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SUPREME COURT OF THE UNITED STATES
_________________
No. 13–301
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UNITED STATES, PETITIONER v. MICHAEL CLARKE
et al.
on writ of certiorari to the united states
court of appeals for the eleventh circuit
[June 19, 2014]
Justice Kagan
delivered the opinion of the Court.
The Internal Revenue
Service (IRS or Service) has broad statutory authority to summon a
taxpayer to produce documents or give testimony relevant to
determining tax liability. If the taxpayer fails to comply, the IRS
may petition a federal district court to enforce the summons. In an
enforcement proceeding, the IRS must show that it issued the
summons in good faith.
This case requires us
to consider when a taxpayer, as part of such a proceeding, has a
right to question IRS officials about their reasons for issuing a
summons. We hold, contrary to the Court of Appeals below, 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.
I
Congress has
“authorized and required” the IRS “to make the
inquiries, determinations, and assessments of all taxes” the
Internal Revenue Code imposes. 26 U. S. C. §6201(a).
And in support of that authority, Congress has granted the Service
broad latitude to issue summonses “[f]or the purpose of
ascertaining the correctness of any return, making a return where
none has been made, determining the liability of any person for any
internal revenue tax . . . , or collecting any
such liability.” §7602(a). Such a summons directs a
taxpayer (or associated person[
1]) to appear before an IRS official and to provide sworn
testimony or produce “books, papers, records, or other data
. . . relevant or material to [a tax] inquiry.”
§7602(a)(1).
If a taxpayer does not
comply with a summons, the IRS may bring an enforcement action in
district court. See §§7402(b), 7604(a). In that
proceeding, we have held, the IRS “need only demonstrate good
faith in issuing the summons.” United States v. Stuart, 489
U. S. 353, 359 (1989) . More specifically, that means establishing
what have become known as the Powell factors: “that the
investigation will be conducted pursuant to a legitimate purpose,
that the inquiry may be relevant to the purpose, that the
information sought is not already within the [IRS’s]
possession, and that the administrative steps required by the
[Internal Revenue] Code have been followed.” United States v.
Powell, 379 U. S. 48 –58 (1964). To make that showing,
the IRS usually files an affidavit from the responsible
investigating agent. See Stuart, 489 U. S., at 360. The
taxpayer, however, has an opportunity to challenge that affidavit,
and to urge the court to quash the summons “on any
appropriate ground”—including, as relevant here,
improper purpose. See Reisman v. Caplin, 375 U. S. 440, 449
(1964) .
The summons dispute in
this case arose from an IRS examination of the tax returns of
Dynamo Holdings Limited Partnership (Dynamo) for the
2005–2007 tax years. The IRS harbored suspicions about large
interest expenses that those returns had reported. As its
investigation proceeded, the Service persuaded Dynamo to agree 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 here, 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 (still within the augmented
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 in February 2011 by filing suit in the United States Tax
Court to challenge the adjustments. That litigation remains
pending. A few months later, in April 2011, the IRS instituted
proceedings in District Court to compel the respondents to comply
with the summonses they had gotten.
Those enforcement
proceedings developed into a dispute about the IRS’s reasons
for issuing the summonses. The IRS submitted an investigating
agent’s affidavit attesting to the Powell factors; among
other things, that 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.” App. 26, 34. In reply, the
respondents pointed to circumstantial evidence that, in their view,
suggested “ulterior motive[s]” of two different kinds.
App. to Pet. for Cert. 72a. First, the respondents asserted that
the IRS issued the summonses to “punish[ ] [Dynamo] for
refusing to agree to a further extension of the applicable statute
of limitations.” App. 52. More particularly, they stated in
sworn declarations that immediately after Dynamo declined to grant
a third extension of time, the IRS, “despite having not asked
for additional information for some time, . . . suddenly
issued” the summonses. Id., at 95. Second, the respondents
averred that the IRS decided to enforce the summonses, subsequent
to Dynamo’s filing suit in Tax Court, to “evad[e] the
Tax Court[’s] limitations on discovery” and thus gain
an unfair advantage in that litigation. Id., at 53. In support of
that charge, the respondents submitted an affidavit from the
attorney of another Dynamo associate, who had chosen to comply with
a summons issued at the same time. The attorney reported that only
the IRS attorneys handling the Tax Court case, and not the original
investigating agents, were present at the interview of his client.
