United States: Supreme Court Grapples With Showing Required For Evidentiary Hearing Before Summons Enforcement

After hearing oral arguments in a case alleging the Internal Revenue Service issued summonses for an improper purpose, the Supreme Court of the United States is set to provide guidance on the type of evidence that a summoned party must show to entitle it to an evidentiary hearing before summons enforcement.


On April 23, 2014, the Supreme Court of the United States heard oral argument in United States v. Clarke (No. 13-1301), a case considering the circumstances under which a party challenging summons enforcement should be entitled to receive an evidentiary hearing before that summons is enforced.  The Supreme Court granted the government's petition for certiorari after the U.S. Court of Appeals for the Eleventh Circuit held that "an allegation of an improper purpose" entitles a party to a "limited adversary hearing" prior to summons enforcement to ascertain whether the Internal Revenue Service (IRS) did issue a summons for such a purpose.  At oral argument, the court wrestled with crafting a standard that would provide more helpful guidance to district courts in determining what evidence a summoned party needs to bring forth to entitle it to an evidentiary hearing.

Background:  Summons Enforcement

In order to ensure the proper determination of a tax liability, Congress "has endowed the IRS with expansive information-gathering authority."  United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984).  Section 7602 of the Internal Revenue Code is the "centerpiece of that congressional design."  Id. at 816.  Under section 7602, the IRS is authorized to "examine any books, papers, records, or other data which may be relevant or material to" a tax investigation and to summon any person to produce such documents.  Section 7602(a)(1), (2).

That authority, however, is subject to judicial review.  When a summoned party refuses to comply, the IRS must petition a federal district court to enforce the summons.  Sections 7402(b), 7604(a).  Congress intended summons enforcement proceedings to "be summary in nature," United States v. Stuart, 489 U.S. 353, 369 (1989); it did not "intend[] the courts to oversee the [IRS'] determinations to investigate," United States v. Powell, 379 U.S. 48, 56 (1964).  Fifty years ago in Powell, the Supreme Court sketched out the analytical framework governing summons enforcement.  To establish a prima facie case, the government must demonstrate that:

  • its investigation is "conducted pursuant to a legitimate purpose;"
  • the information sought "may be relevant to that purpose;"
  • the IRS does not already possess the "information sought" to be summoned; and
  • all statutorily imposed administrative steps have been followed.

Id. at 57-58.  Generally, the government can satisfy this initial burden by filing an affidavit executed by the investigating agent simply stating that the four criteria have been met.  See, e.g., United States v. Kis, 658 F.2d 526, 536 (7th Cir. 1981); United States v. Davis, 636 F.2d 1028, 1034 (5th Cir. 1981).

Once the government has satisfied that minimal requirement, the burden then shifts to the summoned party to either disprove one of the four elements of the government's prima facie showing or demonstrate that judicial enforcement of the summons would constitute an abuse of the court's process.  Powell, 379 U.S. at 58.  Although there is no all-inclusive list as to what constitutes such an abuse, Powell did provide some guidance.  It stated that an "abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation."  Id.  To help meet its burden of showing such an abuse, Powell stated that a summoned party was "entitled" to a pre-enforcement "adversary hearing" where it could "challenge the summons on any appropriate ground."  Id.

