Sixth Circuit Weighs in On Sovereign Immunity and Exceptions to Notice in Third-Party Summons Case

When IRS issues a summons to third parties it generally has to notify the taxpayer whose records are identified. That right to notice is key, as it triggers a correlative right to bring an action in district court to challenge the summons and allows for limited judicial review of IRS’s vast information gathering powers.

It may come as a surprise that not all summonses the IRS issues result in notice to the taxpayer. Section 7609(c)(2) excludes five categories of summonses. I discuss this extensively in Chapter 13 of Saltzman and Book IRS Practice and Procedure. Gaetano v US, a recent Sixth Circuit case, discusses the nature of the exclusion and its relationship to subject matter jurisdiction, standing and sovereign immunity. It also highlights inconsistent approaches that courts have taken to characterizing the exceptions, and concludes that the 7609(c)(2) notice exceptions relate to the court’s underlying jurisdiction to hear challenges to the summons.


Gaetano involves an IRS criminal tax investigation into the taxpayers’ Michigan-based cannabis dispensary business. IRS sought the records pertaining to the Gaetanos from Portal 42, a software company that provides the cannabis industry with point-of-sale systems. Those systems allow businesses to track customer sales data or delete the data remotely with a “kill switch.”

The opinion discusses how an IRS CID agent interviewed the owners of Portal 42 and then served a summons ordering that the owners “give testimony and produce various records “and other data relating to the tax liability or the collection of the tax liability or for the purpose of inquiring into any offense connected with the administration or enforcement of the internal revenue laws concerning [the Gaetanos] for the periods shown.”

The IRS did not notify the Gaetanos, but within two weeks of the service of the summons on Portal 42, the taxpayers filed a petition to quash, alleging that IRS should have given them notice and alleging that the summons was issued in bad faith.

The district court, adopting the magistrate judge’s key holding, dismissed the Gaetanos’ petition to quash, and concluded that they did not have standing under 7609(c)(2)(E).

The (E) exception to notice applies when the summons issued by an IRS criminal investigator in connection with an IRS criminal investigation and the summoned party is not a third-party recordkeeper. Portal 42 was not a third-party recordkeeper (that is statutorily defined in 7603(b)(2)).

There was a dispute about whether the summons was issued in connection a criminal investigation. The Gaetanos’ main argument was that the summons was deficient because it failed to specify the tax periods that the IRS was criminally investigating, but the opinion held that the statute only required that the summons identify the tax periods which IRS sought information.

The Sixth Circuit opinion affirms the district court but in so doing explores and clarifies the import of the five exceptions to notice in Section 7609(c)(2).  As the opinion notes, courts have viewed the exceptions as either “limitations on statutory standing or (as the Government argues) exceptions to [Section 7609’s] sovereign immunity waiver.”

The opinion nicely collects cases that have viewed the exceptions to notice as triggering standing limits or sovereign immunity waivers.

The lower court opinion, in dismissing the challenge for lack of subject matter jurisdiction, was not clear if the dismissal relied exclusively on standing or was also based on the sovereign immunity waiver. The Sixth Circuit viewed this issue as a matter of first impression, and while the result in this case did not hinge on the difference, the opinion discusses why the difference matters, including most importantly that 1) the government cannot waive sovereign immunity and 2) a court can bring that jurisdictional issue up at any stage of litigation.

As we have discussed numerous times, the Supreme Court’s case law on whether a statute confers jurisdictional status has evolved over time. As the opinion notes, the “Supreme Court, however, has cautioned that a statutory condition — even one attached to a waiver of the United States’ sovereign immunity — is not accorded jurisdictional status unless “Congress has ‘clearly state[d]’ as much.” United States v. Kwai Fun Wong, 575 U.S. 402, 409, 418-20 (2015) (citation omitted).

Gaetano analogizes the language in the 7609(c) exceptions as similar to the Federal Tort Claims Act, where the Court has found that the exceptions suspend the whole statute, leaving the “bar of sovereign immunity” and hence concluding that the (c)(2) exceptions are jurisdictional.

