Circuit Court Holds That LLC Distinct From Its Agent For Purposes of Criminal Referral Exception To Summons Power

0 Flares 0 Flares ×

In Equity Investment Associates v US the 4th Circuit considered the limits of the IRS summons power when there is a criminal investigation that relates to but does not directly involve a business entity. The case involved an LLC that donated a conservation easement. The IRS was examining the LLC while there were simultaneous criminal investigations of the LLC’s accountants/tax return preparers and other alleged co-conspirators.


Under Section 7602(d), the IRS is barred from issuing a summons “with respect to any person if a Justice Department [criminal] referral is in effect with respect to such person.”

Under the BBA partnership audit procedures, Jack Fisher was Equity’s partnership representative. Equity was 80% owned by Southeast Property. In turn, Southeast Property was controlled by its managing member, Inland Capital Management, which Fisher managed.

The IRS issued a summons to Equity’s bank. IRS gave notice of the summons to Equity, which sought to quash that summons, arguing that a Justice Department criminal referral was already in effect for Equity or one of its agents (Fisher). In opposing the motion to quash and requesting that the court order enforcement of the summons, the DOJ submitted a declaration from an IRS Supervisory Special Agent who attested that there was no criminal referral for Equity. 

Equity’s tax return preparers had previously pleaded guilty to conspiring to defraud the United States for selling, along with co-conspirators, “investments” in fraudulent syndicated conservation-easement tax shelters. The government was also conducting a criminal investigation of Fisher, who was subsequently indicted for crimes related to the fraudulent syndicated easement scheme.

Does The Criminal Investigation and Prior Referral of Equity’s Agent Serve to Bar A Summons on Equity?

Equity’s argument was premised on using the definition of person in Section 7343, which states that for purposes of chapter 75 of the IRC, a person “includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.” Chapter 75 deals with crimes, offenses and forfeitures (Section 7201 through 7345).

Unfortunately for Equity, the prohibition on IRS summons power when a criminal referral is in place is in Section 7602, and that Code section is within Chapter 78, which deals with civil examinations and encompasses Section 7601 through Section 7655. There is no specific definition of person either in Section 7602 or Chapter 78.

In the absence of a specific definition, the general Code definitional provisions in Section 7701 apply:

Section 7701(a)(1) states that “[w]hen used in [Title 26], where not otherwise distinctly expressed or manifestly incompatible with the intent thereof . . . [t]he term ‘person’ shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation.” § 7701(a)(1). That definition does not consider members, officers, or employees of a business entity to be a part of the same “person” as the business entity itself. By omitting officers, members, and employees from the personhood of business entities in § 7701(a)(1) but including those same people in the definition it adopted for § 7343, Congress made an express decision that “person” for purposes of § 7602 only means the business entity itself.

Equity also argued that even if Section 7701 applied, its definition is non-exclusive in the list of entities that count as a person. As such it asked the court to find that the “statute’s specific reference to only the business entities themselves is thus not exclusive because agents of a business entity are “otherwise within the meaning” of the term “person.”

The court disagreed, finding that person is “not naturally read to suggest both a business entity and its officers, members, and employees.”

And for the final nail in the coffin, the opinion considered how the general summons power in Section 7602(a) refers to entities and their agents in a manner reflecting their distinct status:

Indeed, § 7602‘s text shows that the statute considers business entities as distinct persons from their agents. Under § 7602(a)(2) “the Secretary is authorized . . . [t]o summon the person liable for tax or required to perform the act, or any officer or employee of such person.” If “person” already included the officers and employees of a business entity, there would have been no reason for Congress to have provided for “any officer or employee of such person” in § 7602(a)(2), and Equity’s preferred definition as applied to § 7602(a)(2) would create surplusage.

Was There a Referral For Equity?

The opinion also considered the district court’s denial of an evidentiary hearing concerning whether there was a Justice Department referral addressing Equity as an entity. As the opinion notes, a referral is not a generalized suspicion of criminal activity. It occurs only when (1) the IRS recommends a person to the Attorney General for prosecution or (2) the Justice Department requests a taxpayer’s information from the IRS.

Absent Equity introducing evidence that reflected an actual referral to the Justice Department with respect to Equity, the court declined to remand for an evidentiary hearing. The opinion sweeps in the Clarke standard for when in a summons challenge a district court should allow a hearing:

Equity’s other evidence only suggests that the government believed that Equity had committed a crime. However, suspicion and even criminal investigation does not prevent the IRS from issuing a summons. The IRS can continue to avail itself of the summons power until it crosses the “bright line” of making a Justice Department referral. See Morgan, 761 F.2d at 1012. It is evidence of “specific facts or circumstances” suggesting a Justice Department referral, not generalized suspicion, that Equity must rely on to meet its burden. See Clarke, 573 U.S. at 249.


Our blogging colleague Jack Townsend also discusses the opinion here. As Jack notes, this case reflects fairly straightforward holdings. As usual, Jack makes interesting observations, and for readers with a deeper interest I recommend a read.

Equity Investment Associates is generally consistent with other caselaw reflecting that an entity is distinct from the owners for summons purposes, an issue that may arise when an individual may have or wish to assert a privilege even though a summons is directed to a business entity. It is also yet another case reflecting the IRS focus on conservation easement and inflated charitable deductions. The opinion also discusses in a straightforward way how the use of an an entity treated as a partnership for tax purposes makes the easement donation scheme available to others by passing the corresponding deduction through to its members, thus spreading the claimed tax benefit to investors.  

Avatar photo About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.


  1. Robert Kantowitz says

    Apparently the court thinks (FN 4) that it is fraudulent and devoid of economic substance for a partnership to own property and grant an easement, and that by implication a conservation easement only works if it is one single individual owning the property. The court seems not to understand that partnerships all the time engage in transactions that an individual could have accomplished in such a way that the partners divide up the benefits. The transaction might be faulty or the way the partnership divides up income and loss might lack economic substance, but there is nothing per se wrong with conducting activity through a partnership even if the units are syndicated.

    As to the substantive issue with which the opinion deals, this is a subject near and dear to me, since, when I was clerking for Judge Garth (Third Circuit) in 1979-80, we had a few cases in which the IRS demanded from a third-party record-keeper (a bank) the retained paper copy of a Form 1099. I looked into the Powell case and its progeny and thought a lot about these issues. The civil process must come to a halt when the criminal process commences in order to prevent the government from abusing the civil process, which has fewer safeguards, to support the criminal case. Hence, I question the Fourth Circuit’s holding here that because the two taxpayers are formally separate, the civil process could proceed against one and implicitly support criminal prosecution of either or both on the identical subject matter. As a technical matter of statutory interpretation, the qualifier in section 7701(a)(1) — “manifestly incompatible with the intent thereof” — is broad enough to conflate the two persons. Indeed, one wonders whether the government might even contend that a taxpayer and its wholly owned LLC or grantor trust are separate persons for this purpose.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind