The U.S. Supreme Court recently rendered a unanimous ruling in favor of the IRS regarding its authority to issue a summons without prior notice in specific collection cases, in the case of Polselli v. IRS.[1]

IRS Requirement to Give Notice of a Summons and Collection Exception

In accordance with IRC §7609(a)(1), the IRS is generally obligated to provide notice to individuals who are identified in a summons:

(a) Notice.

(1) In general. If any summons to which this section applies requires the giving of testimony on or relating to, the production of any portion of records made or kept on or relating to, or the production of any computer software source code (as defined in section 7612(d)(2)) with respect to, any person (other than the person summoned) who is identified in the summons, then notice of the summons shall be given to any person so identified within 3 days of the day on which such service is made, but no later than the 23rd day before the day fixed in the summons as the day upon which such records are to be examined. Such notice shall be accompanied by a copy of the summons which has been served and shall contain an explanation of the right under subsection (b)(2) to bring a proceeding to quash the summons.

As the opinion explains:

The IRS must generally give “notice of the summons” to “any person . . . identified in the summons.” §7609(a)(1). Anyone entitled to notice can bring a motion to quash the summons. §7609(b)(2)(A). And the Internal Revenue Code provides district courts with “jurisdiction to hear and determine any proceeding” concerning a motion to quash, §7609(h)(1), thereby waiving the sovereign immunity of the United States, see FAA v. Cooper, 566 U. S. 284, 290 (2012).[2]

The law provides for exceptions to the notice requirements for summonses issued in aid of collection that are found at IRC §7609(c)(2)(D):

(2) Exceptions. This section shall not apply to any summons-- …

(D) issued in aid of the collection of--

(i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued; or

(ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i);

The Court’s opinion summarizes these rules to be considered in this case as follows:

In other words, the IRS may issue summonses both to determine whether a taxpayer owes money and later to collect any outstanding liability. When the IRS conducts an investigation for the purpose of “determining the liability” of a taxpayer, §7602(a), it must provide notice, §7609(a)(1). But once the Service has reached the stage of “collecting any such liability,” §7602(a) — which is a distinct activity — notice may not be required, §7609(c)(2)(D).[3]

The case presented before the Court examined the applicability of the exception when the delinquent taxpayer does not possess any legal interest in the accounts or records subject to the summons.

Facts of the Case

The opinion provides a detailed account of the collection activities leading up to the issuance of the summonses in question:

For multiple years between 2005 and 2017, Remo Polselli underpaid his federal taxes. App. to Pet. for Cert. 65a-66a. After investigating, the IRS determined that Mr. Polselli was liable for the unpaid amounts and other penalties, and entered official assessments against him totaling more than $2 million. Id., at 66a. Revenue Officer Michael Bryant then set out to collect the money, and he developed a few leads in his search for assets that Mr. Polselli may have been concealing. Bryant focused on bank accounts belonging to Mr. Polselli's wife, petitioner Hanna Karcho Polselli. Ibid. Bryant also knew that Mr. Polselli had paid nearly $300,000 toward part of his outstanding tax liability from an account owned by Dolce Hotel Management, LLC, and surmised that Mr. Polselli might have control over funds belonging to that company. Id., at 67a. To further his investigation, Bryant issued a summons under §7602 to the law firm Abraham & Rose, PLC, where Mr. Polselli had long been a client. Ibid. But the firm produced no records in response, stating that it “did not retain any of the documents requested.” Ibid.[4]

At this juncture, the IRS made a strategic decision to cast a wider net in an effort to obtain information pertaining to potentially undisclosed assets. The opinion further elaborates on this matter:

Bryant then issued several additional summonses seeking records concerning Mr. Polselli. Bryant issued one summons to Wells Fargo, requesting the financial records of both Mrs. Polselli and Dolce Hotel Management. Id., at 70a-71a. He also issued summonses to JP Morgan Chase and Bank of America, seeking among other things “[c]opies of all bank statements” relating to Mr. Polselli and petitioners Jerry R. Abraham, P. C., and Abraham & Rose, PLC. Id., at 78a-79a, 85a-86a. Bryant did not provide notice to any of the third parties named in the three summonses. But the banks did, and Mrs. Polselli, Jerry R. Abraham, and Abraham & Rose filed motions to quash in Federal District Court.[5]

The petitioners’ attempt to challenge the summonses in the U.S. District Court was unsuccessful:

The District Court dismissed the case for lack of subject-matter jurisdiction, reasoning that the IRS did not need to provide notice. Polselli v. United States, 2020 WL 12688176, *4 (ED Mich., Nov. 16, 2020). The District Court credited Bryant's assertions that “the purpose of his investigation [was] to locate assets to satisfy Mr. Polselli's existing assessed federal tax liability and that the IRS issued the summonses in question to aid in the collection of these assessed liabilities.” Ibid. Because the Code excluded petitioners from the required notice, there was no waiver of sovereign immunity, and the District Court therefore lacked jurisdiction to entertain the motions to quash. Id., at *5.

