In the
United States Court of Appeals
For the Seventh Circuit
Nos. 08-1743, 08-1744, 08-1746, 08-1747, 08-1749 & 08-1750
S HAHID R. K HAN and A NN C. K HAN, et al.,
Petitioners-Appellees,
v.
U NITED S TATES OF A MERICA,
Respondent-Appellant.
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 07 CV 2570, 07 CV 2571, 07 CV 2573, 07 CV 2575,
07 CV 2583 & 07 CV 2574—Ruben Castillo, Judge.
A RGUED O CTOBER 31, 2008—D ECIDED N OVEMBER 20, 2008
Before F LAUM, R OVNER and W OOD , Circuit Judges.
F LAUM, Circuit Judge. Section 7602(d)(1) of the Internal
Revenue Code states: “No summons may be issued
under this title, and the Secretary may not begin any
action under section 7604 to enforce any summons, with
respect to any person if a Justice Department referral is
in effect with respect to such person.” Interpreting this
statute, the district court quashed an IRS summons seeking
2 Nos. 08-1743, 08-1744, 08-1746, et al.
the testimony of Robert Greisman, CPA in connection
with an investigation and audit of petitioners’ tax returns.
The IRS would not reveal whether it had referred
Greisman to the Department of Justice because of his
involvement in petitioners’ matter.
On appeal, we consider whether § 7602(d)(1) only bars
the IRS from summoning taxpayers whose liabilities are
at issue and who have been referred to the Justice De-
partment, or whether it also bars the IRS from sum-
moning a third party witness referred to Justice. The IRS
Commissioner issued a regulation interpreting the statute
as quashing summonses only when there is a Justice
Department referral of the person whose tax liability is
at issue. Because the IRS Commissioner promulgated
this regulation, we evaluate the statute within the
Chevron framework. For the reasons explained below, we
conclude that the statute is ambiguous and the Treasury
Regulation is reasonable, and we reverse the district
court’s holding.
I. Background
The IRS is examining Shahid and Ann Khan’s federal tax
returns for the 1999 through 2003 tax years. It also is
examining the tax returns of five entities in which Shahid
Khan was a common partner, member, or owner: Uviado,
LLC; SRK Wilshire Partners, LLC; KPASA, LLC; Jonction,
LLC; and SRK Wilshire Investors, LLC (“the entities”). In
an affidavit provided by the government, the IRS revenue
agent assigned to the case, Larry Weinger, attested that
it appeared that the Khans and their entities engaged in
Nos. 08-1743, 08-1744, 08-1746, et al. 3
at least five transactions that the IRS identified as poten-
tially abusive tax shelters. Weinger stated that “taxpayers
appeared to have sheltered approximately $250 million
in income over the years at issue, reducing their federal
income tax liability by approximately $85 million.”
Robert Greisman was an accountant and attorney at the
BDO Seidman accounting firm (“BDO”). He was a
member of BDO’s Tax Solutions Group and an expert in
tax shelters. In his affidavit, Weinger stated that Greisman
had met with the Khans, provided them with accounting
and professional services, and “may have been involved
with the execution of the tax shelter transactions during
the periods under examination.” He said that the petition-
ers paid BDO $8.5 million in fees that they claimed as
expenses on their returns, but that during an interview
Shahid Khan was unable to identify what services BDO
provided. Khan also was unable to answer many of
Weinger’s other questions, and he directed Weinger to
ask BDO for responsive information.
Based on Weinger’s investigation, the IRS issued six
summonses to Greisman on April 16, 2007. The summonses
sought Greisman’s testimony in connection with the IRS
investigation of the tax liability of the Khans and their five
entities. They required that Greisman appear before
Weinger on May 22, 2007.
On May 7, 2007, the petitioners filed petitions to quash
the summonses. The petitions were consolidated into one
case. Petitioners initially argued that the summonses
should be quashed for seven reasons: (1) Greisman’s
testimony was protected on the grounds of the work
4 Nos. 08-1743, 08-1744, 08-1746, et al.
product, attorney-client, and tax practitioner privileges;
(2) the summonses were barred under res judicata or
collateral estoppel; (3) the IRS already possessed all of
Greisman’s unprotected information; (4) Greisman’s
testimony was irrelevant because the IRS had reached
its audit conclusion already; (5) the summonses
improperly sought to circumvent an order in a separate
case involving the same parties; (6) the summonses
were overly broad and onerous; and (7) the summonses
lacked a good faith basis.
