Microsoft Seeks Evidentiary Hearing in Summons Enforcement Case

The Court should grant Microsoft an evidentiary hearing. Once the Court considers Microsoft's evidentiary showing and rules that Microsoft has made the required showing, the Court should grant Microsoft the limited document discovery Microsoft seeks.

Only after the evidentiary hearing and subsequent document discovery should the Court receive briefing and argument on the ultimate question of whether Microsoft has shown cause why the Court should not enforce the summonses.

1. Because IRS summonses are not self-enforcing, see 26 U.S.C. § 7604, to obtain a court's enforcement of a summons, the IRS must first make an initial showing that, among other things, it issued the summons to seek information relevant to a legitimate purpose, United States v. Powell, 379 U.S. 48 (1964).

2. If the IRS makes that initial showing, then the court issues an order to show cause why it should not enforce the summons. Here, the Court found that the government has made the requisite initial showing and issued a show-cause order.

3. Prior to responding to the show-cause order, and making its case for why the court should not enforce the summons, the taxpayer can seek an evidentiary hearing to present facts supporting a defense to enforcement of the summons. To obtain an evidentiary hearing, the taxpayer need only point to "some credible evidence" "plausibly raising an inference" of grounds for not enforcing the summons, such as an abuse of process, bad faith, or improper purpose. United States v. Clarke, 134 S. Ct. 2361, 2367 (2014). This requirement exists largely to shield IRS agents from vexatious requests for testimony when there is no realistic basis for resisting the summons. See id. at 2367-68.

4. If the court grants an evidentiary hearing, and the taxpayer makes "a substantial preliminary showing of abuse or wrongdoing," subsequent discovery may be warranted. United States v. Stuckey, 646 F.2d 1369, 1374 (9th Cir. 1981). Such document discovery of the IRS permits the taxpayer to further support its opposition to the summons before challenging enforcement of the summons in response to the court's show-cause order.

5. Finally, the taxpayer responds to the order to show cause, and makes its substantive case for why the court should not enforce the summons. Microsoft, like any taxpayer, is entitled "to urge the court to quash the summons 'on any appropriate ground.'" Clarke, 134 S. Ct. at 2365 (quoting Reisman v. Caplin, 375 U.S. 440, 49 (1964)). This Court will not enforce a summons if doing so would be an abuse of this Court's process: "It is the court's process which is invoked to enforce the administrative summons and a court may not permit its process to be abused." Powell, 379 U.S. at 58.

The accompanying Memorandum makes a substantial preliminary showing, based on the evidence available to Microsoft without discovery from the IRS, that enforcement of the summonses would be an abuse of process. The IRS has improperly attempted to insert a third-party contractor into what is an inherently governmental function. The IRS has retained a private law firm, Quinn Emanuel Urquhart & Sullivan, LLP ("Quinn Emanuel"), to prepare for litigation. The summonses contemplate that Quinn Emanuel will take sworn testimony in audit "interviews." The purported authority for the IRS to retain Quinn Emanuel to participate in the audit in this way is an invalid temporary regulation, issued without notice and comment, and which contravenes the clear statutory requirement that an officer or employee of the IRS conduct audit interviews. For reasons that are set forth more fully in the accompanying Memorandum, Quinn Emanuel's involvement in the Microsoft audit violates the Internal Revenue Code, relies upon an invalid regulation, and is an impermissible delegation of an inherently governmental function. The Court should refuse to enforce the IRS's summonses because doing so under these circumstances would permit an abuse of the Court's process.

Microsoft's Memorandum serves two purposes:

First, the Memorandum makes the threshold case that an evidentiary hearing is warranted -- that is, it presents "some credible evidence" "plausibly raising an inference" of an abuse of process. Clarke, 134 S. Ct. at 2367. That showing entitles Microsoft to an evidentiary hearing.

Second, the Memorandum presents the evidence that Microsoft will tender if the Court agrees that an evidentiary hearing is warranted. All that remains for the evidentiary hearing is for the IRS to present its evidence and for the Court to decide whether Microsoft has made the required showing. Microsoft submits that the Memorandum makes a "substantial preliminary showing of abuse or wrongdoing," warranting document discovery. Stuckey, 646 F.2d at 1374. Because of the circumstances here, Microsoft does not require live testimony from any IRS agent to make out its case. In a typical evidentiary hearing, a taxpayer might seek to cross-examine the IRS agent responsible for issuing the summons in order to establish that the IRS issued the summons for an improper purpose. But the Ninth Circuit has resisted "defin[ing] precisely the permissible scope of the evidentiary hearing," and "leave[s] that to the discretion of the district court." United States v. Church of Scientology, 520 F.2d 818, 825 (9th Cir. 1975). A hearing, of course, does not require live witness testimony. See, e.g., Int'l Molders' & Allied Workers' Local Union No. 164 v. Nelson, 799 F.2d 547, 554-55 (9th Cir. 1986)(affirming preliminary injunction issued on the basis of affidavits alone and holding that an evidentiary hearing to resolve disputed facts need not be live); United States ex rel. Stinson, Lyons, Gerlin & Bustamante, P.A. v. Prudential Ins. Co., 944 F.2d 1149, 1155 (3d Cir. 1991)(noting that "the term 'hearing' does not necessarily take the form of a live, formal proceeding"). Microsoft does not require testimony from any IRS agent on the existence of an improper purpose. Rather, Microsoft claims that enforcement of the summonses would be an abuse of the Court's process. Enough evidence already exists for Microsoft to make "a substantial preliminary showing of abuse." Id. That evidence, in the form of exhibits and sworn declarations, is presented in the Memorandum.¹

If, after considering the IRS's response to Microsoft's evidentiary showing, the Court determines that Microsoft has made the required showing, Microsoft requests targeted discovery rounding out the circumstances of Quinn Emanuel's hiring, its role in the audit, and its anticipated role in the interviews sought by the summonses. This discovery will further establish the impropriety of Quinn Emanuel's role -- and the impropriety of the summonses in this case -- but it will not be burdensome on the IRS. In fact, the discovery Microsoft seeks precisely tracks a subset of the information Microsoft has already sought through recent FOIA requests to the IRS (copies of which are attached to Microsoft's Memorandum as Exhibits F-G to the Declaration of James M. O'Brien). Microsoft is requesting the same information through discovery that it is also seeking by way of FOIA only because it needs the information in a more timely way than the FOIA procedures provide, in order to present this evidence to this Court in response to this Court's show-cause order.

In sum, the attached Memorandum makes not only the threshold showing of "some credible evidence" "plausibly raising an inference" of abuse required to obtain an evidentiary hearing, Clarke, 134 S. Ct. at 2367, but also the "substantial preliminary showing of abuse or wrongdoing" that warrants discovery in aid of Microsoft's response to the Court's show-cause order, Stuckey, 646 F.2d at 1374. If, after hearing from the IRS, the Court agrees that Microsoft has made out not only the threshold showing required for an evidentiary hearing, but also the more substantial showing required to obtain document discovery, then the Court should allow Microsoft the limited document discovery that it seeks before addressing the enforcement of the summonses on the order to show cause.

DATED this 18^th day of March, 2015.