The opinion has one more wrinkle. While typically a plaintiff bears the burden of proving that there is a waiver of sovereign immunity, Gaetano holds that the government has the burden for establishing that the exception applies when the petition to quash is not facially within one of the exceptions:

The basic rationale for treating sovereign immunity exceptions as affirmative defenses is that a plaintiff should not be required to prove a negative for each enumerated exception, and the government will generally possess the relevant facts to prove that a particular exception does apply. 

That burden for the government is pretty low, and the CID agent’s affidavit was sufficient to connect the summons to a criminal investigation. That the CID agent may have not fully complied with the IRM (including specifying all time periods involved in the investigation) and “goes to the merits of whether a summons should be enforced or quashed. We cannot proceed to the Powell test when 7609 does not confer jurisdiction over this action.”

Another Clawback of Money Paid to the IRS

Last year, I wrote about a Ponzi scheme case, Zazzali v. United States in which the 9th Circuit allowed a bankruptcy trustee to recover money paid to the IRS by the perpetrator of the scheme prior to the filing of the bankruptcy petition. The payments could not be recovered for the estate using the preference provisions because of the timing and the nature of the payments; however, the court allowed the trustee to pull the money away from the IRS and into the bankruptcy estate using a combination of state remedy and waiver of sovereign immunity.

The 9th Circuit decision represented a split with the 7th Circuit, which had held in In re Equipment Acquisition Resources, Inc., 742 F.3d 743 (7th Cir. 2014) that a clawback under similar circumstances was not permitted under the applicable provision of the bankruptcy code. The last entry shown for the Supreme Court docket in Zazzali is Justice Kennedy granting the motion to extend the time to file a petition for a writ of cert. The motion was granted on April 9, and extended the deadline until May 18. The IRS regularly obtains extensions of time when considering whether to appeal. Here, it appears it decided not to appeal. Many reasons could exist for the decision not to appeal. In the meantime, the IRS lost another case with this issue, McClarty v. Hatchett, Case No. 17-451163-MBM (E.D. Mich. 2018) and has filed an appeal to the 6th Circuit in that case. So, the decision not to seek cert in Zazzali does not represent a concession of the issue by the IRS.


At issue in these cases is the interpretation of B.C. 544(b)(1) and 548 and the interplay of one or both of these sections with B.C. 109 and the waiver of sovereign immunity. Where the Zazzali case involved a Ponzi scheme, the Hatchett case involves the use of funds belonging to the debtor, Laurestine Hatchett, to pay the federal tax liabilities of her husband. In 2014 the debtor’s children were appointed co-conservators of for her because of her disability which prevented her from managing her affairs. Mrs. Hatchett’s husband and her daughter were appointed her co-guardians. In 2015 real property was sold for over $300,000 which debtor owned 50/50 with her son. She received net proceeds of $122,827. The son turned the proceeds over to the father who deposited them into an account in the name of his law firm. A major portion of the proceeds were then used to pay federal taxes owed by Mr. Hatchett (the father) or his law firm.

On April 6, 2017, an involuntary chapter 7 petition was filed against debtor. While persons going into bankruptcy file almost all bankruptcy cases voluntarily, under the right circumstances creditors can “take” a person into bankruptcy involuntarily and that happened here. I did not go to the bankruptcy case to try to determine why; however, the involuntary bankruptcy was accepted by the bankruptcy court shortly after it was filed and a trustee was appointed to administer the bankruptcy estate. The trustee has a duty, and a financial interest because of the ways fees are paid, to find and bring back into the estate all money possible. The trustee looked at the transaction described above and determined that it fit the provisions of fraudulent transfer. The IRS in these situations has not participated in the fraudulent transfer other than to accept and apply funds as directed by the person making the payment. Based on the facts here, Mr. Hatchett’s transfer of his disabled wife’s funds to pay his personal or business tax liability certainly appears to be an improper conversion of her funds.

