Answering Brief Filed in Clarke

April 7, 2014 by  
Filed under Clarke, Procedure, Supreme Court

The parties resisting summons enforcement have filed their brief in the Supreme Court in Clarke responding to the government’s opening brief.  Underlying the two sets of briefs is a fundamentally different perspective on the significance of holding an evidentiary hearing at which the agent issuing the summons can be questioned about his motives.  For the government, such a hearing is a big deal, and the courts should not impose that burden on the IRS on the basis of a mere allegation of an improper purpose.  For the summoned parties, such a hearing is a very limited intrusion that must be allowed upon a plausible allegation of bad faith if the notion of judicial oversight of summonses is to have any teeth at all.  They argue that, “[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.”

Thus, the summoned parties argue that the government’s position would “transform summons enforcement into an ex parte affair” because there would be no effective way to challenge the “pro forma showing” of government good faith made by an agent’s affidavit.  The summoned party in most cases cannot realistically meet the government’s requirement that it show independent evidence of bad faith before having a hearing because that knowledge “is peculiarly within the knowledge or files of the Service”; the government’s proposed rule thus imposes a “circular burden” because the point of the hearing is give the summoned party the opportunity to develop that evidence.  The brief rejects the government’s accusation that the Fifth Circuit has created a presumption of government irregularity.  Rather, the brief argues that the presumption of regularity is intact, but the Fifth Circuit’s approach “simply allows the taxpayer an opportunity to overcome that presumption.”  As the summoned parties see it, the government’s “position is not merely that it should receive the benefit of the doubt, but that in practice it should be immune from questioning.”

The brief then addresses why the Court should agree that the summoned parties have made a sufficiently plausible showing of bad faith to justify a hearing.  As with its brief at the petition stage, this argument focuses primarily on the evidence showing that the government was interested in getting information that would assist with the Tax Court litigation, not in conducting an administrative investigation into tax liability.  As noted in our first report on this case, the court of appeals did not rely on that evidence, and the courts thus far have not held that a motivation to assist with Tax Court litigation is an improper purpose that justifies denying enforcement of a summons.  Perhaps recognizing that it may be tough to win in the Supreme Court on the present state of the record, the summoned parties specifically request an opportunity to litigate that issue, stating “if this Court vacates the judgment below, it should remand so that the court of appeals can consider whether evidence that the IRS is using a summons only to circumvent Tax Court discovery rules provides grounds for denying enforcement of the summons.”

Oral argument is set for April 23.

Clarke – Brief for Respondents

Opening Brief Filed in Clarke Summons Enforcement Case

March 3, 2014 by  
Filed under Clarke, Procedure, Supreme Court

The government has filed its opening brief in Clarke.  The brief, which is quite short for a Supreme Court brief, hews closely to the arguments made in the petition for certiorari.  As we noted in our previous report, the government and the parties resisting summons enforcement took a very different view at the petition stage of the quantum of evidence that formed the basis for requiring the evidentiary hearing in this case.  The private parties contended that they had made “substantial allegations” that the summonses were for an improper purpose, while the government referred to those allegations as “unsupported.”

The brief begins by emphasizing that, however the private parties choose to describe the evidence supporting their allegations, the holding of the Fifth Circuit was that a party is entitled to an evidentiary hearing at which it can question IRS officials about their motives in issuing a summons “whenever a taxpayer makes an ‘allegation of an improper purpose.’”  Indeed, the government argues, the court of appeals specifically rejected the idea that the taxpayer’s allegations must be “substantial” or supported by evidence, pointing to the court’s statement that “requiring the taxpayer to provide factual support for an allegation of an improper purpose, without giving the taxpayer a meaningful opportunity to obtain such facts, saddles the taxpayer with an unreasonable circular burden.”

Thus, the government is willing to concede that, “if an objector presents evidence to support an inference of improper motive—or if a district court otherwise believes that such an opportunity for examination is appropriate—the district court may hold a hearing and require IRS agents to justify their actions.”  But here, the government maintains, the court of appeals “erroneously reduced to zero the amount of evidence that is required to rebut a showing of good faith.”

With the question framed in this way, the government presents its arguments concisely.  It argues that requiring an evidentiary hearing based on a mere allegation of improper purpose undermines Congress’s intent that summons enforcement proceedings be summary and expeditious.  Instead, it would afford summoned parties the opportunity to “delay the resolution of summons-enforcement proceedings merely by alleging that the summons was issued for an improper purpose.”  In addition, the government argues that the court of appeals’ approach infers wrongdoing on the part of a government official without evidence, which violates the “presumption of regularity” that public officials are presumed to have properly discharged their duties.

The response brief of the parties resisting the summons is due in mid-March.  Oral argument has been scheduled for April 23.

Clarke – Opening Brief for the Government

Supreme Court to Address the Right to an Evidentiary Hearing in Summons Enforcement Proceedings

February 3, 2014 by  
Filed under Clarke, Procedure, Supreme Court

The Supreme Court has granted certiorari in United States v. Clarke, No. 13-301, to explore the circumstances under which an entity is entitled to an evidentiary hearing before an IRS summons is enforced, so that it can question IRS officials about their motives for issuing the summons.  The parties’ different views of the case are aptly captured by the dueling questions presented.  The government says the case presents the question “whether an unsupported allegation” that the IRS issued a summons for an improper purpose entitles an opponent to examine IRS officials at an evidentiary hearing.  The entities contesting the summons say the case presents the question whether the court erred in ordering such an evidentiary hearing “in light of [their] substantial allegations that the IRS had issued summonses to them for an improper purpose.”

