United States District Court, S.D. New York
For Highland Capital Management, L.P., Petitioner seeks to quash a third-party summons served on Barclay Bank, PLC related to an audit of petitioner for the tax year 2008, Petitioner: Gabrielle Elise Farina, William Mayer Katz, Jr., LEAD ATTORNEYS, Thompson & Knight, LLP (NYC), New York, NY; Mary A. McNulty, PRO HAC VICE, Thompson & Knight LLP (Dallas), Dallas, TX.
For United States of America, Respondent: Shane Patrick Cargo, LEAD ATTORNEY, U.S. Attorney Office SDNY, New York, NY.
MEMORANDUM DECISION AND ORDER ENFORCING SUMMONS
McMahon, United States District Judge.
Petitioner Highland Capital Management, L.P. (" Highland" or " the taxpayer" ), a Texas-based hedge fund, brings this proceeding to quash a third party summons served on Barclays Bank PLC (" Barclays" ) bye the Internal Revenue Service (" IRS" ) in connection with an audit of Highland's 2008 tax return. The IRS cross-moves to enforce the subpoena.
The IRS more than meets its minimal burden of demonstrating, prima facie, that it issued the summons in good faith, and the taxpayer has failed to allege facts that plausibly raise an inference of improper motive. As a result, there is no need for any hearing. Highland's motion to quash the summons is DENIED and the IRS's cross-motion for enforcement is GRANTED.
BACKGROUND FACTS RELATING TO THE SUMMONS
During an audit, the IRS questions losses claimed on Highland's 2008 tax return in connection with two transactions between it and Barclays. See Docket #8, Decl. of Mary A. McNulty (" McNulty Decl." ) at ¶ 5; Docket #12, Decl. of Marcia T. Vanterpool (" Vanterpool Decl." ) at ¶ 3. Highland and Barclays engaged in litigation relating to those two transactions and other transactions as well. See Docket #2, Highland Mot. to Quash at 4. The lawsuit was settled on July 23, 2012; the settlement (pursuant to which Highland paid Barclays $220 million in a lump sum that related to all the challenged transactions, not just the two of interest to the IRS) was memorialized in a settlement agreement. See Vanterpool Decl. at ¶ 14.
In connection with the 2008 audit, the IRS repeatedly asked Highland to produce the settlement agreement. Id. at ¶ ¶ 4, 14; Docket #13, Decl. of Kenneth D. Telchik (" Telchik Decl." ) at ¶ 8; Docket #2, Ex. C to Mot. to Quash, Information Document Request FP-55. Highland resisted, feinted, and tried to get the IRS to agree to accept certain representations instead of the settlement agreement -- which, it claimed, it did not wish to disclose because a confidentiality provision in the agreement required Highland to alert Barclays before responding to the government's demand. See Docket #2, Highland Mot. to Quash at 5. This Highland was reluctant to do, ostensibly because of acrimony that remained after the litigation. Id.
After repeated fruitless attempts to obtain the settlement agreement from Highland -- both informal and via a formal demand for production no later than December 30, 2013 (with which Petitioner simply failed to comply) -- the IRS decided to obtain the agreement from Barclays. See Telchik Decl. at ¶ 15; Docket
#8, McNulty Decl. at 1110, 16; Docket #11, Decl. of Veronica L. Trevino (" Trevino Decl." ) at ¶ 9; Vanterpool Decl. at ¶ 11. When the 2008 audit began, the IRS provided Highland with a copy of IRS Publication 1, which warns a taxpayer being audited that IRS agents " sometimes talk with [third parties]....if we need information that [the taxpayer has]...been unable to provide, or to verify information we have received...Our need to contact other persons may continue as long as there is activity in your case." See Docket #2, Ex. B to Highland Mot. to Quash, Notice of Beginning of Administrative Proceeding and IRS Publication 1 at 4. The publication goes on to advise the taxpayer under audit that, " if we do contact other persons, you have a right to request a list of those contacted." Id. It is uncontested that the Internal Revenue Code and IRS regulations permit this sort of contact, as long as the taxpayer has appropriate notice of it.
In addition to this general warning, it is undisputed that the IRS advised Highland at a January 16, 2014 meeting that the IRS would seek to obtain the withheld settlement agreement from Barclays unless Highland provided it. See Trevino Decl. at 710-11; Telchik Decl. at ¶ 17; McNulty Decl. at 712-14.
Having received nothing from Highland, on February 18, 2014, IRS Specialist Telchik informally asked Barclays to provide the IRS with a copy of the agreement. See id. When Barclays raised the issue of providing notice to Highland, the IRS offered to let Barclays give seven days' notice of turnover to Highland (as required by the settlement agreement's terms). Trevino Decl. at ¶ 11-12. Alternatively, the IRS indicated that it would issue a third party summons to Barclays, which would provide Highland with notice. Id. Barclays elected the former course and ostensibly notified Highland that it planned to turn over the document to the IRS before doing so on March 10, 2014. Vanterpool Decl. at 713-14. However, it appears that neither Highland nor its counsel received notice that the document was being turned over until long after Barclays did so; counsel first learned that the document might be in IRS hands on May 27, 2014, and did not confirm that Barclays had in fact disclosed the settlement agreement until several weeks thereafter. See McNulty Decl. at 71 7-20.
Predictably, seeing the settlement agreement did not satisfy the IRS; the settlement payment was not allocated among the various transactions to which the settlement applied. Telchik Decl. at ¶ 22. This time, the IRS decided not to bother with Petitioner, which had repeatedly refused to provide it with the settlement agreement. Vanterpool Decl. at ¶ 16. Instead, it simply issued a third-party recordkeeper summons to Barclays on May 21, 2014, seeking documents " not already in IRS possession" that were " necessary to examine in order to properly audit the Federal tax liability of Highland for the 2008 taxable year." Telchik Decl. at ¶ 28; see also Vanterpool Decl. at ¶ 16. Highland, of course, was also served with a copy of this summons; indeed, it was receipt of IRS notice of this summons that alerted Highland to the fact that Barclays had already been asked to turn over the settlement agreement. McNulty Decl. at 117-20.
Petitioner seeks to quash this summons to Barclays.
Other Alleged IRS Improprieties
In addition to the apparent failure to notify Highland about Barclays' turnover of the settlement agreement within the seven days required by the terms of ...