United States: Supreme Court Agrees To Hear Administrative Summons Case

The Supreme Court has granted certiorari in U.S. v. Clarke, (Sup. Ct. Dkt. No. 13-301), in which it will address whether an unsupported allegation that the IRS issued a summons for an improper purpose entitles the opponent of the summons to an evidentiary hearing to question the IRS on its reasons for issuing the summons.

In Clarke, the IRS examined the information returns of Dynamo Holdings Limited Partnership (DHLP) for the 2005 to 2007 tax years. In connection with the examination, the IRS in October 2010 issued five administrative summonses under Section 7602 to third parties connected with DHLP, one of which was the chief financial officer of the partnership, Michael Clarke. Neither Clarke nor the others who were summonsed complied.

A few months later, the IRS issued a final partnership administrative adjustment (FPAA) to DHLP. Thereafter, DHLP filed a petition in the Tax Court challenging the adjustments. The IRS also filed five petitions for enforcement of the summonses in district court. Clarke and the others responded in court that the purpose of the IRS investigation was illegitimate and of an "ulterior motive." They argued that the summonses were retribution for DHLP's refusal to grant an extension of the statute of limitations, among other things.

Clarke and the other respondents argued that they were entitled to explore their allegations through discovery and an evidentiary hearing. The district court ordered the summonses enforced, although acknowledging that the respondents were entitled to an adversarial hearing, but not to an evidentiary hearing or discovery.

Under Section 7602, the IRS has broad authority to issue summonses to examine books and records or other material data, as well as to order individuals to appear and produce those documents. To enforce a contested summons, the IRS must meet four factors set forth by the Supreme Court in U.S. v. Powell (379 U.S. 48):

The IRS will typically submit an affidavit in support of meeting those four factors. At that point, the burden of proof shifts back to the individual to disprove one of those four factors or convince the court that the court's process has been abused.

On appeal, the Eleventh Circuit Court of Appeals reversed in a per curiam, unpublished opinion, holding that the district court abused its discretion by declining to hold an evidentiary hearing. The district court should have allowed for an evidentiary hearing so that the respondents could ascertain whether the IRS's issuance of the summons was for an improper purpose.

The Eleventh Circuit's decision is at odds with every other circuit court of appeal. In the other circuits, the district court has discretion not to hold an evidentiary hearing to inquire into the IRS' motive for issuing a summons if a summons opponent produces only a bare allegation of bad faith.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.