We posted on August 1, 2013 Federal Courts Authorize John Doe Summonses Seeking Identities of Credit Card Use For Norweign Tax Authority! where we discussed that federal courts in Minnesota, Texas, Pennsylvania, Oklahoma, Virginia and California had entered orders authorizing the Internal Revenue Service (IRS) to serve John Doe summonses on certain U.S. banks and financial institutions, seeking information about persons who have used specific credit or debit cards in Norway. Now it's happened again as a district court has upheld a summons that IRS issued to an American law firm, pursuant to a request from the French tax authorities, with respect to transfers of funds made by an alleged French citizen to a client trust account maintained by the law firm. (Franck Hanse v. US, Case No. 1:2017cv04573).
The IRS has power to issue summonses "for the purpose of… determining the liability of any person for any internal revenue tax." (Code Sec 7602(a)(2)) If the taxpayer doesn't comply, IRS may bring an enforcement action in district court. (Code Sec 7604(a)).
To obtain a court order enforcing a summons, IRS must first establish good faith by showing that the summons: (1) is issued for a legitimate purpose; (2) seeks information relevant to that purpose; (3) seeks information that is not already in IRS's possession; and (4) satisfies all of the administrative steps set forth in the Code. (U.S. v. Powell, (S Ct 1964) 14 AFTR 2d 5942).
Article 27 of the U.S.-France income tax treaty (the Treaty) provides that the competent authorities of the U.S. and France may exchange information "as may be relevant for carrying out the provisions of this Convention or to the administration or enforcement of the domestic laws concerning taxes of every kind and description imposed on behalf of the Contracting States." The exchange of information provisions of the Treaty also provide that the provisions should not be construed to impose on a Contracting State the obligation "to supply information which is not obtainable under the laws or in the normal course of the administration" of either Contracting State.
Here the taxpayer, Mr. Hanse, was the subject of an investigation by the French tax authorities relating to his potential income tax and wealth tax liabilities. Pursuant to the Treaty, the French tax authorities sent IRS an exchange-of-information request seeking information related to these investigations. Specifically, the French tax authorities requested information relating to transfers of funds totaling over 500,000 euros from Hanse to a client trust account maintained by the Sherman law firm.
Hanse's petition to quash the summons and the court denied their petition to quash. The court first noted, citing Stuart (S Ct 1989) 63 AFTR 2d 89-681, that IRS may issue summonses to obtain information for any treaty partner.
The court then noted that, in resolving a motion to quash an IRS summons, the government bears the initial burden to make a prima facie case that IRS issued the summons in good faith. (2121 Arlington Heights, (CA 7 1997) 109 F.3d 1221) To meet this burden, IRS must satisfy the four factors articulated by the Supreme Court in Powell. Once IRS makes its prima facie case, the burden shifts to the party seeking to quash the summons to come forward with specific facts that disprove any of the Powell factors or otherwise show that IRS issued the summons in bad faith or in a manner that constitutes an abuse of process.
The court quickly determined that IRS met its initial burden. Hanse then raised several objections to the IRS summons; the court rejected all of his objections.
1. Hanse argued that the French tax authorities were not entitled to the information sought by the summons to Sherman under French law. Specifically, Hanse argued that he was a resident of Switzerland, not France, during the relevant tax years and, as a non-resident French citizen, he did not have to pay tax on income earned outside of France. and
2. He argued that the French tax authorities should be required to resolve the question of his residency status before IRS procures information to assist in the French investigation.
The court said that this appeared to be a challenge to the first Powell factor requiring that the summons be issued for a legitimate purpose. It concluded that Hanse's arguments on this point failed because IRS was not required to assess the good faith of France’s tax investigation into Hanse before issuing the summons to Sherman.
3. Hanse then argued that the U.S. is not required under the Treaty to provide any information to France that France could not obtain under its own laws.
The court said that this argument was also of no help to Hanse. The Treaty states that its provisions should not be construed to impose on a Contracting State the obligation "to supply information which is not obtainable under the laws or in the normal course of the administration" of either Contracting State. But, the court said, "even though it does not mandate the exchange of information at variance with French law, neither does the plain language of the Treaty forbid compliance with an otherwise proper treaty request."
4. Hanse then objected to the IRS summons on the basis that IRS did not comply with the notice requirements of Code Sec 7602(c)(1) and Code Sec 7609(a).
The court said that Hanse's argument regarding Code Sec 7602(c)(1) failed because he is not entitled to any advance notice of a third-party summons under this section of the Code.
According to Hanse, as the "taxpayer," he should have been notified, pursuant to that Code section, by IRS that a third party would be contacted in connection with an investigation into his tax liability. But "tax liability" for purposes of this section "does not include the liability for any tax imposed by any other jurisdiction." (Reg 301.7602-2(c)(3)(C)) The summons was issued to Sherman in relation to Hanse's potential tax liability in France, not the U.S., and therefore it did not fall into the relevant definition of "tax liability" for purposes of this section. Therefore, IRS was not required to notify Hanse in advance of a third party summons under Code Sec 7602(c)(1).
And, the court said, IRS presented ample evidence, that Hanse did not challenge, of compliance with Code Sec 7609(a). The summons at issue was served on Sherman on June 1, 2017. Notice was sent to the two parties identified within the summons via certified mail on June 2, 2017. The notice to Hanse was sent to the French address for Hanse provided by the French government in its request, after IRS searched its own databases for an alternative address and found none. No more was required of IRS to properly serve Hanse.
5. Finally, Hanse stated that Sherman is a law firm and therefore some of the summoned materials were protected from disclosure by attorney-client privilege. The court said that Hanse's blanket assertion of privilege was insufficient to challenge the validity of the summons. The party asserting the privilege has the burden to "on a document-by-document basis at least identify the general nature of that document, the specific privilege he is claiming for that document, and facts which establish all the elements of the privilege he is claiming." In addition, Hanse did not even assert that Sherman was retained as his attorney; he merely stated that Sherman was a law firm.
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