Eleventh Circuit Sustains IRS Summons Issued For French Tax Investigation (12/18/19)

[This is a cut and paste of a posting on my Federal Tax Procedure Blog]

In Redfern v. United States (11th Cir. Dkt. 19-12649 12/17/19) (unpublished), here, the Court affirmed the IRS’s issuance of summonses to various banks “at the request of the French government, pursuant to the United States–France Income Tax Treaty, to aid an ongoing investigation into Redfern’s [French] tax liability.”

For background on the process, I cut and paste this (footnotes omitted) from a version of the working draft of my Federal Tax Procedure Book (basically same as in my Federal Tax Procedure 2019 editions):

In an increasingly globalized economy, records relevant to tax administration in one country may be possessed by someone in another country. Under many U.S. bilateral tax treaties, one treaty partner is obligated to assist the other in gathering information relevant to the latter's tax administration. For example, the Canadian tax authority (referred to as the “competent authority” in treaty parlance) under the U.S./Canada Double Tax Treaty may request the U.S. tax authority (i.e., the U.S. competent authority) to obtain information in the U.S. for Canadian tax administration. (This is commonly referred to as an “exchange of information” provision.) If the request is within the scope of the treaty, the U.S. competent authority will authorize the IRS to issue an administrative summons. The ultimate taxpayer involved may then bring a motion to quash if the summons is to a third party or, if the summons is to the taxpayer, may invoke any basis for noncompliance and await the IRS's pursuit of a summons enforcement proceeding.  

In United States v. Stuart, 109 S. Ct. 1183 (1989), Canada made such a request to the U.S., the U.S. issued summonses to third parties, and the taxpayer brought a motion to quash. The issue presented was whether the Code's limitation on the use of administrative summonses when a DOJ referral is in effect (§ 7602(d)) applies in the case of a summons issued under the Canadian treaty in relation to the Canadian tax. That Code limitation had been enacted after the U.S./Canadian double tax treaty in question had been negotiated and entered into force. Arguably, even if that limitation were not in the treaty, Congress's subsequent legislation may have created a treaty override. The taxpayer argued that the status of the Canadian tax investigation was the equivalent of a DOJ referral and thus the use of an IRS administrative summons was not proper. The Court held that, notwithstanding the subsequent enactment, the treaty itself controlled and had no such limitation, so that it need not inquire into the status of the Canadian investigation.  

In subsequent cases, courts have held that the propriety of the foreign country’s tax investigation is not relevant to whether the IRS can issue and enforce the summons (or avoid a petition to quash the summons); rather, the issue is whether the IRS has met the Powell requirements for the summons focusing on its actions and not that of the foreign treaty partner requesting the IRS to use its processes to obtain the requested information.  

 Similar processes are available under the OECD Convention on Mutual Assistance in Tax Matters, which is a multilateral treaty, and possibly other treaties as well, although most of the litigated cases appear to involve the bilateral double tax treaties.

The process employed in Redfern for the summons as follows (Slip Op. p. 2):

As required by Internal Revenue Code § 7609(a)(1), the IRS provided Redfern, as the holder of the accounts, with notice of the summons and an explanation of the recipient’s right to bring a proceeding to quash the summons. Specifically, it mailed the required notice to Redfern at (1) the address that appeared on his most recently filed and processed federal tax return and (2) the address identified by France as the address he reported to the government, as well as (3) to Leslie R. Kellogg, an attorney at Hodgson Russ LLP, from whom the IRS had received a power of attorney signed by Redfern authorizing her to receive confidential tax information on Redfern’s behalf.

Bottom line, the Court of Appeals sustained the summons.  The case is unpublished, so the panel did not think it offered anything new or unusual to past precedent.  It does discuss a key point from past precedent that I had not really focused on before.

The Court discusses the notice required to be given to the taxpayer for third party summonses The Court said (Slip Op. pp. 6-8; cleaned up):

We begin by turning to the Internal Revenue Code. Section 7609(a)(2), which establishes the procedure for third-party summonses, provides that “notice shall be sufficient” if it is “mailed by certified or registered mail to the last known address of such person.” “If such notice is mailed, it shall be sufficient if mailed to the last known address of the person entitled to notice.” The relevant Treasury regulations provide that “a taxpayers last known address is the address that appears on the taxpayer’s most recently filed and properly processed Federal tax return.”  

It is undisputed in this case that the IRS mailed notice of the third-party summonses to Redfern’s last known address in Nicosia, Cyprus, i.e., the address that appeared on his most recently filed and processed federal tax return. This seemingly forecloses our inquiry—the fourth Powell factor merely requires that the IRS follow the administrative steps required by the [Internal Revenue Code], [*7] namely that the IRS has notified the taxpayer in writing of the summonses. The burden then shifts to Redfern to disprove the fourth Powell factor or to demonstrate that judicial enforcement should be denied on the ground that it would be an abuse of the court’s process.

Our review of the record persuades us that Redfern has failed to carry this burden. In evaluating whether the IRS acted in “good faith,” and whether judicial enforcement of the summons would be an abuse of the court’s process, we find it significant that the IRS not only mailed a notice of the summons to Redfern’s Cypriot address in Nicosia, which was the address that appeared on his most recently filed and processed federal tax return, but that it also mailed notices of the summons to the French address that Redfern had reported to the French tax authority and to Hodgson Russ LLP, whom Redfern had previously granted power of attorney. In so doing, the IRS clearly evinced an intent to actually reach Redfern and apprise him of the summonses that it had issued to the banks with which he held accounts. 

Redfern was mailed notice of the third-party summonses in compliance with § 7609(a)(2). The Internal Revenue Code’s procedure expressly provides that notice is sufficient if mailed by certified or regular mail to the last known address of the person entitled to notice. This language negates any inferences that the [*8] requisite notice is not given until its receipt by the addressee.  The notice contemplated in section 7609 is given on the day it is mailed. As a practical matter, that ends the Powell inquiry. Redfern has conceded statutory compliance, even as he argues its constitutional defectiveness, and has therefore failed to overcome his heavy burden to disprove the fourth Powell factor. Moreover, we do not believe that the IRS’s diligent compliance with the Internal Revenue Code’s procedures constitutes abuse of the court’s process.

Redfern also made procedural due process arguments about the notice, but I think they are insubstantial.  Those wanting to pursue the issue might read the opinion (focus particularly on fn. 1 on Slip Op. 9 (which carried over to the next page).

JAT Comments:

1.  The notice requirement requiring only mailing to the last known address is parallel to the requirement that notices of deficiency be sent to the taxpayer's last known address.  Section 6212(b) which provides that the notice of deficiency is sufficient if sent to the last known address.  The law says that the notice of deficiency is valid if so sent, even if the taxpayer did not receive the notice.  The notice of deficiency gives the taxpayer a pre-assessment and pre-payment right to litigate liability, but that "right" is not practically available (obviously) if the taxpayer does not receive the notice.  Still, lack of receipt does not invalidate the notice if it was properly sent to the taxpayer.  (By contrast, the taxpayer can pursue a pre-payment CDP remedy contesting liability for taxes requiring a notice of deficiency if the taxpayer did not receive the notice of deficiency. § 6330(c)(2)(B)..)