Today we are really pleased to welcome guest blogger Keith Fogg, who is a Professor of Law at Villanova Law School, and who currently is visiting at Harvard Law School this academic year to start and direct the tax clinic there. He is a co-founder of the blog, Procedurally Taxing, which seeks to comment on tax procedure issues. Before joining the Villanova Law School faculty, Keith worked for over 30 years with the Office of Chief Counsel, IRS. Keith previously has served as the Chair of the ABA Tax Section’s Pro Bono and Tax Clinic Committee, working to extend the representation of low income taxpayers before the Tax Court, and he currently is a member of the Tax Section Council. He edited the 5th and 6th Editions of the ABA Tax Section publication, Effectively Representing Your Client Before the IRS, and wrote the chapters on liens and levies; he is the principal author of the collection chapters in the revised Saltzman Book treatise IRS Practice and Procedure; he also received the ABA Tax Section Janet Spragens 2015 Pro Bono Award.
In this post, Keith will discuss the fascinating issue of the engagement by the IRS of the private law firm Quinn Emanuel to assist the IRS during an ongoing audit of Microsoft and the questioning of company employees under oath. It is a case that implicates significant issues regarding the potential role of private third parties in the enforcement of the federal tax code, particularly in regards to audits of large corporations.
The IRS is auditing Microsoft. Ordinarily, we do not know when the IRS is auditing a person or a business but the audit of Microsoft has provided, for the last year, a pretty detailed look at the process of auditing Microsoft and, by implication, many large corporations. The Microsoft audit has repeatedly made it to the front pages of the “regular” press. Microsoft is challenging the manner in which the IRS has gone about the audit. The challenge to the IRS audit process first went public when Microsoft brought a FOIA suit to obtain information about the contract the IRS entered into with a private law firm in connection with the audit. Shortly thereafter on December 11 and 19, the IRS filed petitions in the United States District Court for the Western District of Washington seeking to enforce summonses it had issued on October 30, 2014. The publicity continued when Senator Hatch weighed in on the use of private contractors in the manner being used in the Microsoft case and as the court granted Microsoft permission to hold an evidentiary hearing in the summons cases on June 17, 2015. It is now coming to a crescendo with the filing of briefs and the making of oral arguments on November 6, 2015.
With the briefs submitted by both Microsoft and the United States and oral argument completed, soon District Court Judge Ricardo S. Martinez will render an opinion directing Microsoft to comply with the summons or denying enforcement of the summons. Given the amount of effort that has gone into the case to this point, an appeal by the losing party seems like a forgone conclusion. The amount of time and effort that has gone into this information gathering case that is generally a summary proceeding demonstrates why the IRS fought so hard in the Clarke case to prevent summons cases from turning into proceedings with evidentiary hearings and other trappings of fully contested matters. Despite its recent Supreme Court victory in Clarke limiting the scope of the litigation in summons cases, Microsoft’s case represents an exception to the general rule. The full-fledged fight here, while unfortunate and unusual in a summons case, reflects the unusual nature of the case and the tack the IRS has taken in the audit.
The issue at the core of the fight over enforcement of the summons issued to Microsoft concerns the use by the IRS in the audit of a law firm, Quinn Emanuel, to assist the IRS. The fight does not concern the use of a third party to assist with the audit of a large corporation, such use is common, but rather how the IRS uses Quinn Emanuel. Rather than merely using Quinn Emanuel to assist the examiners in determining what questions to ask or providing expert advice on some aspect of the case, the IRS seeks to use Quinn Emanuel to examine Microsoft employees under oath and to provide other assistance that makes the law firm look much more like the lawyer for the IRS and much less like an expert. As the facts portray Quinn Emanuel as a lawyer rather than an expert, the issues get stickier.
At some point in the audit of Microsoft, the IRS decided it needed more legal muscle than provided by attorneys from Chief Counsel, IRS or the Department of Justice Tax Division. It wrote a Temporary Regulation changing the rules on who could participate in an examination of the witness under oath in a summons case to allow a third party to do so. The temporary regulation seems to have been written specifically to allow Quinn Emanuel to participate in the audit of Microsoft. Before the issuance of the temporary regulation only a duly authorized “officer or employee or an agency of the Treasury Department could take testimony under oath to investigate a tax liability pursuant to section 7602(a)(1)-(3) and 7701(a)(11)(B). The IRS hired the law firm of Quinn Emanuel about the same time the temporary regulation was issued.
