United States v. Clarke

(Slip Opinion) OCTOBER TERM, 2013 1
Syllabus
NOTE: Where it is feasible, a syllabus (headnote) will be released, as is
being done in connection with this case, at the time the opinion is issued.
The syllabus constitutes no part of the opinion of the Court but has been
prepared by the Reporter of Decisions for the convenience of the reader.
See United States v. Detroit Timber & Lumber Co., 200 U. S. 321, 337.
SUPREME COURT OF THE UNITED STATES
Syllabus
UNITED STATES v. CLARKE ET AL.
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE ELEVENTH CIRCUIT
No. 13–301. Argued April 23, 2014—Decided June 19, 2014
The Internal Revenue Service (IRS) issued summonses to respondents
for information and records relevant to the tax obligations of Dynamo
Holdings L. P. See 26 U. S. C. §7602(a). When respondents failed to
comply, the IRS brought an enforcement action in District Court.
Respondents 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, characterizing re-
spondents’ arguments as conjecture and incorrect as a matter of law.
The Eleventh Circuit reversed, holding that the District Court’s re-
fusal to allow respondents to examine the agents constituted an
abuse of discretion, and that Circuit precedent entitled them to con-
duct such questioning regardless of whether they had presented any
factual support for their claims.
Held: A taxpayer has a right to conduct an examination of IRS officials
regarding their reasons for issuing a summons when he points to spe-
cific facts or circumstances plausibly raising an inference of bad faith.
Pp. 5–9.
(a) A person receiving a summons is entitled to contest it in an ad-
versarial enforcement proceeding. Donaldson v. United States, 400
U. S. 517, 524. But these proceedings are “summary in nature,”
United States v. Stuart, 489 U. S. 353, 369, and the only relevant
question is whether the summons was issued in good faith, United
States v. Powell, 379 U. S. 48, 56. The balance struck in this Court’s
prior cases supports a requirement that a summons objector offer not
just naked allegations, but some credible evidence to support his
claim of improper motive. Circumstantial evidence can suffice to
meet that burden, and a fleshed out case is not demanded: The tax-
payer need only present a plausible basis for his charge. Pp. 5–7.
2 UNITED STATES v. CLARKE
Syllabus
(b) Here, however, the Eleventh Circuit applied a categorical rule
demanding the examination of IRS agents without assessing the
plausibility of the respondents’ submissions. On remand, the Court
of Appeals must consider those submissions in light of the standard
set forth here, giving appropriate deference to the District Court’s
ruling on whether respondents have shown enough to entitle them to
examine the agents. However, that ruling is entitled to deference on-
ly if it was based on the correct legal standard. See Fox v. Vice, 563
U. S. ___, ___. And the District Court’s latitude does not extend to le-
gal issues about what counts as an illicit motive. Cf. Koon v. United
States, 518 U. S. 81, 100. Pp. 7–9.
517 Fed. Appx. 689, vacated and remanded.
KAGAN, J., delivered the opinion for a unanimous Court.
Cite as: 573 U. S. ____ (2014) 1
Opinion of the Court
NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports. Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash-
ington, D. C. 20543, of any typographical or other formal errors, in order
that corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
_________________
No. 13–301
_________________
UNITED STATES, PETITIONER v. MICHAEL
CLARKE ET AL.
ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF
APPEALS FOR THE ELEVENTH CIRCUIT
[June 19, 2014]
JUSTICE KAGAN delivered the opinion of the Court.
The Internal Revenue Service (IRS or Service) has broad
statutory authority to summon a taxpayer to produce
documents or give testimony relevant to determining tax
liability. If the taxpayer fails to comply, the IRS may
petition a federal district court to enforce the summons.
In an enforcement proceeding, the IRS must show that it
issued the summons in good faith.
This case requires us to consider when a taxpayer, as
part of such a proceeding, has a right to question IRS
officials about their reasons for issuing a summons. We
hold, contrary to the Court of Appeals below, that a bare
allegation of improper purpose does not entitle a taxpayer
to examine IRS officials. Rather, the taxpayer has a right
to conduct that examination when he points to specific
facts or circumstances plausibly raising an inference of
bad faith.
I
Congress has “authorized and required” the IRS “to
make the inquiries, determinations, and assessments of
all taxes” the Internal Revenue Code imposes. 26 U. S. C.
2 UNITED STATES v. CLARKE
Opinion of the Court
§6201(a). And in support of that authority, Congress has
granted the Service broad latitude to issue summonses
“[f]or the purpose of ascertaining the correctness of any
return, making a return where none has been made, de-
termining the liability of any person for any internal
revenue tax . . . , or collecting any such liability.”
§7602(a). Such a summons directs a taxpayer (or associ-
ated person1) to appear before an IRS official and to pro-
vide sworn testimony or produce “books, papers, records,
or other data . . . relevant or material to [a tax] inquiry.”