The taxpayers’ appeal to the Sixth Circuit Court of Appeals also proved unsuccessful, with the majority ruling against them. However, it is worth noting that one judge on the panel dissented from the majority ruling:

The Sixth Circuit affirmed in a divided opinion, reasoning that no notice was required because “the summonses at issue fall squarely within the exception listed in §7609(c)(2)(D)(i).” Polselli v. Department of Treasury-IRS, 23 F. 4th 616, 623 (2022). Before the Sixth Circuit, petitioners had argued in favor of a rule — previously adopted by the Ninth Circuit — requiring that a taxpayer have “some legal interest or title in the object of the summons” for the notice exception to apply. Ip v. United States, 205 F. 3d 1168, 1175 (2000). To decide whether a taxpayer maintains a sufficient legal interest “in the object of the summons,” the Ninth Circuit considers “whether there was an employment, agency, or ownership relationship between the taxpayer and third party.” Viewtech, Inc. v. United States, 653 F. 3d 1102, 1106 (2011). But the Sixth Circuit below rejected the Ninth Circuit’s legal interest test, concluding that it was contrary to the plain language of §7609(c)(2)(D)(i). 23 F. 4th, at 625. The panel below instead held that “as long as the third-party summons is issued to aid in the collection of any assessed tax liability the notice exception applies.” Id., at 624 (internal quotation marks omitted). In so concluding, the Sixth Circuit aligned itself with both the Seventh and Tenth Circuits. See Davidson v. United States, 149 F. 3d 1190 (CA10 1998) (Table); Barmes v. United States, 199 F. 3d 386 (CA7 1999) (per curiam).

Judge Kethledge dissented. He acknowledged that an ordinary reading of the statute exempted the summonses from notice but thought the statutory context compelled a narrower construction. As an initial matter, Judge Kethledge expressed concern that the panel’s reading of the notice exception risked “a significant intrusion upon the privacy of. . . account holders.” 23 F. 4th, at 631. He argued that an ordinary reading of the first exception to notice would render the second exception — codified in §7609(c)(2)(D)(ii) — “superfluous.” Ibid. To avoid that, Judge Kethledge would have narrowed the first exception by adopting the legal interest test from the Ninth Circuit.[6]

The opinion acknowledges that the Supreme Court granted certiorari in this case to address the conflicting decisions among the Circuits. Specifically, it aimed to determine whether the views expressed by the Ninth Circuit and Judge Kethledge, which were contrary to the rulings of the other Circuits, were correct.

The Court’s Decision

Chief Justice Roberts, in authoring the opinion of the Court, promptly dispelled any suspense surrounding the Court's decision in this case. In the first paragraph outlining the Court's ruling, he noted that:

The question presented is whether the exception to the notice requirement in §7609(c)(2)(D)(i) applies only where a delinquent taxpayer has a legal interest in accounts or records summoned by the IRS under §7602(a). A straightforward reading of the statutory text supplies a ready answer: The notice exception does not contain such a limitation.[7]

The opinion delineates the three criteria that must be satisfied for the IRS to be exempted from the requirement of providing notice.:

The statute sets forth three conditions to exempt the IRS from providing notice in circumstances like these. First, a summons must be “issued in aid of. . . collection.” §7609(c)(2)(D). Second, it must aid the collection of “an assessment made or judgment rendered.” §7609(c)(2)(D)(i). By “assessment,” the Code “refers to the official recording of a taxpayer’s liability.” Direct Marketing Assn. v. Brohl, 575 U. S. 1, 9 (2015); see also Hibbs v. Winn, 542 U. S. 88, 100 (2004). Section 7609(c)(2)(D)(i) does not excuse notice, therefore, until the IRS makes an official assessment or a judgment has been rendered with respect to a taxpayer’s liability. Third, a summons must aid the collection of assessments or judgments “against the person with respect to whose liability the summons is issued.” §7609(c)(2)(D)(i). This requirement links the subject of the assessment or judgment with the subject of the collection effort — they must concern the same delinquent taxpayer.[8]

The Chief Justice then notes:

None of the three components for excusing notice in §7609(c)(2)(D)(i) mentions a taxpayer’s legal interest in records sought by the IRS, much less requires that a taxpayer maintain such an interest for the exception to apply.[9]

