Tenth Circuit Says 23-Day Notice Requirement for Third-Party Summons Is Mandatory.
(Parker Tax Publishing May 22, 2014)

Because the IRS failed to give a taxpayer notice of four third-party record summonses at least 23 days before the date the records were to be examined, the summonses were not enforceable. Jewell v. U.S., 2014 PTC 210 (10 Cir. 4/28/14).

Sam Jewell was being investigated by the IRS for allegedly failing to pay employment taxes for several nursing homes he owned. In conjunction with the investigation, the IRS issued four summonses to banks in the Eastern and Western Districts of Oklahoma for records involving the nursing homes. Under federal law, the IRS was supposed to notify Sam at least 23 days before the examination date. Because the IRS waited too long to mail the notices, Sam received the notices less than 23 days before the records were to be examined. Claiming that he was given inadequate notice, Sam filed petitions to quash the summonses in the Eastern and Western Districts of Oklahoma.

The two district courts split on how to interpret the notice requirement. The Western District granted the IRS's summary judgment motion and denied Sam's petition to quash, noting that he received the summonses in time to file his petition. The Eastern District granted Sam's petition to quash and denied the IRS's motion to dismiss, reasoning that the IRS failed to comply with the notice requirement. Sam appealed the ruling in the Western District, and the IRS appealed the ruling in the Eastern District.

In U.S. v. Powell, 379 U.S. 48 (1964), the Supreme Court listed four requirements the IRS must meet to make a prima facie case for enforcement of an administrative summons: (1) the investigation must be conducted for a legitimate purpose; (2) the summons must be relevant to that purpose; (3) the IRS must not already have the information sought; and (4) the IRS must have followed the administrative steps required by the Internal Revenue Code. Sam and the IRS agreed that the fourth prong of Powell determines whether the summonses must be quashed.

Code Sec. 7609 lists special procedures for the IRS's summonses to third parties. That section provides that notice of the summons "shall" be given no later than 23 days before the date of the examination.

The Tenth Circuit began its analysis by considering the meaning of the term "shall." Applying what it referred to as an "age-old precept," the court determined that the term "shall" indicates a mandatory intent. Thus, the court found that Code Sec. 7609 creates a mandatory obligation.

Having found that the 23-day requirement is a mandatory obligation, the court next considered whether that obligation involves an "administrative step" under Powell. The court concluded that it does. The court rejected the IRS's characterization of the notice defect as a mere "technical default." According to the court, even if the IRS's delay constituted a technical default, the question is whether the technical notice requirement involves an "administrative" requirement. The court determined that the meaning of the term "administrative" is broad and would include precisely this sort of "technical" requirement.

The court's nest step was to apply the Supreme Court's opinion in Powell. In that case, the Supreme Court held that the IRS cannot make a prima facie case for enforcement of a summons until it shows it complied with the Code's administrative steps. According to the Tenth Circuit, these steps include the 23-day notice requirement and the IRS admitted that it did not give Sam 23 days' notice. The Tenth Circuit concluded that, under Powell, that failure prevented the IRS from making a prima facie showing for enforcement of the summonses. Thus, Powell prevents enforcement of the summonses.

The court noted that five other circuits the First, Second, Fifth, Sixth, and Eleventh Circuits have declined to apply Powell in this manner. Four of those circuits acknowledged Powell, but declined to enforce the 23-day requirement as mandatory. These courts have taken two approaches. According to the Tenth Circuit, one approach (taken by the First Circuit) is to acknowledge that Powell requires the IRS to comply with all of the required administrative steps, but then to ignore the fact that the 23-day notice is one of the administrative steps required in the Code. A second approach (taken by the Second, Sixth, and Eleventh Circuits) is to assume that the courts have equitable power to excuse the notice defect if the taxpayer was not prejudiced. The Tenth Circuit observed that none of these courts denied that the 23-day requirement was mandatory or an administrative step under the Code. The Fifth Circuit declined to apply Powell when the IRS violated a separate notice provision. Though the IRS violated the notice requirement, the Fifth Circuit allowed enforcement of the summons to avoid elevating "form over substance."

The Tenth Circuit admitted some hesitation in creating a circuit split, but felt obliged to follow Supreme Court precedent, even when it might be viewed as "inequitable" or as "form over substance."

For a discussion of the IRS's summons authority, see Parker Tax, ¶263,120. (Staff Editor Parker Tax Publishing)

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