Case 2:15-cv-00102-RSM Document 46 Filed 05/18/15 Page 1 of 7 1 THE HONORABLE RICARDO S. MARTINEZ 2 3 4 5 6 7 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON AT SEATTLE 8 9 10 UNITED STATES OF AMERICA, NO. 2:15-cv-00102 RSM 11 12 Petitioner, vs. 13 MICROSOFT CORPORATION, et al., MICROSOFT CORPORATION’S NOTICE OF SUPPLEMENTAL AUTHORITY 14 Respondents. 15 16 Defendant Microsoft Corporation (“Microsoft”) respectfully submits a May 13, 2015 17 letter written by Senate Finance Committee Chairman Orrin G. Hatch to IRS Commissioner 18 John Koskinen. In this letter, Senator Hatch raises concerns about the IRS’s hiring of attorneys 19 from Quinn Emanuel Urquhart & Sullivan LLP (“Quinn Emanuel”) to assist in the tax 20 examination of Microsoft because the hiring: “1) appears to violate federal law and the express 21 will of the Congress; 2) removes taxpayer protections by allowing the performance of 22 inherently governmental functions by private contractors; and 3) calls into question the IRS’s 23 use of its limited resources.” 24 25 Senator Hatch sent the letter to Commissioner Koskinen after Microsoft filed its Reply In Support of Motion for Evidentiary Hearing. (Dkt. No. 43.) The letter is relevant to MICROSOFT CORPORATION’S NOTICE OF SUPPLEMENTAL AUTHORITY - 1 Case No.: 2:15-cv-00102 RSM LAW OFFICES CALFO HARRIGAN LEYH & EAKES LLP 999 THIRD AVENUE, 44th FLOOR SEATTLE, WASHINGTON 98104 TEL (206) 623-1700 FAX (206) 623-8717 Case 2:15-cv-00102-RSM Document 46 Filed 05/18/15 Page 2 of 7 1 Microsoft’s argument that the IRS summonses are in furtherance of an audit in which the IRS 2 is unlawfully deploying private lawyers from Quinn Emanuel. (Id. at 1 & n.1.) 3 DATED this 18th day of May, 2015. CALFO HARRIGAN LEYH & EAKES LLP 4 5 6 7 By s/ Patricia A. Eakes By s/ Andrea D. Ostrovsky Patricia A. Eakes, WSBA #18888 Andrea D. Ostrovsky, WSBA #37749 999 Third Avenue, Suite 4400 Seattle, WA 98104 Phone: (206) 623-1700 Fax: (206) 623-8717 Email: pattye@calfoharrigan.com andreao@calfoharrigan.com 8 9 10 11 ` 12 13 BAKER & McKENZIE LLP 14 By 15 16 17 s/ Daniel A. Rosen Daniel A. Rosen, Pro Hac Vice 452 Fifth Avenue New York, NY 10018 Phone: (212) 626-4272 Fax: (212) 310-1600 Email: daniel.rosen@bakermckenzie.com 18 19 BAKER & McKENZIE LLP 20 By 21 22 23 s/ James M. O’Brien James M. O’Brien, Pro Hac Vice 300 E. Randolph Drive, Suite 5000 Chicago, IL 60601 Phone: (312) 861-8602 Fax: (312) 861-2899 Email: james.m.o’brien@bakermckenzie.com 24 Attorneys for Respondent / Intervenor Microsoft Corporation 25 MICROSOFT CORPORATION’S NOTICE OF SUPPLEMENTAL AUTHORITY - 2 Case No.: 2:15-cv-00102 RSM LAW OFFICES CALFO HARRIGAN LEYH & EAKES LLP 999 THIRD AVENUE, 44th FLOOR SEATTLE, WASHINGTON 98104 TEL (206) 623-1700 FAX (206) 623-8717 Case 2:15-cv-00102-RSM Document 46 Filed 05/18/15 Page 3 of 7 CERTIFICATE OF SERVICE 1 2 I hereby certify that on May 18, 2015, I electronically filed the foregoing with the Clerk 3 of the Court using the CM/ECF system which will send notification of such filing to the 4 following: Amy Matchison, Jeremy N. Henson, Noreene C. Stehlik and the U.S. Department 5 of Justice; Daniel A. Rosen, James M. O’Brien and Baker & McKenzie LLP; Robert B. 6 7 Mitchell, Hugh Frederick Bangasser and K&L Gates LLP; George E. Greer and Orrick Herrington & Sutcliffe; Stephen M. Rummage and Davis Wright Tremaine, and I hereby 8 certify that I have mailed by United States Postal Service the document to the following non 9 10 CM/ECF participants: N/A. 11 s/ D. Yvette Chambers D. Yvette Chambers 12 13 14 15 16 17 18 19 20 21 22 23 24 25 MICROSOFT CORPORATION’S NOTICE OF SUPPLEMENTAL AUTHORITY - 3 Case No.: 2:15-cv-00102 RSM LAW OFFICES CALFO HARRIGAN LEYH & EAKES LLP 999 THIRD AVENUE, 44th FLOOR SEATTLE, WASHINGTON 98104 TEL (206) 623-1700 FAX (206) 623-8717 Case Document 46 Filed 05/18/15 Page 4 of 7 ATTACHMENT Case 2:15-cv-00102-RSM Document 46 Filed 05/18/15 Page 5 of 7 ORRIN G. HATCH, UTAH, CHAIRMAN CHUCK GRASSLEY. IOWA MIKE CRAPO. IDAHO PAT ROBERTS. KANSAS MICHAEL B. ENZI, WYOMING JOHN CORNYN. TEXAS JOHN THUNE, SOUTH DAKOTA RICHARD BURR, NORTH CAROLINA JOHNNY ISAKSON, GEORGIA 1108 PORTMAN , OHIO PATRICK J TOOMEY, PENNSYLVANIA OANIEL COATS, INDIANA DEAN HELLER, NEVADA TIM SCOTT. SOUTH CAROLINA RON WVDEN. OREGON CHARLES E. SCHUMER. NEW YORK DEBBIE STABENOW, MICHIGAN M ARIA CANTWELL. WASHINGTON BILL NELSON, FLORIDA ROBERT MENENDEZ. NEW JERSEY THOMAS R. CARPER, DELAWARE BENJAMIN