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Hohman v. Eadie

United States Court of Appeals, Sixth Circuit

July 5, 2018

Jodi C. Hohman; JHohman, LLC; You Got Busted By Me, LLC; Terry Miller, Plaintiffs-Appellants,
v.
Maurice Eadie, et al., Defendants, United States of America; Department of Treasury; Internal Revenue Service, Defendants-Appellees.

          Argued: April 26, 2018

          Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 2:16-cv-11429-Matthew F. Leitman, District Judge.

         COUNSEL

         ARGUED:

          Stuart M. Schwartz, CLARK HILL PLC, Detroit, Michigan, for Appellants.

          Paul A. Allulis, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees.

         ON BRIEF:

          Stuart M. Schwartz, CLARK HILL PLC, Detroit, Michigan, for Appellants

          Paul A. Allulis, Michael J. Haungs, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellees.

          Before: MERRITT, WHITE, and DONALD, Circuit Judges

          OPINION

          MERRITT, Circuit Judge.

          This appeal raises a highly technical issue arising from a potential conflict between the Internal Revenue Code and the Federal Right to Financial Privacy Act of 1978, 12 U.S.C. §§ 3401-3422.[1] The IRS issued two "John Doe" summonses without first obtaining approval in a federal district court as required by the Internal Revenue Code ("Code"), see I.R.C. § 7609(f). The IRS served the summonses on Chase Bank to obtain financial records relating to two limited liability companies ("LLCs"). Plaintiffs, the LLCs and subjects of the John Doe summonses, alleged that the IRS's use of the John Doe summonses to obtain their financial records violated the Right to Financial Privacy Act ("Act"). The district court granted the government's motion to dismiss for lack of subject matter jurisdiction after determining that sovereign immunity barred Plaintiffs' claims under the Act. The issues on appeal are (1) whether the IRS is subject to the Act when it fails to follow its own procedures under the Code, and (2) whether LLCs fall within the Act's waiver of sovereign immunity. We AFFIRM the district court on sovereign immunity grounds.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         The Internal Revenue Code permits the IRS to serve administrative summonses on third parties to produce records related to taxpayers whom the IRS is investigating. See I.R.C. § 7603. Generally, these summonses must identify the person whose records are sought. See I.R.C § 7609. However, the IRS may also serve a John Doe summons, which does not identify the person whose records are sought. I.R.C. § 7609(f). This type of summons may be served only after a federal district court proceeding in which the IRS establishes that:

(1)the summons relates to the investigation of a particular person or ascertainable group or class of persons,
(2)there is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and
(3) the information sought to be obtained. . . is not readily available from other sources.

Id.

         On September 25, 2015, the IRS served a John Doe summons on Chase Bank that sought financial records for two separate accounts (the "First John Doe Summons"). Five days later, on September 30, the IRS served a second John Doe summons that sought financial records for a single account (the "Second John Doe Summons"). The three accounts involved were identified only by account numbers. The IRS failed to seek approval from a federal district court prior to issuing either of the John Doe summonses.

         In October 2015, Chase Bank notified Jodi C. Hohman ("Hohman") and her company JHohman, LLC that it had received the First John Doe Summons from the IRS and that the summons sought records for accounts relating to them. On November 25, 2015, Hohman and JHohman, LLC filed a petition in federal district court to quash the summons. In the petition to quash, Hohman and JHohman, LLC argued that the First John Doe Summons did not meet the requirements listed in I.R.C. § 7609(f), which requires the IRS to obtain approval from a federal court before serving a John Doe summons.

         In response to the petition to quash, the IRS produced sworn declarations from the IRS agents who had issued the First John Doe Summons. It attached a partially-redacted copy of the First John Doe Summons to the declarations. The document revealed the first account number listed on the summons, but the second account number was redacted. Hohman and JHohman, LLC reviewed the document and determined that the first account number on that summons belonged to JHohman, LLC. Because the second account number remained masked, they were unable to determine who owned that account. Their subsequent investigation led them to believe that the second account either belonged to Terry Miller ("Miller"), individually, or his company, You Got Busted By Me, LLC ("Busted, LLC"). Miller is the sole member and owner of Busted, LLC.

         The proceeding also revealed that the IRS had served the Second John Doe Summons on Chase Bank. The IRS attached an unredacted copy of the Second John Doe Summons to the declarations. Hohman and JHohman, LLC determined that the summons sought records relating to an account belonging to Hohman, individually. They later withdrew their petition to quash.

         Plaintiffs Hohman, JHohman, LLC, Miller, and Busted, LLC (collectively, "Plaintiffs") filed suit against the United States, two IRS employees, and unnamed Jane and John Does, on April 20, 2016, alleging that the IRS violated the Right to Financial Privacy Act, the Privacy Act of 5 U.S.C. § 552a, the Fourth and Fifth Amendments of the Constitution, and the Internal Revenue Code's prohibition of the unauthorized disclosure of tax return information.

         On June 24, 2016, the government moved to dismiss the complaint. After a hearing, the district court granted this motion in regards to the claims under the Privacy Act, the Fourth and Fifth Amendments, and the Code's prohibition of the unauthorized disclosure of return information. Hohman v. Eadie, No. 16-cv-11429, 2016 WL 10906875, at *1 (E.D. Mich. Nov. 7, 2016). However, the district court denied the motion to dismiss as to the Right to Financial Privacy Act claim, which is the sole claim ...


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