The government filed an opposition to the petition to
quash, and the United States also moved to enforce the
summonses. This motion was accompanied by Weinger’s
affidavit. Weinger stated that the purpose of the IRS’s
examination was “to ascertain the correctness of the
Khans’ tax returns and to determine the Khans’ correct
federal tax liabilities for the periods in issue.” He said
Greisman’s testimony might shed light on the losses
reported on taxpayers’ 1999-2003 tax returns and the
$8.5 million in fees deducted from taxpayers’ income for
those years. He combated the various arguments that
petitioners made in their petition to quash.
Petitioners, with their reply to the United States’ opposi-
tion to the petition to quash, filed an opposition to the
United States’ motion for enforcement of the summonses.
They reiterated many of the same arguments addressed
in their opening petition. They also argued for the first
time that the summonses violated 26 U.S.C. § 7602(d)(1)
because the declaration of the revenue agent supporting
the United States’ motion for enforcement did not state
Nos. 08-1743, 08-1744, 08-1746, et al. 5
whether the IRS had referred Greisman to the Justice
Department. A Justice Department referral is in effect
“[w]ith respect to any person if (i) the Secretary has
recommended to the Attorney General a grand jury
investigation of, or the criminal prosecution of, such
person for any offense connected with the administra-
tion or enforcement of the internal revenue laws, or (ii) any
request is made under section 6103(h)(3)(B) for the dis-
closure of any return or return information (within the
meaning of section 6103(b)) relating to such person.”
26 U.S.C. § 7602(d)(2)(A). Petitioners argued that a
criminal referral might be in effect for Greisman. In the
absence of a statement from the IRS that Greisman was
not the subject of a referral, they argued that § 7602(d)(1)
barred the IRS from summoning Greisman, a third
party witness. Petitioners requested that the district court
require the government to disclose Greisman’s referral
status.
The government, focusing on the language of
§ 7602(d)(1), responded that the referral provision only
bars the IRS from summoning a person whose tax
liability is being examined and who has been referred to
the Justice Department. The government also pointed to
the federal regulation to argue that the IRS Commissioner
interpreted the statute to apply to the taxpayer under
examination only, and not to a third party. See 26 C.F.R.
§ 301.7602-1(c)(1).
Additionally, the government stated that 26 U.S.C. § 6103
prohibited it from disclosing whether a Justice Depart-
ment referral was in effect with respect to Greisman.
6 Nos. 08-1743, 08-1744, 08-1746, et al.
Section 6103 mandates that tax returns and return infor-
mation shall be kept confidential. “Return information”
includes “whether the taxpayer’s return was, is being, or
will be examined or subject to other investigation or
processing . . . with respect to the determination of the
existence, or possible existence, of liability (or the amount
thereof) of any person under this title for any tax, penalty,
interest, fine forfeiture, or other imposition, or offense.” 26
U.S.C. § 6103(b)(2)(A). The government argued that
disclosing whether it had referred Greisman to the
Justice Department would fall within this definition, as
it would reveal the possible existence of his liability for
a penalty, fine, or offense in the matter of the tax shelters
at issue in this litigation.
The district court in this case quashed the summonses
issued by the IRS. The court focused on the words “any
person” in the statute to hold that the referral language
is not limited to the taxpayer being investigated. The court
stated that it was incumbent upon the government to
ensure that it had not referred Greisman to the
Justice Department. The court found an exception to
§ 6103(b)(2)(A) that would allow the government to
reveal whether it had referred Greisman. Section
6103(h)(4)(c) allows disclosure of a third party’s return
information where it “directly relates to a transactional
relationship between a person who is a party to the
proceeding and the taxpayer which directly affects the
resolution of an issue in the proceeding.” The court
found that Greisman’s potential liability was “directly
related” to resolution of an issue in this action, which it
identified as the use of potentially abusive tax shelters.
Nos. 08-1743, 08-1744, 08-1746, et al. 7
Because the government refused to disclose whether a
referral was in effect, the court determined that the sum-
monses must be quashed.
II. Discussion
The United States appeals the district court’s ruling.
