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Argument analysis: What is the boundary on district court discretion to decide whether to develop evidence before enforcing an IRS summons?

What guidance should be given to district courts that must decide whether the recipient of an IRS summons has raised a sufficient question about the government’s “improper purpose” to merit an evidentiary hearing?  The Eleventh Circuit’s per curiam decision in United States v. Clarke included a broad statement that the lack of an evidentiary hearing “saddles the taxpayer with an unreasonable circular burden.”  The Eleventh Circuit did not explicitly divorce this statement from the facts of the case; it is qualified by the phrase “in situations such as this.”  But the broad statement alarmed the government, which does not want to face the prospect of an evidentiary hearing every time it issues a summons.   The government successfully sought review in the Supreme Court, which heard oral argument in the case on Wednesday.

At oral argument the Court indicated that it would not consider a rule that would require a district court to allow a taxpayer to further develop evidence in the case of any objection whatsoever from a summons recipient.  The Justices instead were determined to contextualize the Eleventh Circuit’s statement.  The argument delved into the details of the case and gave Justice Sonia Sotomayor an opportunity to recall her days as a trier of fact.

Michael Clarke, the CFO of the general partner of Dynamo Holdings Limited Partnership (“Dynamo”), a taxpayer under audit, alleged that the IRS issued him a summons in 2010 for an improper purpose.  Clarke argued that the IRS summons came as retaliation for Dynamo’s refusal to extend the statute of limitations for a third time and aimed to circumvent Tax Court discovery rules.  Clarke pointed to the timing of the summons issuance – soon after Dynamo had refused a statute of limitations extension; about a month after a “Final Partnership Administrative Adjustment,” or FPAA, had been signed by the lead IRS auditor; about three months before the FPAA was issued; and about five months before the government commenced proceedings against the taxpayer in Tax Court.  Clarke also offered the affidavit of Richard Supinski, an attorney for Christine Moog, who had received and responded to a contemporaneous summons in the Dynamo case.  The Supinski affidavit stated that Moog had been interviewed by the government’s lawyers who were involved in the Tax Court case rather than the IRS audit team.

Under IRC § 7402(b), federal district courts have the authority to enforce IRS summons, and under IRC § 7604(b) “shall” do so “if satisfactory proof is made.”  Under United States v. Powell, an IRS summons is enforceable if it is issued for a legitimate purpose, seeks relevant information not yet in the government’s possession, and satisfies required administrative procedures.  In this case, the federal district court denied Clarke’s request for an evidentiary hearing.  The Eleventh Circuit reversed under an abuse-of-discretion standard.

At Wednesday’s oral argument, the government – represented by Assistant to the Solicitor General Sarah Harrington – first tried to use the broad language of the Eleventh Circuit’s decision as its foil.  It asserted that the Eleventh Circuit decision would require an evidentiary hearing or further development of evidence in any case in which a summons recipient objects to a summons.  But Justice Scalia quickly dismissed this view.  The question, he said, was whether the evidence offered by the summons recipient was “plausible.”   Or, said Justice Alito, what do you mean by “evidence”:  “Is circumstantial evidence enough?”  Later, Justice Alito commented, “There are weak inferences and there are strong inferences.”  All of the circuits, suggested Justice Scalia, require the showing of an inference of at least some strength.

Assuming that the purpose of the government was to circumvent Tax Court discovery rules, suggested Justice Kennedy, doesn’t the Supinski affidavit provide sufficient evidence to allow the district court to order a hearing?   And why did the government issue the summons, asked Justice Breyer?   As a district court judge, said Justice Sotomayor, “I would have … asked you enough questions, … until I got to a point when I decided whether or not your answers, like the district court did here, made sense or not.”

But, suggested Justice Sotomayor, different pleading standards could provide models for more precise instructions to district courts about when to require a hearing in response to a summons recipient’s allegation that a summons is invalid.  If a court were to apply the standard applicable to motions to dismiss a complaint, it would only require a “plausible” allegation under Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly.  If a court were to apply a summary judgment-like standard, more evidence would be required to support an order for an evidentiary hearing.

Clarke – represented at the Court by Edward Marod – argued that the Iqbal/Twombly plausibility standard applied.  The government replied that while not equivalent, the summary judgment standard was closer to the appropriate standard.   Yet the government also conceded that in this case the district court could have exercised its discretion in favor of granting the evidentiary hearing.  Thus an outer boundary on district court discretion is at issueThe parties agree that the district court could have in its discretion ordered an evidentiary hearing on the facts of this case, but they disagree on whether the district court abused its discretion by denying an evidentiary hearing.  Clarke says yes, abuse of discretion.  The government says no.

At least some Justices appear to consider it important to clarify the standard.  Justice Ginsburg suggested that the existing law does not “giv[e] the district judges all over the country a clue about appropriate exercise of [discretion].”   And Chief Justice John Roberts explained that, “when we articulate a new standard, sometimes we like to apply it to the particular case to give clearer guidance over exactly what we mean.”

Clarifying the standard here would require the Court to swim about in the facts of the case, and it may be a close call, even if the holding does not divide the Court.   There are at least three pieces of evidence for the Court to weigh:  the appearance of the summons directly after the denied request for a third statute of limitations extension; the Supinski affidavit reporting the participation of the Tax Court team only in the Moog summons proceeding; and the fact that the FPAA had been signed by the IRS audit leader before the issuance of the summons.

A statutory section, IRC § 6223(f), prohibits amendment (absent fraud, malfeasance, or material misrepresentation) after “the Secretary mails” an FPAA.   The IRS auditor’s pre-summons-issuance signature to the FPAA may suggest that the summons could not have been issued for purposes of adjusting the FPAA as it may have been closed as a matter of internal agency procedure.  Or, the mailing of the FPAA soon after the issuance of the summons may suggest that as a practical matter the IRS could not have intended the summons to contribute to the accuracy of the FPAA as issued by the agency, although at oral argument the government explained that evidence produced by the summons might cause the IRS to amend its final determination of liability in the Tax Court proceeding.

In this case, the Court must decide whether these strands of evidence offered by the summons recipient produce a sufficiently “strong inference” as to require the district court judge to require an evidentiary hearing or otherwise develop evidence before the district court enforces the IRS summons under the “satisfactory proof” standard of IRC § 7604(b) and the proper purpose and procedure standard set forth in Powell. 




Recommended Citation: Susan C. Morse, Argument analysis: What is the boundary on district court discretion to decide whether to develop evidence before enforcing an IRS summons?, SCOTUSblog (Apr. 25, 2014, 12:00 PM),