Furthermore, the opinion highlights that Congress had the opportunity to include a provision mandating that the taxpayer possess a legal interest in the records subject to the summons. However, it chose not to do so:

Had Congress wanted to include a legal interest requirement, it certainly knew how to do so. The very next provision — also enacted as part of the Tax Reform Act of 1976 — requires the IRS to “establish the rates and conditions” for reimbursing costs “incurred in searching for, reproducing, or transporting” information sought by a summons. §7610(a)(2); see 90 Stat. 1702. But the IRS may not provide reimbursement if “the person with respect to whose liability the summons is issued has a proprietary interest in” the records “to be produced.” §7610(b)(1). We assume that Congress “acts intentionally and purposely” when it “includes particular language in one section of a statute but omits it in another section of the same Act.” Sebelius v. Cloer, 569 U. S. 369, 378 (2013) (internal quotation marks omitted). The fact that the exception to the reimbursement provision expressly turns on a taxpayer’s “proprietary interest” in records summoned by the IRS strongly suggests that Congress deliberately omitted a similar requirement with respect to the notice exception in §7609(c)(2)(D)(i). And here the provision in question is not just in the “same Act” — it is in the adjacent section, having been enacted in the same Public Law.[10]

Petitioner’s First Argument Against that View – There Should be a Narrow Definition of In Aid of Collection

Subsequently, the opinion examines the petitioner’s two arguments against the view adopted by the Court. The first argument posits that the definition of “in aid of collection” should be limited in scope:

…[P]etitioners adopt a narrow definition of “in aid of the collection.” In their view, the phrase refers only to inquiries that “directly advance” the IRS’s collection efforts. Brief for Petitioners 21. A summons will not directly advance those efforts, they contend, unless it is targeted at an account containing assets that the IRS can collect to satisfy the taxpayer’s liability. And, petitioners say, the only way that a summons issued to a third party will produce collectible assets is if the delinquent taxpayer has a legal interest in the targeted account.[11]

However, the Court determines that such an interpretation is not a fair reading of the term:

This argument does not give a fair reading to the phrase “in aid of the collection.” According to petitioners, the phrase requires that a summons produce collectible assets. But to “aid” means “[t]o help” or “assist.” American Heritage Dictionary 26 (1969). Petitioners agree. See Brief for Petitioners 21 (“aid” means to “support,” “help,” or “assist”). Even if a summons may not itself reveal taxpayer assets that can be collected, it may nonetheless help the IRS find such assets.[12]

The opinion proceeds to provide examples drawn from this particular case:

Consider this case. The IRS’s investigation “suggest[ed] that Mr. Polselli often uses other entities to shield assets from the Internal Revenue Service.” App. to Pet. for Cert. 68a. Bryant suspected, for instance, that Mr. Polselli was using Dolce Hotel Management as an alter ego, and also that he might have access to and use of Mrs. Polselli’s bank accounts. Based on those leads, Bryant initially requested that Abraham & Rose produce “cancelled checks, wire transfer/credit documents, and all other instruments used by Mr. Polselli to pay the firm.” Id., at 67a. Whether Mr. Polselli maintains a “legal interest” in those records — a confounding question, see Viewtech, 653 F. 3d, at 1106 — is neither here nor there. The IRS could not, of course, use records of canceled checks and the like to satisfy Mr. Polselli’s tax deficiency. But if those records showed that money from Dolce Hotel Management was used to pay Mr. Polselli’s account at Abraham & Rose, or to pay others through Abraham & Rose, that could aid in collecting funds from Dolce Hotel Management to help pay Mr. Polselli’s debt to the IRS. Or the Service could use those records to try to identify other alter egos — besides Dolce Hotel Management — where Mr. Polselli might have hidden assets.

By the same token, the summonses Bryant issued to the three banks sought records to “identify. . . entities whose funds Mr. Polselli has control over without formal ownership” and “bank accounts associated with such entities.” App. to Pet. for Cert. 68a. As with the request Bryant issued to Abraham & Rose, even if the three bank summonses did not reveal bank accounts in which Mr. Polselli has a legal interest, they could lead to assets parked elsewhere that the IRS could collect to satisfy his $2 million liability.[13]

Concluding this segment of the analysis, the Chief Justice presents a comprehensive perspective on the extent of assistance in an investigation:

IRS investigations are much like any other: A detective might order forensic testing or speak to witnesses to help identify a culprit, even if those activities are unlikely — in and of themselves — to solve the crime. Similarly, documents in the accounts belonging to Mrs. Polselli or Dolce Hotel Management may be a step in a paper trail leading to assets owned by Mr. Polselli. Everyday tasks illustrate the same point: A recipe might help a chef shop for needed groceries, even though more steps are required before dinner will be ready. By conflating activities that help advance a goal with activities sure to accomplish it, petitioners ignore the typical meaning of “in aid of.”[14]

