United States v. Clarke

Issues: 

Should a court grant an evidentiary hearing to a party summoned by the Internal Revenue Service (IRS), where the party alleges that the summons was issued for an improper purpose and seeks to question IRS officials about the reasons for issuing the summons?

Oral argument: 
April 23, 2014

The IRS investigated the tax returns of Dynamo Holdings Limited Partnership, and in 2010, notified the partnership of deficiencies in its tax returns. The IRS issued summonses to third parties associated with DHLP, including the chief financial officer of the partnership, Respondent Michael Clarke. None of the parties responded to the summonses. DHLP challenged the IRS’s determination in tax court, and in April 2011, the IRS sought enforcement of the unanswered summonses in federal district court. DHLP and Clarke argued that the summonses failed to properly serve an investigative purpose and that the IRS issued them with retaliatory motives. The United States argues that the summonses should be enforced without an evidentiary hearing because the IRS has broad authority to issue summonses, and the evidence fails to show that the IRS had issued the summonses for an improper purpose. Clarke argues that he is entitled to an evidentiary hearing because he sufficiently alleged and demonstrated evidence to show that the IRS issued the summonses to gain an unfair litigation advantage, which is an abuse of the IRS’s power to issue summonses. 

Questions as Framed for the Court by the Parties: 

Whether an unsupported allegation that the Internal Revenue Service (IRS) issued a summons for an improper purpose entitles an opponent of the summons to an evidentiary hearing to question IRS officials about their reasons for issuing the summons.

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Facts

This case centers on whether a party accusing the Internal Revenue Service (“IRS”) of issuing a summons for an improper purpose is entitled to an evidentiary hearing. See Petition For A Writ of Certiorari at I. The IRS began an investigation into the tax returns of Dynamo Holdings Limited Partnership (“DHLP”) for tax years 2005-2007.See Brief for the United States at 4;Brief for Respondents at 3. On August 11, 2010, the investigating IRS agent issued a Final Partnership Administrative Adjustment (“FPAA”), delineating the IRS’s assessment for DHLP’s tax liability for the years in question. See Brief for Respondents at 3. FPAAs notify partnerships of deficiencies in tax returns, and allow parties to challenge adjustments in court. See Brief for the United States at 5.Acting on concerns regarding reported debt and interest expenses, in September and October 2010, the IRS issued five summonses to third parties associated with DHLP, including the chief financial officer of the partnership, Michael Clarke. See Brief for the United States at 4-5; Brief for Respondentsat 4.None of the parties responded to these summonses. See Brief for the United States at 5; Brief for Respondents at 5. 

In February 2011, DHLP sought readjustment, challenging the IRS’s determination in Tax Court. See Brief for the United States at 5; Respondent at 5.In April 2011, the IRS began proceedings for enforcement of the unanswered summonses in the United States District Court for the Southern District of Florida. See Brief for the United States at 6; Brief for Respondents at 6.DHLP intervened, arguing that the Court should deny the IRS’s motion to enforce the summonses because they failed to properly serve an investigative purpose. See Brief for the United States at 6; Brief for Respondents at 6.DHLP and other respondents further argued that the IRS issued the summons with unlawful retaliatory motives. See Brief for Respondents at 7. The District Court rejected DHLP’s arguments and ordered enforcement of the summonses. See Brief for the United States at 7.

DHLP and respondents appealed the District Court’s decision to the Eleventh Circuit Court of Appeals. See United States v. Clarke, 516 Fed. Appx. 689, 690 (11th Cir. 2013) (Unpublished). On April 18, 2013, the Eleventh Circuit vacated the District Court’s enforcement of the summons, finding the lower court abused its discretion in rendering its decision. See id. at fn2.  The Eleventh Circuit thus remanded the case for further hearings. See id. at 690. The United States subsequently filed a petition for a write of certiorari, which the Supreme Court granted on January 10, 2014. See Petition For A Writ of Certiorari.

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Discussion

This case centers on whether a party summoned by the IRS is entitled to an evidentiary hearing to challenge the IRS’s reasons for issuing the summons. The United States argues that an unsupported allegation that the IRS improperly issued a summons does not entitle a party to an evidentiary hearing to question IRS agents about their motives. Moreover, the United States maintains that the IRS’s summons authority is broad and should be enforced across the board. Clarke and DHLP counter that taxpayers are entitled to limited evidentiary hearings as a meaningful check against potential abuse of the summons power. 

