U.S District Court Judge Rebuffs IRS’ Attempt to Use “John Doe” Summons

Jun 02, 2011   

In what many consider to be a surprise, United States District Judge Morrison C. England, Jr. denied the United States ex parte petition for leave to serve “John Doe” summons on Californias Board of Equalization.

Any person making “gifts” in excess of the annual exclusion amount must file an IRS Form 709 United States Gift (and Generation-Skipping Transfer) Tax Return. 26 U.S.C. §§ 2503(b), 6019(a). Taxpayers have a lifetime credit against gift taxes, and Form 709 is used to track

the amount of credit both: 1) utilized by the taxpayer; and 2) remaining for future use. In addition, estate taxes may be due based on the value of an estate when transferred. The estate tax owed includes certain taxable gifts reported on Form 709 during the decedents lifetime.

The IRS has recently realized “a pattern of taxpayers failing to file Forms 709” for real property transfers between non-spouse related parties. The IRS has thus launched a “Compliance Initiative” to investigate those taxpayers who have failed to file Forms 709. As a part of this Compliance Initiative, the government has sought to capture data from states and counties regarding real property transfers taking place between non-spouse family members for little or no consideration during the period of January 1, 2005, through December 31, 2010.

The IRS attempted to obtain informal cooperation from the State of California, and then attempted to obtain permission to use a “John Doe” summons to formally obtain the requested information. The Court held that “because the United States has failed to show that the information sought cannot be obtained from another readily available source, the instant Petition is denied without prejudice.”

Interestingly, the Court noted that it may not have the power to issue a “John Doe” summons to a State. The Court outlined the following questions that would have to be answered before it would issue a “John Doe” summons to a State:

1) Whether a state is a “person” as that word is used in 26 U.S.C. §§ 7602(a) and 7609(f); 2) Whether a states sovereign immunity precludes

issuance of a John Doe Summons; 3) Whether, assuming a state is subject to the Courts power to issue a John Doe Summons, the United States must exhaust all administrative remedies prior to proceeding in federal court; and 4) Whether the United States should be required to

attempt to pursue any and all state court remedies prior to seeking relief in federal court.

A full copy of the opinion is available here.

The attorneys at Fuerst Ittleman, PL have extensive experience litigating against the IRS, including but not limited to IRS summons enforcement. You can reach an attorney at Fuerst Ittleman by emailing us at: contact@fidjlaw.com