Angiulo: Supreme Court Unanimous on I.R.S. Summons and Scrutiny

Monday, June 23, 2014

Leonardo Angiulo, GoLocalProv Legal Expert

 

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The Internal Revenue Service is a remarkably powerful entity with an important role in our government.  Their efforts on behalf of the United States Government are honorable in that they make sure we pay our federal taxes.  Our taxes, in turn, pay for things like the military that protects us and our national parks, which are beautiful.  All that revenue also happens to go to the salaries of our legislators and I.R.S. agents.

According to information contained on Congressman Paul Ryan's website there has been bipartisan concern about the I.R.S. targeting groups based on political affiliation for more than two and a half years.  Recent reports out of Washington D.C. present a question of missing emails for an I.R.S. employee allegedly at the center of the improper targeting as well as heated exchanges between lawmakers (including Ryan) and I.R.S. officials.  Given the divisive rhetoric coming out of our nation's capital the last several years, it can be hard to tell between political grandstanding and legitimate issues of public policy concern.  The propriety of administrative action taken by our nation's tax collectors, however, appears to be something both parties take seriously.

On Thursday June 19, 2014, just a day ahead of Ryan's blistering examination of the I.R.S. Commissioner on Friday, the U.S. Supreme Court quietly issued the case United States v. Clark et al.  What might ordinarily appear to be a dry set of facts, the issuance of a summons for tax records by the I.R.S. to a corporation, takes on a bold new posture given the current state of affairs. 

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As explained by Justice Kagan delivering the unanimous opinion of the court, Dynamo Holdings Limited Partnership filed tax returns for the years 2005 – 2007 that caused the I.R.S. to become suspicious about certain interest expenses claimed in those returns.  When the I.R.S. suspects avoidance of tax liability, they have broad statutory authority to investigate, including the summons of records and testimony from individuals who may have relevant information.  If an individual fails to comply with the summons, the I.R.S. can petition the federal district court to enforce the summons.  At these proceedings, the I.R.S. must prove the summons was issued in good faith.  This standard is ordinarily satisfied with a written statement signed under oath by the investigating I.R.S. agent known as an affidavit. 

Enforcement proceedings, however, aren't one sided.  As Justice Kagan explains, these hearings are adversarial, meaning the target of the summons is entitled to notice of the court date and has the chance to argue and give evidence, including, in some situations, putting witnesses on the stand.  The court's ruling also provides some clarity on two important subjects:  a) what kind of evidence addresses whether a summons is made in good faith, and b) when can a taxpayer put the investigating agent on the stand. 

The taxpayer in the Clark case wanted to put the I.R.S. agent on the stand and conduct an examination of them as a witness.  The court ruled that not every summons enforcement petition should turn into a “fishing expedition for official wrongdoing” and so limited such examination to certain circumstances.  Those circumstances require the taxpayer to first show facts giving rise to a plausible inference of improper motive.

A showing that satisfies this standard requires more than conjecture or simply alleging improper purpose.  The court decided that credible evidence supporting the charge can come from many types of sources, including circumstantial evidence.  That evidence, however, must come from the facts of the particular case the taxpayer is involved in.

The function of this ruling presents a challenging environment for taxpayers who seek to contest summonses for their records.  The I.R.S. can satisfy their burden with a simple affidavit that can be produced easily if a summons was originally issued in good faith.  Individuals, by contrast, must have more than an interest in being obstructionist or a sneaking feeling of impropriety to meet their burden and it is often hard to produce evidence of bad faith if the other party is trying to cover their tracks.

In its ruling, the court highlighted that the I.R.S. is an administrative federal agency working for the public benefit at the direction of Congress as outlined in relevant statutes.  The standards the court chose to apply are the type of checks and balances that provide judicial oversight of an executive branch function without improperly intervening in the legitimate administration of the government. 

The court appears to be enforcing the United States Code as it exists rather than approaching these cases with a presumption that the I.R.S. is acting with improper motives.  In considering this case, one might wonder who else has the role of questioning the way in which laws are being implemented.  Whether you agree with the tactics they use, or the media source covering the hearings, it is members of Congress that have real powers of oversight.  As Justice Oliver Wendell Holmes, Jr said, taxes are the price we pay for a civilized society.  Exactly how that price is extracted from us is the question presently faced by our elected officials, judges and citizens.

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Leonardo Angiulo is an Attorney with the firm of Glickman, Sugarman, Kneeland & Gribouski in Worcester handling legal matters across the Commonwealth. He can be reached by email at [email protected].

 

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