Opinion ID: 4544634
Heading Depth: 3
Heading Rank: 2

Heading: The “Reasonable Basis” Requirement

Text: The novel issue that we consider here is whether the IRS must demonstrate a “reasonable basis” for believing that a named taxpayer has violated or may violate the internal revenue laws before the district court may enforce a third-party summons seeking information about this taxpayer. Byers acknowledges that this “reasonable basis” language stems from a different provision, subsection (f), of the third-party summons statute, entitled “Additional requirement in the case of a John Doe summons.” 26 U.S.C. § 7609(f). This provision states that in order for the IRS to serve a third-party summons “which does not identify the person with respect to whose liability the summons is issued,” the government must demonstrate that “there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law.” 26 U.S.C. § 7609(f)(2). In other words, when the government seeks information about an unnamed person from a third party, it must show the district court that it has some reason to believe that this unnamed person No. 19-1893 Byers v. IRS Page 6 violated or may violate the law. The other provisions of § 7609 do not explicitly set forth any requirements that the government must satisfy in order to enforce a third-party summons relating to a named person, besides giving proper notice to this person. The fact that only the John-Doe provision of § 7609 includes the “reasonable basis” language forecloses Byers’s argument that it constitutes a prerequisite for the enforcement of any third-party summons, whether involving a named or unnamed person. “[W]here Congress includes particular language in one section of a statute but omits it in another . . . , it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion.” Keene Corp. v. United States, 508 U.S. 200, 208 (1993) (quoting Russello v. United States, 464 U.S. 16, 23 (1983)) (internal quotation marks omitted). In our view, if Congress had wished to impose a “reasonable basis” requirement on the IRS when it issued named third-party summonses, it would have done so in the text of the statute. Byers maintains that this should not end our inquiry. Despite the lack of any language in § 7609 applying the “reasonable basis” requirement to named third-party summonses, Byers says that this requirement does apply. First, she argues that the Supreme Court’s decision in Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310 (1985), supports her reading of the statute. The question in Tiffany Fine Arts was whether the IRS had to comply with the abovementioned JohnDoe procedures when it served summonses to investigate the tax liability of both named and unnamed parties. Id. at 318. In discussing John-Doe third-party summonses, the Court explained that “Congress determined that when the IRS uses its summons power not to conduct a legitimate investigation of an ascertainable target, but instead to look around for targets to investigate, the privacy rights of taxpayers are infringed unjustifiably.” Id. at 320. It continued: In response to this concern, §§ 7609(a) and (b) gave the real parties in interest—those actually being investigated—the right to intervene in the enforcement proceedings. Similarly, the John Doe requirements of § 7609(f) were adopted as a substitute for the procedures of §§ 7609(a) and (b). In effect, in the John Doe context, the court takes the place of the affected taxpayer under §§ 7609(a) and (b) and exerts a restraining influence on the IRS. Id. at 321. From this dicta, Byers discerns a recognition by the Supreme Court that “known taxpayers are entitled to the same substantive protections section 7609(f) affords to unknown No. 19-1893 Byers v. IRS Page 7 taxpayers.” Appellant Br. at 13. This is so, Byers argues, “[b]ecause the Supreme Court treats section 7609(f) [the John-Doe summons provision] as a procedural ‘substitute’ for section 7609(a) [the notice provision for named summonses].” Id. Put another way, the fact that the John-Doe procedure is merely a substitute means, according to Byers, that named and unnamed third-party summonses “address identical substantive privacy concerns,” id. at 12—namely, the concern that the government will simply “look around for targets to investigate,” Tiffany Fine Arts, 469 U.S. at 320. If the substantive privacy concerns are the same, says Byers, then protections for taxpayers should be the same, whether they are named or unnamed in a thirdparty summons. Yet Tiffany Fine Arts does not hold, let alone insinuate, any of this. The Supreme Court’s holding was straightforward: “[When] the IRS serves a summons on a known taxpayer with the dual purpose of investigating both the tax liability of that taxpayer and the tax liabilities of unnamed parties, it need not comply with the requirements for John Doe summonses set out in § 7609(f), as long as all the information sought is relevant to a legitimate investigation of the summoned taxpayer.” Id. at 324 (emphasis added); see also United States v. Boulware, 203 F. App’x 168, 170 (9th Cir. 2006). If the IRS need not comply with the John-Doe requirements for a dual-purpose summons, then it need not comply with these requirements for a summons with the sole purpose of investigating a named taxpayer. Moreover, the Court in Tiffany Fine Arts explained that “the interests at stake are very different” when “the summoned party [as opposed to an unnamed party] is itself under investigation.” 