June 19, 2014

Supreme Court Decides United States v. Clarke

On June 19, 2014, the United States Supreme Court held that a taxpayer has the right to examine Internal Revenue Service (IRS) officials regarding their reasons for issuing a summons only if the taxpayer points to facts or circumstances that raise a reasonable inference that the IRS acted in bad faith in issuing the summons.

The IRS has the power to issue summonses requiring taxpayers to appear before an IRS agent and provide sworn testimony or documents relating to a tax investigation. If a taxpayer fails to comply with a summons, the IRS may ask a federal district court to enforce the summons. In such a proceeding, the IRS "need only demonstrate good faith in issuing the summons."

The IRS issued summonses to Clarke and three others regarding the tax returns of a partnership with which the four people were associated. None of them complied with the summonses, so the IRS began an enforcement proceeding in district court in which it submitted an affidavit asserting that it sought testimony and records to investigate the partnership's tax reporting, and not for harassment or any other improper purpose. Clarke and the others requested an opportunity to examine the investigating agents about their motives in issuing the summonses, alleging that the IRS had two "ulterior motives" in issuing the summonses. First, they asserted that the summonses were issued shortly after the partnership refused the IRS's request for an extension of the limitations period for assessing tax liability. Second, they alleged that the IRS began enforcement proceedings only after the partnership had filed suit in United States Tax Court (relating to IRS adjustments that increased the partnership's tax liability), which they argued was a strategy to obtain discovery that the IRS could not obtain in Tax Court.

The district court denied the request to examine the agents about their motives in issuing the summonses because Clarke and the others "made no meaningful allegations of improper purpose" that would justify such an examination. The Eleventh Circuit reversed, holding that a simple allegation of improper purpose, even if it lacked factual support, entitles a taxpayer to question IRS agents concerning the motive for issuing a summons.

The Supreme Court vacated the Eleventh Circuit's decision. The Court noted that the enforcement proceeding is intended to be adversarial, and that a taxpayer may present argument and evidence relating to the summons's validity. But the proceeding is also "summary in nature," without detailed court oversight of the summons process. The Court held years ago that courts may ask only whether the IRS issued a summons in good faith, and that the IRS may satisfy its burden of demonstrating good faith through a simple affidavit from an investigating agent. The Court held that the balance between the adversarial and the summary nature of the proceeding supported a rule that "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," and that "[n]aked allegations of improper purpose are not enough" to permit such an examination. The Court remarked that circumstantial evidence can suffice to meet the taxpayer's burden, but "bare assertion or conjecture is not enough." The Supreme Court remanded the case to the Eleventh Circuit to determine "whether the District Court asked and answered the relevant question" regarding the allegations of bad faith.

Justice Kagan delivered the Court's unanimous opinion.

Download Opinion of the Court

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