On June 2, 2016, the United States Tax Court issued Guralnik v. Commissioner denying a Motion to Dismiss for Lack of Jurisdiction the Internal Revenue Service (IRS) filed on the ground that the taxpayer’s petition was not timely filed. As these motions are typically granted or denied by the court through a simple order, it seemed strange that the court would issue a division opinion, which is generally reserved for cases involving an issue of first impression or an important legal issue or principle. The court, however, used this case as a means to change precedent related to the date on which a petition must be filed in Tax Court to be considered timely. Continue reading
The U.S. Supreme Court issued a unanimous opinion Thursday in United States v. Clarke (No. 13-301) addressing the standard that must be satisfied before a taxpayer can question Internal Revenue Service personnel about its reasons for issuing a summons. The standard announced by the court, in an opinion authored by Justice Elena Kagan, requires a taxpayer to show “specific facts or circumstances plausibly raising an inference of bad faith” before a taxpayer may examine IRS officials.
“Naked allegations of improper purpose are not enough,” the court held. Instead, “[t]he taxpayer must offer some credible evidence supporting his charge.”
The case arose out of an IRS examination of Dynamo Holdings Limited Partnership focusing on interest expenses reported on the 2005 through 2007 income tax returns. When the three-year statute of limitations was about to expire, Dynamo agreed to a one-year-long extension, and later to a second one-year extension with the IRS. Dynamo refused, however, to grant the IRS a third extension.
Shortly after being refused the third extension, the IRS issued summonses to five individuals seeking information about Dynamo’s tax liabilities. Four of the five individuals refused to comply with the summonses. Two months later, the IRS issued a Final Partnership Administrative Adjustment that increased Dynamo’s tax liability, and Dynamo filed suit in Tax Court contesting the adjustment. Three months later, the IRS initiated summons enforcement proceedings in the district court.
The enforcement proceedings focused on whether the IRS acted in good faith in issuing the summonses. An IRS agent submitted an affidavit that attested to the required factors to obtain enforcement of an IRS summons pursuant to United States v. Powell, 379 U.S. 48 (1964): (1) there was a legitimate purpose for the investigation; (2) the summons inquiry is relevant to the purpose; (3) the IRS does not already have the information sought; and (4) administrative steps required by the Internal Revenue Code have been followed.
Seeking to demonstrate that the IRS acted in bad faith, the summoned individuals claimed that the IRS issued the summonses for two improper purposes: (1) as retribution for Dynamo’s refusal to agree to a third statute of limitations extension; and (2) as an inappropriate end-around the limited discovery rules in Tax Court in order to obtain additional evidence to use against Dynamo in that proceeding. The individuals argued that they were entitled to question IRS personnel to explore these issues.
The district court denied the taxpayers’ requests and ordered them to comply with the summonses. On appeal, the Eleventh Circuit reversed, holding that the district court abused its discretion in refusing to allow the IRS agents in question to be examined.
Following established circuit precedent, the court of appeals reasoned that “requiring the taxpayer to provide factual support for an allegation of an improper purpose, without giving the taxpayer a meaningful opportunity to obtain such facts, saddles the taxpayer with an unreasonable circular burden, creating an impermissible ‘Catch 22.’” The individuals therefore could “question IRS officials concerning the Service’s reasons for issuing the summons[es].”
Notably, the appellate court’s ruling was an anomaly, as every other circuit addressing the issue (including the First, Third, and Seventh Circuits) had held that bare allegations of improper motive were insufficient to justify examination of an IRS agent. The Supreme Court granted certiorari to resolve the conflict, and firmly guided the Eleventh Circuit back into the fold by holding that “some credible evidence” of alleged improper motive must be adduced before IRS agents may be examined.
Specifically, the taxpayer must come forward with “specific facts or circumstances plausibly raising an inference of bad faith.” Because direct evidence will rarely be available, circumstantial evidence is sufficient, but “[n]aked allegations” are not. This standard, the court reasoned, should sufficiently protect a summons dispute from turning into a fishing expedition. Because the Eleventh Circuit never assessed the facts and circumstances submitted by the summoned individuals in support of their bad-faith claims, the court vacated the decision and remanded for further proceedings.
