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Polselli v. IRS

Supreme Court of the United States
598 U. S. ____ (2023) (2023)
ELI5:

Rule of Law:

When the Internal Revenue Service (IRS) issues a third-party summons in aid of collecting an already-assessed tax liability, the notice exception under 26 U.S.C. §7609(c)(2)(D)(i) applies regardless of whether the delinquent taxpayer has a legal interest in the records being summoned.


Facts:

  • For multiple years, Remo Polselli underpaid his federal taxes.
  • The IRS entered official assessments against Mr. Polselli for more than $2 million in unpaid taxes and penalties.
  • An IRS Revenue Officer, Michael Bryant, began collection efforts, suspecting Polselli was concealing assets.
  • Bryant believed Polselli might be using bank accounts belonging to his wife, petitioner Hanna Karcho Polselli, and a company, Dolce Hotel Management, LLC.
  • Polselli had previously used an account owned by Dolce Hotel Management to pay part of his tax liability.
  • Bryant issued summonses to Wells Fargo, JP Morgan Chase, and Bank of America, seeking the financial records of Mrs. Polselli, her husband's law firm (Abraham & Rose, PLC), and Jerry R. Abraham, P.C.
  • The IRS did not provide notice of these summonses to the petitioners whose records were sought.
  • The banks, however, notified the petitioners of the summonses.

Procedural Posture:

  • The IRS issued summonses to three banks for petitioners' financial records.
  • Hanna Karcho Polselli, Jerry R. Abraham, P.C., and Abraham & Rose, PLC (petitioners) filed motions to quash the summonses in the U.S. District Court for the Eastern District of Michigan, the court of first instance.
  • The District Court dismissed the motions for lack of subject-matter jurisdiction, holding that the statutory exception to notice applied, meaning sovereign immunity was not waived.
  • The petitioners (appellants) appealed to the U.S. Court of Appeals for the Sixth Circuit.
  • A divided panel of the Sixth Circuit affirmed the District Court's dismissal, siding with the IRS (appellee).
  • The U.S. Supreme Court granted the petitioners' writ of certiorari to resolve a circuit split on the issue.

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Issue:

Does the exception to the IRS's third-party summons notice requirement under 26 U.S.C. §7609(c)(2)(D)(i) apply only when the delinquent taxpayer has a legal interest in the summoned records?


Opinions:

Majority - Chief Justice Roberts

No, the exception to the IRS's third-party summons notice requirement does not require the delinquent taxpayer to have a legal interest in the summoned records. The plain text of §7609(c)(2)(D)(i) contains no such limitation. The statute sets forth three conditions: the summons must be 'issued in aid of... collection,' it must aid collection of an 'assessment made or judgment rendered,' and it must be for the liability of the person whose liability is at issue. None of these conditions mention a legal interest. The fact that the adjacent statutory section, §7610, explicitly includes a 'proprietary interest' test for cost reimbursement further indicates that Congress's omission in §7609 was deliberate. The petitioners' argument that the phrase 'in aid of the collection' requires a summons to directly produce collectible assets is too narrow; the phrase means to 'help' or 'assist,' and a summons can aid collection by revealing a paper trail to hidden assets. Furthermore, this reading does not render the exception's second clause superfluous, as the two clauses apply in different circumstances—one triggered by an 'assessment' against a taxpayer, the other by the 'liability' of a transferee or fiduciary.


Concurring - Justice Jackson

I agree that the statute imposes no 'legal interest' limitation. However, the IRS's summoning power under this exception is not boundless. The default rule under §7609 is notice, which serves to balance the IRS's investigatory needs against individual privacy rights. The exception for collection efforts should not be read so broadly as to 'devour the rule.' Allowing the IRS to issue unnoticed summonses without limit, no matter how tenuous the connection between the third party and the taxpayer, would upset the statute's careful balance. Courts and the IRS must be vigilant in applying the exception and should conduct a careful, fact-based inquiry to ensure the agency does not overreach, rather than assuming the exception applies automatically once a case enters the collection phase.



Analysis:

This decision resolves a circuit split by rejecting the Ninth Circuit's 'legal interest' test, thereby broadening the IRS's power to gather information during collection efforts without providing notice to third parties. The ruling provides clarity and uniformity, strengthening the government's hand in pursuing taxpayers who may be hiding assets through associates or related entities. However, by declining to define the precise contours of 'in aid of the collection,' the Court leaves the door open for future litigation over the reasonableness and scope of such summonses. This may shift the legal battleground from the existence of a legal interest to the factual connection between the summons and the collection effort, potentially increasing scrutiny on the IRS's justification for seeking sensitive third-party financial data.

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