19 June 2014

Law in Plain English: United States v. Clarke

This is one in a series of posts designed to describe court decisions in plain English. For more detail and background on the legal issues, see the link to the case below. For similar posts, click here.

SCOTUSblogUnited States v. Clarke

Argument: Apr 23 2014 (Aud.)

Background: The Internal Revenue Service (IRS) issued five administrative summonses, pursuant to 26 U.S.C. § 7602, during an investigation into the tax liabilities of Dynamo Holdings Limited Partnership (Dynamo) and Michael Clarke, in his capacity as Dynamo's CFO. To obtain enforcement of a summons, the IRS must make a four-part prima facie showing that (1) "the investigation will be conducted pursuant to a legitimate purpose," (2) "the inquiry may be relevant to the purpose," (3) "the information sought is not already within the Commissioner's possession," and (4) "the administrative steps required by the Code have been followed." Once the IRS makes its prima facie showing, the burden shifts to the party opposing the summons to either (1) disprove one of the four elements of the IRS's prima facie case, or (2) "convince the court that enforcement of the summons would constitute an abuse of the court's process."  A party opposing a summons is entitled to an adversary hearing before enforcement is ordered, and that, at the hearing, the opponent may challenge the summons on any appropriate ground. Under Fifth Circuit precedent, 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. Nonetheless, the district court ordered enforcement of the summons. Clarke appealed, and the Fifth Circuit vacated the order and remanded the case to the district court, ruling that Clarke was entitled to a hearing to explore his allegation of an improper purpose.

Issue: The question before the Court is whether an unsupported allegation that the Internal Revenue Service (IRS) issued a summons for an improper purpose entitles an opponent of the summons to an evidentiary hearing to question IRS officials about their reasons for issuing the summons.

Holding: In a unanimous decision, the Supreme Court ruled that a taxpayer has a right to conduct an examination of IRS officials regarding their reasons for issuing a summons when he points to specific facts or circumstances plausibly raising an inference of bad faith. It is not enough to simply allege that the agents had an improper purpose, without providing any credible evidence to support that allegation.
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