A right to an adversary hearing, however, does not necessarily entitle a summoned party to a pre-enforcement evidentiary hearing.  See Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 324 n.7 (1985) (finding that a district court "was well within [its] discretion to conclude, after reviewing submissions of the parties and holding oral argument, that an evidentiary hearing on the question of enforcement was unnecessary").  Indeed, most all circuit courts have required more than a bare allegation to trigger such an evidentiary hearing.  See, e.g., Sugerloaf Funding, LLC v. U.S. Dep't of Treasury, 584 F.3d 340, 345 (1st Cir. 2009) ("In order to proceed to an evidentiary hearing, a taxpayer must make a sufficient threshold showing ... To make this showing, the taxpayer must do more than allege an improper purpose; he must introduce evidence to support his allegations."); United States v. Tiffany Fine Arts, Inc., 718 F.2d 7, 14 (2d Cir. 1983) ("Unless a taxpayer opposing enforcement of a summons makes a 'substantial preliminary showing' of an alleged abuse, neither an evidentiary hearing nor limited discovery need be ordered by the district court."); Kis, 658 F.2d at 540 (requiring summoned party to "develop facts from which a court might infer a possibility of some wrongful conduct by the Government" before granting it an evidentiary hearing); United States v. Garden State Nat'l Bank, 607 F.2d 61, 71 (3d Cir. 1979) (entitling taxpayer to evidentiary hearing in situations where it "factually refute[s]" material government allegations or "raises proper affirmative defenses ... [that] are factually supported by [its] affidavits"); accord United States v. Judicial Watch, Inc., 371 F.3d 824, 831 (D.C. Cir. 2004); Fortney v. United States, 59 F.3d 117, 121 (9th Cir. 1995); Hintze v. IRS, 879 F.2d 121, 127 (4th Cir. 1989), overruled on other grounds by Church of Scientology v. United States, 506 U.S. 9 (1992); United States v. Balanced Fin. Mgmt., Inc., 769 F.2d 1440, 1444-45 (10th Cir. 1985).  The outlier is the Eleventh Circuit.  While appearing to equate Powell's requirement for an adversary hearing with a right to an evidentiary hearing, the Eleventh Circuit has held that "an allegation of improper purpose is sufficient to trigger a limited adversary hearing where the taxpayer may question IRS officials concerning the Service's reasons for issuing the summons."  Nero Trading, LLC v. U.S. Dep't of Treasury, 570 F.3d 1244, 1249 (11th Cir. 2009) (quoting United States v. Southeast First Nat'l Bank, 655 F.2d 661, 668 (5th Cir. 1981)); see also id. at 1249 (stating that it viewed "Southeast First National Bank [as] the legitimate offspring of the Supreme Court's seminal decision in Powell").  The summonses at issue in Clarke involved allegations of improper purposes.

Clarke

Background

The genesis of the dispute in Clarke arose in 2010 when the IRS wanted to further examine the tax returns of Dynamo Holdings Limited Partnership for tax years 2005-2007.  Although the partnership had twice previously agreed to extend the statute of limitations period so that the IRS investigation remained timely, it refused to extend it a third time.  Soon after that refusal, in September 2010, the IRS issued summonses to six individuals connected to the partnership, but five of those six individuals (the five are respondents in the Supreme Court case, and in such capacity, the "Respondents") did not comply.  Just before the limitations period closed in December 2010, the IRS issued a Final Partnership Administrative Adjustment (FPAA) to the partnership.  The partnership challenged the FPAA in February 2011 by filing a petition in the U.S. Tax Court.  In late April 2011—six months after the return date for most of the summonses and almost three months after the partnership filed its petition in Tax Court—the IRS filed summons enforcement actions in the U.S. District Court for the Southern District of Florida.

Procedural History

Before the district court, the Respondents argued that the IRS did not have a legitimate purpose in issuing the summonses because, among other reasons, they were (1) issued in retaliation for the partnership's refusal to extend the statute of limitations period a third time and (2) designed to circumvent the U.S. Tax Court's limitations on the scope of discovery.  United States v. Clarke, 111 AFTR 2d 2013-1697 (S.D. Fla. Apr. 16, 2012).  The Respondents brought forth some evidence supporting the latter contention, including (i) the fact that the IRS sought to continue the Tax Court proceeding on the ground that the summonses were still outstanding and (ii) a declaration from the lawyer of the sixth summoned individual (who ultimately complied with the summons request) that her IRS interview was conducted exclusively by the two lawyers representing the IRS in the Tax Court proceeding and that the examining agent was not even in attendance.  To further prove their contentions, the Respondents requested an evidentiary hearing to inquire into the government's purposes for issuing and enforcing the summonses (and also requested pre-hearing discovery).  The district court, however, ordered enforcement of the summonses.  It rejected the first argument as a "naked assertion" unsupported by evidence.  It then dismissed the second contention because it determined that, even if the IRS had used the summons process to sidestep discovery limitations, such a finding was not a valid reason to quash a summons.  Cf. Mary Kay Ash v. Commissioner, 96 T.C. 459, 462, 472-73 (1991) (denying taxpayer's motion for protective order barring IRS from using evidence obtained through a summons but emphasizing that it was not deciding the enforceability of the summons since that issue was in the district court's jurisdiction).

