One of the procedural cases that I read last year that jumped out at me was US v Clarke, an 11th Circuit case that considers when a recipient of an IRS summons may be entitled to an evidentiary hearing at the district court to investigate whether the IRS issued the summons for an impermissible purpose. Clarke was argued before the Supreme Court last week. Oral argument transcript can be found here; audio posted here. I will briefly describe the case and highlight some of the interesting parts of the oral argument that suggest that the Court is wrestling with how to frame procedural protections in summons enforcement proceedings.
Clarke was the CFO of the general partner in a partnership under examination; he alleged that the IRS issued the summons in retaliation for the partnership’s failure to extend the statute of limitations on assessment for a third time and to circumvent Tax Court discovery in a case that was commenced after the taxpayer refused to comply with the summons.
By way of brief background (those who want more background can look at Saltzman and Book Chapter 13, which discusses summons enforcement proceedings or an excellent post by Jack Townsend discussing background of the case) when a taxpayer fails to comply with an IRS summons, the IRS may file an enforcement petition in a federal district court. Under Powell, an IRS summons is enforceable if it is issued for a legitimate purpose, seeks relevant information that the government does not yet have, and satisfies required administrative procedures. The courts have generally held that a party opposing enforcement of a summons is entitled to present evidence showing the summons should be quashed. Most courts have generally not provided opponents the opportunity to question as a matter of right the IRS employee or employees responsible for issuing the summons, if in response to the petition to quash the IRS response includes a sworn affidavit by an appropriate Service employee attesting to the good faith of the Service actions. This has been the case even if and the opponent alleges Service misconduct, which if proven, might in fact constitute bad faith and reflect grounds for quashing the summons.
The Dispute
CFO Clarke argued that he was entitled to discovery and an evidentiary hearing before the district court granted the petition to enforce the summons. The district court issued an order enforcing the summons without holding an evidentiary hearing or allowing for discovery. The 11th Circuit agreed with the district court’s decision not to allow for discovery but would have remanded the case to allow for an evidentiary hearing to allow the taxpayers to explore whether in fact the summonses were issued for an improper purpose. The circuit court cited to a 2009 11th Circuit case (Nero Trading v Treasury) that acknowledges that 11th Circuit “precedent in this area is not in accord with that of a number of our sister circuits.” Nero Trading held that a summons opponent “is entitled to a limited adversarial hearing in order to ascertain whether the Service issued a given summons for an improper purpose,” and 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.”
The 11th Circuit in Clarke sated that opponents making allegations of improper purpose may generally not have sufficient facts in their possession. Getting an opportunity to develop those facts may be critical to support an allegation of improper purpose:
As we have explained, in situations such as this, 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, creating an impermissible “Catch 22.”
Oral Argument
At oral argument, the government took issue with the Eleventh Circuit’s approach:
First, the Eleventh Circuit’s rule ignores Congress’s intent that IRS summons enforcement proceedings be summary in nature. Second, the automatic examination rule is inconsistent with this Court’s treatment of analogous, administrative, and grand jury subpoenas in other contexts. And the third, the rule fails to respect the district courts’ core discretion to govern its own proceedings, including governing when and how evidence should be developed.
The government’s approach on argument was to essentially defer to the trial court’s discretion, even though when pressed the government admitted that based upon the facts alleged the district court would have had enough if it chose to order an evidentiary hearing. The exchange between Justices Kennedy, Scalia and counsel for the government encapsulates the government view:
JUSTICE KENNEDY: All right. So you say that the district court — that there is a sufficient showing here so that a district court, in the exercise of its discretion, could order a further hearing.
MS. HARRINGTON: Yes. I mean, we think almost any time a district court thinks there’s a reason to hold the hearing, that it would allow examination by IRS officials
JUSTICE SCALIA: I am trying to figure out the difference between the two sides here. And I guess you can only answer for half of it. But I suspect the difference is you are saying that there is enough evidence here to allow a district court to exercise its discretion, but not enough to reverse a district court if it did not exercise its discretion in favor of allowing the hearing. Is that right?
MS. HARRINGTON: Yes…
Counsel for Clarke took a differing view, essentially arguing that the facts as alleged would have triggered a limited hearing:
The taxpayer is entitled to an evidentiary — a limited evidentiary hearing when he presents specific facts from which an improper purpose in issuance or enforcement of a summons may plausibly be inferred from those facts.
