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Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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In the

United States Court of Appeals

For the Seventh Circuit ____________________

No. 14-3789

UNITED STATES OF AMERICA,

Plaintiff-Appellee,

v.

TITAN INTERNATIONAL, INC.,

Defendant-Appellant.

____________________

Appeal from the United States District Court

for the Central District of Illinois.

No. 14-C-3263 — Richard Mills, Judge.

____________________

ARGUED SEPTEMBER 21, 2015 — DECIDED FEBRUARY 1, 2016

____________________

Before POSNER, WILLIAMS, and SYKES, Circuit Judges.

SYKES, Circuit Judge. In February of 2014, the Internal 

Revenue Service issued an administrative summons to Titan 

International, Inc., to inspect its 2009 books and records in 

connection with an audit of the company’s 2010 tax return. 

Titan had taken an operating-loss carryforward in the 2010 

tax year for a loss that occurred in 2009. Titan had claimed 

this same loss in 2009, and the IRS had already audited the 

company’s return for that tax year.

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Titan refused to comply with the 2014 summons because 

the IRS had inspected the same records during its audit of 

the company’s 2009 return. Titan’s refusal was based on

26 U.S.C. § 7605(b), which provides that “only one inspection of a taxpayer’s books of account shall be made for each 

taxable year unless ... the [Treasury] Secretary ... notifies the 

taxpayer in writing that an additional inspection is necessary.” Because the Secretary had not issued this notice, Titan 

asserted that the reinspection of its 2009 records was not 

permitted. The district court disagreed and ordered Titan to 

comply with the summons.

We affirm. Section 7605(b) applies if the IRS seeks to inspect a taxpayer’s records when auditing a tax liability for a 

given year when the agency has already inspected the 

records in auditing the taxpayer’s liability for that same tax 

year. It does not apply when the IRS seeks already-inspected 

records for an audit of a different tax year. Because the IRS 

summoned the 2009 records in connection with an audit of 

Titan’s 2010 return—not its 2009 return—§ 7605(b) imposes 

no barrier here.

 I. Background

Titan is an Illinois manufacturer of parts for off-road 

equipment. In 2010 the IRS audited Titan’s 2009 tax return. 

During the course of that audit, the agency summoned

Titan’s 2009 general ledger, its 2009 airplane flight logs, and 

other 2009 business travel documents. Titan complied with 

that summons, and the audit concluded with a reduction of 

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No. 14-3789 3

Titan’s claimed net operating loss for that year.1 Titan accepted this adjustment to its 2009 tax liability and the audit 

was closed.

In 2014 the IRS opened an audit of Titan’s 2010 tax return

and again summoned Titan’s 2009 general ledger, flight logs,

and travel records. This inquiry related to an operating-loss 

carryforward Titan had claimed on its 2010 return. Citing

§ 7605(b), Titan refused to comply, asserting that the statute 

blocks inspection of already-inspected records unless the 

Treasury Secretary makes a finding of necessity and notifies 

the taxpayer in writing of that finding. No such notice was 

sent before the IRS summoned Titan’s 2009 records for the 

2010 audit.

The United States, on behalf of the IRS, filed a petition in

the district court to enforce the summons. The court rejected 

Titan’s interpretation of § 7605(b) and ordered it to comply.

 II. Discussion

Titan’s appeal raises only a legal question about the 

meaning of § 7605(b). Questions of statutory interpretation 

are subject to de novo review. Breneisen v. Motorola, Inc., 

656 F.3d 701, 704 (7th Cir. 2011). We begin with the relevant 

text of the statute:

 

1 A net operating loss is a deduction valued as the excess of a business’s 

deductions over the business’s income for a given year. A net-operatingloss deduction earned in one year can be applied to reduce the business’s 

tax liability of a later year (i.e., a year in which the business’s income was 

greater than its deductions). This is called a net-operating-loss carryforward.

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No taxpayer shall be subjected to unnecessary 

examination or investigations, and only one inspection of a taxpayer’s books of account shall be 

made for each taxable year unless ... the Secretary ... notifies the taxpayer in writing that an 

additional inspection is necessary.

§ 7605(b) (emphasis added).

