TaxProf Blog op-ed: Reflections on United States v. Clarke, by Steve R. Johnson (Florida State):
On June 19, the Supreme Court decided United States v. Clarke, 2014 WL 2765284, vacating & remanding 517 Fed. Appx. 689 (11th Cir. 2013). Clarke involves the ability of a party challenging an IRS summons to obtain an evidentiary hearing to probe whether the IRS issued the summons in bad faith. Unique among the circuits, the 11th Circuit’s position was that even a bare allegation of bad faith was sufficient to entitle the taxpayer or other target to a hearing at whether it could question IRS officials about their motives. In an opinion authored by Justice Kagan, the Supreme Court rejected that view, holding instead that the taxpayer/target is entitled to a hearing only “when he points to specific facts or circumstances plausibly raising an inference of bad faith.” *2.
The outcome of the case isn’t a surprise. A unanimous Court needed only a short opinion (operatively only four pages) to dispose of the view of the outlier circuit. But if powerhouse college football and basketball programs sometimes schedule “breather” games against East Podunk State, perhaps the Supreme Court too is allowed occasionally to pencil in an easy one.
To say that the result of Clarke is unsurprising, however, does not imply that the decision is bereft of significance. I offer eight thoughts below.
The key thing about Clarke is the message that it sends to the lower courts: the reaffirmation of the spirit of Powell. The cornerstone summons enforcement case is United States v. Powell, 379 U.S. 48 (1964). Powell instructs that the IRS must make a threshold showing, after which the burden shifts to the taxpayer or target to demonstrate other grounds on which enforcement of the summons should be denied. The IRS’s threshold burden is light, and the taxpayer/target’s counter burden is heavy. As a result, the Government wins the overwhelming majority of litigated summons enforcement cases, so much so that often the main practical objectives of contesting the summons are achieving delay or inducing the IRS to drop the matter (the game not being worth the candle) or to accept a compromise under which the scope of the original summons is narrowed.
Both Clarke and United States v. Stuart, 489 U.S. 353, 359 (1989), state that demonstrating good faith is part of the IRS’s burden, but they both add that that demonstration is made when the IRS satisfies the four Powell factors: that the investigation is pursuant to a legitimate purpose, that the inquiry is relevant to that purpose, that the information sought is not already within the IRS’s possession, and that the administrative steps required by the IRC have been taken. *2. Typically, these factors are established by an affidavit of the IRS agent performing the investigation.
From the IRS’s standpoint, the worst possible outcome of Clarke would have been an opinion stating or implying that Powell was too indulgent towards the IRS and that courts should impose more exacting scrutiny in summons enforcement actions. That problem did not materialize. The first sentence of the Clarke opinion states that the IRS “has broad statutory authority” to issue summonses. *2. Two paragraphs later, the opinion notes that, under sec. 6201(a), the IRS is not just “authorized” but also “required” to make inquiries, determinations, and assessments. Id. The remainder of the opinion is studded with other encouragements of indulgent review of summonses. Again at *2, the Court remarks: “Congress has granted the Service broad latitude to issue summonses.” At *4, the Court notes that “we have also emphasized that summons enforcement proceedings are to be summary in nature” (quoting Stuart at 369); it observes that “[t]he purpose of a summons is not to accuse, much less to adjudicate, but only to inquire” (quoting United States v. Bisceglia, 420 U.S. 141, 146 (1975); and it declares that the IRS summons “is a crucial backstop in a tax system based on self-reporting” (quoting id.). And at *5, the Court cautions against “turning every summons dispute into a fishing expedition for official wrongdoing.”
The message, surely, is unmistakable. In Clarke, the Supreme Court is telling lower courts that the indulgent-towards-the-IRS spirit of Powell remains alive and well.
I do not think this spirit is unfair. Certainly, a balance must be struck between effective regulation and revenue-raising on the other hand and avoiding oppression or unnecessary burdens on citizens on the other hand. I’ve been concerned about that since I wrote my law review note as a student. See Steve R. Johnson, Reasonable Relation Reassessed: The Examination of Private Documents by Federal Regulatory Agencies, 56 NYU L. Rev. 742 (1981). The standard shouldn’t be “the IRS gets whatever it wants, whenever it wants it, and regardless of the reason for which it wants it.”
