir. 2014), here, the Court held that shall means shall.  So stated, not a surprising holding.  The context -- ah yes, context is important -- was the statutory textual requirement in Section 7609(a)(1), here, that the taxpayer being investigated "shall be given" notice of the summons "within 3 days of the day on which such service is made, but no later than the 23rd day before the day fixed in the summons as the day upon which such records are to be examined."  Now for further background.

The summons authority is in Section 7602, here.  Section 7609 is titled "Special procedures for third-party summonses."  The critical "shall" is in Section 7609(a)(1).

Summonses generally must meet the four part Powell test established in United States v. Powell, 379 U.S. 48 (1964), here (brackets added to highlight the four parts]:
[i] that the investigation will be conducted pursuant to a legitimate purpose, [ii] that the inquiry may be relevant to the purpose, [iii] that the information sought is not already within the Commissioner's possession, and [iv] that the administrative steps required by the Code have been followed * * * .
The issue in Jewell was whether, given the command of the Section 7609(a)(1) that notice "shall be given," the IRS's failure to give Jewell notice in the time period required prevents the IRS from having issued a valid summons and therefore prevents the IRS from petitioning the district court to enforce the summons.

Essentially, the Court held that shall means shall and denied enforcement of the petition.  And, to complete the reasoning, the Court said that the giving of timely notice was an administrative step required by Powell.

The Court engages in a lawyerly discussion over the meaning of shall.  When is the use of shall mandatory or simply precatory, a guide but not a straightjacket?  The court discusses the contrary authority in other circuits where a no harm no foul approach was adopted -- i.e., the summons would be enforced unless the taxpayer shows prejudice (or perhaps the IRS shows lack of prejudice), so that the requirement was merely a technicality that can be dispensed with or ignored.  Not so, says the Court.  The use of shall, properly and plainly interpreted, established an administrative step that Powell requires to be met.