While the Eleventh Circuit, in an unpublished opinion, agreed with the district court that the Respondents were not entitled to pre-hearing discovery, it vacated the district court's order enforcing the summonses and remanded for it "to hold a hearing."  United States v. Clarke, 517 Fed. Appx. 689 (11th Cir. 2013).  Without directly addressing the Respondents' second contention regarding circumvention of discovery limitations, the Eleventh Circuit held that "an allegation of improper purpose," such as the allegation that the IRS issued the summonses to retaliate against the partnership, "is sufficient to trigger a limited adversary hearing where the taxpayer may question IRS officials concerning the Service's reasons for issuing the summons."  The Eleventh Circuit reasoned that "requiring the taxpayer to provide factual support for an allegation of improper purpose, without giving the taxpayer a meaningful opportunity to obtain such facts, saddles the taxpayer with an unreasonable circular burden, creating an impermissible 'Catch 22.'"  The government filed a petition for certiorari from that decision, which the Supreme Court granted.

While the question certified by the Supreme Court was whether a summoned party's "unsupported allegation" that the IRS issued a summons for an improper purpose entitles it to an evidentiary hearing, the parties in their respective merits briefs diverge in characterizing the issue.  In line with the certified question, the government views the evidentiary hearing as a significant burden, one that should not be imposed based on "an unsupported obligation."  According to the government, requiring district courts to permit an "examination of IRS officials in response to such bare allegations would have a recurring detrimental effect on the IRS's efficient enforcement of the federal tax laws."  And such an examination, argues the government, would contravene congressional intent that summons enforcement proceedings should be summary in nature.

In contrast, Respondents, eschewing the notion that their case rested on "unsupported allegations," argue that a "limited evidentiary hearing" is proper in light of their "substantial allegations."  The government's position, according to the Respondents, "is not merely that it should receive the benefit of the doubt, but that in practice it should be immune from questioning."  The Respondents argue that their approach "properly balances the taxpayer's rights against the government's legitimate interest in expeditious enforcement of its investigative summonses and ensures that summons enforcement proceedings are meaningful, while remaining summary in cases where the taxpayer fails to raise questions as to the IRS's good faith."  In other words, "[f]or the judiciary to fulfill its function of safeguarding against abusive summonses, it cannot be entirely dependent on one-sided submissions by the government attesting in conclusory fashion that its summons is being pursued for a proper purpose."

Oral Argument

During oral argument at the Supreme Court, the justices' questions made it objectively clear that most of them viewed the Eleventh Circuit's negligible threshold to trigger a right to an evidentiary hearing as erroneous.  Right from the outset, Justice Scalia stated that "[n]obody defends what the lower court said here," (and later noted that "we're way beyond" applying the Eleventh Circuit's rule); instead, the questioning focused on the differences in the parties' respective positions.  At bottom, the government agreed with Justice Scalia's characterization of its position "that there is enough evidence here to allow a district court to exercise its discretion [to allow an evidentiary hearing], but not enough to reverse a district court if it did not exercise its discretion in favor of the hearing."  In contrast, the Respondents' position was that, based "on the facts of this case," the district court abused its discretion in denying them such a hearing.