Nonetheless, it is appropriate to cut the IRS a great deal of information-gathering slack. A central fact about audits, collection, and criminal investigation is informational asymmetry. In the main, the taxpayer was a party to the transactions and knows what happened while the IRS wasn’t and doesn’t. Facilitating the IRS’s attempts to reduce its knowledge gap should lead to more and better settlements before trial and more accurate decision of cases that do go to trial. The expansive intention of Congress expressed in sec. 6201(a)’s “authorized and required” direction should not be strangled by a judicial hand clenched tightly in summons enforcement cases. For a good statement of this view, see Ash v. Comm’r, 96 T.C. 459, 473-76 (1991) (Chabot, J., concurring in the result).
The above should not be read as suggesting that Clarke was an unmixed triumph for the IRS. The IRS would have been even happier had the Court declared that the right of examination could be triggered only by the taxpayer/target presenting direct evidence of an improper purpose. Clarke did not go that far. Instead, the Court stated: “The taxpayer must offer some credible evidence supporting his charge. But circumstantial evidence can suffice to meet that burden …. 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.” *5.
Clarke’s rejection of the 11th Circuit’s “bare allegation” position strikes me as consistent with other areas of practice. Some degree of factual specificity may be required to establish standing, for a complaint to survive a motion to dismiss, and for a nonmoving party to avoid summary judgment. See, e.g., Clapper v. Amnesty Int’l USA, 133 S. Ct. 1138 (2013); Ashcroft v. Iqbal, 556 U.S. 662 (2009); Celotex Corp. v. Catrett, 447 U.S. 317 (1986). I tread lightly on this point because I lack expertise and because there are nuances beyond my generalizations. More research would be needed before this claim could be asserted with full confidence. At this point, though, it is my less-than-fully-tutored impression that there’s something to this suggestion of cross-area consistency.
Reaffirmation of the spirit of Powell is especially opportune now. One of the great dynamics of the looming era of tax administration is international cooperation to detect and defeat cross-border tax avoidance and evasion. This is all about facts. Retrenching from Powell would have undercut the ability of the IRS to address cross-border schemes on its own and to cooperate with the revenue authorities of other countries in addressing such schemes cooperatively.
Another significant aspect of Clarke is clarification or reassertion of the respective roles of the district courts and circuit courts in summons enforcement cases. Clarke cautioned that the circuit court must “give appropriate deference to the District Court’s ruling.” *5. The standard is abuse of discretion, and “the Court of Appeals must take into account … the District Court’s broad discretion to determine whether a taxpayer has shown enough to require the examination of IRS investigators.” Id. The Court justified this on the grounds that it “reflects the district court’s superior familiarity with, and understanding of, the dispute” and that “it comports with the way appellate courts review related matters of case management, discovery, and trial practice.” Id.
When this deference is combined with the murkiness of when circumstantial evidence crosses the line separating mere conjecture from reasonable inference, it is likely that the district court’s judgment as to the sufficiency of the evidence will often be immune from reversal as a practical matter. Clarke cautions, though, that deference disappears when the district court applies the wrong legal standard or when the decisive matters are “legal issues about what counts as an illicit motive.” *6.
I admit to some trepidation here. The roles of the district and circuit courts laid out by Clarke as to summons enforcement are strikingly similar to the roles of district and circuit courts in criminal sentencing as laid out by cases such as Gall v. United States, 128 S. Ct. 586 (2007), Kimbrough v. United States, 128 S. Ct. 558 (2007), and Rita v. United States, 127 S. Ct. 2456 (2007).
These decisions have produced disorder and disparities in sentencing in criminal tax cases. We will see whether Clarke creates similar problems in summons enforcement.
What will be the next set of issues addressed by summons enforcement cases in the post-Clarke world? When Clarke is heard on remand, one issue will be whether the circumstantial evidence adduced by the taxpayer rises to the level of reasonable inference. Frankly, that doesn’t interest me much. It’s a fairly close call; the district court could go either way; whichever way it goes is highly unlikely to be reversed on appeal; and it’s an “eye of the beholder” situation without clear principles allowing reasoned conclusions as to whether the district court made the right call.
What interests me much more is the set of issues involving what motivations constitute, as a matter of law, bad faith on the part of the IRS. The taxpayer in Clarke alleged two bad purposes: 1- the IRS used the summons to try to coerce the taxpayer to consent to extend (for the third time) the sec. 6501 statute of limitations on assessment – or to punish the taxpayer for not doing so and 2- the IRS used the summons to try to gain an unfair advantage in the litigation of the merits in the pending Tax Court case, circumventing and abusing the Tax Court’s discovery rules.
