Saturday, December 14, 2013

Is a Party Entitled to a Hearing in a Summons Enforcement Case Based Solely on Allegations of Improper Purpose? (12/14/13)

Yesterday, I posted on my Federal Tax Procedure Blog, an entry regarding the Government's petition for certiorari seeking to insure a streamlined procedure for summons enforcement proceedings.  See Is a Party Entitled to a Hearing in a Summons Enforcement Case Based Solely on Allegations of Improper Purpose? (Federal Tax Procedure Blog 12/13/13), here.  Because summonses and summons enforcement are key investigative tools in the criminal tax universe, I will post "cut and paste" the contents of that blog here:

The United States has petitioned the Supreme Court in United States v. Clarke, 517 Fed. Appx. 689, 2013 U.S. App. LEXIS 7773 (11th Cir. 2013), here, an unpublished decision.  The Eleventh Circuit's opinion in Clarke is short and pithy, so I quote it all (except I omit the caption and two of the three footnotes):
This case involves the Internal Revenue Service's (IRS) issuance of five administrative summonses, pursuant to 26 U.S.C. § 7602, during an investigation into the tax liabilities of Dynamo Holdings Limited Partnership (Dynamo). Specifically, [List of summonsed parties omitted] appeal the district court's orders granting the IRS's petitions to enforce the summonses. After careful review of the record, and having had the benefit of oral argument, we vacate the district court's order enforcing the summonses and remand for the district court to hold a hearing. 
To obtain enforcement of a summons, the IRS must make a four-part prima facie showing that (1) "the investigation will be conducted pursuant to a legitimate purpose," (2) "the inquiry may be relevant to the purpose," (3) "the information sought is not already within the Commissioner's possession," and (4) "the administrative steps required by the Code have been followed." United States v. Powell, 379 U.S. 48, 57-58, 85 S. Ct. 248, 13 L. Ed. 2d 112 (1964); see also Nero Trading, LLC v. U.S. Dep't of Treasury, IRS, 570 F.3d 1244, 1248 (11th Cir. 2009). Once the IRS makes its prima facie showing, the burden shifts to the party opposing the summons to either (1) disprove one of the four elements of the IRS's prima facie case, or (2) "convince the court that enforcement of the summons would constitute an abuse of the court's process." Nero, 570 F.3d at 1249 (internal quotation omitted). The Supreme Court has stated that because the district court's process is used to enforce a summons, the court should not permit its process to be abused by enforcing a summons that was issued for an improper purpose. See Powell, 379 U.S. at 58. According to the Powell Court, an improper purpose may include any purpose "reflecting on the good faith of the particular investigation." Id. 
In Powell, the Supreme Court also explained that a party opposing a summons is entitled to an adversary hearing before enforcement is ordered, and that, at the hearing, the opponent "may challenge the summons on any appropriate ground." Id. (internal quotation omitted). Subsequently, in United States v. Southeast First National Bank of Miami Springs, we held that "an allegation of improper purpose is sufficient to trigger a limited adversary hearing where the taxpayer may question IRS officials concerning the Service's reasons for issuing the summons." 655 F.2d 661, 667 (5th Cir. 1981) (footnote omitted). More recently, we have reaffirmed Southeast First National Bank, calling it "the legitimate offspring of the Supreme Court's seminal decision in Powell.Nero, 570 F.3d at 1249. 
Appellants contend they were entitled to discovery and an evidentiary hearing before the district court granted the IRS's petitions to enforce the summonses because they alleged the IRS may have issued and sought to enforce the summonses for at least four improper purposes.One of the reasons the IRS may have issued the summonses, according to Appellants, was solely in retribution for Dynamo's refusal to extend a statute of limitations deadline. Although Appellants raised the possibility of numerous improper purposes, federal pleading standards allow claims and defenses to be pled in the alternative, and do not require them to be consistent. See Fed. R. Civ. P. 8(d)(2) & (d)(3). If the IRS issued the summonses only to retaliate against Dynamo, that purpose "reflect[s] on the good faith of the particular investigation," and would be improper. See Powell, 379 U.S. at 58. 
Under our precedents, Appellants were entitled to a hearing to explore their allegation of an improper purpose. n3 As we have explained, in situations such as this, 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." See Nero, 570 F.3d at 1250; S.E. First Nat'l Bank, 655 F.2d at 667. While "the scope of any adversarial hearing in this area is left to the discretion of the district court," binding Circuit authority requires that Appellants be given an opportunity "to ascertain whether the Service issued a given summons for an improper purpose." Nero, 570 F.3d at 1249. As required by Southeast First National Bank, on remand Appellants should be permitted to "question IRS officials concerning the Service's reasons for issuing the summons[es]." 655 F.2d at 667 (footnote omitted).
   n3 Appellants, however, are not entitled to discovery. We have held that the full "panoply of expensive and time-consuming pretrial discovery devices may not be resorted to as a matter of course and on a mere allegation of improper purpose." Nero, 570 F.3d at 1249 (internal quotation and emphasis omitted). 
The documents and proceedings regarding the petition for certiorari may be viewed on the SCOTUS Blog page, here.  The key documents are:

