March 16, 2016
The Eleventh Circuit this morning affirmed the district court’s decision in Clarke that had enforced a group of IRS summonses. The court’s legal analysis provides a glimmer of hope for taxpayers who desire to contest future summonses on grounds of bad faith, but there are daunting factual challenges to being able to actually make use of that legal analysis.
As evidenced by our prior reports, this case has a long history that now encompasses a Supreme Court opinion and three decisions by the Eleventh Circuit. To recap, the summoned parties sought an evidentiary hearing at which they could examine the IRS agent who issued the summonses to explore whether the summonses were issued in bad faith. The Eleventh Circuit had originally ordered such a hearing, but the Supreme Court reversed on the ground that the Eleventh Circuit’s standard was too lenient in requiring a hearing on the basis of a “bare allegation” of improper motive. Instead, the Supreme Court held that the correct standard requires the taxpayer to “point to specific facts or circumstances plausibly raising an inference of bad faith.”
On remand from the Supreme Court, the district court accepted all of the government’s arguments. It declined to allow the taxpayers to introduce additional evidence to make their case. And it dismissed all of their bad faith allegations as “improper as a matter of law.” The court of appeals took issue with that statement and explained that two of the taxpayers’ allegations were legally sound, but held that the “facts and circumstances” to which the summoned parties pointed were not sufficient to raise a plausible inference of bad faith in this case.
First, the court of appeals emphasized that “issuing a summons only to retaliate against a taxpayer would be improper as a matter of law.” The court found, however, that the taxpayers had not established a plausible basis for a retaliation accusation simply by pointing out that the IRS did not seek to enforce the summonses until six months after they were issued and the matter was already in the Tax Court. The taxpayer argued that this timeline showed that the investigating agents did not need the information sought in the summonses and therefore must have issued them for a retaliatory motive. The court of appeals responded that this argument “requires substantial conjecture that is both implausible and unsupported by the record.”
Second, the court of appeals stated that issuing a summons as a way of circumventing Tax Court discovery limitations would be an improper purpose. As we noted in our report on the oral argument in the Supreme Court, the taxpayers had arguably made a reasonable case that the IRS’s decision to enforce the summonses was motivated by a desire to obtain evidence that could help with the Tax Court proceedings; six months passed before the IRS sought to enforce the summonses and lead counsel in the Tax Court proceeding—not the examining agent—conducted the examination of an individual who chose to comply with the summons issued to her.
The strength of this argument, however, turned on being able to examine the IRS’s decision to enforce, rather than its decision to issue, the summonses because the summonses were issued well before there was any Tax Court proceeding. The Supreme Court had left that question unanswered, but the Eleventh Circuit determined to adhere to its “well-established” precedent “that the validity of a summons is tested at the date of issuance.” Given that proposition, along with the rule that commencing Tax Court proceedings does not extinguish the IRS’s summons power, the court of appeals acknowledged that it would be difficult for a taxpayer to make out a claim of bad faith based on circumvention of Tax Court limitations on discovery. The court of appeals stated that “the circumstances under which a taxpayer could successfully allege improper circumvention of tax discovery are exceptionally narrow” and described such claims are “rarely tenable.” In this case, the court explained that it was “of no consequence” that the summoned information could assist the IRS in its Tax Court litigation; because the summonses were issued pursuant to a valid investigation and before the Tax Court proceedings commenced, the summoned parties were obligated to provide the information. That obligation did not evaporate just because an FPAA was issued or a Tax Court petition was filed. Indeed, the court of appeals noted its agreement with the government’s argument that “it is the domain of the tax court to control discovery in the pending tax litigation.”
In sum, the Eleventh Circuit’s decision gives some theoretical grounds for taxpayers to get the opportunity to examine IRS agents at an evidentiary hearing, but as a practical matter, the decision is unlikely to lead to many such examinations. The long saga of the Clarke case has apparently ended with a result that the government will likely find satisfactory.
P.S. We hope that our readers enjoy the new, updated look of the blog, which coincides with Miller & Chevalier’s move to new office space.