The basic summons enforcement rules are long established, but the devil can be in the details.  Under United States v. Powell, 379 U.S. 48 (1964), a summons is to be enforced if the IRS demonstrates that:  (1) “the investigation will be conducted pursuant to a legitimate purpose”; (2) “the inquiry may be relevant to the purpose”; (3) the IRS does not already have the information; and (4) the IRS followed the proper administrative steps.  The IRS generally carries its initial burden simply by producing an affidavit from the investigating agent, which then shifts the burden to the party contesting the summons.  At that point, it gets a little murkier.  If the party contesting the summons raises a “substantial question” as to whether the summons is an abuse of process, then it is entitled to an “adversary hearing” at which it “may challenge the summons on any appropriate ground.”  Id. at 58.

What happened here is that the IRS wanted to look more carefully into a partnership’s tax returns, particularly its claim of $34 million in interest expenses over two years.  Although the partnership agreed to two extensions of the statute of limitations, it declined to extend the period a third time.  Shortly thereafter, the IRS issued six summonses to third parties connected to the partnership, but those parties did not comply with the summonses.  Just before the limitations period closed, the IRS issued a notice of Final Partnership Administrative Adjustment (FPAA) to the partnership, and the partnership challenged the FPAA by filing a petition in the Tax Court.  A couple of months later, the IRS filed summons enforcement actions.

The summoned parties, who are the respondents in the Supreme Court, responded by contending that the summonses were not issued for a legitimate purpose and requesting an evidentiary hearing and discovery.  They basically made two arguments.  First, they contended that the summons was issued in retaliation for the partnership’s refusal to extend the statute of limitations, pointing to the fact that the summonses were issued very soon after that refusal was communicated.  Second, they contended that the summonses were designed to circumvent the Tax Court’s restrictions on discovery.  They advanced some evidence to support this contention, including the IRS’s request for a continuance in the Tax Court on the ground that the summonses were outstanding.

The district court (for the Southern District of Florida) ordered the summonses enforced, stating that a hearing is not required based on a “mere allegation of improper purpose” to retaliate.  With respect to respondents’ second contention, the district court said that a finding that the IRS was using the summons process to avoid discovery limitations in the Tax Court would not be a valid ground for quashing a summons.

The Eleventh Circuit reversed in an unpublished opinion.  It ordered the district court to hold an evidentiary hearing at which respondents could question the IRS examining agent about his motives for issuing the summonses (though the court declined to authorize discovery).  The court explained that the district court had abused its discretion because the respondents were entitled to a hearing “to explore their allegation” that the summonses were issued “solely in retribution for [the partnership’s] refusal to extend a statute of limitations deadline.”

The difference in the way the two parties have phrased the question presented reflects the two different grounds on which the respondents challenged the summonses.  The allegation that the summonses were a form of retaliation or punishment, instead of for a legitimate investigative purpose, is pretty close to an “unsupported allegation.”  That the summons followed closely on the heels of the decision not to extend the statute of limitations is weak evidence of an improper retaliatory purpose, though, as the respondents point out, it is hard to have strong evidence of a retaliatory purpose without having discovery or a hearing.  Thus, the respondents may have a hard time defending the court of appeals decision on its own terms.

On the other hand, the respondents will be able to advance their second basis for challenging the summonses as an alternate ground for affirmance, even though the court of appeals did not rely upon it.  On that ground, the respondents have more than an “unsupported allegation” – they are more like “substantial allegations” – that the summonses were designed to obtain evidence for use in the Tax Court proceedings that could not have been obtained through discovery.  The government’s response on this point is the same as that of the district court – namely, that these allegations, if true, would not demonstrate an illegitimate purpose and would not be grounds for quashing the summons.  Two courts of appeals have reached this issue and have agreed with the government.  On the other hand, respondents have a logical argument that a summons is an investigative tool and the investigation phase is over by the time the FPAA has issued and the case has been docketed in the Tax Court.  Respondents note in this connection that the IRS’s own Summons Handbook states that, “[i]n all but extraordinarily rare cases, the Service must not issue a summons” after a notice of deficiency is mailed because at that point “the Service should no longer be in the process of gathering the data to support a determination because the [notice of deficiency] represents the Service’s presumptively correct determination and indicates the examination has been concluded.”  This second ground not reached by the court of appeals thus may prove to be the more interesting and closely contested aspect of this case.

To add a little more spice to this case, the Court’s determination to revisit summons enforcement comes at a time when the IRS may significantly increase its use of its summons power.  On January 2, 2014, a new policy went into effect for audits of the largest taxpayers that threatens the issuance of a summons when a taxpayer fails to timely respond to requests for documents and/or information.  The new policy sets out a mandatory timeline for warning letters and a drop-dead due date, after which the examining agent will initiate procedures for the issuance of a summons.  This policy could well lead to many more summons enforcement proceedings.  For more information on the IRS’s new IDR enforcement policy, please contact George A. Hani (ghani@milchev.com) or Mary W. Prosser (mprosser@milchev.com).

The government’s opening brief is due February 24.  The case will be argued in late April and a decision is expected by the end of June.

Clarke – petition for certiorari

Clarke – brief in opposition

Clarke – reply brief in support of certiorari petition

Clarke – court of appeals opinion

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