The Tenth Circuit Court of Appeals held April 28 that the IRS failed to give adequate notice to a taxpayer named in a third-party summons, ordering two lower courts to grant the taxpayer's petition to quash the summonses and creating a split in the federal circuit courts.

In Jewell v. U.S., No. 13-6069 (10th Cir. 2014), the IRS issued four summonses to banks in the Eastern and Western Districts of Oklahoma for records involving nursing homes owned by the taxpayer, Sam Jewell. Under Section 7609(a)(1), the IRS "shall" notify a person identified in the summons at least 23 days before the examination date of the summons. The taxpayer received the notices less than 23 days before the records were to be examined.

The Eastern and Western Districts of Oklahoma disagreed on whether the IRS gave proper notice to the taxpayer, but the Tenth Circuit ruled that the IRS had not given proper notice. The Supreme Court, in U.S. v. Powell, 379 U.S. 48 (1964) outlined the four requirements the IRS must follow to make a case for enforcement of an administrative summons:

  1. The investigation must be conducted for a legitimate purpose.
  2. The summons must be relevant to that purpose.
  3. The IRS must not already have the information sought.
  4. The IRS must have followed "administrative steps" required by the tax code.

In Jewell, the issue was whether the IRS followed the fourth factor of the Powell analysis pertaining to "administrative steps." The Tenth Circuit reasoned that Section 7609(a)(1) says the IRS "shall" give adequate notice, and that "shall" indicates a "mandatory intent." The court rejected the government's arguments that in some cases, "shall" does not signal mandatory intent, holding that in this case, the IRS was not obligated to issue the summons, but chose to.

The 23-day notice requirement included in Section 7609(a)(1) is an "administrative step," under Powell, the court held. The court acknowledged that five other circuit courts (the First, Second, Fifth, Sixth and Eleventh Circuits) have declined to apply Powell in this manner, but that in the Tenth Circuit's opinion, the Supreme Court's decision in Powell is clear, in that "[i]f the IRS does not comply with the administrative requirements of the Internal Revenue Code, its summons are unenforceable."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.