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July 4, 2005
On January 29, 2005, we reported
under the headline, “Dramatic
Development,” that the U.S. Court of Appeals for the Second
Circuit had issued a decision in Schulz v. IRS. The Court held that
taxpayers cannot be compelled by the IRS to turn over personal and private
property to the IRS, absent a federal court order. “...absent an effort to seek enforcement through a federal court, IRS summonses apply no force to taxpayers, and no consequence whatever can befall a taxpayer who refuses, ignores, or otherwise does not comply with an IRS summons until that summons is backed by a federal court order…[a taxpayer] cannot be held in contempt, arrested, detained, or otherwise punished for refusing to comply with the original IRS summons, no matter the taxpayer's reasons, or lack of reasons for so refusing.”
On March 9, 2005, we reported under the
headline, “IRS:
Gut Schulz v IRS. DOJ: Court’s Opinion Threatens Tax System,”
that on behalf of its client, IRS, the DOJ had filed a motion with the
Court, requesting that the Court amend its decision in Schulz. On June 29, 2005, the Court issued its much-anticipated decision regarding the government’s motion to amend the Court’s earlier ruling. With a firm reliance on the Court’s primary role of protecting the People’s individual, unalienable Right to Due Process guaranteed by the 5th and 14th Amendments, the court soundly rejected the government’s pleading. Writing for the three-judge panel, Judge Straub wrote, in part: “…The government has moved to amend our per curiam opinion, reported at Schulz v. IRS., 395 F.3d 463 (2nd Cir. 2005) (“Schulz I”)… Having considered the arguments of the parties, we grant the petition to rehear for only the limited purpose and to the extent necessary to clarify our prior opinion and hold that: 1) absent an effort to seek enforcement through a federal court, IRS summonses “to appear, to testify, or to produce books, papers, records, or other data,” 26 U.S.C. Section 7604, issued “under the internal revenue law, “ id., apply no force to the target, and no punitive consequences can befall a summoned party who refuses, ignores, or otherwise does not comply with an IRS summons until that summons is backed by a federal court order; 2) if the IRS seeks enforcement of a summons through the federal courts, those subject to the proposed order must be given a reasonable opportunity to contest the government’s request; 3) if a federal court grants a government request for an order of enforcement then any individual subject to that order must be given a reasonable opportunity to comply and cannot be held in contempt or subjected to indictment under 26 U.S.C. section 7210 for refusing to comply with the original, unenforced IRS summons, no matter the taxpayer’s reasons or lack of reasons for so refusing.” [page 3]. Soundly rejecting the government’s view of Congress’s tax enforcement scheme as “Draconian,” the Court said: “…the government appears to argue alternatively, or in combination, that: 1) the government may use the federal courts to punish taxpayers who disobey an IRS summons even if the summons is never enforced by court order; 2) if an IRS summons is enforced by a court order, the court may punish disobedience of the IRS summons before providing the taxpayer an opportunity to comply with the court’s order; or 3) if an IRS summons is enforced by a court order, the court may punish disobedience of the IRS summons even if the taxpayer complies with the court’s order. In our view, expressed in Schulz I, none of these proposals is consistent with the comprehensive tax-enforcement scheme in which 26 U.S.C. sections 7210, 7604(a) and 7604(b) are situated, constitutional due process, or the relevant precedents of this Court and the United States Supreme Court…" [ page 5]. Trumpeting the primary role of the Judiciary of protecting the People from unconstitutional acts of the other two branches of the government, the Court went on to say: "…the IRS summons is administratively issued but its enforcement is only by federal court authority in an adversary proceeding affording the opportunity for challenge and complete protection to the witness.” [page 9] (emphasis in the original). Most
significantly, the Court held, relying on a 1920 decision by the United
States Supreme Court, that the principles of due process apply to all
administrative orders. We take that to mean the Court’s order applies
not only to IRS first party summonses, but also to IRS third party
summonses, and to IRS levies and liens. “The rule of due process upon which we relied in Schulz I, and upon which we rely now, can be stated thus; any legislative scheme that denies subjects an opportunity to seek judicial review of administrative orders except by refusing to comply, and so put themselves in immediate jeopardy of possible penalties ‘so heavy as to prohibit resort to that remedy,’ Oklahoma Operating Co. v. Love, 252 U.S. 331, 333 (1920), runs afoul of the due process requirements of the Fifth and Fourteenth Amendments.“ [Page 10].
Although the objects in contention in Schulz were IRS administrative
summonses, it is unavoidable that the Due Process issues raised and
articulated by the Court in Schulz have direct implication for all
forms of routine IRS administrative process including liens, levies and
seizures. This decision reiterates those constitutional principles.
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