The Supreme Court has held that a taxpayer has a right to conduct an examination of Internal Revenue Service officials regarding their reasons for issuing a summons when he points to specific facts or circumstances plausibly raising an inference of bad faith.
In a brief filed with the court on March 17, Michael Clarke and his partners in Dynamo Holdings, LP argued that they are entitled to a limited evidentiary hearing to show that summonses were issued improperly by the IRS as retribution for their refusal to extend a statute of limitations.
The Eleventh Circuit earlier ruled in Clarke’s favor, and the IRS appealed to the Supreme Court (see Supreme Court Hears Case on IRS Summonses).
In his brief, Clarke argued, “Under United States v. Powell, 379 U.S. 48 (1964), an individual or entity that receives an IRS summons is entitled to the opportunity to show, at an adversary hearing, that the summons should be quashed because judicial enforcement of the summons would constitute an abuse of the courts processes—including, for example, if the summons was issued by the IRS for an improper purpose.”
The government argued in its brief that the Eleventh Circuit decision “erroneously reduced to zero the amount of evidence that is required” to rebut the IRS showing of good faith.
In its decision, the Supreme Court vacated the judgment of the Eleventh Circuit and remanded the case to the Eleventh Circuit for further proceedings.
Justice Kagan, writing for a unanimous court, said that the Eleventh Circuit applied a categorical rule demanding the examination of IRS agents without assessing the plausibility of the respondents’ (Clarke’s and Dynamo’s) submissions. On remand, the Court of Appeals must consider the submissions in light of that standard.
“It’s not as if you get an unlimited right to inquire into the motive of the IRS just because you say there is misconduct,” said tax litigation attorney Barbara Kaplan, a shareholder at Greenberg Traurig LLC and chair of the firm’s New York tax practice.
“The court held that a taxpayer is entitled to examine the IRS agent when he can point to specific facts and circumstances that plausibly raise the inference of bad faith,” she added. “Making allegations of improper purpose are not enough. The taxpayer must show some credible evidence that gives rise to a plausible inference of improper motive. The taxpayer doesn’t have a blanket right to do that or conduct a fishing expedition and automatically get the right to a hearing.”
Nevertheless, “it’s a taxpayer victory,” she said. “Although its breadth may be limited by the requirement that the taxpayer contesting the summons must first put forth credible evidence to support allegations of an improper IRS purpose, in the past, evidentiary hearings were rarely granted, even if such evidence was presented, and now the burden will be on the IRS to show the background for issuance of the summons from its files.”