§7602(a)(1).
If a taxpayer does not comply with a summons, the IRS
may bring an enforcement action in district court. See
§§7402(b), 7604(a). In that proceeding, we have held, the
IRS “need only demonstrate good faith in issuing the
summons.” United States v. Stuart, 489 U. S. 353, 359
(1989). More specifically, that means establishing what
have become known as the Powell factors: “that the inves-
tigation will be conducted pursuant to a legitimate pur-
pose, that the inquiry may be relevant to the purpose, that
the information sought is not already within the [IRS’s]
possession, and that the administrative steps required by
the [Internal Revenue] Code have been followed.” United
States v. Powell, 379 U. S. 48, 57–58 (1964). To make that
showing, the IRS usually files an affidavit from the re-
sponsible investigating agent. See Stuart, 489 U. S., at
360. The taxpayer, however, has an opportunity to chal-
lenge that affidavit, and to urge the court to quash the
summons “on any appropriate ground”—including, as
relevant here, improper purpose. See Reisman v. Caplin,
375 U. S. 440, 449 (1964).
——————
1 The IRS has authority to summon not only “the person liable for
tax,” but also “any officer or employee of such person,” any person
having custody of relevant “books of account,” and “any other person
the [IRS] may deem proper.” 26 U. S. C. §7602(a)(2). For convenience,
this opinion refers only to the “taxpayer.”
Cite as: 573 U. S. ____ (2014) 3
Opinion of the Court
The summons dispute in this case arose from an IRS
examination of the tax returns of Dynamo Holdings Lim-
ited Partnership (Dynamo) for the 2005–2007 tax years.
The IRS harbored suspicions about large interest expenses
that those returns had reported. As its investigation
proceeded, the Service persuaded Dynamo to agree to two
year-long extensions of the usual 3-year limitations period
for assessing tax liability; in 2010, with that period again
drawing to a close, Dynamo refused to grant the IRS a
third extension. Shortly thereafter, in September and
October 2010, the IRS issued summonses to the respond-
ents here, four individuals associated with Dynamo whom
the Service believed had information and records relevant
to Dynamo’s tax obligations. None of the respondents
complied with those summonses. In December 2010 (still
within the augmented limitations period), the IRS issued a
Final Partnership Administrative Adjustment proposing
changes to Dynamo’s returns that would result in greater
tax liability. Dynamo responded in February 2011 by
filing suit in the United States Tax Court to challenge the
adjustments. That litigation remains pending. A few
months later, in April 2011, the IRS instituted proceed-
ings in District Court to compel the respondents to comply
with the summonses they had gotten.
Those enforcement proceedings developed into a dispute
about the IRS’s reasons for issuing the summonses. The
IRS submitted an investigating agent’s affidavit attesting
to the Powell factors; among other things, that declaration
maintained that the testimony and records sought were
necessary to “properly investigate the correctness of [Dy-
namo’s] federal tax reporting” and that the summonses
were “not issued to harass or for any other improper pur-
pose.” App. 26, 34. In reply, the respondents pointed to
circumstantial evidence that, in their view, suggested
“ulterior motive[s]” of two different kinds. App. to Pet. for
Cert. 72a. First, the respondents asserted that the IRS
4 UNITED STATES v. CLARKE
Opinion of the Court
issued the summonses to “punish[ ] [Dynamo] for refusing
to agree to a further extension of the applicable statute of
limitations.” App. 52. More particularly, they stated in
sworn declarations that immediately after Dynamo de-
clined to grant a third extension of time, the IRS, “despite
having not asked for additional information for some time,
. . . suddenly issued” the summonses. Id., at 95. Second,
the respondents averred that the IRS decided to enforce
the summonses, subsequent to Dynamo’s filing suit in Tax
Court, to “evad[e] the Tax Court[’s] limitations on discov-
ery” and thus gain an unfair advantage in that litigation.
Id., at 53. In support of that charge, the respondents
submitted an affidavit from the attorney of another Dy-
namo associate, who had chosen to comply with a sum-
mons issued at the same time. The attorney reported that
only the IRS attorneys handling the Tax Court case, and
not the original investigating agents, were present at the
interview of his client. In light of those submissions, the
respondents asked for an opportunity to question the
agents about their motives.
The District Court denied that request and ordered the
respondents to comply with the summonses. According to
the court, the respondents “ha[d] made no meaningful
allegations of improper purpose” warranting examination
of IRS agents. App. to Pet. for Cert. 18a. The court char-
acterized the respondents’ statute-of-limitations theory as
“mere conjecture.” Id., at 14a. And it ruled that the re-
spondents’ evasion-of-discovery-limits claim was “incorrect
as a matter of law” because “[t]he validity of a summons is
tested as of the date of issuance,” not enforcement—and
the Tax Court proceedings had not yet begun when the
IRS issued the summonses. Id., at 15a.