The first thing Microsoft had to do in the summons case, aside from failing to appear at the time appointed in the summons, was to convince the Court that this was an extraordinary case and the Court should hold an evidentiary hearing concerning the validity of the summons. To do that it essentially argued that the hiring of a private law firm to participate in and ask questions of the witnesses under oath improperly passed a government function to a private party and may have improperly delegated aspects of a tax audit to a private firm. Though the IRS argued that these were legal issues that did not require evidence, the Court granted the evidentiary hearing because Microsoft has pointed to sufficient facts to raise an “inference of impropriety.” As mentioned above, courts allow evidentiary hearings in summons cases only in unusual circumstances and the Supreme Court has emphasized the summary nature of the proceedings.
The evidentiary hearing itself also sparked disagreement between the parties. Microsoft wanted to have its attorneys testify. The IRS thought this was inappropriate under the Washington state rules of conduct which generally prohibit a lawyer from serving as both the advocate and the witness. The Court again allowed Microsoft to proceed with witnesses in the manner it proposed.
After the evidentiary hearing Microsoft filed an opening brief, the IRS filed a reply brief and Microsoft filed a reply to the brief of the IRS. Now the case has reached the point of decision. Microsoft’s opening brief in the summons matter and the reply brief filed by the Government frame the issues. I will focus my discussion here on Microsoft’s reply brief because it raises some interesting issues.
Microsoft argues first that contractors may not take testimony. It argues that section 7602 limits how the IRS can conduct the taking of testimony following a summons and that the limitation prohibits the IRS from using a contractor for this function. The IRS argues that asking questions of a witness under oath in a summons setting is not necessarily taking testimony. Because Microsoft argues that asking questions under oath is taking testimony and that only the IRS can take testimony in a summons case, Microsoft further argues that the temporary regulation violates the statute and should be struck down. Here, Microsoft goes into a Chevron argument concerning the validity of the temporary regulation and it cites to Dominion Res., Inc. v. United States, and SEC v. Chenery Corp. The issue of the appropriateness of a regulation has been extensively discussed in Procedurally Taxing here and here. The attack on the temporary regulation is interesting and certainly not frivolous. After the big loss this past summer in the Tax Court in the Altera case another loss would certainly set the IRS back with respect to its rule making process. Because the temporary regulation at issue here was out of the ordinary both in the way it was created and what it created, Microsoft has a chance on this argument.
Microsoft next argues that the IRS issued the summonses for the improper purpose of extending the statute of limitations. It spends little effort making this argument and the argument has little chance of success. The IRS does not need to explain everything about its audit plans in seeking a statute extension from a taxpayer. Its failure to discuss how it planned to use Quinn Emanuel can hardly provide too much fodder for undoing the agreement to extend.
Microsoft’s third argument is that the summons should not be enforced because it is just a veiled attempt to allow Quinn Emanuel to conduct pre-trial discovery. By their nature summonses seek to gather information prior to trial. The participation of Quinn Emanuel does not change the dynamic much as I see it on this issue. Chief Counsel lawyers were going to be involved in the summons matter in any event. Having a different set of lawyers involved does not make much difference with respect to the purpose of gathering the information.
Microsoft’s fourth argument goes back to the heart of the problem created by using Quinn Emanuel in the manner anticipated by the IRS. Microsoft argues that the participation of this private law firm in the questioning of the witnesses places the firm in an impermissible position of conducting the examination. In addition to the arguments about Quinn Emanuel’s role in the audit and whether that role exceeds the role permitted by statute, Microsoft also makes an argument, in response to replies it received from the IRS about the role of Quinn Emanuel that “QE’s admitted role in providing the IRS with a “legal assessment” of its case is contrary to Section 7803(b)’s requirement that legal advice to the IRS be provided by the Office of Chief Counsel, which resides under a separate branch of the Treasury Department from the IRS.” The 7803 raises a different statutory argument than Microsoft raised in its attack on the regulation. Here, the argument centers on who is the lawyer for the IRS. Can the IRS go out and hire new or additional lawyers if it does not find it is getting the service or expertise it needs from its own lawyers or does the statute limit it to using the government lawyers mentioned in the statute? In its responses to Quinn Emanuel’s role, the IRS seems to move them away from assisters to the revenue agents to the role of attorney. That may help in arguing that the role does not take away the government function of examination but does it create an opening that if the role is really that of lawyer the role now runs afoul of another provision of the code.
The case presents an interesting look at the proper role of the government and of those assisting the government. Congress decided it wanted whistleblowers to assist the IRS in finding taxpayers it might not otherwise find. Congress seems poised to try for a second time to foist private debt collectors off on the IRS. Has Congress given the IRS the authority to allow contractors to perform something very close to a function reserved for government employees or is this contract just a simple hiring of a contractor in the ordinary (except for the need for the temporary regulation) course of business?