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A Summons to Collect a Tax Penalty Is Proper When the IRS’s Criminal Referral Has Been Terminated

In Haber v. United States of America, No. 15-2078, the Court (Calabresi, J., Lynch, J., and Lohier, J.) considered and rejected petitioner James Haber’s challenges to an administrative summons issued by the IRS.  Among his other challenges, Haber contended that the summons was improper because a criminal referral to the DOJ was still in effect.  The Court rejected this argument and Haber’s suggestion that the Government must use precise language to terminate a criminal referral.  Instead, the Court took a common-sense view of the evidence and concluded that the DOJ had indeed terminated its investigation of the IRS’s criminal referral, and so the administrative summons was properly issued.  DOJ need not use any particular words to declare the termination of the investigation; it need only be clear from the record that the investigation has ended.

Background

James Haber was the subject of both a $25 million penalty issued by the IRS and a related criminal investigation.  The penalty and investigation arose from the alleged failure of Haber and his company, The Diversified Group, Inc. (“DGI”), to register tax shelters in violation of 26 U.S.C. § 6111.  Haber and DGI paid $18,370 and $15,500, respectively, toward the penalty and then filed claims for refund and two separate actions (a request for a Collection Due Process hearing and an action in the Court of Federal Claims) to contest the penalty.  As Haber challenged the penalty, the IRS began an investigation to locate assets that would satisfy the unpaid penalty.  That investigation lead to an account at Signature Bank, and the Revenue Officer served an administrative summons on the bank for account information.  That summons is at issue in this case. 

Haber sought to quash the summons, arguing that the IRS was precluded from issuing a summons due to an outstanding criminal referral in his case.  The Government moved to dismiss the petition on the basis that the United States had not waived its sovereign immunity for a summons issued in aid of collecting an assessment.  The Government also produced three documents related to the termination of the IRS’s criminal referral of Haber’s case to the DOJ:  (1) a supplemental declaration from the Revenue Officer explaining the steps she took to ensure there were no pending investigations of Haber; (2) a letter from the DOJ stating that the referral was “terminated . . . as to all matters except the Form 1099 issue”; and (3) a letter from the U.S. Attorney for the Southern District of New York stating that the U.S. Attorney’s Office and the IRS New York Field Office had “closed their respective criminal investigations of Mr. Haber and his companies [including the 1099 issue].”

The District Court granted the Government’s motion to dismiss Haber’s petition to quash the IRS summons.  Haber appealed.

Termination of Criminal Referral and Authority to Issue Summons

The Court rejected Haber’s argument that the IRS lacked authority to issue the summons at issue.  Haber argued that the summons was invalid because the IRS cannot issue an administrative summons when a Justice Department referral is still in effect.  Section 7602(d)(2)(B) governs Justice Department referrals and provides that a “Justice Department referral shall cease to be in effect . . . when . . . the Attorney General notifies the Secretary [of the Treasury or his Delegate], in writing, that . . . he will discontinue such a grand jury investigation.”  Haber argued that, for a termination to be effective, the Government must track the statutory language precisely and state in writing that it plans to “discontinue such a grand jury investigation.”  (The letter in this case used the word “terminate” instead of “discontinue”). 

The Court declined to adopt Haber’s approach, concluding that there was “no magic to the word ‘discontinue,’” that the DOJ letter in this matter effectively terminated the referral, and noting that “the government would be laughed out of court if it ever suggested that the 2009 letter had not discontinued the referral.”  Haber, the Court held, had failed to allege any facts to indicate that the referral was in effect at the time the summons was issued.  As a result, the IRS properly issued the summons.  In general, when a court believes that a “magic words” argument is being made, it is usually a prelude to the rejection of the argument, which is what happened here.

Other Issues

Haber also brought challenges related to the District Court’s dismissal for lack of subject matter jurisdiction and his request for jurisdictional discovery.  The subject matter jurisdiction challenge centered on whether the Government had waived sovereign immunity for a challenge to the summons issued.  In general, the target of an IRS summons may bring an action to quash the summons.  But that right does not apply when a summons is issued “in aid of the collection” of a taxpayer’s liability because the United States has not waived its sovereign immunity by statute under those circumstances.  The Court rejected Haber’s contention that a summons is only issued “in aid of collection” when actual collection is imminent and held that the summons was indeed issued in aid of collection. 

Finally, the Court upheld the District Court’s denial of Haber’s request for jurisdictional discovery. 

-By Susan Millenky and Harry Sandick