  • The Government's petition for certiorari, here.
  • The Brief in Opposition, here.
The Government's petition states the question presented as follows:
Whether an unsupported allegation that the Internal Revenue Service (IRS) issued a summons for an improper purpose entitles an opponent of the summons to an evidentiary hearing to question IRS officials about their reasons for issuing the summons.
The Brief in Opp states the question presented as follows:
Under United States v. Powell, 379 U.S. 48 (1964), an individual or entity that receives an IRS summons is entitled to the opportunity to show, at an adversary hearing, that the summons should be quashed because judicial enforcement of the summons would constitute an abuse of the court’s processes—including, for example, if the summons was issued by the IRS for an improper purpose. 
The question presented is whether the court of appeals erred in ruling, on the facts of this case, that in light of respondents’ substantial allegations that the IRS had issued summonses to them for an improper purpose, respondents should have a hearing at which they could examine IRS officials about the purpose for which the summonses were issued.
JAT Comments:

1.  It is reported that "the taxpayer in Clarke sought to prevent the enforcement of several summonses by alleging that the IRS issued them solely to extend the applicable limitations periods -- an illegitimate purpose."  Matthew R. Madara, Supreme Court Asked to Resolve Summons Enforcement Question, 2013 TNT 240-7 (12/13/13).

2.  A regular IRS administrative summons is at issue in Clarke, but I should note that there is an automatic unilateral suspension of the statute of limitations if (i) the summons is a "designated summons" under Section 6503(j)(2), (ii) the judicial enforcement proceeding is brought before the end of the statute of limitations, and (iii) the summonsee (either the taxpayer or a third party) fails to comply.  I explain the designated summons in the following excerpt from my Federal Tax Procedure Book (footnotes omitted):
The designated summons is just a type of summons and therefore must meet the Powell standards.  Further, the IRS can issue the designated summons without any requirement that the taxpayer has been uncooperative or dilatory.  In other words, the IRS can issue the summons when it (the IRS) has itself been dilatory or has not timely allocated adequate audit resources to conclude the audit within the time frame that Congress allowed for audits, and thereby unilaterally keep open the statute of limitations.  The suspension period begins on the date the court proceeding to enforce the summons is commenced and ends on the day the court proceeding is finally resolved.  § 6503(j)(3).  Recently promulgated regulations provide guidance as to when the court proceeding is finally resolved so as to end the suspension period.  The Commissioner or his delegate makes the determination of final compliance as soon as practicable.  A procedure is established for the summonsed party to make a statement of compliance that will require that the IRS respond with notice that the IRS takes the position that the party has or has not complied. 
Because it can be used to keep open the statute of limitations unilaterally, Congress required that the designated summons be reviewed by the Division Commissioner and the Division Counsel of the Office of Chief Counsel for the organizations that have jurisdiction over the corporation whose liability is the subject of the summons. Consistent with Congress' purpose, the IRS uses the designated summons only sparingly because, so it is reported, just the threat that the summons might be used has modified taxpayer behavior in response to IRS's requests for information and documents. 
The IRS uses the standard IRS summons for the designated summons but must display prominently at the top of that summons the following: “This is a designated summons pursuant to section 6503(j).”
3.  Similarly, there can be a suspension of the statute of limitations for noncompliance with a regular IRS administrative summons, as suggested by the comment in paragraph 1 of my comments.  Again a cut and paste from my Book (footnotes omitted):
Litigating the propriety of the summons can affect the statute of limitations even if the summons is not a designated summons.  If the taxpayer brings the proceeding to quash a summons subject to the limitations of § 7609, the civil and the criminal statute of limitations will be suspended.  § 7609(e)(1).  Further, if the IRS and the summonsed party do not resolve compliance with the summons, the civil and criminal statute of limitations for the taxpayer with respect to whom the summons was issued is suspended from a date six months after the summons was issued until compliance is finally resolved.  § 7609(e)(2).  The point, of course, that merely moving to quash the summons even if you can avoid potential sanctions under Rule 11 may not be in the client's interest.  On the other hand, however, in some situations depending upon close analysis of the situation, merely slowing down the IRS's investigative juggernaut even at the cost of a suspended statute of limitations may be a good strategic call.
4.  Let me put this in a summons enforcement procedural context.  In a summons enforcement proceeding, the IRS through DOJ Tax (or an AUSA) files a petition with a declaration of the IRS agent that covers the Powell bases (noted above).  Assuming there are no apparent defects in the petition and declaration, the IRS has made a prima facie case and is then entitled to have the summons enforced unless the summonsed party does something.  The issue presented is whether merely alleging skullduggery on the IRS's part -- actually alleging some failure of the IRS to satisfy the Powell tests -- is sufficient without any actual proof to get a hearing or, possibly, discovery in advance of the hearing.

