Court Sustains Use of Regular Summons to Appraiser Investigated Even Though Third Party Taxpayers May be Identified (1/14/16)

In Clower v. United States, 2015 U.S. Dist. LEXIS 174254 (N.D. Ga. Dec. 17, 2015), here, the IRS issued a summons to Jim R. Clower, an appraiser, for "documents including, among other things, appraisal work files, documents reflecting customers for whom he prepared appraisals, and correspondence related to appraisals completed for the purpose of valuating real property for conservation or historical easements."  Those who observe the tax scene will recognize that there is a lot of abuse of overvaluation of conservation and historical easements for purposes of claiming charitable deductions.  And, the fatal flaw in many promoted tax schemes/shelters have for many years been grossly inflated valuations.  I infer that the IRS suspected Clower of doing multiple valuations that might require investigation for the possible assertion of penalties against Clower.  See § 6695(a),  Substantial and gross valuation misstatements attributable to incorrect appraisals, here.  The summons in question was clearly addressed to Clower with respect to his potential liability.  The summons was thus a regular IRS summons.

Should Clower respond to the summons, however, he would likely identify the clients for whom he had given appraisals.  In such cases, the IRS may not otherwise know who many of those clients were.  Presumably, the IRS already knew of at least one such client because the IRS had Clower's name.  Normally, if multiple potential taxpayers of an IRS investigation are unknown but identifiable through some common participant in an aggressive scheme (such as shelter promoters or even foreign banks), the IRS can issue a John Doe Summons ("JDS") to that common participant.  See § 7609(f), here.  The JDS requires court approval.  It is far less convenient for agents than issuing a regular summons where the regular summons could produce the same information.  That is apparently what happened in Clower.  The IRS issued the summons to Clower with respect to his potential liability and would thereby discover the identities of taxpayers using his services.  So this overlap of the regular summons and the JDS creates some tension, particularly if the IRS were to use the regular summons to avoid the hassle of the JDS.  As we say in the Saltzman & Book, Tax Practice & Procedure ¶ 12.05[4][b][v] John Doe Summons.(online, viewed 1/14/16) [footnotes in brackets, with links to the cited cases added by JAT]:

The Service sometimes finds that the John Doe Summons procedures slow it down. The Service must first convince DOJ Tax that it is worth seeking the district court's approval of the John Doe Summons. DOJ Tax must gear up and present the matter to an often skeptical and almost always overworked District Court who must play devil's advocate to the government's ex parte application for the summons. Obviously, the Service would much prefer to use its regular administrative summons, which has no such cumbersome steps. 

In United States v. Tiffany Fine Arts, Inc. [469 US 310 (1985), here], the Supreme Court blessed the Service's use of the regular administrative summons rather than the John Doe Summons where the target of the summons was a shelter promoter. The administrative summons was issued with the promoter identified as the taxpayer being investigated, but the information and documents sought could also identify otherwise unknown shelter investors who dealt with the promoter. The Service could then open investigations of the shelter investors. The Supreme Court blessed that gambit and refused to require the John Doe Summons procedure. 

After Tiffany Fine Arts, the Service saw an escape from the annoyances of the John Doe Summons procedures — simply find a reason to audit the third party with information or documents identifying otherwise unidentified taxpayers that arguably were relevant to a tax investigation of the third party. Tiffany Fine Arts says that will work. However, where the allegation of investigation of the third party is merely pretextual to get information about unidentified taxpayers with whom the third party dealt, courts are open to quashing the general administrative summons, thus relegating the Service to the John Doe Summons procedure.[United States v. Gertner, 65 F3d 963 (1st Cir. 1995), here]

Clower appeared to be making the Gertner argument.  The Court identified Clower's arguments as (bold face supplied by JAT:

According to the petition, Clower is a certified general appraiser who has performed independent fee appraisals since 1969. In his petition, Clower avers that the IRS summons violates the requirements of 26 U.S.C. § 7609(b)(2) because (1) it is at least in part a John Doe Summons, n1 and the IRS did not follow the requirements for issuing such a summons; (2) it is a fishing expedition designed to produce evidence [2]  that could expose Clower to penalties and probable prosecution; (3) it fails to specify the projects being investigated or the targets of those investigations; (4) it requires disclosure of sensitive personal and/or privileged documents and information belonging to persons who are not a part of the investigation; and (5) it is unreasonable and irrelevant because it asks for information outside the statute of limitations. Clower avers that the Court has jurisdiction to hear his petition pursuant to 26 U.S.C. § 7609(h)(1).

The first is the relevant one.  The Court dealt cryptically with the argument as follows:

The summons attached to the petition was issued to Jim R. Clower, "In the matter of Jim R. Clower under 26 USC Secs. 6694, 6695, 6700, 6701, 6707 and 6708."  Although Clower contends in his petition and his motion to strike that the summons is a John Doe summons and that it fails to specify the targets of the investigation(s), he has not offered any arguments or evidence to support this or to contradict the plain language of the summons.

Unlike Gertner where the summonsee established to the satisfaction of the district court judge that the IRS was not interested in the liability of the summonsee but just wanted to identify the otherwise unidentified taxpayer.  The facts of Gertner are unusual and anyone wanting to make a Gertner-like argument are well advised to obtain copies of the briefs and submission (including affidavits) in that case..  Of course, the summonsee of the regular summons will not be able to mount the attack in a direct motion to quash but must fail to comply and then assert the Gertner-like argument in a summons enforcement proceeding.

In this regard, the Court does note in footnote 2:

The fact that the summons may serve a "dual purpose" of determining a known taxpayer's liabilities and "discovering information that would aid in identifying unnamed taxpayers and investigating their liabilities" does not make it a John Doe summons subject to the procedures in § 7609(f). See United States v. Gottlieb, 712 F.2d 1363, 1367-68 (11th Cir. 1983) (quoting United States v. Barter Sys., Inc., 694 F.2d 163, 169 (8th Cir. 1982)).

Clower and Tiffany Fine Arts illustrate that, if the IRS has a legitimate reason to investigate the common party and can fashion summonses seeking information and documents relevant to that investigation, the IRS can use the regular summons to, in part, identify third parties for investigation in the same process.

The other claims Clower made were also rejected.  Among the reasons is that the summons was issued to Clower with respect to his liability and the person to whom the summons is issue is not authorized to move to quash under § 7609 which deals with summonses to third parties.  This does not mean that the summonsee identified as being investigated cannot assert appropriate defenses.  It just means that the defenses are asserted in a summons enforcement proceeding initiated by the Government after the summonsee fails to comply.  Noncompliance with the summons will not itself draw sanctions; rather only noncompliance with the district court's enforcement order, if granted, can be sanctioned  Also, the seminal decision in United States v. Powell, 379 U.S. 48 (1964) sustaining the broad scope of the IRS summons, although not cited by the Court, really disposes of the balance of Clower's claims.

The docket entries indicate that Clower appealed on December 25, 2015 (presumably by online filing since I doubt the cleark's office was opened).