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A 360-Degree View: August and September 2017

Upcoming Tax Controversy Activities in September:

September 13, 2017: Tom Jones is presenting an update on Captive Tax in Charleston, South Carolina, at the South Carolina Captive Insurance Association Annual Conference.

September 14, 2017: Robin Greenhouse and Kristen Hazel will be speaking at McDermott Will & Emery’s Tax in the City®: A Women’s Tax Roundtable meeting in New York City about tax ethics.

September 18, 2017: Justin Jesse is speaking at the PLI Basics of International Taxation session in San Francisco about “Tax Concerns for US Persons Investing or Operating Outside of the US (Outbound Investments) – Active Business Operations.”

Wrapping up August:.

Our August 2017 blog posts are available on taxcontroversy360.com, or read each article by clicking on the titles below. To receive the latest on tax controversy news and commentary directly in your inbox as they are posted, click here to subscribe to our email list.

August 3, 2017: Tax Court Addresses “Issue of First Impression” Defense to Penalties

August 7, 2017: President Trump Nominates Copeland and Urda to US Tax Court

August 8, 2017: Record Numbers Are Giving Up US Citizenship

August 9, 2017: TIGTA Pounces on IRS Federal Records Retention Policies; Recommends Changes

August 11, 2017: The IRS Is Struck Down Again in Privilege Dispute

August 14, 2017: McDermott Named “Law Firm of the Year” at 2017 US Captive Services Awards

August 16, 2017: Grecian Magnesite Mining v. Commissioner: Foreign Investor Not Subject to US Tax on Sale of Partnership Interest

August 17, 2017: Sovereign Immunity Principles Bar Taxpayers from Challenging John Doe Summonses

August 23, 2017: Court Rejects Taxpayer’s Claim for US-Swiss Treaty Coverage

August 24, 2017: Internal Revenue Service Updates Golden Parachute Payments Audit Technique Guide, Signaling Key Items IRS May Review on Audit

August 25, 2017: IRS Criminal Investigation Division Announces Two New Initiatives




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Sovereign Immunity Principles Bar Taxpayers from Challenging John Doe Summonses

We recently wrote here about “John Doe” summonses and a case where an anonymous “John Doe” was allowed to intervene in a summons enforcement action. To refresh, under Internal Revenue Code (IRC) Section 7602 the Internal Revenue Service (IRS) has broad authority to issue administrative summonses to taxpayers and third parties to gather information to ascertain the correctness of any return. If the IRS does not know the identity of the parties whose records would be covered by the summons, the IRS may issue a “John Doe” summons to a third party to produce documents related to the unidentified taxpayers.

In Hohman v. United States, Case No. 16-cv-11429 (E.D. Mich. July 11, 2017), two John Doe summonses directed a banking institution to deliver to the IRS records related to three accounts, which were identified only by account numbers. Two of the accounts were held by limited liability companies (LLCs) and the other was held by an individual. The banking institution notified some of the account-holders that it had received a John Doe summons that sought records for accounts relating to them.

The account-holders filed a civil action, alleging that the IRS’s efforts to obtain their financial records through the use of John Doe summonses violated the federal Right to Financial Privacy Act (RFPA). The RFPA accords customers of banks and similar financial institutions certain rights to be notified of and to challenge in court administrative subpoenas of financial records in the possession of banks.  The individual account-holder did not allege that the IRS actually obtained or disclosed any records of account information as a result of the John Doe summons.

The government moved, under Rule 12(b)(1) of the Federal Rules of Civil Procedure (FRCP), to dismiss the RFPA claims for lack of subject-matter jurisdiction. The government asserted that it has sovereign immunity from the account-holders’ RFPA claims. The waiver of sovereign immunity under the RFPA applies only to claims that a government authority disclosed or obtained financial records.

The court agreed with the government. First, the court concluded that the RFPA’s waiver of sovereign immunity applies only to “customers,” and the LLCs were not “customers” as defined under the RFPA. The court reasoned that the plain language of the RFPA does not state that an LLC is either a “person” or a “customer” and the court was not at liberty to expand the definitions. Second, the court concluded that sovereign immunity was not waived with respect to the individual’s claim because the individual had not alleged that the IRS actually obtained or disclosed any financial records or information from the account as a result of the John Doe summons.

Practice Point:  Although waivers of sovereign immunity are often construed strictly, taxpayers should consult with their advisors to determine whether their particular facts may allow an action against the government.




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