PURPOSE OF THE SUMMONS POWER

According to the United States, the IRS has a broad summons power to fulfill its investigatory responsibility. Brief for Petitioner, at 2. Specifically, the United States notes that the IRS is tasked with determining individuals’ tax liability and the correctness of their tax returns. Id. To that end, the IRS may “examine any books, papers, records, or other data which may be relevant or material to such inquiry,” and can summon individuals to appear, produce documents, and give testimony. Id. In other words, the summons power enables the IRS to broadly gather information, a necessary function in our complex self-reporting system of federal taxation. Id. at 13. Without the power to compel disclosure, the United States contends, the national tax burden would not be fairly distributed. Id. In turn, the United States maintains that when a summoned party does not comply with a summons, the United States can petition a federal court to enforce the summons. Id. at 3. The United States emphasizes that summons-enforcement proceedings are not intended to determine guilt or tax liability, but to gain information so the IRS can fulfill its basic responsibility. Id.

Clarke and DHLP counter that parties summoned by the IRS are entitled to an evidentiary hearing before a federal court where they can challenge the grounds for issuing the summons. Brief for Respondent, at 1. This procedure, they contend, is an important safeguard against abuse of the summons power. Id. at 2. On the other hand, they argue, the government asserts that a court should enforce a summons so long as the IRS submits an affidavit asserting that it acted properly. Id.Permitting this minimal requirement, Respondents argue, would remove a taxpayer’s right to question the IRS about why it issued the summons, even in situations where the taxpayer could point to facts suggesting that the IRS improperly issued the summons. See id.Respondents further contend that the government’s approach would render meaningless the right to an adversary hearing. Id.  Because evidence of IRS bad faith will almost certainly be in the government’s possession (not the taxpayer’s), Respondents argue that a taxpayer who states a plausible allegation of IRS bad faith should at least get a limited evidentiary hearing where they can examine an IRS agent about the reasons for issuing a summons. See Id.

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Analysis

In this case, the Court will determine whether a party summoned by the Internal Revenue Service ("IRS") is entitled to an evidentiary hearing to question IRS officials about their basis for issuing the summons (e.g. for an improper purpose) before the court allows the summons to be enforced. The United States argues that the summons should be enforced without an evidentiary hearing because Clarke failed to demonstrate with sufficient evidence that the summons was issued for an improper purpose. Clarke argues that it made a plausible allegation of bad faith not based on speculative assertions and thus should be able to question IRS officials about the purposes underlying the summons.

SCOPE OF IRS’S AUTHORITY TO ISSUE SUMMONS

The United States argues that Congress has given the IRS broad authority to issue summons to correctly determine an individual’s tax liability. See Brief for the United States at 12–13. Because some individuals fail to comply with the federal tax system, the United States contends that the IRS is authorized to investigate these taxpayers by issuing summonses. See id. at 13–14. In further support of its position, United States analogizes the IRS’s power to issue summons with the grand juries and other administrative agencies power to issue subpoenas. See id. at 14. The United States claims that an unsupported allegation that a grand jury subpoena was improperly issued would not excuse compliance with the subpoena or justify a discovery into the grand juries motive for issuing the subpoena. See id. at 24. Accordingly, the United States claims that if the summons is necessary to properly enforce the tax code, that authority should be upheld. See id. at 15. Moreover, the United States contends that Congress intended for the summons proceedings to be handled expeditiously, and by allowing the summoned party to question IRS officials about the basis for issuing the summons based on an unsupported allegation hinders the Congress’s intent. See id. at 17–18. In fact, the United States argues that taxpayers may delay the summons-enforcement proceedings if they know that they will be entitled to an evidentiary hearing merely by alleging that the summons was issued for an improper purpose. See id. at 29.