The IRS defended the action by arguing that sovereign immunity protected it from this action. Essentially, the IRS made the same arguments it previously made in Zazzali and Equipment Acquisition Resources.

The bankruptcy court started with an explanation of the applicable fraudulent transfer law and the two provisions in the bankruptcy code at issue here:

Fraudulent transfers can be avoided under two different sections of the Bankruptcy Code:

11 U.S.C. § 548, which creates a body of federal fraudulent transfer law, and 11 U.S.C. § 544(b), which gives the trustee power to avoid a fraudulent transfer by the debtor if the transfer would be voidable by one of the debtor’s creditors under state law. Specifically, § 544(b)(1) permits a trustee to step into the shoes of an actual creditor who has a fraudulent transfer remedy under other “applicable law” (i.e. a state fraudulent transfer statute) and exercise that creditor’s remedies on behalf of the bankruptcy estate. 11 U.S.C.§ 544(b)(1) provides, in relevant part, that a “trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim. . .

The key difference between an action under § 548 and an action under § 544(b)(1) is the reach-back period. Section 548, captures only transfers made in the two years preceding the filing of the bankruptcy. Section § 544(b)(1) looks to the specific state statute’s reach-back period, which is generally longer than two years. Thus, a bankruptcy trustee seeking to recover transfers made more than two years prior to the filing of the bankruptcy must file an action under 544(b)(1).

The court then discussed the interplay of sovereign immunity with the fraudulent transfer provisions since the IRS argument in the case was that sovereign immunity prevented the relief requested. BC 106 sets out the waiver of sovereign immunity and that section lists all of the bankruptcy code sections that waive immunity. Included in that list are 544 and 548. The court notes that the plain language of the statute includes the statutes at issue within the waiver of sovereign immunity citing favorably to the Ninth Circuit’s decision in Zazaali. The IRS argues that while 544 waives sovereign immunity it does not waive it for suits that could not be brought outside of bankruptcy. Since no waiver exists outside of bankruptcy for a creditor to sue the IRS under a state based fraudulent transfer statute, Congress could not have intended to allow such a suit by the trustee in a bankruptcy case.

The bankruptcy court rejected the IRS interpretation and followed the reasoning In Zazzali stating:

The Ninth Circuit’s broad reading of section 106 was bolstered by the fact that section 106(a)(1) was enacted after section 544(b)(1). As a consequence, when Congress passed 106(a)(1), it was, presumably, well aware of the fact that section 544(b) allowed a trustee to bring claims derived from applicable state law, a power that had been included in the Bankruptcy Code at the time the Code was enacted in 1978, and had existed under the Bankruptcy Act of 1898.

The court also cited the reason for the fraudulent conveyance statute in support of its decision:

It is undisputed that Debtor does not have a tax liability to the IRS. In its fraudulent transfer action under § 544(b)(1), the Trustee is simply seeking to recover money that Debtor should have used to pay her own creditors. In abrogating governmental immunity for suits brought under § 544, Congress’s clear intention was that the fraudulently transferred property must be recovered for the benefit of Debtor’s creditors, regardless of the status of the recipient of the fraudulent transfer.

The court then addressed additional defenses raised by the IRS. The IRS based the first of these defenses on BC 106(a)(5) which provides:

Nothing in this section shall create any substantive claim for relief or cause of action not otherwise existing under this title, the Federal Rules of Bankruptcy Procedure, or nonbankruptcy law.

In rejecting this argument the court finds that the substantive claim is permitted under otherwise existing law, specifically BC 544(b)(1).

It then moves to the IRS argument that the federal law in title 26 preempts the state law fraudulent conveyance action. The IRS arguments is that “state law is preempted where state law attempts to regulate conduct in a field that ‘Congress intended the Federal Government to occupy exclusively.'” In rejecting this argument the bankruptcy court finds that the argument of the IRS does not apply since the suit here has nothing to do with the payment or collection of taxes from Laurestine Hatchett. The fraudulent conveyance suit seeks to bring money into the bankruptcy estate wrongfully taken from her. The court focuses on her and not on the payment of taxes by her husband.