Titan argues that the statute limits the IRS to a single inspection of a “taxpayer’s books of account” created for a 

particular taxable year, unless the Secretary finds a second 

inspection “necessary” and sends written notice to that 

effect. In other words, Titan reads “for each taxable year” as 

modifying “taxpayer’s books of account.” On this interpretation, Titan’s 2009 records—already inspected during the 

audit of its return for tax year 2009—cannot be inspected 

again in connection with the audit of its 2010 tax return (or 

any subsequent tax-year audit, for that matter) unless the

Secretary first sends written notice of necessity.

Titan’s interpretation is disjointed and curiously omits 

some of the language of the statute. The key statutory phrase 

is this: “[O]nly one inspection of a taxpayer’s books of 

account shall be made for each taxable year.” The more 

natural reading of this language limits the IRS to one inspection of a taxpayer’s books per audit of a given year’s tax 

return (subject, of course, to notice and a finding by the 

Secretary that a second inspection is necessary). Read in this 

more natural way, § 7605(b) does not bar the summons of 

Titan’s 2009 records for the purpose of auditing its 2010 tax 

return.

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Two cases, one from this court and one from the tax 

court, confirm this interpretation of the statute. In Reineman 

v. United States, the taxpayers purchased six horses in 1954

for their horse-breeding business. 301 F.2d 267, 268 (7th Cir. 

1962). They then deducted the entire cost of the horses on 

their 1954 tax return. Id. In 1956 the IRS audited the 1954 tax 

return and adjusted that deduction. Id. at 269. Later the IRS 

audited the taxpayers’ 1955 tax return; in the process the 

agency reopened the 1954 audit (without written notice from 

the Secretary) and again adjusted the deduction for the six 

horses. Id. at 269–71. The 1954 records inspected by the IRS 

to adjust the deduction for the second time were wholly 

irrelevant to the 1955 audit. Id. at 271. We concluded that the 

second inspection of those records violated § 7605(b) because 

it was an “additional inspection” of the taxpayers’ books for 

the purpose of reopening the 1954 tax return. Id. at 272.

The second relevant case is Digby v. Commissioner, 

103 T.C. 441 (1994). There the IRS audited a married couple’s 

1987 tax return and allowed them to claim a pass-through 

loss for that year from their S corporation. Id. at 443. In the 

course of that audit, the IRS inspected records showing the 

couple’s basis in its S corporation stock. See id. at 444. The 

IRS later audited their 1988 tax return, a year in which the 

couple claimed another pass-through loss from the same 

S corporation. Id. To complete this audit, the IRS necessarily

summoned the same basis records it inspected for the 1987 

audit; as the tax court explained, the agency was “in possession of the information necessary to make a [basis] determination for 1988 and/or 1987.” Id. at 448. Based on these 

summoned records, the IRS determined that the couple’s 

basis was inadequate to support the pass-through loss for 

1988 and 1987, despite its prior 1987 audit. Id. at 445–46. The 

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IRS therefore disallowed the pass-through loss for both 

years. Id. at 446.

The tax court concluded that the second inspection of the 

records was not a violation of § 7605(b) because that inspection was undertaken for the purpose of examining the 1988 

tax return, and—unlike Reineman—those records were 

necessary to complete that audit. Id. at 448–49. The court 

ruled that an additional adjustment of the tax return for an 

earlier taxable year is not a violation of § 7605(b) so long as it

was not coupled with an additional inspection of the taxpayer’s books for the purpose of adjusting that year’s tax liability. Id.

This case is more like Digby than Reineman. The IRS first 

inspected Titan’s 2009 records to verify its net operating loss 

in connection with an audit of its 2009 tax return. The IRS 

now seeks to inspect those same records for the purpose of 

auditing Titan’s 2010 tax return in order to determine the 

validity of its 2010 net-operating-loss carryforward. Much 

like the pass-through loss at issue in Digby (and unlike the 

deduction at issue in Reineman), the net-operating-loss 

carryforward on the 2010 tax return cannot be verified 

unless the IRS inspects the 2009 records. Accordingly, the

summons for inspection of Titan’s 2009 books and records 

for the purpose of auditing its 2010 tax return does not 

require written notice and a finding of necessity by the 

Secretary under § 7605(b).

AFFIRMED.

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