Supreme Court Limits A Taxpayer’s Ability To Examine The IRS At A Summons Enforcement Hearing

On June 19, 2014, the United States Supreme Court held that a taxpayer has a right to examine IRS officials regarding their purpose of issuing a summons.1 However, in reversing and vacating an Eleventh Circuit's decision, the Supreme Court did not recognize a taxpayer's right to a formal hearing based on unsupported allegations that the summons was issued in bad faith. The Supreme Court found that the Eleventh Circuit erred in ruling that a bare allegation of improper purpose was sufficient to question IRS officials and remanded the case to the circuit court for further consideration in light of the Supreme Court's decision.

The summons dispute arose from an IRS examination of the tax returns of Dynamo Holdings Limited Partnership (Dynamo) for the 2005–2007 tax years. The IRS questioned interest expenses that those returns had reported. As its investigation proceeded, Dynamo agreed 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 respondents, 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 (within the 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 by filing suit in the United States Tax Court to challenge the adjustments. While that litigation was pending, a few months later, the IRS instituted proceedings in District Court to compel the respondents to comply with the summonses. In the enforcement proceeding respondents disputed the IRS's reasons for issuing the summonses. The IRS submitted the usual investigating agent's affidavit attesting to the Powell factors; among other things, the 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."2 In reply, the respondents pointed to circumstantial evidence that, in their view, suggested "ulterior motive[s]" of two different kinds.3

In response, the respondents asserted that the IRS issued the...