Finally, the court rejects the IRS argument that IRC 7422 prohibits the repayment of this money. IRC 7422 provides:

No suit prior to filing claim for refund.–No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary, according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof. The bankruptcy court says that 7422 has no applicability to this situation.

The IRS will continue its arguments on this issue into the circuit court. If it loses again, I expect it will either seek to take this case to the Supreme Court or it will give up on this argument. In the meantime trustees will look for payments to the IRS by debtors in bankruptcy that satisfy the tax debt of someone other than the debtor.


District Court Reverses Bankruptcy Court and Finds that Emotional Distress Alone Insufficient to Justify Awarding of Damages When IRS Violates Stay on Collection

Earlier this year in Migraine Caused by Improper IRS Collection Action During Bankruptcy Stay Triggers Damages for Emotional Distress I discussed Hunsaker v US, where a bankruptcy court held that IRS was on the hook for damages arising for violations of the stay on collection even when the only damages were from the emotional distress and were not actual economic damages. Last week a district court in Oregon reversed the bankruptcy court, finding that there was no clear waiver of the government’s sovereign immunity  in the absence of direct economic damages.


In my post earlier this year, I described what led to the Hunsakers suing the government. It started with financial problems when they realized that their “homestead was discovered to be subject to disputed claims by secured creditors, in turn complicated by claims of Marion County, Oregon, that the purchase of the homestead created an unlawful partition.” In September 2012 the Hunsakers filed a Chapter 13 bankruptcy reorganization. IRS received notice of the filing, and it filed a proof of claim for $ 9,301. As I previously discussed, “at the moment of the Chapter 13 filing, the automatic stay under the Bankruptcy Code came into place. In a Chapter 13 case it continues throughout the life of the case, which usually means it lasts for three to five years until completion of the plan or dismissal of the case.”

So IRS had notice of the plan, and should have backed off on collection. IRS however failed to back off and on numerous occasions sought payment and in fact served levies on Social Security payments even though the Hunsakers’ attorney contacted IRS and reminded IRS of the stay and the illegality of the IRS collection actions.

At the Bankruptcy Court, the judge found a specific connection between the IRS misconduct and an increase and aggravation of the Hunsakers’ anxiety and stress and awarded them $4,000 on account of that stress and anxiety, which in the judge’s opinion contributed to the onset and severity of Mrs. Hunsaker’s migraines. In reaching that conclusion, the bankruptcy court relied on and discussed a 9th Circuit case, In re Dawson that, on reconsideration, concluded that emotional distress stemming from violations of the bankruptcy stay can give rise to actual damages even if the debtor suffers no pecuniary losses.

On appeal, the district court noted that Dawson did not address the government’s violations of the stay; that case involved a private creditor. That was a key difference.

I will avoid the temptation to provide the NSFW link to Mel Brooks’ History of the World Part 1 where he reminds us that it is indeed good to be the king. While we no longer have royalty, sovereign immunity remains and limits the opportunities for private parties to sue the government. It stems from the adage that the king can do no wrong. While IRS most certainly can and does do wrong, the principle protects IRS from damages unless there is a specific and clear Congressional expression allowing the government to be sued.

The district court provided the framework:

Section 106(a) of the Bankruptcy Code clearly waives sovereign immunity for some claims under § 362(k). See 11 U.S.C. § 106(a) (“[S]overeign immunity is abrogated as to a governmental unit to the extent set forth in this section with respect to . . . [§] 362[.]”). Section 362(k) allows individual debtors injured by a creditor’s willful violation of the automatic stay to recover “actual damages.”

The opinion then goes on to discuss how in Dawson the 9th circuit provided that “allowing emotional distress damages best fulfills legislative intent to protect debtors from excessive psychological and emotional harm.” But that was not enough for the Hunsakers, as the creditor in Dawson was a private party and not Uncle Sam:

That emotional distress damages are available against private parties does not automatically authorize them against the federal government. After all, “when it comes to an award of money damages, sovereign immunity places the Federal Government on an entirely different footing than private parties.” Lane v. Pena, 518 U.S. 187, 196 (1996).

