Court Affirms Holding Dismissing Damages Claim for IRS Failure to Obtain Court Approval for JDS (7/7/18)

I have previously blogged on the trial proceedings in Hohman v. United States, 2017 U.S. Dist. LEXIS 106439 (ED MI 2017) where the taxpayer sought damages for the IRS's improper use of a John Doe Summons ("JDS") under § 7609(f) without the necessary court approval.  See Court Dismisses Claims Where IRS Issued JDS Without Required Court Approval for JDS (Federal Tax Crimes Blog 7/20/17), here.  The Sixth Circuit has affirmed in Hohman v. Eadie, ___ F.3d ___, 2018 U.S. App. LEXIS 18269 (6th Cir. 2018), here.  Taxpayers have no remedy.

The interesting issue on the appeal is whether the Financial Privacy Act gave a remedy under 12 USC § 3417.  Under 12 USC § 3413, there is an exception for disclosure of records "in accordance with procedures authorized by Title 26." So, if the JDS had been valid, there would be no question that the taxpayers would have no remedy.  Does the IRS's failure to meet the requirements for JDS change the result?  Here is the court's identification of the issue and its decision to duck the issue:

The parties dispute the meaning of the "in accordance with" language. When confronted with this question, the district court stated that from a plain reading, the exception only applies to IRS summonses issued "in accordance with" procedures under the Code. The court reasoned that because the IRS failed to follow the requisite Code procedures by issuing summonses without first obtaining approval in federal district court, it was subject to the provisions of the Act, including damages claims. 

On appeal, Plaintiffs contend that the district court correctly determined that the plain meaning of this language is that the IRS has to act "in accordance with" the Code, or it is subject to the Act. In support, Plaintiffs cite Neece v. IRS, 922 F.2d 573, 577 (10th Cir. 1990). In Neece, the IRS made a similar argument when it asserted that it was allowed to informally review bank records under I.R.C. § 7602. The IRS referenced the same provision of the Act authorizing "disclosure of financial records in accordance with procedures authorized by [the Internal Revenue Code]." 12 U.S.C. § 3413(c). The Tenth Circuit disagreed and determined that while I.R.C. § 7602 permitted the IRS to issue a third-party summons, I.R.C. § 7609 set forth the procedure the IRS was required to follow. Neece, 922 F.2d at 577-78. The IRS had not followed the proper procedure under its own Code, and so the IRS was bound by the Act. Id. at 577. 

In response, the government argues that the Act has no application to any activities carried out under the Code, including the issuance and enforcement of IRS summonses. In support, it cites the legislative history to argue that Congress indicated that this exception was intended to exempt IRS summonses generally because they are governed by their own privacy regime. It also contends that Neece is distinguishable because it involved an instance where the IRS obtained records informally, instead of through the issuance of a summons. 

There are two possible ways to read the phrase "in accordance with." Congress either intended for this language to mean: (1) that the Code and not the Act governs the IRS, or (2) that the IRS must follow the procedures under the Code, or it is subject to the Act. A review of the relevant provision and legislative history indicates that Congress did not give any thought to or explain what it intended to have happen in a case like this. The House Committee Report states that under the exception, because IRS administrative summonses are already subject to the privacy safeguards of I.R.C. § 7609, they are exempted from the procedures of the Act. H.R. Rep. 95-1383, at 226 (1978). 

Because we uphold the district court's ruling on sovereign immunity grounds, however, there is no need for us to resolve this issue.