Clarke argues that Congress intended for the judiciary to act as a check against the possibility of IRS’s abuse of its power to issue a summons. See Brief for Respondents at 12. According to Clarke, agencies do not have the broad authority to abuse its investigatory powers or issue summons in order to take advantage in litigation. See id. at 38. Indeed, Clarke contends that in situations where the government misused the grand juries subpoena power to gain a litigation advantage, courts have allowed challenges to grand jury subpoenas. See id. at 28. Moreover, Clarke argues that there is a structural difference between the grand jury and the IRS, and that the possibility of intruding into the secrecy of grand jury proceedings is not applicable in the IRS context. See id.at 28, 30. By allowing a summoned party the opportunity for an evidentiary hearing, Clarke claims that it provides a fair and balanced procedure to ensure that the IRS is employing its power for legitimate ends. See id. at 26–27. Furthermore, Clarke argues that the limited evidentiary hearing will not delay the system because it only serves as a “screening mechanism that affords taxpayers a fair opportunity to develop their contentions.” Id. at 20. Indeed, according to Clarke, an evidentiary hearing normally lasts only for a few hours and the courts have proven to be capable of ensuring that these hearings do not last unnecessarily long. See id.at 23. Therefore, Clarke argues that an evidentiary hearing is not an unreasonable burden on the IRS and will not delay or interfere with the enforcement of the tax laws. See id. at 24. 

DID RESPONDENT SUFFICIENTLY DEMONSTRATE BAD FAITH?

United States argues that once the IRS shows that the summons was issued in good faith, the district court must enforce it. See Brief for the United States at 16. United States contends that an unsupported allegation does not allow the summoned party to question IRS officials about their motive for issuing the summons. See id. at 19. Rather, United States argues that the summoned party has the opportunity to present evidence already in his possession and allege that the summons was issued for an improper purpose during a summons-enforcement proceeding. See id. at 20. United States further clarifies its position by arguing that the summoned party cannot fish for IRS’s underlying motives in issuing the summons when no evidence points to an improper purpose. See id. at 21. In such cases, United States argues that the district court should deny the summoned party’s request to question IRS officials. See id.Furthermore, United States argues that if there is not enough evidence to support a possible wrongdoing, an evidentiary hearing would merely be a waste of time and resources. See id. at 27. And in this case, United States claims that a reasonable trier of fact could not infer that the IRS had issued the summons for an improper purpose. See id. Moreover, United States contends that taxpayers are already protected by the possibility of any abusive summons practices through IRS’s requirement to demonstrate a good faith basis for issuing the summons and allowing the taxpayer to present objections at a summons-enforcement hearing. See id. at 28. 

Clarke argues that once a taxpayer makes a plausible allegation that the IRS issued the summons for an improper purpose, the taxpayer should have the opportunity for an evidentiary hearing to question IRS officials. See Brief for Respondents at 25. According to Clarke, because taxpayers are limited in their ability to gather evidence to successfully prove that the IRS is acting in bad faith, and IRS’s simple declaration that they acted in good faith is likely to be dispositive, any evidence in support of the IRS’s position is rarely checked or tested against. See id. at 14–16, 18. Moreover, the burden is on the taxpayers to demonstrate at the evidentiary hearing that further discovery is warranted. See id. at 28. As such, Clarke claims that it is appropriate to allow a summoned party an evidentiary hearing to challenge the government’s good faith in “a substantial way.” Id. at 26. In fact, according to Clarke, four circuits have ruled that taxpayers are entitled to an evidentiary hearing to question IRS’s motive in issuing the summons. See id. at 20. Clarke contends that if the hearing reveals no evidence of wrongdoing on the IRS’s part, then the court should enforce the summons. See id. at 28. In this case, Clarke alleges that his argument that the IRS issued the summons for an improper purpose is not based on speculative assertions. See id. at 34. Indeed, Clarke argues that he specifically alleged bad faith and supported his claims with affidavits and other evidence to show that the IRS issued the summons to gain an unfair procedural advantage in tax court litigation. See id. at 34–35. Accordingly, Clarke claims that it is appropriate that he be entitled to an evidentiary hearing to question the IRS on this point. See id. at 42.

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Conclusion

In this case the Supreme Court will determine whether a taxpayer is entitled to an evidentiary hearing to question IRS officials about the grounds for issuing a summons, where the taxpayer alleges that the summons was improperly issued. The United States maintains that the IRS has a broad summons power to carry out its broad statutory duty – determining individuals’ tax liability and the accuracy of their returns. To that end, the United States argues that the IRS’s summons power should be summarily enforced. Clarke and DHLP argue that evidentiary hearings are an important check against abuse of the summons power, and that summoned taxpayers are at least entitled to a limited hearing where they can examine an IRS agent about the reasons for issuing a summons. This case implicates the scope of the IRS’s summons power and taxpayers’ procedural rights within the federal tax system.

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Edited by: 
Acknowledgments: 

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