It argues that the plain meaning of the statute should
resolve the case in its favor. In the alternative, it argues
that if we find § 7602(d)(1) to be ambiguous on the ques-
tion at issue, “the regulation implementing § 7602(d)(1)
leaves no doubt as to the correctness of the Government’s
position.” We review a district court’s determination of
whether the factual conditions for enforcement of an IRS
summons have been met for clear error, and we review
legal conclusions de novo. United States v. Ins. Consultants
of Knox, 187 F.3d 755, 759 (7th Cir. 1999).
Section 7602 of the Internal Revenue Code grants the
IRS “broad power” to issue summonses to investigate
violations of the tax code. Miller v. United States, 150
F.3d 770, 772 (7th Cir. 1998). The statute, which was
amended by Congress in 1982, authorizes the Secretary of
the Treasury to examine books and records, issue sum-
monses and take testimony for the purposes of “ascertain-
ing the correctness of any return, making a return where
none has been made; [or] determining the liability of any
person for any internal revenue tax . . . .” 26 U.S.C.
§ 7602(a). We have recognized the IRS summons power
as “vital to the efficacy of the federal tax system, ‘which
seeks to assure that taxpayers pay what Congress has
mandated and to prevent dishonest persons from
8 Nos. 08-1743, 08-1744, 08-1746, et al.
escaping taxation thus shifting heavier burdens to
honest taxpayers.’ ” United States v. BDO Seidman, 337 F.3d
802, 810 (7th Cir. 2003) (quoting United States v. Bisceglia,
420 U.S. 141, 146 (1975)).
If a summoned party refuses to testify pursuant to a
summons, the United States may seek judicial enforce-
ment. See 26 U.S.C. §§ 7402(b), 7604. To enforce a summons,
the United States need only make an initial showing that:
(1) the summons was issued for a legitimate purpose;
(2) the summoned data may be relevant to that purpose;
(3) the data is not already in the Government’s possession;
and (4) the administrative steps required by the Internal
Revenue Code for issuance and service have been fol-
lowed. United States v. Powell, 379 U.S. 48, 57-58 (1964). In
addition, the United States must not violate provisions of
§ 7602, including § 7602(d)(1), designed to ensure the
summons is issued in good faith. The taxpayer faces a
“heavy” burden to overcome the government’s prima facie
case. United States v. LaSalle Nat’l Bank, 437 U.S. 298,
316 (1978).
This case presents a question of first impression con-
cerning the meaning of § 7602(d)(1). Our first task is to
identify the proper framework in which we will evaluate
the question. As mentioned, the IRS Commissioner pro-
mulgated a regulation to interpret the statutory language
at issue. The Commissioner promulgated the regulation
pursuant to the Congressional grant of general rulemaking
authority reflected in 26 U.S.C. § 7805(a). We review
general authority tax regulations under the criteria articu-
lated in Chevron U.S.A., Inc. v. Natural Resources Defense
Nos. 08-1743, 08-1744, 08-1746, et al. 9
Council, Inc., 467 U.S. 837 (1984). Bankers Life & Casualty Co.
v. United States, 142 F.3d 973, 982-83 (7th Cir. 1998).
Chevron calls for a two-step inquiry. First, we look to
the language of the pertinent statutory provision. “If the
plain meaning of the text either supports or opposes the
regulation, then we stop our analysis and either strike or
validate the regulation.” Bankers Life, 142 F.3d at 983. In
searching for a plain meaning, we should “give effect, if
possible, to every clause and word of a statute.” Duncan v.
Walker, 533 U.S. 167, 174 (2001) (internal quotation
marks omitted). Proper statutory construction requires
considering “not only the bare meaning of a word but
also its placement and purpose in the statutory scheme.”
Bailey v. United States, 516 U.S. 137, 145 (1995).
If the statutory language is either silent or unclear on
the point at issue, we proceed to Chevron’s second step:
We assess the reasonableness of the Commissioner’s
regulation. Bankers Life, 142 F.3d at 983. “If the regulation
is a reasonable reading of the statute, we give deference to
the agency’s interpretation.” Id. Our authority at this
second step of the analysis is therefore limited. It is not
our role to determine the most appropriate interpreta-
tion of the statute, but simply to assess whether the
regulation reflects a reasonable construction. Chevron, 467
U.S. at 843 n.11. For “Congress has delegated to the
Commissioner, not to the courts, the task of prescribing
‘all needful rules and regulations for the enforcement’ of
the Internal Revenue Code.” United States v. Correll, 389
U.S. 299, 307 (1967) (quoting 26 U.S.C. § 7805(a)).