469 U.S. at 321. Because a summoned party would have “a direct incentive to oppose enforcement,” this would supply “sufficient protection against the evils that Congress sought to remedy when it enacted [the John-Doe provision].” Id. at 321–22. Although Byers was not the “summoned party” in this case, she was a noticed party, and her “vigilance and self-interest” are identical to—if not greater than—that of a hypothetical named party who is itself summoned by the IRS.3 Id. at 321. Just as a summoned party is not 3As the Supreme Court noted in Tiffany Fine Arts, sometimes a summoned third-party may be uninterested in opposing enforcement. See 469 U.S. at 322 (“It is possible that the summoned party, even if it is itself being investigated, will not oppose enforcement, and that as a result the IRS might obtain some information that is relevant only to the liabilities of unnamed taxpayers.”); Saltzman & Book, IRS Practice and Procedure, ¶ 13.03[1], 1999 WL 1050986, at  (“Often, a summoned third party, such as a bank, will not object to the summons.”). A named taxpayer, like Byers, might therefore have an even greater interest in opposing enforcement than, for example, a third party whose personal records were not sought by the government. No. 19-1893 Byers v. IRS Page 8 entitled to the extra procedural protections set forth in § 7609(f), Byers—as a named party who received notice that the IRS was investigating her and who timely intervened—was clearly able to fend for herself. Relatedly, the Court in Tiffany Fine Arts reasoned that cases involving named parties simply do not implicate Congress’s concern with an aimlessly roving IRS: “[B]y definition, the IRS is not engaged in a ‘fishing expedition’ when it seeks information relevant to a legitimate investigation of a particular taxpayer.” Id. The Supreme Court understood § 7609(f) as an antidote to the IRS searching for parties to target, rendering the provision inapplicable when the IRS has identified a particular party by name, such as Byers. It is true that simply including the name of a targeted party may be a poor proxy for whether the government is engaged in a “legitimate investigation.” Id. Indeed, in other doctrinal arenas, courts expressing concern with “fishing expeditions” speak of the investigating or complaining party’s failure to adduce “enough fact to raise a reasonable expectation that discovery will reveal evidence of illegal[ity],” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007), not of the investigating or complaining party’s failure to identify which party it is investigating or suing. See, e.g., Fed. Trade Comm’n v. Am. Tobacco Co., 264 U.S. 298, 305–06 (1924) (stating, in a case involving the Federal Trade Commission and known investigated parties: “Anyone who respects the spirit as well as the letter of the Fourth Amendment would be loath to believe that Congress intended to authorize one of its subordinate agencies to sweep all our traditions into the fire, and to direct fishing expeditions into private papers on the possibility that they may disclose evidence of crime.”) (citing Interstate Commerce Comm’n v. Brimson, 154 U.S. 447, 479 (1894)). Yet in the context of a summons targeting a named taxpayer, as the Eighth Circuit has observed, “the Secretary or his delegate has been specifically licensed to fish by § 7602.” United States v. Giordano, 419 F.2d 564, 568 (8th Cir. 1969).4 With respect to third-party summonses in particular, the Supreme Court in Tiffany Fine Arts explained clearly that Congress had “only one specific . . . worry: that the party receiving a summons would not have a sufficient interest in protecting the privacy of the records if that party was not itself a 4In fact, as we explain infra Part III.D, the Supreme Court has cautioned against turning the enforcement proceeding into an opportunity for the taxpayer to go on a fishing expedition into the government’s potential misconduct in issuing a summons. United States v. Clarke, 573 U.S. 248, 254–55 (2014) (cautioning against “turning every summons dispute into a fishing expedition for official wrongdoing”). No. 19-1893 Byers v. IRS Page 9 target of the summons.” 