The issue then, as Justice Breyer noted, was "how to write the facts into [the decision]."  Even though a majority of the justices may not have agreed with the Eleventh Circuit's reasoning, they did not rule out the possibility that they would affirm on alternative grounds.  Indeed, Justice Breyer grilled the government on the IRS' reasons for seeking the information requested in the summons.  While the government's attorney initially answered that the IRS wanted it to be able to revise the FPAA (which was finalized prior to enforcement of the summonses) if the information obtained necessitated a change in the determination of the partnership's tax liability, the Respondents' lawyer noted that section 6223(f) prohibits the IRS from issuing a second FPAA (subject to exceptions not relevant here).  On rebuttal, the government clarified that the IRS wanted the information to "amend its final determination of liability for the taxpayer ... in the Tax Court."  Justice Breyer then asked whether a district court could properly enforce a summons that was sought "to get information that ... has no purpose other than to change, modify, or help [the government's] case in the Tax Court."  The government's lawyer diverted answering that question by noting that, while that was the reason for enforcing the summons, it was not the reason for issuing the summons; she then argued that the Tax Court has stated that issuing a summons in such a circumstance "doesn't offend anything that's happening in the Tax Court."  She also pointed out that the taxpayer could seek recourse in the Tax Court proceeding by asserting that the Tax Court should exclude any information obtained through the summonses.  When Justice Ginsburg raised that point to the Respondents, their attorney stated that, while he could not know for sure whether the Tax Court would exclude it, this "[c]ase isn't [about] the documents; it's [about] the examination."

The justices' questioning also revealed the parties' diverging views on the type of "evidence" required to trigger an entitlement to an evidentiary hearing.  After the government argued that a summons opponent's evidence must at least raise an inference of an improper purpose, Justice Alito noted that the question "all depends on what you mean by 'evidence.'"  The government responded that circumstantial evidence would be sufficient.  However, Justice Sotomayor later returned to that same question, asking whether the "evidence" required in this setting should be interpreted similarly to the evidence required (1) in "the Iqbal-Twombly world" [referencing the Supreme Court's decisions in Ashcroft v. Iqbal, 556 U.S. 662 (2009) and Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), which interpreted the pleading standards in Federal Rule of Civil Procedure (Rule) 8 to require a complainant to describe facts that give rise to a plausible entitlement to relief] or (2) to meet the summary judgment standard, which, under Rule 56, requires a party to proffer certain documents to support its assertion that a fact cannot be or is genuinely disputed.

Unsurprisingly, the government argued that the evidence required to trigger an entitlement to an evidentiary hearing is better analogized to the summary judgment standard.  According to the government, the Iqbal-Twombly standard—where a complainant "is entitled to the presumption that what they say is true"—"doesn't really work here," since the IRS would have already made a showing of a proper purpose, which raises a presumption that the government is indeed acting in good faith and with a proper purpose.  Thus, said the government, it is more appropriate to require the summons opponent to meet the summary judgment standard of evidence to overcome that presumption; that is, the burden to disprove the summons was issued for a proper purpose.  In contrast, the Respondents argued that the required evidence need only meet the fact pleading standards under Rule 8.  The Respondents' lawyer reasoned that, if the Respondents did not have "the ability to come forward with allegations that under Iqbal and Twombly would pass muster," it would lead to "the impermissible Catch-22" discussed by the Eleventh Circuit; there would be "an unreasonable circular burden" to "have evidence to get evidence," and it could not "get evidence without already having the evidence."

In sum, it is fairly certain that the Supreme Court's decision will not rely on the Eleventh Circuit's reasoning.  That said, the oral argument did not clearly indicate whether a majority of the justices were in favor of reversing the Eleventh Circuit and holding the district court properly exercised its discretion, or whether they were more inclined to agree with the Eleventh Circuit's decision—albeit it on different grounds—to remand to the district court to hold an evidentiary hearing.  The court is expected to issue its decision by the end of June.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.