Starting with Chevron’s step one, then, we consider
whether there is a plain meaning, as to the question at
10 Nos. 08-1743, 08-1744, 08-1746, et al.
issue, of the phrase “[n]o summons may be issued, . . . with
respect to any person if a Justice Department referral is
in effect with respect to such person.” The government
argues that the text of § 7602(d)(1) demonstrates that the
referral provision applies only to the taxpayer whose
liabilities are being investigated, and that it does not
apply to a third party witness like Greisman. The govern-
ment focuses on the words “with respect to” to argue that
a summons is issued to a witness, but with respect to the
investigation of a particular taxpayer. It claims that the
district court improperly construed the words “[n]o
summons may be issued . . . with respect to any person” to
mean “[n]o summons may be issued . . . to any person.” In
this case, while the summonses were issued to Greisman,
the government argues that they were issued with respect
to the tax liabilities of the Khans and their entities. The
government also argues that a conclusion that the sum-
monses here were “issued ‘with respect to’ Greisman,
presumably on the assumption that a summons is issued
‘with respect to’ whomever it is addressed, renders the
terms ‘with respect to’ and ‘any person’ redundant.”
Because the IRS did not refer the Khans or their entities
to the Justice Department, the government argues that
§ 7602(d)(1) does not bar the IRS from summoning
Greisman.
Petitioners combat the government’s characterization of
the “with respect to” language. They claim that only the
general prepositional phrase “with respect to” carries the
flexibility to encompass both the summoned witness
and the taxpayer under audit within the “any person”
universe.
Nos. 08-1743, 08-1744, 08-1746, et al. 11
Petitioners also focus on the words “any person” in
arguing that § 7602(d)(1) protects both the taxpayers whose
liabilities are under investigation and third party wit-
nesses. They note that § 7602(d)(2) also employs the “any
person” language, but that § 7602(a)(2) references “the
person liable for tax.” Thus, they say Congress con-
sciously drew a distinction. And they point out other
distinctions to argue that whenever Congress wished to
specify a universal, indefinite, or narrow prepositional
object, it said so. Compare 26 U.S.C. §§ 7602(d)(1) (“with
respect to any person”) and (d)(2)(B) (“with respect to a
person”) with (c)(1) (“with respect to the determination
or collection of the tax liability of such taxpayer”)
(emphasis added in each example).
But the government argues that reading § 7602(d)(1) in
pari materia with § 7602(d)(3) leads to the conclusion that
the referral provision of § 7602(d)(1) applies only to the
taxpayer whose liability is the subject of the investigation.
Section 7602(d)(3) provides that, with respect to the
summons at issue, each taxable period or taxable event
and each tax “shall be treated separately.” The govern-
ment argues that, for summons purposes, tax liability
is treated separately from the witness’s own civil or
criminal liability, so a conclusion that the summons can
be enforced only if there is no Justice Department referral
in effect with respect to Greisman conflicts with
§ 7602(d)(3). In other words, the government argues, “if
a referral were in effect with respect to Greisman’s in-
volvement in promoting abusive tax shelters, that would
be a separate liability under § 7602(d)(3), and cannot
defeat the summons issued with respect to Khans’ income
tax liabilities.”
12 Nos. 08-1743, 08-1744, 08-1746, et al.
We begin with petitioners’ arguments. We find some-
what appealing petitioners’ argument that Congress’s
use of narrow objects of the prepositional phrase “with
respect to” elsewhere in the statute evidences that it
would have employed an object more narrow than “any
person” in this provision if it had wanted to do so.
Section 7602(a)(2) specifies “the person liable for tax” and
§ 7602(c)(1) specifies “any person other than the tax-
payer.” In light of these other provisions, the “any person”
language from § 7602(d)(1) could plausibly refer to both
taxpayers and third party witnesses. Moreover, the fact
that the statute employs the phrase “with respect to” in
§§ 7602(c)(1)-(2)—like it does in the section at issue in
this case—but specifies “taxpayer” as the object in both
instances supports petitioners’ argument. If the statute
specifies the “taxpayer” as the object in Section (c), and
then specifies “any person” as the object in Section (d), it
is plausible to interpret Section (d) as barring an IRS
summons when a Justice Department referral is in effect
not just for the taxpayer, but for anyone that the IRS can
summon. Of course, if these arguments led us to a “plain
meaning” of the statutory provision as to the question
at issue here, we would stop our analysis and affirm
the district court. We would not proceed to the second
prong of Chevron.