The opinion discusses how that different footing requires a clear expression that Congress meant for the government to be sued, and the district court said that was not present in these circumstances:

The Dawson court concluded the phrase “actual damages” was ambiguous even given the text and context of § 362(k) as a whole. 390 F.3d at 1146. The legislative history discussed in Dawson cannot waive sovereign immunity where the text of § 362(k) otherwise remains ambiguous. See Cooper, 132 S. Ct. at 1448 (“Legislative history cannot supply a waiver that is not clearly evident from the language of the statute.”). Because the phrase “actual damages” is ambiguous, this Court must construe § 362(k) in favor of immunity. See id. (any ambiguities in the statutory language must be strictly construed in favor of immunity, including ambiguities regarding the scope of the waiver). Reinforcing this conclusion is the fact that, before concluding “actual damages” includes emotional distress damages, the Dawson panel came to the opposite conclusion in an opinion it later withdrew. Dawson v. Washington Mutual Bank, F.A., 367 F.3d 1174 (9th Cir.), withdrawn, 385 F.3d 1194 (9th Cir. 2004). The two Dawson opinions provide compelling proof that any waiver of sovereign immunity as to emotional distress damages in § 362(k) is, at best, implicit.

(emphasis added).

The cite in the above block quote is to a 2012 Supreme Court case, F.A.A. v. Cooper, 132 S. Ct. 1441, 1448 (2012). The district court notes that Cooper supports its holding as well, as in that case the Supreme Court in examining a possible cause of action under the Privacy Act looked to “essentially the same question: if a statute waives sovereign immunity for “actual damages,” does that waiver include emotional distress damages? Id. at 1447–48. The Supreme Court answered no.”

Parting Thoughts

For good measure, the Hunsaker opinion discusses how even if there were no sovereign immunity issue it was skeptical that in fact there was an injury that was sufficient to warrant damages anyway, pointing to “alleged only brief losses of appetite, stress, and mounting frustration after receiving the IRS notices.” When I wrote my original post on the bankruptcy court case I said I was somewhat surprised at the outcome and I am not surprised that the district court reversed. On the other hand, the IRS conduct in this case is nothing to write home about.

I understand the government wanting to limit the possibility that other debtors similarly suffering from IRS mistakes in this process would sue and connect their stress from the IRS mistakes to an award, even a smallish one. It does seem that there should be some ramification for IRS mistakes, especially when the mistakes are repeated and the taxpayer/debtor has made a good faith effort to ensure that the government is aware of the stay. I note that Congress last systematically looked at these issues was in 1998 when it added Section 7433(e), allowing for an alternate statutory hook for taxpayers to petition the bankruptcy court for actual, direct economic damages and costs of the action if the IRS willfully violated the automatic stay injunction (7433(e) is also now the exclusive means for IRS violations of the discharge). I am not aware how often IRS whiffs on respecting these provisions so perhaps the issue is one rarely encountered in practice.

What Duty/Ability Does the IRS Have to Notify Clients of Professionals It is Auditing?

We welcome back guest blogger Marilyn Ames who takes a look at a recent complaint filed against the IRS by individuals who may not have received zealous representation from their accountants based on a conflict of interest.  Like me, Marilyn is retired from the Office of Chief Counsel, IRS where she worked for many years as a manager in the Houston office.  She currently assists in updating Saltzman and Book, IRS Practice and Procedure chapters while enjoying her retirement in Alaska.  Keith

