United States v. Clarke et al.

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 the respondents for information and records relevant to the tax obligations of Dynamo Holdings L. P. See 26 U. S. C. § 7602(a). When the respondents flailed to comply, the IRS brought an enforcement action in District Court. The 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 the respondents' arguments as conjecture and incorrect as a matter of law. The Eleventh Circuit reversed, holding that the District Court's refusal to allow the respondents to examine the agents constituted an abuse of discretion, and that Circuit precedent entitled them to conduct 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 speci-fc facts or circumstances plausibly raising an inference of bad faith. Pp. 253–257. (a) A person receiving a summons is entitled to contest it in an adver-sarial 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 taxpayer need only present a plausible basis for his charge. Pp. 253–255. (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 the respondents have shown enough to entitle them to examine the agents. However, that ruling is entitled to deference only if it was

based on the correct legal standard. See Fox v. Vice, 563 U. S. 826, 839. And the District Court's latitude does not extend to legal issues about what counts as an illicit motive. Cf. Koon v. United States, 518 U. S. 81, 100. Pp. 255–257. 517 Fed. Appx. 689, vacated and remanded. Kagan, J., delivered the opinion for a unanimous Court.

Sarah E. Harrington argued the cause for the United States. With her on the briefs were Solicitor General Ver-rilli, Assistant Attorney General Keneally, Deputy Solicitor General Stewart, Robert W. Metzler, and Deborah K. Snyder.

Edward A. Marod argued the cause for respondents. With him on the brief were Jack J. Aiello, Martin R. Press, Seth P . Waxman, Paul R. Q. Wolfson, Joshua M. Salzman, and Christina Manfredi McKinley.

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 flails 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.

Congress has “authorized and required” the IRS “to make the inquiries, determinations, and assessments of all taxes”

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 investigation will be conducted pursuant to a legitimate purpose, 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 responsible investigating agent. See Stuart, 489 U. S., at 360. The taxpayer, however, has an opportunity to challenge that affidavit, and to urge the court to quash the summons “on any appropriate ground”—includ-ing, as relevant here, improper purpose. See Reisman v. Caplin, 375 U. S. 440, 449 (1964).

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 [Dynamo's] federal tax reporting” and that the summonses were “not issued to harass or for any other improper purpose.” 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 issued the summonses to “punish[ ] [Dynamo] for refusing to agree to a further ex-

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 characterized the respondents' statute-of-limitations theory as “mere conjecture.” Id., at 14a. And it ruled that the respondents' 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 respondents to examine IRS agents constituted an abuse of discretion. In support of that ruling, the Court of Appeals cited binding Circuit precedent holding that a simple “allegation of improper purpose,” even if lacking any “factual sup-

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. 1118 (2014), and we now vacate the Eleventh Circuit's opinion.

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); Pow-ell, 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 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

Yet we have also emphasized that summons enforcement 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 honest 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 evidence, 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 adversarial process concerning a summons's validity, the taxpayer is entitled to examine an IRS agent when he can point to spe-cifc 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 circumstantial 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 although bare assertion or conjecture is not enough, neither 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

But that is not the standard the Eleventh Circuit applied. Although the respondents gamely try to put another 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 entitling 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 summonses 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) materials 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 examination of IRS agents even when a taxpayer made only conclusory allegations. See supra, at 252. That was error. On remand, the Court of Appeals must consider the respondents' submissions in light of the standard we have stated.

That consideration must as well give appropriate deference 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

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. 826, 839 (2011) (“A trial court has wide discretion when, but only when, it calls the game by the right rules”). We leave to the Court of Appeals the task of deciding whether the District Court asked and answered the relevant question—once again, whether the respondents pointed to specific facts or circumstances 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 respondents' claim that the Government moved to enforce these summonses to gain an unfair advantage in Tax Court litigation. See supra, at 252–253. The Government responds, and the District Court agreed, that any such purpose is irrelevant because “the validity of a summons is judged at the time” the IRS originally issued the summons, 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' alternative theory, the Government briefly suggested at argument that issuing a summons because “a taxpayer declined to extend a statute of limitations

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.