469 U.S. at 320. Accordingly, Congress provided extra protections— such as the “reasonable basis” requirement—only in John-Doe cases, when investigated taxpayers could not contest the summonses themselves. See H.R. REP. 94-658, at 311 (1975) (“[T]he committee does not intend that the John Doe summons is to be available for purposes of enabling the Service to engage in a possible ‘fishing expedition.’”); S. REP. 94-938 (I), at 373 (1976) (same). Next, Byers relies on Powell, and the cases it cites, as establishing a general “reasonableness test” for the enforcement of agency summonses. Reply Br. at 1–2. This assertion is without support. Byers ignores that Powell favorably mentioned “the general rejection of probable cause requirements in like circumstances involving other agencies.” 379 U.S. at 57. For example, Powell recounted how in United States v. Morton Salt Co., 338 U.S. 632 (1950), the Court had permitted the Federal Trade Commission to investigate “merely on suspicion that the law is being violated, or even just because it wants assurance that it is not.”5 Powell, 379 U.S. at 57 (quoting Morton Salt, 338 U.S. at 642–43). Powell did not “confirm[] that the agency must articulate some reasonable basis to gain judicial approval of its summonses.” Reply Br. at 3. Neither Tiffany Fine Arts nor Powell supports Byers’s atextual reading of the statute. Other factors counsel against Byers’s argument. One is the Supreme Court’s general reluctance to interfere with the IRS’s summons power: “While § 7602 is ‘subject to the traditional privileges and limitations,’ any other restrictions upon the IRS summons power should be avoided ‘absent unambiguous directions from Congress.’” Arthur Young & Co., 465 U.S. at 816 (quoting United States v. Euge, 444 U.S. 707, 714 (1980), and Bisceglia, 420 U.S. at 150, respectively)). No such “unambiguous direction” is present here. Similarly, a “reasonable basis” burden would be at odds with our interpretation of Powell as requiring exceedingly little from the IRS in order to carry its initial burden in enforcing a summons. See, e.g., Kondik v. United States, 81 F.3d 655, 656 (6th Cir. 1996) (prima-facie case for enforcement “is generally 5Byers emphasizes the reference to “suspicion” in this sentence, Reply Br. at 3, but ignores that the rest of the sentence apparently permits the agency to investigate even when it has no suspicion of illegality, and “just . . . wants assurance” that the law is not being violated, Morton Salt, 338 U.S. at 643. No. 19-1893 Byers v. IRS Page 10 made by the submission of an affidavit from the agent who issued the summonses”); United States v. Will, 671 F.2d 963, 966 (6th Cir. 1982) (same); United States v. AS Holdings Grp., LLC, 521 F. App’x 405, 409 (6th Cir. 2013) (“The IRS may meet this ‘minimal burden’ by submitting an affidavit from the agent issuing the summons.”) (quoting United States v. Pragovich, 363 F. App’x 313, 314 (6th Cir. 2009) (order)). And although we have never ruled on the precise issue that Byers raises, we have recognized that the John-Doe procedures are distinct from the rest of § 7609. See United States v. Ritchie, 15 F.3d 592, 596 (6th Cir. 1994) (“If the taxpayer whose tax liability is being investigated is a known, named individual, the IRS must give notice to that person that a summons has been issued to the third-party recordkeeper. On the other hand, if the identity of the party under investigation is unknown, notice need not be given (for obvious reasons), but other requirements apply to these ‘John Doe’ summonses.”) (internal citations omitted) (emphases added). None of this leaves a named taxpayer without recourse to challenge the propriety of an investigation, as discussed further below. See United States v. Gertner, 65 F.3d 963, 968 (1st Cir. 1995) (“Though a conclusory affidavit is enough to satisfy the government’s burden at the first tier of the framework [the prima-face showing], it can come back to haunt the proponent if it is not later supplemented by more hearty fare once the challenger succeeds in scaling the second tier [the abuse-of-process tier].”) (internal citations omitted); H.R. REP. 94-658, at 309 (“[T]he committee intends that the noticee would have standing to raise other issues which could be asserted by the third-party record keeper, such as asserting that the summons is ambiguous, vague or otherwise deficient in describing the material requested, or that the material requested is not relevant to a lawful investigation.”). At the prima-facie stage, however, the IRS’s burden is minimal and inconsistent with a “reasonable basis” requirement. There is no shortage of reasons to reject Byers’s argument. But her argument, we acknowledge, has intuitive appeal—“Shouldn’t the government have to give a reason why it wants my information?”—and merits this fulsome response. In all, Byers has raised a colorable policy argument, but not a legal one. “Simply stated, the IRS is not required to comply with the ‘John Doe summons’ requirements, where the summons relates to an investigation of a named No. 19-1893 Byers v. IRS Page 11 party.” 35 Am. Jur. 2d Federal Tax Enforcement § 55. The district court did not err in rejecting Byers’s argument.