I Do Not Have What You Want: The Affirmative Defense of Non-possession In Summons Enforcement Proceedings

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I am prepping to teach tax procedure in Villanova’s Graduate Tax Program.  Most of the students in our program are full time tax professionals, both accountants and lawyers. Few of the students in the GTP specialize in tax procedure, so I try to teach the course with an eye toward what practitioners may find useful. One topic that generates intense interest is the IRS’s broad power to seek access to a taxpayer’s books and records, including its power to issue an administrative summons to compel a taxpayer to turn over records or documents. There have been lots of interesting developments in the summons world in the last few years. An area that generates lots of litigation, and occupies a large chunk of the material in the summons chapter in the Saltzman and Book IRS Practice and Procedure, is the various affirmative defenses that can be raised when fighting an IRS enforcement proceeding in district court.

A defense that has occasionally succeeded is that the summoned party claims and establishes that they do not have what the IRS is seeking. After IRS establishes a prima facie case that a court should order enforcement, a summoned party can establish non-possession of documents as an affirmative defense.  I previously wrote about this issue, and discussed the difficulty in proving non-possession in Summons Enforcement For Undisclosed Offshore Accounts: The I Don’t Have Em Defense Is Not an Easy One to Win.  The recent case of United States v Santoso  in a federal district court in Maryland is a nice example of a successful non-possession defense.

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In Santoso, the US was seeking three categories of documents: (1) ownership of entities and structures, (2) non-taxable sources of income, and (3) professionals that Santoso had engaged. After the IRS initially established a prima facie showing that the petition should be enforced, and a determination that Santoso had submitted sufficient evidence of non-possession to warrant a hearing, the court had an evidentiary hearing to allow for the possibility that she could meet the burden of proving that she did not have what the IRS sought.

The caselaw in this area establishes that to succeed in using this affirmative defense the party must demonstrate not only that she does not possess the documents, but also that she has taken reasonable steps to obtain them if they are within her control. Moreover, conclusory statements or self-serving testimony alone is not going to get over the hurdle. 

In finding that Santoso met her burden and established non-possession the opinion notes the following:

  1. She submitted two sworn statements and testified under oath about both her non-possession and efforts to track down what the IRS wanted; 
  2. She established that she obtained bank statements, hospital bills and tuition records, as well as reviewed emails that spanned a decade, as part of her effort to find responsive documents; 
  3. She authorized her attorney Andrew Feldman to contact people and entities who potentially had documents that might be responsive;
  4.  She provided testimony and documentary evidence establishing Feldman’s efforts, all of which resulted in no further documents, especially with respect to the taxpayer’s late mother and her estate documents.

 The latter two points seemed to matter a great deal in this case, as the opinion discusses in some detail the correspondence between Santoso’s attorney and the third parties. The correspondence between the attorneys and third parties, some of which was met by responses stating that the parties did not want to get involved or did not have information that was requested, showed to the judge a good faith effort to comply with the summons.  

The government argued that she could have done more to conduct a diligent search and that there were likely other records that related to transfers that the IRS believed that she received from her mother’s estate that were in her constructive control. As to the latter point, the court noted that she testified that she did not inherit anything from her mother’s estate, which suggested that she had no right to compel production of documents pertaining to the estate. In concluding that her search and efforts were diligent enough, the court noted that while the efforts were unsuccessful, it appeared to the judge that she was “sincere” in trying to obtain information the government sought:

While there may always be additional steps that could be taken, the actions taken by Santoso and her attorney, as described above, can hardly be considered inaction. Moreover, although there is a relative dearth of authority regarding what a taxpayer must do to show that she has taken “all reasonable steps” to identify and obtain documents, what has been established is that she must make more than a pro forma demand and cursory search for records….The actions taken by Santoso and Feldman are certainly more than that.

Conclusion

It is not easy to establish non-possession as an affirmative defense. It is helpful when one can demonstrate a significant amount of time and money spent trying to get what the IRS is seeking. This case should be in the practitioner’s toolkit.

Leslie Book About Leslie Book

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

Comments

  1. Kenneth H. Ryesky says

    Cf. Estate of DiPalma v. Commissioner, 71 T.C. 324, 327 (1978):

    “Although the record herein is not as neat and tidy as we would have preferred, we are satisfied that petitioner has carried its burden of proof that the delay in filing of the estate tax return was due to reasonable cause and not to willful neglect. The executrix did not sit supinely by and leave everything to [the Estate attorney] Dallacasa. She made inquiry of him.”

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