Supreme Court Grapples With Showing Required For Evidentiary Hearing Before Summons Enforcement

After hearing oral arguments in a case alleging the Internal Revenue Service issued summonses for an improper purpose, the Supreme Court of the United States is set to provide guidance on the type of evidence that a summoned party must show to entitle it to an evidentiary hearing before summons enforcement.

On April 23, 2014, the Supreme Court of the United States heard oral argument in United States v. Clarke (No. 13-1301), a case considering the circumstances under which a party challenging summons enforcement should be entitled to receive an evidentiary hearing before that summons is enforced. The Supreme Court granted the government's petition for certiorari after the U.S. Court of Appeals for the Eleventh Circuit held that "an allegation of an improper purpose" entitles a party to a "limited adversary hearing" prior to summons enforcement to ascertain whether the Internal Revenue Service (IRS) did issue a summons for such a purpose. At oral argument, the court wrestled with crafting a standard that would provide more helpful guidance to district courts in determining what evidence a summoned party needs to bring forth to entitle it to an evidentiary hearing.

Background: Summons Enforcement

In order to ensure the proper determination of a tax liability, Congress "has endowed the IRS with expansive information-gathering authority." United States v. Arthur Young & Co., 465 U.S. 805, 816 (1984). Section 7602 of the Internal Revenue Code is the "centerpiece of that congressional design." Id. at 816. Under section 7602, the IRS is authorized to "examine any books, papers, records, or other data which may be relevant or material to" a tax investigation and to summon any person to produce such documents. Section 7602(a)(1), (2).

That authority, however, is subject to judicial review. When a summoned party refuses to comply, the IRS must petition a federal district court to enforce the summons. Sections 7402(b), 7604(a). Congress intended summons enforcement proceedings to "be summary in nature," United States v. Stuart, 489 U.S. 353, 369 (1989); it did not "intend[] the courts to oversee the [IRS'] determinations to investigate," United States v. Powell, 379 U.S. 48, 56 (1964). Fifty years ago in Powell, the Supreme Court sketched out the analytical framework governing summons enforcement. To establish a prima facie case, the government must demonstrate that:

its investigation is "conducted pursuant to a legitimate purpose;" the information sought "may be relevant to that purpose;" the IRS does not already possess the "information sought" to be summoned; and all statutorily imposed administrative steps have been followed. Id. at 57-58. Generally, the government can satisfy this initial burden by filing an affidavit executed by the investigating agent simply stating that the four criteria have been met. See, e.g., United States v. Kis, 658 F.2d 526, 536 (7th Cir. 1981); United States v. Davis, 636 F.2d 1028, 1034 (5th Cir. 1981).

Once the government has satisfied that minimal requirement, the burden then shifts to the summoned party to either disprove one of the four elements of the government's prima facie showing or demonstrate that judicial enforcement of the summons would constitute an abuse of the court's process. Powell, 379 U.S. at 58. Although there is no all-inclusive list as to what constitutes such an abuse, Powell did provide some guidance. It stated that an "abuse would take place if the summons had been issued for an improper purpose, such as to harass the taxpayer or put pressure on him to settle a collateral dispute, or for any other purpose reflecting on the good faith of the particular investigation." Id. To help meet its burden of showing such an abuse, Powell stated that a summoned party was "entitled" to a pre-enforcement "adversary hearing" where it could "challenge the summons on any appropriate ground." Id.

A right to an adversary hearing, however, does not necessarily entitle a summoned party to a pre-enforcement evidentiary hearing. See Tiffany Fine Arts, Inc. v...