5.  Although, in my Federal Tax Procedure Book, I have a longer discussion of summonses and enforcement, the following is the portion pertinent to this petition (footnotes omitted):
6. Litigation Regarding Summonses. 
Litigation regarding summonses may arise in the following contexts. 
(1) If the IRS is not satisfied with the witness's response, the IRS may bring a summons enforcement proceeding under §§ 7402(b) and 7604.  The summons enforcement proceeding is pursued as in Powell and Tiffany Fine Arts by the government filing a petition (just a pleading) and an affidavit containing the critical allegations of fact, along with any other supporting documents to establish its prima facie case.  The taxpayer will then have a limited opportunity to contest the existence of the Powell predicates.  See the discussion earlier in the text (beginning on p. ?) about summons enforcement proceedings.  To summarize, courts usually summarily enforce the summons with only limited discovery or hearing on the IRS’s petition to enforce, if the petition is procedurally regular with an IRS affidavit asserting the Powell predicates and no taxpayer responsive allegation with some support as to the absence of one or more of the Powell predicates.  Usually, the taxpayer will be unable to successfully perfect a Powell attack. 
The IRS will often choose not to file a summons enforcement proceeding upon a witness' noncompliance, if it has some alternative method for obtaining the information, if the information is deemed relatively unimportant, or if the statute of limitations does not permit the orderly conclusion of the judicial enforcement proceedings (including the administrative steps to obtain DOJ approval to institute the proceedings).  Note, however, that the key element of the designated summons -- the suspension of the statute of limitations -- requires the prompt commencement of judicial enforcement proceedings.  One issue that is unresolved among the circuits is whether the district court must enforce the summons as is or may impose conditions upon enforcement. 
(2) If  the witness is a third party witness, the taxpayer identified in the summons may file a proceeding to quash.  § 7609(b).  The proceeding must be brought in the district where the witness “resides or is found.”  However, taxpayers and their counsel considering such action need to seriously review the bases they will assert for quashing.  As noted above, under the Powell standard the bases for overturning an IRS summons are limited indeed.  Accordingly, framing the motion to quash must be done with care and with attention to the fact that a frivolous motion might attract sanctions under Rule 11 of the Federal Rules of Civil Procedure. 
I have placed in the class materials copies of two petitions for enforcement.  The first relates to the now defunct law firm of Jenkins & Gilchrist and is a combined “promoter summons” and John Doe summons relating to abusive tax shelters.   The second is a John Doe summons to UBS bank related to its alleged assistance to U.S. tax evaders via foreign entities and devices.  You may look at them now, but will want to revisit them when we discuss the John Doe summons. 
* * * *
The district court ordering enforcement of the summons may order compliance with the summons before an appeal can be pursued.  The taxpayer feeling the district court has improperly enforced the summons then faces the Hobson's choice of complying or refusing to comply, thus being held in contempt by the district court.  Courts will undertake a balancing of the following interests in determining whether to stay compliance pending an appeal: (1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will suffer irreparable injury without a stay; (3) whether issuance of a stay would substantially injure the other parties; and (4) whether the public interest would be served by a stay. 
The district court may not enforce the summons as written by the IRS.  The district court may enforce as to part of the summons but not as to a part as to which the Powell factors are not present, or the district court may conditionally enforce a summons.  Consider the following: 
We should clarify, however, the distinction between granting partial enforcement of a summons and conditionally enforcing a summons, because this distinction has become muddied throughout these proceedings. Monumental’s request for a protective order covering the documents sought by the IRS would constitute conditional enforcement of the summons because restrictions would be imposed on the IRS’s use of summoned materials. Partial enforcement, in contrast, narrows the scope of the summons by limiting the type and amount of documents that the summoned party must produce. Although this court has permitted a summons to be limited in scope, * * * we have never addressed the question of whether conditional enforcement is permissible—a question that has been addressed by both the Fifth and Ninth Circuits. See Jose [United States v. Jose, 131 F.3d 1325, 1329 (9th Cir. 1997)], 131 F.3d at1326-29 (requiring the IRS to give the summoned parties five-days notice before transferring the documents to other divisions within the IRS was held to constitute impermissible conditional enforcement); United States v. Barrett, 837 F.2d 1341, 1350 (5th Cir. 1988) (holding that district courts cannot place conditions on enforcement of a summons, but must simply decide “whether to enforce or not to enforce the summons”). This circuit’s position on the issue need not be decided at the present time in light of our disposition of the enforcement request. 
For those practitioners advising clients whether to contest a summons, consider the following quote: 
Those who resist an IRS summons all have one thing in common: They lose. Only about one challenge in 200 succeeds even in part. 
* * * * 
Practically speaking, “the taxpayer bears an almost impossible burden to resist enforcement of the summons.” 
Finally, it is not inconceivable that contesting a summons without some minimum good faith basis might draw sanctions in the proceeding but might even be viewed as an attempt to obstruct justice as a sentencing enhancement in a subsequent criminal conviction.
Code Sections cited in the foregoing blog entry:

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