Page 2 - Meet John Doe Summonses

A John Doe summons is a summons “which does not identify the person with respect to whose liability the summons is issued.” [The Code] grants the IRS broad authority to conduct “inquiries, determinations, and assessments of all taxes.”
TAX CONTROVERSY CORNER
requirements of the Code.8 e burden then shifts to the party challenging enforcement to establish that the sum- mons was issued in bad faith or that enforcement would constitute an abuse of the court’s process.9
In addition to satisfying the Powell requirements, in order to issue a John Doe summons, the government must obtain a court order after establishing that:
(1) the summons relates to the investigation of a particular
person or ascertainable group or class of persons,
(2) there is a reasonable basis for believing that such per- son or group or class of persons may fail or may have failed to comply with any provision of any internal
revenue law, and
(3) the information sought to be obtained from the
examination of the records or testimony (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.
is procedure is ex parte and based “solely on the petition and supporting a davits” of the government.10
the party receiving a John Doe summons, such as a bank or other third party, does not have an interest in protecting the records from disclosure and thus would not oppose enforce- ment, leaving the IRS with “no real adversary.” Congress did not want the IRS to use its summons power to “look around for targets to investigate” because of concern that such “ sh- ing expeditions” would unjusti ably infringe on the privacy rights of taxpayers.13 Accordingly, as explained by the Supreme Court in Ti any Fine Arts, “[w]hat § 7609(f ) does is to pro- vide some guarantee that the information that the IRS seeks through a summons is relevant to a legitimate investigation, albeit that of an unknown taxpayer,” and it puts the court in “the place of the a ected taxpayer under §§ 7609(a) and (b) and exerts a restraining in uence on the IRS.”14
It is important to note that the IRS does not have to use the John Doe summons procedure when it serves a sum- mons on a particular taxpayer with the “dual purpose” of investigating that taxpayer’s tax liability and unidenti ed parties’ tax liabilities. In Ti any Fine Arts,15 the taxpayer was a holding company for various subsidiaries that pro- moted tax shelters, and the IRS issued it a summons for the names of the people who distributed licenses of a certain medical device from the taxpayer, and thus were likely to have reported the bogus tax bene ts of the tax shelter. e taxpayer argued that the IRS’s request for the names of the licensees indicated that the primary purpose of the summons was to audit the licensees, and not the taxpayer itself. e Supreme Court found that the summons had a dual purpose but so long as the summoned party is under investigation, there is less concern about the IRS engaging in a shing expedition because “a party with a real interest in the investigation ... ha[s] standing to challenge the IRS’s exercise of its summons authority.”16 e Court found that a dual-purpose summons does not constitute a John Doe summons and that the IRS did not have to comply with Code Sec. 7609(f ) “as long as all the information sought is relevant to a legitimate investigation of the summoned taxpayer.”17 e IRS, however, cannot issue a summons to a speci c taxpayer as a pretext for avoiding the John Doe summons requirements. Rather, the IRS must show that it has a bona de interest in the summoned party’s tax li- ability, otherwise, the purported dual-purpose summons would be treated as a John Doe summons and subject to the additional requirements of Code Sec. 7609(f ).18
Can John Doe Summonses Be Challenged?
As noted above, the government’s application for author- ity to issue a John Doe summons is made ex parte.19 e ex
In Bisceglia, the Supreme Court described the rationale for allowing the IRS to issue John Doe summonses:
It would seem elementary that no meaningful in- vestigation of such events could be conducted if the identity of the persons involved must rst be ascer- tained, and that is not always an easy task. Fiduciaries and other agents are understandably reluctant to disclose information regarding their principals ... Moreover, if criminal activity is afoot, the persons involved may well have used aliases or taken other measures to cover their tracks.11
After the decision in Bisceglia, Congress enacted Code Sec. 7609(f), in order to provide “some restraint on the power to issue John Doe Summons without ‘impos[ing] an undue burden on the Service ... ’”12 Congress was concerned that
40 JOURNAL OF PASSTHROUGH ENTITIES CCH Draft MAY–JUNE 2017