The John Doe Summons procedures were designed to provide checks and balances. But, the IRS often finds that the procedures slow it down. The IRS must convince DOJ Tax, whose attorneys are plenty busy with other work, that it is worth going through the procedures to get the summons. DOJ Tax must gear up and present the matter to a frequently skeptical and almost always overworked District Judge who must play devil's advocate to the Government's ex parte application for the summons. Obviously, the IRS would much prefer just to use its administrative summons which has no such cumbersome steps.
In United States v. Tiffany Fine Arts, Inc., 469 U.S. 310 (1985), the Supreme Court blessed the IRS's use of the regular administrative summons rather than the John Doe summons where the target of the summons has transactions relevant to its tax liability which, if discovered, might also identify unknown third parties’ and be relevant to their tax liabilities. The context there was a tax shelter promoter who sold the product to unknown third parties. By allegedly investigating the promoter’s tax liability to support inquiries into whether it reported its income from those unknown third parties, the IRS could summons the information under the general administrative summons by meeting the minimal requirements of Powell. The Supreme Court blessed that gambit and refused to require the John Doe Summons procedure. After Tiffany Fine Arts, the IRS saw the end-run around the John Doe Summons procedures -- simply find a reason to audit the third party record-keeper such as the tax shelter promoter and find some pretext that obtaining the names of the third parties is relevant under the Powell standards to the audit of the record-keeper.
In United States v. Gertner, 65 F.3d 963 (1st Cir. 1995), which you should now read, a law firm filed a Form 8300 (currency transaction report) notifying the IRS that the law firm had received in excess of $10,000 in cash. The form, however, failed to identify the taxpayer, asserting ethical grounds, the attorney client privilege and constitutional grounds. The IRS then issued a regular IRS summons to the law firm to produce the withheld information. The IRS used the regular IRS summons as opposed to the John Doe summons on the ground the Supreme Court blessed in Tiffany Fine Arts -- i.e., that the summonsee's taxes were being investigated as well as the unknown taxpayer's taxes. Analyzing the case under the Powell good faith standard, the district court concluded that the IRS's grounds for using the general summons -- i.e., that it was investigating the law firm's tax liability -- was pretextual, mere smoke and mirrors to achieve the real goal of investigating the unidentified taxpayer. The Court of Appeals affirmed, noting importantly that the John Doe Summons procedure required advance court approval, a procedure the Government sought to avoid here on the pretext that it was after something more than the taxpayer's identity. The Court of Appeals noted that the requirement of advance court approval could not be ignored by the IRS simply by chanting a litany based on Tiffany Fine Arts.Readers may be aware of a very recent kerfuffle in the Second Circuit regarding a nontax issue where the Second Circuit took the highly unusual step of removing a federal district judge from a case in which the judge took the City of New York to task for, very generally, " improperly steering cases and commenting out of court." The New York Times has a wonderful "Room for Debate" series of articles on the issues raised. The series is titled "The Appearance of Impartiality" and may be viewed here. One of the authors in the series is Nancy Gertner, who became a U.S. district judge herself after the skirmish in the case above. So I thought I would post links to the series and Nancy Gertner's article here as an excuse to post the foregoing about the concepts of the John Doe Summons (hoping, of course, that those interested in the John Doe Summons might also have an interest in the Appearance of Impartiality).