Consider the implications.  One that comes readily to mind is the use of shall in statutory requirements for a notice of deficiency.  For example, uncodified Section 3463 of the Internal Revenue Restructuring and Reform Act of 1998 ("Act") states that the IRS "shall include on each notice of deficiency . . . the date determined by [the IRS] as the last day on which the taxpayer may file a petition with the Tax Court." Courts have not invalidate the notice of deficiency for failure to meet this "shall" requirement. A number of cases have so held, and the Tax Court made this holding less than a year ago.  John C. Hom & Assocs. v. Comm'r, 2013 U.S. Tax Ct. LEXIS 12 (T.C. 2013), here. Here is the Tax Court's reasoning:
Although the adequacy of the content of a notice of deficiency has frequently been litigated, courts have held repeatedly that a notice of deficiency is valid if it notifies the taxpayer that a deficiency has been determined and gives the taxpayer the opportunity to petition this Court for redetermination of the proposed deficiency. See Frieling v. Commissioner, 81 T.C. 42, 53 (1983); Perlmutter v. Commissioner, 44 T.C. 382 (1965), aff'd, 373 F.2d 45 (10th Cir. 1967). A notice is invalid for this purpose only where the notice discloses on its face that there has been no determination. See Clapp v. Commissioner, 875 F.2d 1396, 1400 (9th Cir. 1989) (distinguishing Scar v. Commissioner, 814 F.2d 1363 (9th Cir. 1987), rev'g 81 T.C. 855 (1983)). Mistakes in a notice will not invalidate it if there is no prejudice to the taxpayer. Elings v. Commissioner, 324 F.3d 1110 (9th Cir. 2003). 
In Smith v. Commissioner, 114 T.C. 489, 491 (2000), aff'd, 275 F.3d 912 (10th Cir. 2001), we addressed whether the failure to include in the notice the date a petition was due invalidated the notice. The requirement to include the last day to file the petition was also added by RRA 98 sec. 3463, 112 Stat. at 767, and is stated as follows: "The Secretary of the Treasury or the Secretary's delegate shall include on each notice of deficiency under section 6212 of the Internal Revenue Code of 1986 the date determined by such Secretary (or delegate) as the last day on which the taxpayer may file a petition with the Tax Court." 
Here, as in Smith, section 6212 does not specify that a notice sent without the specified information is invalid. As in Smith, there was no prejudice shown by petitioner. The information described in section 6212(a) was made available to the addressee of the notice, although in a manner that may not be sufficient for a taxpayer without access to a computer or knowledge of how to access a Web site. The notice, however, was not misleading, and petitioner was able to file, and did file, a timely petition. 
The Court of Appeals for the Ninth Circuit reached the same result in Elings v. Commissioner, 324 F.3d at 1112-1113, explaining: 
In other contexts, the Supreme Court and this court have held that, when Congress fails to specify a consequence for an agency's failure to follow mandatory requirements, the failure does not render the agency's action ineffectual. n14 Obedient to this instruction, we conclude that the IRS's failure to include the calculated date does not invalidate the notice.
 n14 See United States v. James Daniel Good Real Prop., 510 U.S. 43, 63-65, 114 S.Ct. 492, 126 L.Ed.2nd 490 (1993); Brock v. Pierce County, 476 U.S. 253, 258-62, 106 S.Ct. 1834, 90 L.Ed.2d 248 (1986) (holding, when addressing an agency's mandatory duty to act within a certain time period, that "courts should not assume that Congress intended the agency to lose its power to act" for failure to follow even mandatory statutory requirements when Congress has not so stated); see also Intercontinental Travel Mktg. v. FDIC, 45 F.3d 1278, 1284-85 (9th Cir. 1994) (concluding that FDIC's failure to comply with mandatory statutory requirement of mailing a notice, when the failure was merely negligent, did not justify precluding the agency from further action).
The minor and technical nature of the error and the lack of prejudice in this case further supports our conclusion. Non-prejudicial minor or technical errors in a notice do not invalidate the notice. Major errors, such as those that show the IRS failed to comply with the most fundamental statutory mandate, can invalidate a notice. However, these errors are quite rare. The failure to include the calculated date, when notice was dated and instructed Elings that he had ninety days in which to file his petition, was a non-prejudicial minor or technical error. Therefore, the error did not invalidate the notice. [Additional fn. refs. omitted.] 
The Court of Appeals for the Ninth Circuit specifically agreed with the analysis by the Court of Appeals for the Tenth Circuit in affirming Smith v. Commissioner, 275 F.3d 912, and with the Court of Appeals for the Fifth Circuit reaching the same result in Rochelle v. Commissioner, 293 F.3d 740 (5th Cir. 2002), aff'g 116 T.C. 356, 362-363 (2001). 
The rationale of Smith and Elings applies at least as much to this case. There was no prejudice to petitioner. Petitioner does not allege that any attempt to contact the local office of the National Taxpayer Advocate was made. Moreover, it is apparent from the record that petitioner's officer and shareholder is adept at Internet research and could easily have accessed the Web site to locate the appropriate local office of the National Taxpayer Advocate. We conclude that the notice of deficiency was valid.
More commonly encountered is the requirement in Section 6212(a) & (b), here, that the notice of deficiency be sent to the taxpayer's last known address.  The word "shall" is not used, but certainly implied.  And, of course, since actual receipt by the taxpayer is not required, the requirement to send to the last known address is important to access to the Tax Court, thereby assuring a prepayment remedy.  Notwithstanding the importance to the system that the IRS get this right, the courts adopt a no harm, no foul rule.  If the taxpayer actually receives the notice of deficiency in time sufficient to permit the orderly filing of a petition to the Tax Court, the could will not invalidate the notice of deficiency.  See e.g., Kuykendall v. Commissioner, 129 T.C. 77 (2007).

As noted by the Tenth Circuit, specifically, in the context of summons enforcement, the holding that shall means shall is not mainstream.

Back to summonses, the Supreme Court already has a summons enforcement case, United States v. Clarke.  See Scotus Blog here. I am not sure that it will have an appetite at this time for a second case in the near future.  So, I would not expect the Government to petition for certiorari.

There are other contexts in which this split in the Circuits over the meaning of shall could arise.  Of course shall is a confusing word.  See Bryan Garner on Words, Shall We Abandon Shall? (ABAJournal 8/12), here.  The short form version of his musings on "shall" is in Bryan Garner on Words, Ax these terms from your legal writing (ABAJournal 4/1/14), here, where he says succinctly:
shall Judge Frank Easterbrook, one of the most celebrated jurists in the country, once wrote in an opinion: "Shall is a notoriously slippery word that careful drafters avoid." He's exactly right. Courts have held that shall can mean has a duty to, should, is, will, and even may. The word is like a chameleon: It changes its hue sentence to sentence. Abjure it. Forswear it. You shan't regret it.
Unfortunately, when Congress uses it in legislation, the citizens and ultimately the courts cannot avoid determining what it means.


  1. Or, perhaps, stalking horses for similar actions against more "system-relevant" banks engaged in similar activities. If these indictments do not create a problem (and its hard to see how they would), then more will follow. As a nation, we cannot operate in a legal system where some banks are too big to indict, for obvious reasons.

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