Some may argue that the Clarke Court accepted that these motivations, if proved, constitute bad faith sufficient to deny enforcement of the summons. I don’t think so. The better reading of Clarke is that the Court saw its job simply as correcting the 11th Circuit’s wrong standard and laying down the right standard. The Court did not feel it necessary to address, and it did not address, whether the motivations ascribed by the taxpayer to the IRS are improper and require nonenforcement. The Court remarked: “We state no view on those issues; they are not within the question presented for our review.” *6.
There are depths that would have to be plumbed in order to do full justice to these questions. In brief, however, I do not find the taxpayer’s arguments compelling. Regardless of what motives are ascribed to the IRS as a matter of fact, the taxpayer’s arguments should fail as a matter of law. First, the SOL extension argument. The IRS prefers to obtain information from a taxpayer cooperatively and informally, but the back-and-forth of negotiation can take time, particularly in big, complex cases. If the limitations period remains open by consent, time exists to proceed in this fashion. Otherwise, the IRS must proceed through formal process, i.e., the summons. There’s nothing sinister or abusive about proceeding this way. See *6 (noting that, at oral argument, “the Government briefly suggested … that issuing a summons because a taxpayer declined to extend a statute of limitations would not be an improper purpose”)(punctuation omitted).
Second, the “abuse of Tax Court process” argument. The district court saw this as “incorrect as a matter of law because the 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.” *3 (punctuation omitted). I have further problems with the taxpayer’s argument. Typically in tax procedure when a party – either the taxpayer or (especially) the government – have multiple remedies open to them, those remedies are independent. Thus, for example, when both the general federal tax lien and one or another special tax lien both exist in a particular case, the IRS can proceed under either and the expiration of one does not impair the validity of the other. When Congress and court rules give the IRS various ways to get information from the taxpayer and others, the IRS should be able to use any of them or all of them. The IRS’s use of one information-gathering tool is not an abuse of other, independent tools.
We’ve been around this block before, and I thought that we’d gotten past this canard. Some badly reasoned cases accepted the “abuse of Tax Court discovery” argument, but they were rightly repudiated. E.G., Ash v. Comm’r, 96 T.C. 459 (1991) (full court reviewed) (modifying Universal Mfg. Co. v. Comm’r, 93 T.C. 589 (1989), and Westreco, Inc. v. Comm’r, T.C. Memo. 1990-501)).
When one thinks about the taxpayer’s argument through the lens of information asymmetry, it is a profoundly strange argument. The taxpayer has the information; the IRS doesn’t have it. The taxpayer complains of the IRS seeking an unfair advantage. I guess the unfair advantage is trying to get the information the taxpayer already has so that the court deciding the merits can have the benefit of a fully developed factual record. Strange.
In arguing about what motives constitute bad faith, the IRS is helped by a principle of statutory interpretation. The courts have often held that, when Congress has created a highly detailed, highly articulated, highly technical statutory scheme, there is insufficient space for regulatory or judicial glossing or supplementation of the statute. E.g., United States v. Brockamp, 519 U.S. 347, 349 (1997). Many features of Subtitle F of the IRC fit that bill, including the SOL rules in secs. 6501 and 6503 and the summons rules in secs. 7201 through 7212.
Apply the principle. There’s an undertone in this case, but it should play no role in resolution of the question whether an “extend the SOL” motivation constitutes prohibited bad faith. The taxpayer in Clarke had already extended the SOL twice, and the IRS asked for a third extension. One may wonder whether the IRS was being inefficient (although, of course, alternative benign explanations are possible). The law gives the taxpayer remedies if that’s the case. For example, if the audit started too late, there might be interest abatement under sec. 6404; or the taxpayer could effect the consent via Form 872-A, then terminate it with a Form 872-T if the protraction becomes intolerable; or, if Form 872 is used instead of an 872-A, the taxpayer could refuse to execute the first, second, or third time around. All of these remedies are provided by the law. The highly detailed and articulated IRC provisions do not, however, establish “can’t use a summons” as a recognized remedy for alleged or suspected IRS inefficiency. On remand of Clarke, the courts should not create such a remedy that Congress and the regulators chose not to establish.
Similarly, the IRC sections as to IRS summons set out numerous limitations on and prohibitions of the use of a summons in particular situations. Congress did not make “using a summons instead of Tax Court discovery procedures” one of those situations. The courts should respect Congress’s choice of remedies and not create additional remedies not set out in the detailed and technical statutes.