Friday, June 20, 2014
SCOTUS: IRS Summons Challenger Must Show Facts Giving Rise to Plausible Inference of Improper IRS Motive
The IRS examined the tax returns of Dynamo Holdings Limited Partnership, and issued summonses to the respondents, "four individuals associated with Dynamo whom the Service believed had information and records relevant to Dynamo’s tax obligations. None of the respondents complied with those summonses."
The IRS instituted proceedings in District Court to compel the respondents to comply with the summonses. The IRS submitted an investigating agent’s declaration that the testimony and records sought were necessary to “properly investigate the correctness of [Dynamo’s] federal tax reporting” and that the summonses were “not issued to harass or for any other improper purpose.” In reply, the respondents pointed to circumstantial evidence suggesting that the IRS had “ulterior motives” for issuing the summonses: to “punish [Dynamo] for refusing to agree to a further extension of the applicable statute of limitations,” and to “evad[e] the Tax Court[’s] limitations on discovery.” Accordingly, the respondents asked for an opportunity to question the agents about their motives.
The District Court ordered the respondents to comply with the summonses. The Court of Appeals for the Eleventh Circuit reversed, holding that a simple “allegation of improper purpose,” even if lacking any “factual support,” entitles a taxpayer to “question IRS officials concerning the Service’s reasons for issuing the summons.”
The Supreme Court, in a unanimous opinion authored by Justice Kagan, vacated the Eleventh Circuit's opinion and remanded, holding that the Eleventh Circuit had applied an incorrect legal standard:
A person receiving an IRS summons is . . . entitled to contest it in an enforcement proceeding. . . . As part of the adversarial process concerning a summons’s validity, the taxpayer is entitled to examine an IRS agent when he can point to specific facts or circumstances plausibly raising an inference of bad faith. Naked allegations of improper purpose are not enough: The taxpayer must offer some credible evidence supporting his charge. But circumstantial evidence can suffice to meet that burden; after all, direct evidence of another person’s bad faith, at this threshold stage, will rarely if ever be available. And although bare assertion or conjecture is not enough, neither is a fleshed out case demanded: The taxpayer need only make a showing of facts that give rise to a plausible inference of improper motive. That standard will ensure inquiry where the facts and circumstances make inquiry appropriate, without turning every summons dispute into a fishing expedition for official wrongdoing. . . . But that is not the standard the Eleventh Circuit applied. . . . [T]he Court of Appeals viewed even bare allegations of improper purpose as entitling a summons objector to question IRS agents.
United States v. Clarke, No. 13-301 (U.S. June 19, 2014).