In an action that partakes a little of the old fairy tale of spinning gold out of straw, on April 22, 2016, the former CEO and COO of Sprint Corporation, William Esrey and Ronald LeMay, filed suit against the United States seeking damages of $42.5 and $116.8 million, respectively, under the Federal Tort Claims Act.  The basis for their suit is that the Internal Revenue Service did not inform them that their long-time accounting firm, Ernst & Young, was under investigation for its actions in selling tax shelters. Mr. Esrey and Mr. LeMay had not only purchased tax shelters from Ernst & Young, but Ernst & Young was the certified public accounting firm for their employer, Sprint.  The plaintiffs contend the IRS “helped EY to hide information from Plaintiffs knowing that such information would have been critical to Plaintiffs’ evaluation of whether to trust EY and whether to continue to tell Sprint that EY was trustworthy and devoted to helping Plaintiffs resolve their tax audits with the IRS.” The complaint can be viewed here.


A little background to this convoluted story might be helpful before taking a quick look at the basis for Mr. Esrey’s and Mr. LeMay’s suit and the greater issues the suit raises.  At the time when our story begins unfolding, Mr. Esrey was Sprint’s CEO and the Chairman of its board, and Mr. LeMay was its COO and, according to the complaint, Mr. Esrey’s heir apparent.  Mr. Esrey and Mr. LeMay both employed Ernst & Young as a tax advisor and financial planner, and Ernst & Young was also the certified public accountant for Sprint.  Messrs. Esrey and LeMay both purchased tax shelters from E&Y in each of the years from 1999 through 2001.

The IRS did not take a kindly view of E&Y’s tax shelters, and according to the complaint, began an investigation of these transactions in March of 2002, that at some point included both civil and criminal investigators. The IRS also began auditing those taxpayers who had purchased tax shelters from E&Y, including the plaintiffs. Apparently not recognizing that having the seller of your tax shelter represent you before the IRS might be problematic, Mr. Esrey and Mr. LeMay engaged E&Y to represent them when the IRS began looking at their tax returns.  In the meantime, E&Y negotiated a resolution with the IRS with respect to some of its tax shelter activities, and in June of 2003, paid the IRS $15 million for failing to register the tax shelters they were selling and for failing to maintain lists of those for whom E&Y had acted as a material advisor with respect to the tax shelters.  (Although neither the complaint nor the IRS press release indicate the basis for the payment, presumably these were penalties imposed under IRC §§ 6707 and 6708, which are in a subchapter titled “Assessable Penalties.”) According to the complaint, as part of the settlement the IRS agreed not to use the word “penalty” in its press release in exchange for an additional $1.4 million over the amount previously agreed to.

After the settlement in 2003, the criminal investigation of E&Y and its employees continued on, and in May of 2007, four employees were indicted on tax charges in connection with the marketing of tax shelters, and two were eventually convicted.  Newspapers began reporting that E&Y was under investigation for these activities.  Plaintiffs contend that it was at this time they learned of the criminal investigation.

When the employment contracts for Mr. Esrey and Mr. LeMay were renewed in 2001, the plaintiffs disclosed to the Sprint board of directors that they had “entered into the transactions that EY had promoted.”  By 2002, according to the complaint, the Sprint board and audit committee became concerned there would be a conflict of interest between Esrey and LeMay and E&Y because of the audit of the tax shelters.  The complaint does not disclose what caused Sprint to become concerned about this.  The plaintiffs made a presentation to the board in December of 2002 recommending that Sprint dismiss E&Y as its auditor because of the board’s concern regarding a conflict of interest, and E&Y made a presentation that its advice to the plaintiffs “was sound and its actions proper.” The board determined that a potential conflict of interest was great, but that firing its auditor would result in negative publicity and would impact Sprint.  Instead, they asked Mr. Esrey and Mr. LeMay to resign, which they did in 2003.  Although the complaint does not indicate how the amount requested in damages was computed, it was this loss of their employment that has caused the plaintiffs to sue the United States. For those of you who want to know the rest of the story, the complaint also states that Mr. Esrey and Mr. LeMay filed suit in the Tax Court with respect to their tax shelters, the result of which is not disclosed, and they also initiated an arbitration action against E&Y and received a final award in 2014, the amount of which is also unknown.