Petitioner’s Second Argument- The Court’s Reading Makes the Second Clause Superfluous, Which the Court Should Seek to Avoid if Possible

The second objection seeks to apply the general rule of statutory interpretation, which states that unless the language of a provision explicitly demands it, the statute should not be construed in a way that renders a portion of the provision redundant or unnecessary. In such cases, if an alternative interpretation is possible, the Court should favor that option instead:

Petitioners next argue that the exception provided in clause (i) must be read narrowly so as to avoid making entirely superfluous the exception found in clause (ii). Clause (i) excuses notice when the IRS issues a summons “in aid of the collection of . . . an assessment made or judgment rendered against” the delinquent taxpayer. §7609(c)(2)(D)(i). Clause (ii) exempts from notice any summons “issued in aid of the collection of . . . the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i).” §7609(c)(2)(D)(ii). We ordinarily aim to “giv[e] effect to every clause and word of a statute.” Microsoft Corp. v. i4i L. P., 564 U. S. 91, 106 (2011) (internal quotation marks omitted). If clause (i) already exempts from notice every summons that helps the IRS collect an “assessment” against a delinquent taxpayer, petitioners argue, there would be no work left for clause (ii) to do. Adding a “legal interest” requirement, on the other hand, would cabin the scope of clause (i), leaving some purpose for clause (ii).[15]

Nevertheless, the Chief Justice asserts that, according to the Court’s interpretation, clause (ii) does apply in situations that would not fall under the purview of clause (i), and it presents two crucial distinctions. Firstly, clause (ii) is applicable in cases where there exists a liability without an official assessment:

First, clause (i) is applicable upon an assessment, while clause (ii) is applicable upon a finding of liability. Under the Code, a taxpayer’s “liability” for unpaid taxes arises before the IRS makes an official “assessment” of what the delinquent taxpayer owes. See §6203 (“The assessment shall be made by recording the liability of the taxpayer. . . .”); see also United States v. Galletti, 541 U. S. 114, 122 (2004) (assessment refers to “the calculation or recording of a tax liability”). Although an assessment may “trigge[r] levy and collection efforts,” Hibbs, 542 U. S., at 101, the Code does not require in all cases that the IRS make a formal assessment before attempting to collect an outstanding tax liability. See §§6501(c)(1)-(3) (authorizing the IRS to bring “a proceeding in court for collection of [a] tax. . . without assessment” in situations involving false returns, willful attempts to evade taxes, and failures to file a return).[16]

Additionally, the clauses pertain to different entities:

Second, petitioners’ argument overlooks that clause (i) and clause (ii) are addressed to different entities. Clause (i) concerns assessments or judgments against a taxpayer — “the person with respect to whose liability the summons is issued.” §7609(c)(2)(D)(i). Clause (ii), in contrast, concerns the liability of a “transferee or fiduciary.” §7609(c)(2)(D)(ii). That the notice exception distinguishes between taxpayers and their fiduciaries or transferees should come as no surprise. The Code elsewhere separately empowers the IRS to collect outstanding tax liabilities from taxpayers, on the one hand, and from transferees or fiduciaries, on the other. See §6901. The Code also differentiates between taxpayers and their fiduciaries or transferees in empowering the IRS to issue summonses in the first place. See §7602(a).[17]

Although these distinctions may not arise frequently, the crucial point is that they have the potential to apply in certain cases:

These distinctions — between liability and assessment or judgment, and between taxpayers and their transferees or fiduciaries — are not just academic. They show that the second notice exception found in clause (ii) applies in situations where clause (i) may not. To dispense with notice, clause (i) requires that there be “an assessment made or judgment rendered against the person with respect to whose liability the summons is issued.” §7609(c)(2)(D)(i). By contrast, clause (ii) does not impose the same conditions. It instead authorizes the IRS to issue a summons in aid of collecting a “liability at law or in equity,” and refers specifically to the liability of any “transferee or fiduciary” of the delinquent taxpayer. §7609(c)(2)(D)(ii). As a result, clause (ii) permits the IRS to issue unnoticed summonses to aid its collection from transferees or fiduciaries before it makes an “official recording of a taxpayer’s liability.” Direct Marketing Assn., 575 U. S., at 9. “That may not be very heavy work for the phrase to perform, but a job is a job, and enough to bar the rule against redundancy from disqualifying an otherwise sensible reading.” Gutierrez v. Ada, 528 U. S. 250, 258 (2000); see also Nielson v. Preap, 586 U. S. ___, ___ (2019) (slip op., at 21) (a clause that “still has work to do” is not superfluous).[18]

