Tenth Circuit throws out IRS summonses

BY SALLY P. SCHREIBER, J.D.

In a decision that creates a split from five other circuit courts, the Tenth Circuit Court of Appeals quashed IRS summonses that were issued after the 23-day period required under Sec. 7609(a)(1) ( Jewell, Nos. 13-6069, 13-7038 (10th Cir. 4/28/14)).
 
When the IRS issued four summonses to banks seeking records about nursing homes owned by Sam Jewell, it failed to notify Jewell 23 days before the records were to be examined. The summonses were issued in separate federal district courts in Oklahoma, the eastern and western districts. Jewell filed petitions in both courts seeking to quash all of the summonses because they did not comply with Sec. 7609(a)(1)’s 23-day period. The two courts reached opposite conclusions about whether the summonses should be enforced. Both parties appealed the contrary decisions to the Tenth Circuit.

In deciding to quash the summonses, the appeals court examined whether the IRS had complied with the requirements of Powell, 379 U.S. 48 (1964), the Supreme Court case that governs the validity of these summonses. The fourth Powell requirement is that the IRS must have followed the administrative steps required by the Code. The court determined that the 23-day period in Sec. 7609(a)(1) is an administrative step required by the Code.

The IRS argued that the step is procedural, not administrative, but the court disagreed, finding that it was both procedural and administrative, and that one did not preclude the other. Accordingly, the court affirmed the eastern district’s decision quashing the summonses and reversed the western district’s decision with instructions to quash the summonses. 

In reaching this result, the Tenth Circuit acknowledged that five other circuits (the First, Second, Fifth, Sixth, and Eleventh) have not applied Powell to quash summonses when the notice was provided late. The court noted that it hesitated to create a split in circuits, but “we have little choice because we are obliged to follow the Supreme Court’s holding in Powell even if other circuit courts have not” (slip op. at 9).

The court explained that the First Circuit had acknowledged that Powell required the IRS to follow the Code’s administrative steps, but it then ignored that the 23-day notice is required by the Code. The Second, Sixth, and Eleventh Circuits took an equitable approach of excusing the defect if the taxpayer was not prejudiced by the delay. The Fifth Circuit declined to apply Powell to a different notice provision than that involved here, holding that quashing the summons would exalt form over substance.

Despite these other decisions, the court emphasized that the Supreme Court expressed itself clearly in Powell when it said, “If the IRS does not comply with the administrative requirements of the Internal Revenue Code, its summonses are unenforceable” (slip op. at 10).  

A dissenting judge objected that, although the 23-day notice is mandatory, the punishment for violating it should not necessarily be quashing the summons. Instead, the judge argued, the court should apply a totality-of-the-circumstances analysis in deciding whether to enforce or quash the summons.  

Sally P. Schreiber ( sschreiber@aicpa.org ) is a JofA senior editor.

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