Yesterday the Supreme Court issued an opinion in which it set forth standards for obtaining an evidentiary hearing in the context of a summons enforcement proceeding. Clarke v. U.S., No. 13-301 (June 19, 2014).
The threshold for the government to obtain summons enforcement in a U.S. district court is fairly low. In general, the government simply needs to meet the Powell factors: (1) that the investigation will be conducted pursuant to a legitimate purpose; (2) that the inquiry may be relevant to the purpose; (3) that the information sought is not already within the government’s possession; and (4) that the administrative steps required by the Internal Revenue Code have been followed. U.S. v. Powell, 379 U.S. 48, 57-58 (1964).
The government typically satisfies these factors by submitting a declaration of a revenue officer or revenue agent to the district court. However, the taxpayer has an opportunity to dispute the declaration, and in Clarke the respondents alleged that the court should quash the summons because the summonses were issued for an improper purpose.
The dispute in Clarke was about whether the respondents were entitled to an evidentiary hearing in the district court to allow it to question the IRS agents about their motives for issuing the summonses. The district court refused to grant an evidentiary hearing, and ordered the respondents to comply with the summonses, finding that the respondents hadn’t produced sufficient indicia of an improper purpose. On appeal, the Eleventh Circuit reversed, finding that the allegation of improper purpose was sufficient to entitle the respondents to question the government’s officials about the reasons for the issuance of the summons.
The Supreme Court reversed the Eleventh Circuit, finding that naked allegations of improper purpose were not sufficient, and that the respondents must offer some credible evidence to support the allegations. The Court noted that circumstantial evidence may be sufficient in certain cases to allow for an evidentiary hearing, since direct evidence of bad faith will rarely be available. Taxpayers must make a showing of facts that give rise to a plausible inference of improper motive.
The Supreme Court directed the Eleventh Circuit Court to consider whether the respondents met the standards set forth above, including a direction that proper deference must be given to the trial court’s ruling.