Lastly, the Court highlights that clause (ii) can also be valuable in situations where the taxpayer files for bankruptcy.:

Clause (ii) addresses an additional potential problem as well. Delinquent taxpayers sometimes declare bankruptcy or otherwise discharge debt. When they do so, the Government may not be able to collect “an assessment made or judgment rendered against the” taxpayer. §7609(c)(2)(D)(i). In those situations, clause (i) may not apply, for a summons cannot be “issued in aid of ” an impossible collection effort. §7609(c)(2)(D). But clause (ii) may nevertheless permit the IRS to issue unnoticed summonses to collect the “liability” of the taxpayer's transferee or fiduciary. §7609(c)(2)(D)(ii).[19]

But What About Our Privacy?

Lastly, the petitioners argue that IRC §7609 was enacted to safeguard privacy, and the absence of notice and the opportunity for affected individuals to challenge the summons undeniably raises privacy concerns:

Petitioners also emphasize the privacy concerns that led Congress to enact the notice requirement in the first place. They highlight that “Congress enacted §7609 in response to two decisions in which we gave a broad construction to the IRS’s general summons power.” Tiffany Fine Arts, 469 U. S., at 314. In Donaldson v. United States, 400 U. S. 517 (1971), we considered whether the employee of a company to which the IRS had issued a summons could intervene to prevent his employer’s compliance with the Service’s request. Id., at 527. We concluded that the employee had no right to do so. Id., at 530. And in United States v. Bisceglia, 420 U. S. 141 (1975), we approved an IRS summons issued to a bank “for the purpose of identifying an unnamed individual who had deposited a large amount of money in severely deteriorated bills,” concluding that the IRS had not abused its authority. Tiffany Fine Arts, 469 U. S., at 315 (characterizing Bisceglia).

Donaldson and Bisceglia help explain why Congress enacted §7609, which establishes a baseline rule requiring the IRS to provide notice and which authorizes anyone entitled to notice to move to quash a summons. §7609(a).[20]

However, the Court interprets Congress’ response differently than the petitioners do:

But neither case obliges us to read the notice exception in §7609(c)(2)(D)(i) more narrowly than its terms provide. We think the history highlighted by petitioners supports a contrary conclusion. That Congress proved acutely aware of our prior decisions supports a plain reading not only of the general notice requirement, but also of the specific exception the statute provides.[21]

The opinion concludes by briefly addressing the limitations on the Government's authority to issue data summonses.

We do not dismiss any apprehension about the scope of the IRS’s authority to issue summonses. As we have said, “the authority vested in tax collectors may be abused, as all power is subject to abuse.” Bisceglia, 420 U. S., at 146. Tax investigations often involve the pursuit of sensitive records. In this case, for instance, the IRS sought information from law firms concerning client accounts. And even the Government concedes that the phrase “in aid of the collection” is not “limitless.” Tr. of Oral Arg. 33. The Government proposes a test turning on reasonableness: So long as a summons is “reasonably calculated to assisting in collection,” it can fairly be characterized as being issued “in aid of ” that collection. Id., at 26; see also id., at 36 (“[T]he third party should have some financial ties or ha[ve] engaged in financial transactions with the delinquent taxpayer.”).[22]

The concurring opinion, authored by Justice Jackson and joined by Justice Gorsuch, delves into greater detail regarding the limits of the IRS’s powers under this decision. However, the Court as a whole concluded that this particular case was not the appropriate context to extensively discuss the limits of the IRS’s powers in this area:

This is not, however, the case to try to define the precise bounds of the phrase “in aid of the collection.” The parties did not argue, and the panel below did not decide, the contours of that phrase. See Illinois v. Gates, 462 U. S. 213, 222-223 (1983). In addition, both the briefing by the parties and the question presented focus only on whether the exception provided in §7609(c)(2)(D)(i) requires that a taxpayer maintain a legal interest in records summoned by the IRS. For the reasons we have given, the answer is no.[23]

[1] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023, https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/supreme-court-finds-no-legal-interest-limitation-in-notice-exception/7gpk7 (retrieved May 19, 2023)

[2] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[3] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[4] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[5] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[6] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[7] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[8] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[9] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[10] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[11] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[12] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[13] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[14] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[15] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[16] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[17] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[18] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[19] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[20] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[21] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[22] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023

[23] Polselli v. IRS, US Supreme Court, Case No. 21-1599, May 18, 2023