Determining the Enforceability of a Section 6038A Summons

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

When is a section 6038A summons enforceable? The IRS must satisfy certain statutory and other requirements for a section 6038A summons to be enforceable. One approach to challenging a summons is to demonstrate that the IRS did not comply with the Powell requirements – requirements that take their name from the Supreme Court’s seminal case in United States v. Powell, 379 U.S. 48 (1964).

As background, a domestic reporting company (“DRC”) is required to maintain certain records in addition to those required by IRC § 6001. A DRC is either a domestic corporation that is 25-percent foreign-owned or a foreign corporation that is 25-percent foreign-owned and engaged in a trade or business within the United States. Those additional records are typically relevant in determining the correct U.S. tax treatment of transactions with foreign related parties. A section 6038A summons provides the IRS a mechanism to request those records from a DRC.

Generally, a court will enforce a 6038A summons where the IRS complies with the following Powell requirements:

  1. There is a legitimate purpose for the investigation;
  2. The material sought is relevant to that purpose;
  3. The material sought is not already within the IRS’s possession; and
  4. The IRS followed the administrative steps required by the Internal Revenue Code.

The IRS establishes a prima facie case that a summons is enforceable when it complies with the requirements and provides a sworn declaration that the summons complied with the Powell requirements. To rebut a prima facie case, the taxpayer must demonstrate an “abuse of power” or “lack of institutional good faith,” which can be difficult.

If a DRC is served with a 6038A summons, it may initiate judicial proceedings to either quash the summons or to review the Service’s determination that the DRC did not substantially comply with the summons. The statute of limitations is suspended during any such proceedings and for 90 days after a court’s final determination.

Substantial compliance is the standard and is determined by the facts and circumstances of the matter. If the DRC does not substantially comply, then the IRS applies a noncompliance rule where it has sole discretion to determine the amount of the DRC’s deductions related to transactions with a foreign related person. One particularly important factor in the substantial-compliance calculus is the substance of the foreign-based documentation provided.

The first step in challenging the enforceability of a section 6038A summons is to determine whether the summons complies with the Powell requirements. If the summons is in compliance, then a judicial proceeding may be necessary to prove either “abuse of power” or “lack of institutional good faith” by the Service. Taxpayer’s faced with a section 6038A summons should carefully vet their procedural options. Simply refusing to respond to a 6038A summons without further action is a risky tactic in light of the noncompliance rule.  For more on Section 6038A summonses, see Summonsing Foreign Records: The Section 6038A Summons.  For more on international tax enforcement, see some of our prior posts, including An Update on International Tax EnforcementCourt Finds Senator Rand Paul and Co-Plaintiffs Lacked Standing to Challenge Foreign Account Reporting RulesThe Fifth Amendment Privilege Against Self Incrimination and the Foregone Conclusion Doctrine in the Context of Foreign Tax Records.

 

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