L. CARDIN, MARYLAND SHERROD BROWN. OHI O MICHAEL F. BENNET, COLORADO ROBERT P. CASEY. JR.. PENNSYLVANIA MARK R WARNER, VIRGINIA tinitrd ~tatrs ~tnatr COM MITTEE ON FINANCE W ASHINGTON, DC 20510- 6200 CHRIS CAMPBELL. STAFF DIRECTOR JOSHUA SHEINKMAN, DEMOCRATIC STAFF DIRECTOR May 13, 20 15 The Honorable John Koskinen Commissio ner Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC 20224 Dear Commissioner Koskinen: As you know, the Senate Finance Committee has jurisdiction over the Internal Revenue Service and a responsibility to ensure that the Internal Revenue Code is administered correctly. As Chairman, I have the obligation to carry out that responsibi lity through congressional oversight. To that end, I write today concerning the IRS' s issuance of temporary regulations and related actions which I believe call into question the integrity of the agency' s examination process. In a tax system based on voluntary compliance, the integrity of the tax administration process and protection of taxpayer rights is of paramount importance. To those ends, Congress put in place specific restrictions on government action in the examination process. One such restriction is the requirement that only Treasury officials carry out certain examination functions, such as taking sworn testimony from taxpayers. The IRC authorizes the Secretary of the Treasury to make inquiries regarding tax liability, and permits the Secretary to delegate this authority to "officers or employees of the Treasury Department .. . .'' 1 This authority includes both the examination of "books, papers, records, or other data[,]" and the taking of testimony under oath.2 While the Secretary has broad powers to delegate authorities, any delegation is limited to an "officer, employee, or agency of the Treasury Department" unless Congress expressly grants broader authority.3 In addition to limitations on who can carry out these functions, Congress also created safeguards around the use of confidential taxpayer infonnation by prohibiting officers and employees of the United States from disclosing taxpayer info rmation except in limited circumstances.4 By enacting these provisions, Congress made clear that certain revenue functions may be carried out on ly by specified officers of the Treasury Department and that taxpayer data can only be disclosed in limited circumstances. Despite these statutory prohibitions against the outsourcing of certain revenue functions or sharing of confidential taxpayer info rmation, in May of last year the IRS hired a litigation law 1 26 U.S.C. §§ 6201 ; 760 1(a). 26 U.S.C. § 7602(a). 3 26 U.S.C. § 770 I (a)( 11 )(8), ( 12)(A). 4 26 u.s.c. § 6 103. 2 Case 2:15-cv-00102-RSM Document 46 Filed 05/18/15 Page 6 of 7 firm to assist in the income tax audit and investigation of a corporate taxpayer, including the conduct of sworn interviews. According to press reports, the IRS retained the law firm of Quinn Emanuel on a $2.2 million contract to perform functions inherent to the Secretary's inquiry authorities. This contract marks the first time, to the Committee's knowledge, that the agency has hired a private contractor to take such an involved role in an examination. Only weeks after retaining the law firm, the Treasury Department and IRS issued a temporary regulation, without a notice and comment period, allowing third party contractors to take compulsory, sworn testimony in connection with an IRS investigation. 5 The new, temporary regulation would allow private contractors - in this case, litigation attorneys billing taxpayers over $1,000 an hour, according to the contract - to question a witness under oath and ask the witness to clarify objections or assertions of privilege. It would also give these attorneys access to confidential taxpayer information while raising questions over how well that information is then protected from further disclosure. The temporary regulation was issued as a "clarification," despite the fact that it is an unprecedented expansion of the role of outside contractors in the examination process, and one that violates the IRC provisions quoted above. Press reports indicate the IRS has already begun acting under the authority of the temporary regulation, issuing numerous summons for individuals related to the corporate taxpayer to give testimony before the private contractor. The contract itself raises additional questions over your agency's compliance with federal