The Court of Appeals for the Eleventh Circuit reversed,
holding that the District Court’s refusal to allow the re-
spondents to examine IRS agents constituted an abuse of
discretion. In support of that ruling, the Court of Appeals
Cite as: 573 U. S. ____ (2014) 5
Opinion of the Court
cited binding Circuit precedent holding that a simple
“allegation of improper purpose,” even if lacking any “fac-
tual support,” entitles a taxpayer to “question IRS officials
concerning the Service’s reasons for issuing the summons.”
517 Fed. Appx. 689, 691 (2013) (quoting United States v.
Southeast First Nat. Bank of Miami Springs, 655 F. 2d
661, 667 (CA5 1981)); see Nero Trading, LLC v. United
States Dept. of Treasury, 570 F. 3d 1244, 1249 (CA11 2009)
(reaffirming Southeast).
Every other Court of Appeals has rejected the Eleventh
Circuit’s view that a bare allegation of improper motive
entitles a person objecting to an IRS summons to examine
the responsible officials.2 We granted certiorari to resolve
that conflict, 571 U. S. __ (2014), and we now vacate the
Eleventh Circuit’s opinion.
II
A person receiving an IRS summons is, as we have often
held, entitled to contest it in an enforcement proceeding.
See United States v. Bisceglia, 420 U. S. 141, 146 (1975);
Powell, 379 U. S., at 57–58; Reisman, 375 U. S., at 449.
The power “vested in tax collectors may be abused, as all
power” may be abused. Bisceglia, 420 U. S., at 146. In
recognition of that possibility, Congress made enforcement
of an IRS summons contingent on a court’s approval. See
26 U. S. C. §7604(b). And we have time and again stated
that the requisite judicial proceeding is not ex parte but
——————
2 See, e.g., Sugarloaf Funding, LLC v. United States Dept. of Treas-
ury, 584 F. 3d 340, 350–351 (CA1 2009) (requiring “a sufficient thresh-
old showing that there was an improper purpose”); Fortney v. United
States, 59 F. 3d 117, 121 (CA9 1995) (requiring “some minimal amount
of evidence” beyond “mere memoranda of law or allegations” (internal
quotations and alterations omitted)); United States v. Kis, 658 F. 2d
526, 540 (CA7 1981) (requiring “develop[ment] [of] facts from which a
court might infer a possibility of some wrongful conduct”); United
States v. Garden State Nat. Bank, 607 F. 2d 61, 71 (CA3 1979) (requir-
ing “factual[ ] support[ ] by the taxpayer’s affidavits”).
6 UNITED STATES v. CLARKE
Opinion of the Court
adversarial. See Donaldson v. United States, 400 U. S.
517, 527 (1971); Powell, 379 U. S., at 58; Reisman, 375
U. S., at 446. The summoned party must receive notice,
and may present argument and evidence on all matters
bearing on a summons’s validity. See Powell, 379 U. S.,
at 58.
Yet we have also emphasized that summons enforce-
ment proceedings are to be “summary in nature.” Stuart,
489 U. S., at 369. The purpose of a summons is “not to
accuse,” much less to adjudicate, but only “to inquire.”
Bisceglia, 420 U. S., at 146. And such an investigatory
tool, we have recognized, is a crucial backstop in a tax
system based on self-reporting. See ibid. (restricting
summons authority would enable “dishonest persons [to]
escap[e] taxation[,] thus shifting heavier burdens to hon-
est taxpayers”). Accordingly, we long ago held that courts
may ask only whether the IRS issued a summons in good
faith, and must eschew any broader role of “oversee[ing]
the [IRS’s] determinations to investigate.” Powell, 379
U. S., at 56. So too, we stated that absent contrary evi-
dence, the IRS can satisfy that standard by submitting a
simple affidavit from the investigating agent. See Stuart,
489 U. S., at 359–360. Thus, we have rejected rules that
would “thwart and defeat the [Service’s] appropriate
investigatory powers.” Donaldson, 400 U. S., at 533.
