In an issue of first impression at the Circuit Court level, the Sixth Circuit issued its opinion in Hohman, et al. v. Eadie, et al. on July 5, 2018, affirming the decision of the District Court in the Eastern District of Michigan that limited liability companies (“LLCs”) are not “customers” as defined under the Right to Financial Privacy Act (“Act”) and are therefore not entitled to the waiver of sovereign immunity provided by the Act.
In Hohman, the IRS issued “John Doe” summonses to two separate banks for records related to three different accounts without first obtaining approval from the federal district court, as required by I.R.C. § 7609(f). After receiving notice of the summonses from their banks, Plaintiffs initially sought to quash the subpoenas, but that petition was later withdrawn. Limited discovery determined that the subpoenas sought records from Plaintiff Jodi Hohman’s individual bank account, Plaintiff JHohman, LLC’s bank account, and the bank account of Plaintiff You Got Busted By Me, LLC. After withdrawing their petition to quash, Plaintiffs subsequently filed suit against the United States, the two IRS employees involved in the issuances of the John Doe summonses at issue, and unnamed John Does, alleging violation of the Right to Financial Privacy Act, violations of the Fourth and Fifth Amendments of the U.S. Constitution, and the Internal Revenue Code’s prohibition of the unauthorized disclosure of tax return information.
At issue on appeal was the district court’s determination that it lacked subject matter jurisdiction because sovereign immunity barred the Plaintiff’s claims under the Act. Specifically, although the district court determined that the IRS had violated I.R.C. § 7609(f), it found that the private cause of action created under § 3417 of the Act waiving sovereign immunity did not apply to LLCs because LLCs were not “plainly within the plain meaning of the words ‘individual or partnership of less than five individuals’” as set forth in 12 U.S.C. § 3401(4). For reasons outside the Sixth Circuit’s analysis, the district court had determined that Hohman, individually, had failed to state a claim. What remained on appeal were the claims of the two LLCs.
In affirming the district court’s decision, the Sixth Circuit focused on the liability component of an LLC as opposed to the tax structure, specifically highlighting the fact that unlike an individual or partnership, an LLC does not have any member that remains liable for the company’s debts. While individuals, sole proprietorships, partnerships, and limited partnerships have all been found to qualify as a “customer” for purposes of the Act, the Sixth Circuit agreed with the two district courts that have addressed this issue and found that, like corporations, LLCs were not intended to be included within the definition of “customer” under the Act (Flatt v. U.S. SEC, 2010 WL 1524328, at *3 (S.D. Fla. Apr. 14, 2010) and Exchange Point, LLC v. U.S. SEC, 100 F. Supp. 2d 172, 176 (S.D.N.Y. 1999)).
Kati Sanford Goodner is based in the firm’s Knoxville office. Commercial Litigation and Tax Controversy are Kati’s primary focus, although her experience and practice routinely includes Estate and Trust Litigation, Conservatorships, and advising her small business clients in a variety of matters ranging from formation issues to shareholder disputes and litigation. With an extensive background in litigation, Kati represents taxpayers before the Internal Revenue Service and the Tennessee Department of Revenue in both civil and criminal tax matters, whether in the early stages of an examination, at the collections stage, or seeking relief from IRS liens and levies through the administrative process or in Court. She is adept at handling complex litigation, has represented clients in Tennessee and across the country, and she routinely works with professionals ranging from accountants to highly-specialized physicians and engineers.
Kati is a regular speaker and author on tax-related matters, including legislative changes and practical applications of the tax code for individuals and small businesses. In addition to serving on various boards within the Knoxville, Tennessee, and American Bar Associations, she is a member of the Tennessee Bar Association’s Tax Law Section and the American Bar Association’s Section of Taxation. She also serves as a member of the City of Knoxville’s Better Building Board and enjoys working with middle school girls at Cedar Springs Presbyterian Church.