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  • Tenth Circuit Refuses to Quash IRS Subpoena for Bank Account Data Requested Under Mexican Treaty
    April 2013
    Recent U.S. efforts to close its "tax gap" through enhanced enforcement measures, such as FATCA, have increased the global tax community’s focus on the exchange of information between tax authorities. However, the exchange of tax information by governments is not a recent development, and U.S. income tax treaties and tax information exchange agreements (or “TIEAs”) have a long history. U.S. income tax treaties (as well as the OECD model income tax treaty) include an article devoted to the exchange of information and assistance in collection of taxes.[1] A recent order and judgment by the Tenth Circuit issued in the case of Solomon Juan Marcos Villareal v. United States of America[2] illustrates how the IRS can use a summons to obtain U.S. financial data beneficial to a non-U.S. tax authority’s investigation of a non-U.S. taxpayer and then share that information with the tax authority pursuant to the terms of an income tax treaty or TIEA.
    Facts of the case
    Pursuant to Article 27 (Exchange of Information) of the 1994 Convention Between the Government of the United States Of America and the Government of the United States of Mexico for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (the “1994 Treaty”), Mexico's tax authority (the Servicio de Administración Tributaria or SAT) requested the IRS to assist in the investigation of Solomon Villareal's 2009 tax liability. After review of the request, the IRS issued a summons to the Bank of America requesting certain bank account information for the calendar year 2009. Villareal was notified of the request, and he filed a motion in district court to either quash the summons or conduct an evidentiary hearing to determine whether the IRS acted in bad faith in issuing the summons. The District Court agreed with the IRS that the summons should be enforced, and Villareal appealed that decision to the Tenth Circuit Court of Appeals.
    Legal background
    In 1980 the United States and Mexico agreed to exchange tax information pursuant to a TIEA. Subsequently, in 1994, the United States and Mexico signed the 1994 Treaty. The earlier TIEA is referenced in Article 27 of the 1994 Treaty, and is the operative provision for the exchange of tax information between the two governments. TIEAs generally provide for the exchange of information existing in the files of the tax authority, as well as for use of a sovereign’s compulsory measures to obtain any requested information.
    The Internal Revenue Code provides the IRS with broad information gathering authority, including the authority to issue a summons for various investigative purposes.[3] The U.S. federal district courts also are empowered to enforce a summons issued by the IRS in the event a taxpayer (or another party to the summons) refuses to voluntarily comply with the summons.[4] In order to enforce the summons, the IRS must satisfy the criteria set out in United States v. Powell.[5] Powell requires the IRS to demonstrate that (i) the investigation will be conducted pursuant to a legitimate purpose, (ii) the information sought may be relevant to that purpose, (iii) the information sought is not already in the government's possession, and (iv) the administrative steps required by the Internal Revenue Code have been followed.
    Although the IRS summons authority is broad, a summons generally may not be issued in connection with a criminal case pending with the Justice Department if the purpose of the summons is to obtain further information from the taxpayer or a witness or to uncover assets to apply against assessed liabilities.[6] In United States v. Stuart[7] a Canadian citizen sought to avoid an IRS summons issued in order to provide certain bank account information to the Canadian tax authorities by arguing that it was necessary for a court to first determine whether the corresponding Canadian tax investigation had not reached a stage analogous to a criminal investigation by the U.S. Justice Department. The Supreme Court ruled, inter alia, that such a determination was not a prerequisite for the enforcement of such a summons.
    Opinion of the Court
    The opinion of Tenth Circuit in Villareal begins by stating the criteria that the government must satisfy as specified in Powell for enforcement of its summons. It then states that "the government’s burden at this stage ‘is a slight one because the statute must be read broadly in order to ensure that the enforcement powers of the IRS are not unduly restricted.’” The court goes on to say that the burden on the resisting taxpayer is a “heavy one.” According to the court “unless Mr. Villareal can show that enforcement would ‘constitute an abuse of the court's process, or that in issuing the summons the IRS lack[ed] institutional good faith,’ the summons must be enforced."
    Villareal argued that the IRS failed to satisfy the criteria in Powell because the SAT, allegedly, is engaged in a harassment campaign against him, which tainted the summons with an improper purpose. Villareal also contended that the IRS was engaged in a "fishing expedition" and that the information requested was "irrelevant."
    The court rejects these arguments, characterizing them as “conclusory.” The court, relying on Stuart, states that only the good faith of the IRS in issuing the summons is relevant, not the good faith of the SAT in requesting the information. The court faults Villareal for not developing his facts sufficiently and for not providing an affidavit factually opposing the IRS. The court also rejects Villareal's request for a hearing stating, inter alia, that the court must be mindful of wasting judicial time and resources.
    The Villareal case illustrates the relative ease with which the IRS may enforce a summons when a foreign tax authority requests assistance in building its case against a taxpayer. The Villareal case does not fully explore, however, the meaning of the term “institutional good faith.” For example, if the IRS has knowledge that the foreign tax authority is not acting in good faith, would that knowledge cause a court to conclude that the IRS was not itself acting in good faith when it issued the summons? The Tenth Circuit does say that the good faith of the Mexican tax authorities is not relevant under the Powell standard. Does it necessarily follow that the IRS's knowledge of a lack of good faith by a foreign tax authority also is not relevant? The facts were not that well developed in Villareal. Perhaps one day a court will have facts before it that squarely present this issue.
    [1] United States Model Income Tax Convention of November 15, 2006.
    [2] No. 12-1131, D.C. No. 1:11-CV01000-CMA-CBS (filed April 22, 2013).
    [3] Section 7601 and section 7602.
    [4] Section 7604.
    [5] 379 U.S. 48 (1964) (“Powell”).
    [6] This restriction is necessary in order to coordinate the IRS summons authority with the rules of discovery in a criminal case.
    [7] 489 U.S. 353 (1989).