The balance we have struck in prior cases comports with
the following rule, applicable here: As part of the adver-
sarial process concerning a summons’s validity, the tax-
payer is entitled to examine an IRS agent when he can
point to specific facts or circumstances plausibly raising
an inference of bad faith. Naked allegations of improper
purpose are not enough: The taxpayer must offer some
credible evidence supporting his charge. But circumstan-
tial evidence can suffice to meet that burden; after all,
direct evidence of another person’s bad faith, at this
threshold stage, will rarely if ever be available. And
Cite as: 573 U. S. ____ (2014) 7
Opinion of the Court
although bare assertion or conjecture is not enough, nei-
ther is a fleshed out case demanded: The taxpayer need
only make a showing of facts that give rise to a plausible
inference of improper motive. That standard will ensure
inquiry where the facts and circumstances make inquiry
appropriate, without turning every summons dispute into
a fishing expedition for official wrongdoing. And the rule
is little different from the one that both the respondents
and the Government have recommended to us.3
But that is not the standard the Eleventh Circuit ap-
plied. Although the respondents gamely try to put an-
other face on the opinion below, see Brief for Respondents
24–25, and n. 17, we have no doubt that the Court of Appeals
viewed even bare allegations of improper purpose as enti-
tling a summons objector to question IRS agents. The
court in fact had some evidence before it pertaining to the
respondents’ charges: The respondents, for example, had
submitted one declaration relating the timing of the sum-
monses to Dynamo’s refusal to extend the limitations
period, see App. 95, and another aiming to show that the
IRS was using the summonses to obtain discovery it could
not get in Tax Court, see id., at 97–100. But the Eleventh
Circuit never assessed whether those (or any other) mate-
rials plausibly supported an inference of improper motive;
indeed, the court never mentioned the proffered evidence
at all. Instead, and in line with Circuit precedent, the
court applied a categorical rule, demanding the examina-
tion of IRS agents even when a taxpayer made only con-
clusory allegations. See supra, at 4. That was error. On
remand, the Court of Appeals must consider the respond-
——————
3 See Tr. of Oral Arg. 29 (respondents) (The taxpayer is entitled to
question the agent “when he presents specific facts from which an
improper purpose . . . may plausibly be inferred”); id., at 5 (United
States) (“[A] summons opponent has to put in enough evidence to at
least raise an inference” of improper motive, and “[c]ircumstantial
evidence is enough”).
8 UNITED STATES v. CLARKE
Opinion of the Court
ents’ submissions in light of the standard we have stated.
That consideration must as well give appropriate defer-
ence to the District Court’s ruling. An appellate court, as
the Eleventh Circuit noted, reviews for abuse of discretion
a trial court’s decision to order—or not—the questioning of
IRS agents. See 517 Fed. Appx., at 691, n. 2; Tiffany Fine
Arts, Inc. v. United States, 469 U. S. 310, 324, n. 7 (1985).
That standard of review reflects the district court’s supe-
rior familiarity with, and understanding of, the dispute; and
it comports with the way appellate courts review related
matters of case management, discovery, and trial prac-
tice. See, e.g., Hoffmann-La Roche Inc. v. Sperling, 493
U. S. 165, 172–173 (1989); Crawford-El v. Britton, 523
U. S. 574, 599–601 (1998). Accordingly, the Court of
Appeals must take into account on remand the District
Court’s broad discretion to determine whether a tax-
payer has shown enough to require the examination of IRS
investigators.
But two caveats to that instruction are in order here.
First, the District Court’s decision is entitled to deference
only if based on the correct legal standard. See Fox v.
Vice, 563 U. S. ___, ___ (2011) (slip op., at 11) (“A trial
court has wide discretion when, but only when, it calls the
game by the right rules”). We leave to the Court of Ap-
peals the task of deciding whether the District Court
asked and answered the relevant question—once again,
whether the respondents pointed to specific facts or cir-
cumstances plausibly raising an inference of improper
motive.
And second, the District Court’s latitude does not extend
to legal issues about what counts as an illicit motive. As
indicated earlier, one such issue is embedded in the re-
spondents’ claim that the Government moved to enforce
these summonses to gain an unfair advantage in Tax
Court litigation. See supra, at 4. The Government re-
sponds, and the District Court agreed, that any such
Cite as: 573 U. S. ____ (2014) 9
Opinion of the Court
purpose is irrelevant because “the validity of a summons is
judged at the time” the IRS originally issued the sum-
mons, and here that preceded the Tax Court suit. Tr. of
Oral Arg. 7; see Reply Brief 19–20; App. to Pet. for Cert.
15a. Similarly, with respect to the respondents’ alterna-
tive theory, the Government briefly suggested at argu-
ment that issuing a summons because “a taxpayer de-
clined to extend a statute of limitations would [not] be an
improper purpose,” even assuming that happened here.
Tr. of Oral Arg. 6. We state no view on those issues; they
are not within the question presented for our review. We
note only that they are pure questions of law, so if they
arise again on remand, the Court of Appeals has no cause
to defer to the District Court. Cf. Koon v. United States,
518 U. S. 81, 100 (1996) (“A district court by definition
abuses its discretion when it makes an error of law”).
For these reasons, we vacate the judgment of the Court
of Appeals and remand the case for further proceedings
consistent with this opinion.
It is so ordered.