The Supreme Court’s decision is not surprising in that it aligned the Eleventh Circuit with other federal circuits, but it is surprising in that it adopted a formulation of the summons enforcement standard that is different from the standards already in use by other circuits. Crafting its own standard, the court now requires a showing that “plausibly rais[es] an inference of bad faith” or improper motive.
Justice Kagan’s opinion also provided guidance regarding the appropriate standard of review for appellate courts in summons enforcement proceedings. First, a court of appeals must review for abuse of discretion a trial court’s decision as to whether an examination of IRS agents is warranted. But, the court cautioned, a district court’s decision in this regard is entitled to deference only if based upon the correct legal standard. Second, the district court is not entitled to deference as to legal issues as to what qualifies as an improper purpose for issuance of an IRS summons.
The court’s limited opinion focused almost entirely on the legal standard and refrained from deciding any other aspect of the case. For example, the court did not opine as to whether issuing a summons to gain an unfair advantage in Tax Court litigation or to retaliate against a taxpayer for refusing to further extend the statute of limitations are improper motives for issuing a summons. Instead, the court left those issues to be decided by the court of appeals on remand, noting that both are legal issues for which no deference is due the district court.
The court also chose not to opine as to whether the evidentiary proof of bad faith submitted by the individuals (primarily, two sworn declarations) would satisfy the new standard.
One declaration set forth the timeline of Dynamo’s refusal to extend the statute of limitations and the issuance of the summonses, thereby implying the retributive nature of the summonses. The other described how IRS attorneys who were handling the Tax Court litigation were present when the one individual complied with the summons, and the initial investigating agents were not, tending to show the summons’ purpose was to support the Tax Court litigation.
Whether these are in fact improper motives, and whether declarations of this type are a sufficient basis to meet the new standard, will have to be addressed on remand as well as by lower courts now that the legal standard for challenging a summons enforcement has been clarified by the Supreme Court.
Following the government shutdown, the United States Tax Court has reopened for business. (See prior posts on the shutdown’s impact on the IRS and Tax Court here and here.) During the shutdown, which lasted from October 1 through October 16, the Tax Court was closed and was not accepting filings or holding trials. Following the deal to end the shutdown, the Tax Court issued two notices addressing how the shutdown impacted pending cases, deadlines, and trials. The first (interim) notice was issued on October 17 and is available here. The second, more comprehensive notice was issued later in the day on October 17 is available here. Taxpayers and practitioners with cases in the Tax Court should carefully review these notices to understand how the Court’s closure for 16 days impacts scheduling deadlines and trial dates.
We previously discussed the impact of the federal government shutdown on the Internal Revenue Service (see prior post here) and how IRS operations have virtually ground to a halt since October 1, 2013, the first day of the shutdown. Another government agency impacted by the shutdown is the United States Tax Court in Washington, D.C., which has been closed since October 1. According to a notice posted on the Tax Court website, no pleadings will be received by the court (including through the eFiling system), and no pleadings will be served by the court, until further notice. Due dates previously established by court rules or court order are extended by the number of days that court operations are suspended.
However, because the Tax Court lacks the authority to extend statutory filing deadlines imposed by the Internal Revenue Code, taxpayers must still comply with such deadlines. For example, IRC 6213(a) requires a taxpayer to file a petition for redetermination of a deficiency within 90 days after mailing of a statutory notice of deficiency. This deadline is not extended as a result of the government shutdown, so any affected taxpayer must still timely file a petition. The Tax Court advises taxpayers that hand-delivery is not available because of closure of the court, so petitions must be sent by U.S. mail or an approved private carrier such as Federal Express. No Tax Court personnel will be available to confirm receipt, so taxpayers and practitioners would be well-advised to utilize a delivery service that provides proof of delivery.
In a more recent notice published on the IRS website, the court has announced that all trial sessions scheduled to begin on October 7 and 8, 2013, have been cancelled. These particular trial sessions were scheduled for Baltimore, Chicago, Dallas, Detroit, Miami, New Orleans, Pittsburgh, and Washington, D.C.
In contrast, other federal courts (district courts, Courts of Appeals, and the U.S. Supreme Court) remain open, at least until October 15, when federal court funding is expected to run out.