Supreme Court’s Clarke Decision Sets Forth General Guidelines for When Evidentiary Hearings Should Be Required in Summons Enforcement Proceedings

As expected, the Court this morning reversed the Eleventh Circuit’s decision in Clarke based on the Court’s agreement with the government’s position that the Eleventh Circuit erroneously had required an evidentiary summons enforcement hearing based on nothing more than the bare allegation of an improper purpose. See our previous report here.  But the Court’s unanimous opinion, authored by Justice Kagan, went on to attempt to provide guidance for future disputes over the availability of such hearings, including the resolution of this case on remand, and that guidance could perhaps lead courts to allow such hearings more often than in the past.

The Court summarized the standard to be applied by a court in considering the summoned party’s request for a hearing as follows: “whether the [summoned party has] pointed to specific facts or circumstances plausibly raising an inference of improper motive.”  It elaborated on that standard to some extent elsewhere in the opinion, although the general language still leaves considerable room for interpretation by the lower courts:

“[T]he taxpayer is entitled to examine an IRS agent when he can point to specific facts and circumstances plausibly raising an inference of bad faith.  Naked allegations of improper purpose are not enough:  The taxpayer must offer some credible evidence supporting his charge.  But circumstantial evidence can suffice to meet that burden; after all, direct evidence of another person’s bad faith, at this threshold stage, will rarely if ever be available.  And although bare assertion or conjecture is not enough, neither is a fleshed out case demanded:  The taxpayer need only make a showing of facts that give rise to a plausible inference of improper motive.  That standard will ensure inquiry where the facts and circumstances make inquiry appropriate, without turning every summons dispute into a fishing expedition for official wrongdoing.”

The immediate result of the decision is a remand to the Eleventh Circuit to determine whether the district court’s refusal to order an evidentiary hearing comported with this standard.  The Court did not express a view on whether the evidence that the private parties had put forth (alleging retaliation for failure to agree to a statute of limitations extension and an ulterior motive to conduct the equivalent of discovery for the Tax Court case) met the standard, stating that whether those purposes would be improper was not within the question presented to the Court.  But the Court did set forth some principles for how the Eleventh Circuit should go about reviewing the district court’s decision.

At the outset, the district court’s decision is entitled to deference and is reviewed for abuse of discretion.  But the Court emphasized “two caveats” to that discretion. First, no deference is owed if the district court did not apply the correct standard. Second, no deference is owed to the district court’s decision on “legal issues about what counts as an illicit motive.”

In that connection, the Court proceeded to state that this second caveat encompassed the issue to which the private parties have attached considerable importance – namely, the contention that the IRS was seeking to enforce the summons only in order to obtain discovery for the Tax Court proceedings.  The district court had agreed with the government that this would not constitute an improper purpose because the validity of a summons should be judged as of the time of issuance (which was before the Tax Court proceedings were initiated), not as of the time the IRS moves to enforce the summonses. The Supreme Court declined to endorse that argument, inviting the Eleventh Circuit to consider it as a legal issue on which it owes no deference to the Tax Court.

Thus, the government has dodged a bullet in Clarke, with the Supreme Court reversing the Eleventh Circuit and rejecting the proposition that IRS agents can be hauled into an evidentiary hearing on the basis of a bare allegation of improper purpose.  But the government could well find itself facing a loss again on remand when the Eleventh Circuit applies the standard set forth in Clarke to the evidence in this case.  There is nothing in the Supreme Court’s opinion to discourage the Eleventh Circuit (presumably the same judges who already voted once to afford an evidentiary hearing in this case) from concluding that the private parties here did make a sufficient showing because, as a matter of law, it is improper for the IRS to move to enforce a summons for the purpose of obtaining information to be used in pending Tax Court proceedings.  It will be worth following the remand proceedings in the court of appeals to see how the Eleventh Circuit deals with this issue.

Clarke – Supreme Court decision