However, while petitioners’ argument has some persua-
sive value, we must closely analyze § 7602(d)(1)’s use of
the phrase “with respect to” as well. Synonyms for “with
respect to” include “pertaining to” and “concerning.”
Encarta World English Dictionary (2007). When we replace
“with respect to” in § 7602(d)(1) with “concerning,” for
Nos. 08-1743, 08-1744, 08-1746, et al. 13
example, the statute reads in relevant part: “no summons
may be issued . . . concerning any person if a Justice De-
partment referral is in effect concerning such person.”
Replacing “with respect to” with “concerning” illuminates
the persuasiveness of the government’s interpretation of
the statute to mean that the referral at issue applies only
to the taxpayer whose liabilities are being investigated,
and not to a third party witness. Moreover, the govern-
ment’s argument that § 7602(d)(3) undermines petitioners’
interpretation of the statute (because the IRS cannot
know which taxable period or event forms the basis of
the third party referral) bolsters its interpretation. The
government’s interpretation of the statute is also plausible.
Despite each side’s best efforts to demonstrate that the
statute has a plain meaning that supports its argument, we
conclude that while both interpretations have some merit,
there is no clear winner. When we focus on context, the
petitioners’ interpretation seems persuasive; when we
focus on the ordinary meaning of “with respect to,” the
government’s argument seems superior. The inability to
decipher “plain” meaning leads to the conclusion that
the statute is unclear and ambiguous regarding the issue
in this case. When there are two plausible but different
interpretations of statutory language, there is ambiguity.
Finding ambiguity, we proceed to Chevron’s second step.
We defer to the IRS Commissioner’s interpretation of the
statute if it is reasonable. We must determine whether
the regulation “harmonizes with the language, origins, and
purpose of the statute.” Banker’s Life, 142 F.3d at 983. In
this step, we can take into account extrinsic sources such
as legislative history.
14 Nos. 08-1743, 08-1744, 08-1746, et al.
The regulation implementing § 7602(d)(1) states:
The Commissioner may neither issue a summons
under this title nor initiate a proceeding to enforce a
previously issued summons by way of Section 7604
with respect to any person whose tax liability is in issue,
if a Justice Department referral is in effect with respect
to that person for that liability.
26 C.F.R. § 301.7602-1(c)(1) (emphasis added).
The government argues that this regulation stands for
the proposition that an IRS summons of a third party is
not barred if it has referred the third party to the Justice
Department. Petitioners respond that the regulation,
rather than hurting their case, simply does not address
whether a summons may be enforced with respect to a
third party witness subject to a Justice Department referral.
Petitioners’ argument is unconvincing. The Treasury
Regulation also includes five examples of the application
of § 7602(d)(3)’s mandate that each tax period (or taxable
event) and each tax must be treated separately for the
purposes of the referral provision of § 7602(d)(1). None
of the examples suggests that the referral provision can
apply to third parties. In fact, this suggestion is not
made anywhere in the regulation or legislative history.
The language that the Commissioner added to
the regulation in interpreting the statute is clear. It con-
firms that, in the view of the Commissioner, § 7602(d)(1)
applies only when the IRS has referred the taxpayer
whose liabilities are at issue. The regulation does not bar
the IRS from summoning a third party witness when it
Nos. 08-1743, 08-1744, 08-1746, et al. 15
has referred the summoned third party witness to the
Justice Department.
The regulation’s interpretation of the statute is reason-
able and in harmony with the statute. Legislative history
supports this interpretation as well. The Senate Committee
on Finance’s report that accompanied the legislation
explains: “Under the bill, the Secretary may not issue
any summons or commence any action to enforce a sum-
mons if a Justice Department referral is in effect with
respect to the person whose tax liability is in issue.” S. Rep.
No. 97-494, at 286 (1982) (emphasis added). There is no
evidence that Congress intended to expand this statute
to a summoned third party, such as Greisman, when a
Justice Department referral has been issued for the
third party witness.
We defer to the Treasury Department regulation. We
hold that the IRS can summon Griesman in the investiga-
tion of petitioners even if the IRS referred him to the
Justice Department concerning petitioners’ tax liabilities.
III. Conclusion
For the foregoing reasons, we R EVERSE the district
court’s holding.
11-20-08