Argument preview: When can the recipient of an IRS summons put the government on the stand?
on Apr 18, 2014 at 1:24 pm
If a taxpayer refuses to respond to a summons issued by the IRS, the government must take the summons to a federal district court to seek enforcement. There, the government generally provides sworn affidavits to support a prima facie case in support of enforcement, consistent with United States v. Powell. What if the summons recipient then alleges that the summons has been issued for an improper purpose? Must the district court grant an evidentiary hearing? The government successfully sought Supreme Court review of this issue following a per curiam decision against it, and in the summons recipient’s favor, in United States v. Clarke.
In this case, the district court denied a taxpayer request for an evidentiary hearing. The Eleventh Circuit reversed under an abuse-of-discretion standard. It cited circuit precedent, its 2009 decision in Nero Trading LLC vs. U.S. Department of Treasury, for the proposition that the failure to grant an evidentiary hearing “saddles the taxpayer with an unreasonable circular burden.” But in Nero Trading, the Eleventh Circuit emphasized the district court’s “perfunctory order with only passing reference to any legal standard and no reference at all to either the merits of the Service’s prima facie case or Nero Trading’s claims in rebuttal.” In this case, though, the district court considered each of the taxpayer’s arguments in favor of an evidentiary hearing one by one and explicitly endeavored to distinguish its careful approach from the “perfunctory” approach of the district court in Nero Trading.
In 2010, Dynamo Holdings Limited Partnership (“DHLP”) was under IRS audit for tax years 2005-2007. DHLP had agreed to extend the three-year statute of limitations twice, but it declined to do so a third time. In September and October 2010, the IRS issued administrative summons to five recipients. It summoned Michael Clarke as the Chief Financial Officer of Dynamo GP, Inc. and as the Chief Financial Officer of Beekman Vista, Inc. In December 2010, just before the statute of limitations period expired, the IRS issued a “Final Partnership Administrative Adjustment,” or FPAA, to DHLP. This FPAA apparently had been signed by the IRS agent managing the DHLP case in August 2010, although it was not issued until December 2010. In February 2011, DHLP challenged the results of the FPAA in Tax Court.
When Clarke refused to obey the summons, the government sought enforcement in district court pursuant to Section 7604(b) of the Internal Revenue Code, which provides that “[i]t shall be the duty of the judge . . . to hear the application, and, if satisfactory proof is made, to enforce the summons.” A 1982 Senate Report indicates that “summons enforcement proceedings should be summary in nature and discovery should be limited.”
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. Typically, a sworn government affidavit will support a prima facie case that these factors have been met. Then, the recipient of a summons may allege that one or more of the factors have not been met. The district court decides whether to grant an evidentiary hearing or discovery measures in response to the allegations from the summons recipient.
In this case, Clarke asked the district court for an evidentiary hearing, alleging an improper purpose related (among other things) to the possible use of the information in the examination of another taxpayer; the possibility of retaliation for DHLP’s failure to extend the statute of limitations period; and the filing of a Tax Court petition by the government subsequent to the issuance of the summons. The district court declined to order a hearing, but the Eleventh Circuit reversed. The government then asked the Supreme Court to grant review, which it did on January 10 of this year.
In his brief on the merits, Clarke emphasizes the interaction between the summons and the pending Tax Court proceeding. For example, he suggests that the IRS had put the DHLP audit to bed in August 2010, before the summonses were issued, because its agent signed the FPAA at that time. And he references a declaration which states that an interview with another one of the five summons recipients was conducted not by the IRS agent who had conducted the audit, but rather by different IRS attorneys participating in the Tax Court proceeding, even though Tax Court discovery rules limit the use of third-party depositions.
Fishy? Perhaps. But the same story was before the district court judge, who declined to order an evidentiary hearing. Did that judge really abuse his discretion? The Eleventh Circuit’s decision in Nero Trading approvingly cites the Fifth Circuit’s decision in In re E.E.O.C. for the proposition that a “mere allegation of improper purpose” is not sufficient to support “time-consuming pre-trial discovery” or, by implication, an evidentiary hearing. The Supreme Court might decide this case in favor of the government by relying on its own tax precedents relating to trial court factual determinations. These emphasize an appellate court’s limited ability to review decisions like the district court’s holding in this case that the summons recipients had not supplied more than “mere allegations” of improper purpose.
Another possibility is that the Court will endeavor to reconcile whatever split exists among the circuits on this issue. The government’s brief in support of certiorari states that no other court of appeals would reverse a district court denial of an evidentiary hearing in response to a “bare allegation of bad faith.” But was there only a “bare allegation of bad faith” in this case? The government’s position on the circuit split begs the question.
Meanwhile, Clarke’s description of the law of other courts of appeals on this issue meticulously explains that some form of hearing or discovery is available, or other elements of the discovery process give the recipient of a summons the opportunity to gather some information from the government. Clarke cites First, Fifth, and Ninth Circuit case law in particular. But in each case, the test includes consideration of whether a summons recipient presents a sufficiently persuasive allegation. Thus Clarke’s survey of circuit precedent also begs the question.
The Justices might well like to know each side’s view on whether other courts of appeals would have similarly treated a district court’s denial of an evidentiary hearing differently based on the specific facts of this case. Could they line the other circuits’ law up in order of friendliness to the recipient of the summons versus government friendliness?
From a policy perspective, the IRS does not want to face the prospect of an evidentiary hearing every time it issues a summons. Indeed, the IRS is trying to speed up the audit process by requiring quicker response times for information document requests made to large-business taxpayers. This may result in more summonses in the short term in response to large businesses’ failure, at least initially, to meet the shorter deadlines.
An evidentiary hearing requirement could throw sand in the wheels of increased efficiency. Yet the abuse of process by the government is a possibility that must be taken seriously. And the statutory language and legislative history are open to interpretation. Next week, the Court will take on the question of the extent to which district courts will retain the power to balance these factors in the future.
Susan Morse joined the University of Texas law faculty in 2013. She studies and writes about international tax reform and tax compliance; and has taught federal income tax, business tax, international tax, and tax policy courses.