UNITED STATES v. CLARKE
The Internal Revenue Service (IRS) served five summonses to top officers of the Dynamo Holdings Limited Partnership (Dynamo) during its investigation into the company’s tax liabilities. The United States District Court for the Southern District of Florida granted enforcement of the summonses. Dynamo opposed the summonses by arguing that it was entitled to a hearing to determine whether the summonses were proper. On appeal, the U.S. Court of Appeals for the Eleventh Circuit vacated the decision that allowed the summonses to be enforced and remanded the case back to the district court for a hearing on whether the investigation was launched under an improper purpose, which would render enforcement of the summonses unlawful.
Does an allegation that the Internal Revenue Service (IRS) issued a summons for an improper purpose entitle an opponent of the summons to a hearing to question IRS officials about their reasons for issuing the summons before the court allows the summonses to be enforced?
Legal provision: 26 U. S. C. §7602(a)
No. Justice Elena Kagan delivered the opinion for the unanimous Court. The Court held that a simple allegation of improper purpose was not sufficient to entitle a taxpayer to examine IRS officials; however, the taxpayer does have the right to such an examination if the taxpayer can point to specific facts or circumstances that could plausibly result from bad faith on the part of the IRS. Because the summons stage is necessarily a preliminary one, the taxpayer does not need to present a fully fleshed-out case, but neither should a summons dispute turn into a search for wrongdoing.
Chief Justice John G. Roberts: Justice Kagan has our opinion this morning in Case 13-301, United States versus Clarke.
Justice Elena Kagan: If the IRS has concerns about the correctness of somebody's tax returns, it can issue a summons which is a demand for testimony or documentation.
If the person's summoned fails to answer, the IRS can file a petition for enforcement in a federal district court.
A taxpayer can then contest the summons in that proceeding by presenting argument or evidence that the summons was issued in bad faith.
The question in this case presents is when a taxpayer as a right in that kind of proceeding to question IRS agents about their motive for issuing the summons.
The respondents in this case received summonses relating to the tax returns of a company called Dynamo Holdings.
They declined to comply and the IRS initiated an enforcement action.
The taxpayer's charge that the IRS agents responsible for the summonses had two kinds of impermissible motive.
First, they said that the agents had issued the summonses as retaliation for Dynamo's decision not to agree to an extension of the statute of limitations.
And second, they contended to that the agents had only decided to enforce the summonses to circumvent rules about the discovery and related Tax Court litigation.
The respondents asked to question to IRS agents about those issues as part of their efforts to contest the summonses.
The District Court turned down that request and ordered the respondents to comply with the summonses but the Court of Appeals of the Eleventh Circuit reversed the District Court holding that any taxpayer who makes an allegation of bad faith even an unsupported one is automatically entitled to question IRS agents.
We disagree with that.
There is a balance to be struck here.
On the one hand, an individual who receives a summons is entitled to contest it.
And to have a meaningful opportunity to do that, taxpayers must sometimes be allowed to question IRS agents about their motives.
But on the other hand, the IRS also has a strong interest in keeping these enforcement proceedings fairly streamlined and not having them all turned into fishing expeditions.
We think that balance is consistent with the following rule, a taxpayer contesting a summons is entitled to examine IRS agents if she can point the specific fact or circumstances plausibly raising an inference of bad faith.
Circumstantial evidence may suffice to meet that burden but bare allegations are not enough.
The Eleventh Circuit's holding was based on an incorrect rule so we remand the case for the Court to consider the respondent's factual submissions under the proper standard.
In doing so, the Court of Appeals should give appropriate deference to the District Court's ruling unless, it determines that the District Court itself applied the wrong standard or made an error of law about what counts as bad faith.
Our decision is unanimous.