Backtracking from a reading of Clarke which would require a limited hearing when there were mere allegations of improper purpose, counsel for Clarke said in light of the specific facts alleged in the case (mostly relating to the summons as a tool to avoid the limited Tax Court discovery rules, but also in light of the summons coming on the heels of a refusal to extend the statute of limitations), the district court erroneously limited the opportunity to find out if there were an improper purpose. Counsel for Clarke would leave it to the district court as to what type of hearing and what kind of evidence would be allowed to be gathered but at a minimum suggested that there should have been a chance to cross-examine the IRS employee whose affidavit was supplied to justify the IRS’s issuance of the summons.
The case presents a chance for the Court to articulate what standard the district court should use to determine whether it should order additional evidentiary hearings in light of both an allegation of improper purpose and some facts that support (but do not necessarily establish) that there was in improper purpose. From the oral argument it seems clear the Court will expressly disavow one reading of the Eleventh Circuit’s approach, namely that allegations alone trigger additional evidentiary hearing rights.
The oral argument included Justice Sotomayor referring to pleading standards as a possible guide for the Court should it choose to give more guidance to district courts facing allegations of improper purpose. Last week’s summary of the argument in the SCOTUS blog by our former guest blogger Susan Morse nicely summarizes the pleading standards that the Court may look to in fashioning a rule:
But, suggested Justice Sotomayor, different pleading standards could provide models for more precise instructions to district courts about when to require a hearing in response to a summons recipient’s allegation that a summons is invalid. If a court were to apply the standard applicable to motions to dismiss a complaint, it would only require a “plausible” allegation under Ashcroft v. Iqbal and Bell Atlantic Corp. v. Twombly. If a court were to apply a summary judgment-like standard, more evidence would be required to support an order for an evidentiary hearing.
Clarke argued that the Court should look to the motion to dismiss Iqbal and Twombly standard; while the government argued that neither the motion to dismiss nor summary judgment standard fits. Instead the government would leave a wide berth for the district court judge to fashion what process (if any) would be due in light of the allegations and inferences from the allegations.
Some Parting Thoughts
I am not sure where the Court will land in this case though I do suspect it will expressly disavow a reading of Clarke that would trigger an immediate right to a full-blown evidentiary hearing following allegations, even if supported by some circumstantial evidence. The issue presented reminds me of the discussion Professor Bryan Camp raised in his 2004 article on tax administration in the Florida Law Review. In that article, Professor Camp distinguished between an adversarial and inquisitorial approach to process, and argued that the underlying nature of tax process is inquisitive rather than adversarial:
The key descriptive distinction between adversarial and inquisitorial process, so far as it relates to tax determination, lies in the relation between the decisionmaker and the evidence-gatherer. That is, who controls the gathering and presentation of the information to the decisionmaker? An adversarial process separates the evidence-gatherer from the decisionmaker; it relies on multiple parties in interest to gather evidence and present it to a passive, neutral decisionmaker (either a judge or a jury). An inquisitorial process merges the two roles; it relies on a neutral decisionmaker to gather the relevant information as part and parcel of the decisionmaking.The adversarial process stereotypically dumps a load of evidence on the decisionmaker all at once, whereas the inquisitorial process is stereotypically heuristic, with the decisionmaker gathering evidence and making decisions about the issues interactively. (at page 18, citations omitted)
Camp’s article is essential reading for those who wish to place IRS procedures in broader context. While I disagree with some of it—especially when it minimizes aspects of the adversarial nature of the examination and collection process, I find it most powerful in its description of the IRS’s fact-gathering powers and summons powers as inquisitorial. Professor Camp’s distinction between adversarial and inquisitive process underlies part of the tension in Clarke and Nero, where the 11th Circuit’s unease with a more inquisitorial approach led to its outlier status. Professor Camp’s description of inquisitorial protections also foreshadows Justice Sotomayor, who at the Clarke oral argument said in light of the allegations she herself “would have figured out and asked you enough questions without holding a hearing, just through your attorney, until I got to a point where I decided whether or not your answers, like the district court did here, made sense or not.”
Clarke thus tees up the issue as to where to situate procedural protections at a particular stage of tax procedure. How the Court views tax process generally may influence the outcome and perhaps lead to more guidance for those wishing to challenge the validity of an IRS summons.