A unanimous decision overturns the Eleventh Circuit and harmonizes with other circuits on the threshold for showing an improper summons motive.
The U.S. Supreme Court vacated and remanded a decision of the Eleventh Circuit in which the appeals court had held that a bare allegation of improper motive entitles a person objecting to an IRS summons to examine the responsible officials. Instead, the Court held that in an adversarial hearing concerning a summons’s validity, the taxpayer is entitled to examine an IRS agent only when the taxpayer can point to specific facts or circumstances plausibly raising an inference of bad faith. The unanimous decision noted that every other court of appeals has rejected the Eleventh Circuit’s view.
Facts: The summons dispute arose in connection with an IRS examination of the tax returns of Dynamo Holdings Limited Partnership for 2005 to 2007, which focused on large interest expenses Dynamo took in those years. Although Dynamo agreed twice to extend the statute of limitation during the exam, it refused the IRS’s third request. After the refusal, the IRS issued summonses to four individuals who the IRS believed had information about Dynamo, none of whom complied with the summonses. The IRS also issued a final partnership administrative adjustment (FPAA), proposing changes to Dynamo’s tax returns for the years at issue. Dynamo challenged the FPAA in Tax Court, and that proceeding is still pending.
Issues: When the IRS issued a summons enforcement action in federal district court, the four taxpayers who received the summonses (including Michael Clarke, who had been Dynamo’s CFO), objected that the summonses were issued for improper purposes: (1) to punish Dynamo for refusing to extend the statute a third time and (2) to evade the Tax Court’s limits on discovery. The taxpayers therefore requested that they be allowed to question the IRS’s investigating agents.
The district court rejected this request, holding that the allegation that the summonses were issued in retaliation for refusal to extend the statute of limitation was “mere conjecture” and that the second allegation failed as a matter of law because the validity of a summons must be tested when it is issued, and Dynamo had not yet commenced its Tax Court case when the summonses were issued.
The Eleventh Circuit, however, reversed the district court and held that, under its precedent, “a simple ‘allegation of improper purpose,’ even if lacking any ‘factual support,’ entitles a taxpayer to ‘question IRS officials concerning the Service’s reasons for issuing the summons’ ” (Clarke, slip op. at 5 (citations omitted)).
Holding: The Supreme Court explained that the Eleventh Circuit’s holding was overbroad and that the court committed error by applying a categorical rule that allowed an examination of IRS agents without assessing the plausibility of a taxpayer’s allegations. The Court held that a taxpayer has a right to examine IRS officials regarding their reasons for issuing a summons, but only when the taxpayer points to specific facts or circumstances plausibly raising an inference of bad faith. The Court explained, “Naked allegations of improper purpose are not enough: The taxpayer must offer some credible evidence supporting his charge.” However, the Court further stated that circumstantial evidence can be used to meet this burden (Clarke, slip op. at 6).
By Sally P. Schreiber, J.D., a JofA