Supreme Court: Circumstantial Evidence Can Suffice to Challenge Motive for IRS Summons. (Parker Tax Publishing July 7, 2014)

A person receiving a summons is entitled to contest it in an adversarial enforcement proceeding and, while the person objecting must offer some credible evidence to support a claim of improper motive on behalf of the IRS, circumstantial evidence can suffice. U.S. v. Clarke, 2014 PTC 300 (S. Ct. 6/19/14).

The IRS issued summonses under Code Sec. 7602(a) to Michael Clarke and three others for information and records relevant to the tax obligations of Dynamo Holdings L. P. When the taxpayers failed to comply, the IRS brought an enforcement action in district court. The taxpayers challenged the IRS's motives in issuing the summonses, seeking to question the responsible agents. The district court denied the request and ordered the summonses enforced. The court characterized the taxpayers' arguments as conjecture and incorrect as a matter of law. The Eleventh Circuit reversed, holding that the district court's refusal to allow the taxpayers to examine the agents constituted an abuse of discretion, and that court precedent entitled them to conduct such questioning regardless of whether they had presented any factual support for their claims.

In a unanimous opinion, the Supreme Court vacated and remanded the case to the Eleventh Circuit, holding that a taxpayer has a right to conduct an examination of IRS officials regarding their reasons for issuing a summons when the taxpayer points to spefacts or circumstances plausibly raising an inference of bad faith. Thus, the Court said, a person receiving a summons is entitled to contest it in an adenforcement proceeding. The Court noted, however, that because such proceedings are summary in nature, the only relevant question is whether the summons was issued in good faith. Prior case law, the Court observed, supports a requirement that a summons objector cannot offer merely naked allegations, but some credible evidence to support a claim of improper motive. According to the Court, circumstantial evidence can suffice to meet that burden, and a fully developed case is not required. The taxneed only present a plausible basis for his charge, the Court said.

In the instant case, the Supreme Court found that the Eleventh Circuit applied a categorical rule demanding the examination of IRS agents without assessing the plausibility of the taxpayers' submissions. On remand, the Court ordered the Eleventh Circuit to consider those submissions in light of the standard set forth by the Court, giving appropriate deference to the district court's ruling on whether the taxpayers had shown enough to entitle them to examine the IRS agents.

For a discussion of the IRS's summons authority, see Parker Tax ¶263,120. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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