Ignoring such obvious issues as the statute of limitations problem and the causation issue (after all, the injury complained of occurred in 2003, and was the result of Sprint choosing its auditor over its executives), the larger questions for the tax community are whether a failure to disclose information about a taxpayer’s representative to the taxpayer is actionable under the Federal Tort Claims Act, and whether it should be. By its terms, 28 USC § 2674 provides a remedy for persons injured by governmental negligence in circumstances like those in which a person would be compensated for the negligence of another private person.  Generally, in litigation between private parties, the burden to disclose a conflict of interest in legal representation is on the attorney representing the taxpayer, not on the opposing party or the opposing party’s counsel.  Is it ethical or even desirable to have the IRS reaching out to a taxpayer to question the taxpayer’s choice of representative? If a failure to warn a taxpayer is actionable, when does the duty to warn arise?  Should the IRS issue press releases when it begins investigating return preparers, so the public can avoid those who may prepare questionable returns – at the risk of ruining a potentially innocent person’s business?  An investigation is simply that – an investigation.

The FTCA also permits the United States to assert any defense based on judicial or legislative immunity that would otherwise have been available to the employee whose actions form the basis for the suit.  Any plaintiff arguing that the IRS should have disclosed information to the plaintiff that does not involve the plaintiff’s own tax returns is always going to have to overcome the hurdle of IRC § 6103 – the disclosure statute.  The plaintiffs have ignored this hurdle in their complaint, but it is a sure bet that the United States will not.  It is clear that the IRS believed that Section 6103 applied to the investigation of E&Y; the press release announcing the $15 million paid to the IRS expressly states that the closing agreement between E&Y and the IRS included a disclosure authorization allowing the IRS to issue the press release. If the IRS does have a duty to disclose that a representative is questionable, how does the IRS do that without potentially disclosing the tax return information of other taxpayers?

In support of its allegations that the IRS is liable for the plaintiffs losing their jobs, the complaint asserts that the IRS had a policy at the time of the E&Y audits to seek assurances from taxpayer representatives who were tax shelter promoters that their clients were informed of potential conflicts of interest, citing a then-applicable provision of the IRM and an opinion given by Chief Counsel to an employee of the IRS.  While the plaintiffs are correct that there was such a policy, the policy was to require promoters to inform their clients of a potential conflict of interest, and for the IRS to seek assurances from the representative that it had done so.  While the complaint is silent on whether the IRS asked for and received such an assurance from E&Y, it is not clear that even if the IRS failed to do so that the plaintiffs would have a right to recover.  They would first have to overcome the hurdle of United States v. Caceres, 440 US 741 (1979), in which the Supreme Court held, in a case involving the Internal Revenue Manual, that courts are only required to enforce agency regulations when compliance is mandated by the Constitution or federal law; otherwise, agency directives do not give taxpayers rights not otherwise given.  If the plaintiffs prevail in this suit against the United States, will the IRS be tempted to hide its directions to employees in documents not publicly disclosed, or for IRS attorneys to only give oral advice not made available to the public?

This case raises a number of interesting questions, and its progress will bear watching for the greater impact it may have on both those who enforce the tax laws and those who represent taxpayers.




Ford v US: Supreme Court Weighs in on Lower Court Jurisdiction in Interest Disputes

Yesterday, the Supreme Court granted cert and remanded the case of Ford v US back to the Sixth Circuit.  The case on the merits involves the question as to when Ford is entitled to receive overpayment interest on about $875 million of deposits it made that it subsequently requested the IRS treat as advance payments.  Later, Ford and IRS both agreed that Ford overpaid its taxes and Ford received a refund of the overpaid amounts. IRS and Ford disagreed on when the payments should generate overpayment interest. I will briefly discuss the interesting jurisdictional issue that the Court raised, as it brings into question whether the case should have been brought originally in the Court of Federal Claims, and not a district court.


Ford and the US disputed when the interest should have run on its overpayment under Section 6611(b)—Ford said the date should be when it first remitted its deposits; the US said interest ran only from when Ford requested that the deposits be treated as advance payments of tax.

