Today’s guest post on the Clarke case is by Stuart Gibson. Stu litigated complex tax cases for 30 years at the Tax Division of the Department of Justice, before retiring in 2013. His portfolio included the John Doe summons enforcement case against UBS, the first district court case involving a foreign tax credit generator tax shelter, and other major tax shelter and compliance matters. Stu now works as a solo practitioner, and consults on matters involving tax compliance and complex litigation. In this insightful post, Stu provides context on last week’s Supreme Court Clarke decision, and offers predictions as to what the case means going forward. Les
Ever since 1964, when the Supreme Court issued its decision in Powell, setting out a “simple”4-part test for enforcing IRS summonses, the courts have carried on a love-hate relationship with the IRS’s summons power. This week’s decision in Clarke continues that long tradition.
On the “love”side, the Powell decision led the courts to give the IRS broad discretion to summons information. Among other things,
- The IRS may summons materials that “may be relevant”to a legitimate inquiry.
- In a proceeding to enforce a summons, the IRS may meet its burden of proof with a simple affidavit from the issuing agent.
- Once the IRS meets its low threshold under Powell, the burden shifts to the opponent to show why the summons should not be enforced, and that burden is substantial.
- A party opposing a summons is usually not entitled to any discovery or evidentiary hearing —and may only get one or the other by raising a significant dispute of fact through a counter-affidavit or other admissible evidence.
On the “hate”side, the Supreme Court’s invitation for taxpayers to challenge a summons on “any appropriate ground”(Reisman v. Caplin), opened the door for taxpayers to raise creative arguments in asking the courts to limit the IRS’s summons power (for a time at least). In response to that invitation,
- Some courts prevented the IRS from issuing summonses “solely”in aid of a criminal investigation —until Congress amended the law to allow the IRS to issue such summonses.
- Some courts held that the IRS summons power does not extend to obtaining handwriting exemplars —until the Supreme Court ruled that it does.
- Some courts allowed opponents to conduct extensive discovery into the IRS’s motivation for issuing a summons —or even conducting an audit or investigation —until, perhaps, Clarke.
- Some courts, to punish or deter wrongful disclosures, have restricted the IRS’s ability to use the information obtained through its summons power —this issue remained unresolved when the Supreme Court affirmed a Ninth Circuit decision on a 4-4 tie vote.
Adherents of both the “love”and the “hate”approach can each find something to like in the Clarke decision. On the “love”side, to no one’s surprise, the Court ruled that a party opposing a summons must do more than make a “naked allegation”of improper purpose, in order to be entitled to examine the IRS agent who issued the summons. Thus, the Court ostensibly preserved the essence of the Powell enforcement mechanism: a summary proceeding under which the IRS must meet a low threshold for enforcement.
On the other hand, the Court left open a two-handled door —one handle on the law, and one on the facts —for parties to examine the issuing agent as part of a challenge on “improper purpose”grounds. On the facts, the Court ruled that a taxpayer opposing an IRS summons is entitled to examine the agent, “when he can point to specific facts or circumstances plausibly raising an inference of bad faith.”As I will discuss below, this formulation offers fertile ground for serious challenge.
On the law, the Court affirmed that whether the IRS issued the summons to obtain an unfair advantage in the Tax Court (where discovery is limited), or to retaliate against the taxpayer for refusing to consent to extend the statute of limitations, are issues of law which are appropriate for de novo review in the courts of appeals. Similarly, the Court declined to decide the question of law whether (as the court of appeals had ruled) the determination of good faith is to be made as of the date the summons is issued (and not when the enforcement action is filed). Again, these caveats from the Supreme Court offer additional opportunities to challenge IRS summonses.
Applying Clarke to future cases, the Supreme Court has offered a road map for any taxpayer who wishes to examine the issuing agent as part of challenging a summons on bad faith grounds. To do so, the opponent must simply, (1) “point to” (not swear to) (2) “specific facts or circumstances”(including circumstantial evidence) (3) “plausibly raising” (that is, according to the dictionary, having an appearance of truth or reason) (4) “an inference of bad faith.”(not proof, but merely an inference). To the determined taxpayer and their advocate, this standard seems to invite, rather than discourage, challenges.
Perhaps as important as articulating this standard was the Court’s clear direction that applying the standard in any given case lies within the discretion of the district court hearing the case. Thus, while the trial court in Clarke did not buy the taxpayer’s argument that the timing of the filing of the enforcement action raised legitimate questions about the IRS’s good faith, another trial court might find exactly the opposite. In my long career, which included litigating dozens of summons enforcement cases, I have encountered judges who would give the taxpayer great leeway in challenging a summons, and other judges who were far more disposed to allow the IRS to gather the information it was seeking, without delay or interference. If, by announcing this standard, the Court was seeking regularity or uniformity in determining when to give taxpayers the right to examine the issuing agent as part of a “good faith”challenge, it might just have invited just the opposite result.
As for law-based challenges, the Court’s decision seems to give life to legal theories which many had thought were long settled in the IRS’s favor. Thus, the Court did not offer any view —as it was not asked to —on whether the IRS’s good faith is determined on the date it issued the summons, or on the date the government sued to enforce it. Similarly, the Court did not opine on whether, as a matter of law, a taxpayer may demonstrate IRS bad faith simply by showing that the summons was issued after the taxpayer refused to extend the statute of limitation
So what does this decision mean going forward? It does not alter the general dynamic in summons cases. In the vast majority of cases, the IRS will meet its burden under Powell, and the taxpayer will not be able to point to specific facts or circumstances raising a plausible inference of bad faith. In those cases, taxpayers and their attorneys would be well advised to comply (or encourage third parties to comply), and preserve their resources to contest their ultimate civil or criminal liability. Where legitimate questions remain, however, Clarke offers hope to taxpayers that they may raise and pursue those questions in the summons enforcement arena. One thing is for certain, Clarke will not end summons enforcement litigation. It should, however, result in more focused summons litigation. That may explain why no one was breaking out the champagne to celebrate the decision in Clarke.