law. As stated above, the IRC restricts the examination of"books, papers, records, or other data[,]" and the taking of testimony under oath, to the Secretary and limited delegates. Yet the contract in question explicitly provides for the private contractor to identify materials the agency should demand, "including any necessary data, documents, or interviews," and to take a role in "preparing for or participating in interviews[.]" Upon identification of materials, the contract states that "the Service will attempt to secure the requested records." This language suggests that the private contractor in this case will be taking on unauthorized activities in contravention of the IRC. The IRS's hiring of a private contractor to conduct an examination of a taxpayer raises concerns because the action: 1) appears to violate federal law and the express will of the Congress; 2) removes taxpayer protections by allowing the performance of inherently governmental functions by private contractors; and 3) calls into question the IRS' s use of its limited resources. Federal Law and the Will of Congress In writing the IRC, and specifically sections 6201, 7602, and 7701, the Congress intentionally chose to restrict the performance of certain revenue functions, such as examinations and the taking of sworn testimony, to the Secretary and limited delegates. When Congress has chosen to augment this authority, as it did in the case of private contractors performing tax collection functions, it has done so through explicit statutory authorization.6 If the IRS believes it is necessary to expand the use of private contractors to question witnesses and assume other 5 6 26 C.F.R. § 301.7602-IT(b). The American Jobs Creation Act of 2004, P.L. 108-357, § 88 l(a)(I). Case 2:15-cv-00102-RSM Document 46 Filed 05/18/15 Page 7 of 7 examination functions, the agency shou ld consult with Congress and seek additional authorization. Taxpayer Protections Unlike private contractors, Treasury Department officials are required to swear an oath to the Constitution and are subject to rules of conduct and federal law regulating their interactions with taxpayers. This is one of the core reasons Congress has sought to limit certain examination actions to these officials, w ho are accountable to the public and for w ho m there is a clear chain of command. Turning over inherently government functions such as the conduct of an examination to private contractors not only jeopardizes the rights of taxpayers, but also confuses the examination process and changes the well-regulated relationship between revenue examiners and private taxpayers. IRS Resources As explained above, the IRS has hired the private contractor under a $2.2 million contract and is paying private attorneys over $1,000 an hour to carry out functions that are more properly carried out by Treasury officials. The IRS has over 40,000 employees dedicated to enfo rcement efforts, including more than 36,000 tasked specifically w ith exams and collections. If none of these employees, nor IRS Office of Chief Counsel or Department of Justice tax attorneys, have sufficient expertise to undertake the examination at hand, we should have a broader conversation about your agency' s hiring practices and recruitment needs. In my experience as Chairman, I know that the both the IRS Office of Chief Counsel and Justice Department employ excellent attorneys w ho sho uld be m ore than able to conduct an examination without turning over interviews and document requests to private contractors. For these reasons, I ask that you immediately halt the use of the private contractors described above for both the examination of records and the taking of sworn testimony. I also ask that your agency brief m y Committee staff without delay to: l ) explain the reasoning behind and procedure by w hich you issued the temporary regulation; 2) explain your agency's novel readings of the IRC provisions referenced above; 3) detail the use of private contractors for examination functions generally; 4) info rm the Committee whether you intend to use private contractors to represent the IRS in litigation, either under contract and/or as special government employees; and 5) inform the Committee whether the practice described above will be used against other taxpayers. I thank you in advance for your cooperatio n in this matter. Sincerely, O rrin G. Hatch Chairman, Senate Committee on F inance