Justices Side With IRS on Subpoena Authority

WASHINGTON (CN) - Speculation is not enough to resist a summons over tax liabilities, the Supreme Court ruled Thursday, saying the taxpayer needs evidence of bad faith.

The nine-page decision notes that the 11th Circuit was an outlier in finding otherwise.

"Every other Court of Appeals has rejected the Eleventh Circuit's view that a bare allegation of improper motive entitles a person objecting to an IRS summons to examine the responsible officials," Justice Elena Kagan wrote for the unanimous court.

The Internal Revenue Service had sought to enforce the five administrative summonses in question as part of its investigation of Dynamo Holdings.

Dynamo, Beekman Vista CFO Michael Clarke and a Robert Julien, a subpoenaed trustee, persuaded the federal appeals court to vacate those summonses, however, after complaining that they were denied discovery and an evidentiary hearing. The trio said the subpoenas may have had at least four improper purposes.

They claimed, for example, that the IRS issued the subpoenas solely in retribution for Dynamo's refusal to extend a statute of limitations deadline.

Faced with an order to divulge the reasoning behind its subpoenas, the United States sought relief from the Supreme Court.

Unanimously vacating the 11th Circuit's order Thursday, the justices said "that a bare allegation of improper purpose does not entitle a taxpayer to examine IRS officials."

"Rather, the taxpayer has a right to conduct that examination when he points to specific facts or circumstances plausibly raising an inference of bad faith," Kagan added.

It is also worth noting that a summons aims "'not to accuse,' much less to adjudicate, but only 'to inquire,'" the decision states.

"The balance we have struck in prior cases comports with the following rule, applicable here: As part of the adver­sarial process concerning a summons's validity, the tax­payer is entitled to examine an IRS agent when he can point to specific facts or circumstances plausibly raising an inference of bad faith," Kagan wrote. "Naked allegations of improper purpose are not enough: The taxpayer must offer some credible evidence supporting his charge. But circumstan­tial evidence can suffice to meet that burden; after all, direct evidence of another person's bad faith, at this threshold stage, will rarely if ever be available. 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. That standard will ensure inquiry where the facts and circumstances make inquiry appropriate, without turning every summons dispute into a fishing expedition for official wrongdoing. And the rule is little different from the one that both the respondents and the government have recommended to us." (Emphasis in original.)

In rejecting claims that the 11th Circuit relied on more than "bare allegations of improper purpose," Kagan noted that the federal appeals court "never assessed" whether the materials that the challengers submitted "plausibly supported an inference of improper motive; indeed, the court never mentioned the proffered evidence at all."

"Instead, and in line with circuit precedent, the court applied a categorical rule, demanding the examina­tion of IRS agents even when a taxpayer made only con­clusory allegations," Kagan added. "That was error."

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