The Sixth Circuit agreed with the government’s interpretation. One interesting part of the case is that the Sixth Circuit decided the case, in part, on the basis that Section 6611(b) was a waiver of sovereign immunity, and those waivers should be strictly construed.

In its cert petition, Ford argued that the Sixth Circuit impermissibly framed Section 6611(b) as the applicable provision waiving sovereign immunity. Instead, Ford argued 28 USC 1346(a)(1) was the provision waiving sovereign immunity; 6611(b) was a substantive provision that was entitled to no special governmental deference. The reason Ford believed this was important is that it opened the door to a construction of Section 6611(b) that was not tethered to the principle that provisions waiving sovereign immunity are to be construed strictly in favor of the government.

In its response to the cert petition, DOJ argued for the first time that 28 USC 1346 (giving concurrent jurisdiction to the court of federal claims and district courts) was not the correct statute conferring jurisdiction on the lower courts. I will repeat the government’s position below as set out in its response in opposition to the cert petition:

Petitioner asserts (Pet. 17 n.1) that Section 1346(a)(1) itself provides the requisite “express congressional consent to the award of interest separate from a general waiver of immunity to suit.” Shaw, 478 U.S. at 314. Section 1346(a)(1) grants jurisdiction to district courts (concurrent with the Court of Federal Claims) over “[a]ny civil action against the United States for the recovery of *                  *                  * any sum alleged to have been excessive or in any manner wrongfully collected under the internal-revenue laws.” 28 U.S.C. 1346(a)(1). That language does not literally encompass (and, a fortiori, does not unambiguously authorize) petitioner’s current suit. Petitioner does not seek to recoup any prior payment made to the government that was “excessive” or “wrongfully collected,” but instead seeks additional interest on an overpayment that has already been refunded.

As explained above, however, the term “sum” in Section 1346(a)(1) is modified by the phrase “excessive or in any manner wrongfully collected under the internal- revenue laws.” That phrase might encompass interest that the taxpayer has paid over to the IRS and seeks to recoup, as when the IRS assesses additional tax and interest, and the taxpayer pays the full assessment and then sues for a refund.

The interest that petitioner seeks here, however, was never in petitioner’s possession, and petitioner does not assert that it is either “excessive” or “wrongfully collected.” Thus, even apart from the fact that Section 1346(a)(1) does not specifically mention interest, the provision does not literally authorize petitioner’s current suit.

In a footnote (note 9), the government suggested the result that the Supreme Court took:

“[b] ecause binding Sixth Circuit precedent held that Section 1346(a)(1) vests district courts with jurisdiction over suits like this one, the government did not argue below that the district court lacked jurisdiction over this case….This Court, however, obviously would not be bound by that circuit precedent.”

Earlier, in its response (n. 3), DOJ stated that it believed the Tucker Act controlled. The Tucker Act is found at 28 U.S.C. 1491(a), and is a general statutory provision providing for waiver of sovereign immunity on certain claims, and which vests jurisdiction in the Court of Federal Claims.

Since the parties in the lower courts did not address whether the Tucker Act, and not 28 USC 1346, formed the basis for waiver of sovereign immunity, the Supreme Court remanded the case back to the Sixth Circuit. The Sixth Circuit will now directly consider the jurisdictional issue. In either case, I believe Ford is correct that conflating 6611(b) with either of the two provisions waiving sovereign immunity is an error, and the courts will likely consider the merits as to when interest is due apart from statutory construction principles tied to sovereign immunity.

As an aside, the possibility of Ford decreasing lower court diversity through funneling these types of cases exclusively to the Court of Federal Claims, rather than the myriad district courts, ties in nicely with Keith’s prior post on the Golsen rule. Jack Townsend too takes up the issue of specialized court review of tax cases, with an excellent post linking articles that have discussed the issue.

Later this week, we will post as to the merits of the parties’ claims on when overpayment interest was due to Ford.