In light of those submissions, the respondents asked for an
opportunity to question the agents about their motives.
The District Court
denied that request and ordered the respondents to comply with the
summonses. According to the court, the respondents “ha[d]
made no meaningful allegations of improper purpose”
warranting examination of IRS agents. App. to Pet. for Cert. 18a.
The court characterized the respondents’
statute-of-limitations theory as “mere conjecture.”
Id., at 14a. And it ruled that the respondents’
evasion-of-discovery-limits claim was “incorrect as a matter
of law” because “[t]he validity of a summons is tested
as of the date of issuance,” not enforcement—and the
Tax Court proceedings had not yet begun when the IRS issued the
summonses. Id., at 15a.
The Court of Appeals
for the Eleventh Circuit reversed, holding that the District
Court’s refusal to allow the respondents to examine IRS
agents constituted an abuse of discretion. In support of that
ruling, the Court of Appeals cited binding Circuit precedent
holding that a simple “allegation of improper purpose,”
even if lacking any “factual support,” entitles a
taxpayer to “question IRS officials concerning the
Service’s reasons for issuing the summons.” 517 Fed.
Appx. 689, 691 (2013) (quoting United States v. Southeast First
Nat. Bank of Miami Springs, 655 F. 2d 661, 667 (CA5 1981)); see
Nero Trading, LLC v. United States Dept. of Treasury, 570 F. 3d
1244, 1249 (CA11 2009) (reaffirming Southeast).
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.[
2] We granted certiorari to resolve that conflict,
571 U. S. __ (2014), and we now vacate the Eleventh
Circuit’s opinion.
II
A person receiving an
IRS summons is, as we have often held, entitled to contest it in an
enforcement proceeding. See United States v. Bisceglia, 420
U. S. 141, 146 (1975) ; Powell, 379 U. S., at
57–58; Reisman, 375 U. S., at 449. The power
“vested in tax collectors may be abused, as all power”
may be abused. Bisceglia, 420 U. S., at 146. In recognition of
that possibility, Congress made enforcement of an IRS summons
contingent on a court’s approval. See 26 U. S. C.
§7604(b). And we have time and again stated that the requisite
judicial proceeding is not ex parte but adversarial. See
Donaldson v. United States, 400 U. S. 517, 527 (1971) ;
Powell, 379 U. S., at 58; Reisman, 375 U. S., at 446. The
summoned party must receive notice, and may present argument and
evidence on all matters bearing on a summons’s validity. See
Powell, 379 U. S.,at 58.
Yet we have also
emphasized that summons enforcement proceedings are to be
“summary in nature.” Stuart, 489 U. S., at 369.
The purpose of a summons is “not to accuse,” much less
to adjudicate, but only “to inquire.” Bisceglia, 420
U. S., at 146. And such an investigatory tool, we have
recognized, is a crucial backstop in a tax system based on
self-reporting. See ibid. (restricting summons authority would
enable “dishonest persons [to] escap[e] taxation[,] thus
shifting heavier burdens to honest taxpayers”). Accordingly,
we long ago held that courts may ask only whether the IRS issued a
summons in good faith, and must eschew any broader role of
“oversee[ing] the [IRS’s] determinations to
investigate.” Powell, 379 U. S., at 56. So too, we
stated that absent contrary evidence, the IRS can satisfy that
standard by submitting a simple affidavit from the investigating
agent. See Stuart, 489 U. S., at 359–360. Thus, we have
rejected rules that would “thwart and defeat the
[Service’s] appropriate investigatory powers.”
Donaldson, 400 U. S., at 533.
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. 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.[
3]
But that is not the
standard the Eleventh Circuit applied. Although the respondents
gamely try to put an-other face on the opinion below, see Brief for
Respondents 24–25, and n. 17, we have no doubt that the
Court of Appeals viewed even bare allegations of improper purpose
as entitling a summons objector to question IRS agents. The court
in fact had some evidence before it pertaining to the
respondents’ charges: The respondents, for example, had
submitted one declaration relating the timing of the summonses to
Dynamo’s refusal to extend the limitations period, see App.
95, and another aiming to show that the IRS was using the summonses
to obtain discovery it could not get in Tax Court, see id., at
97–100. But the Eleventh Circuit never assessed whether those
(or any other) materials 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. See
supra, at 4. That was error. On remand, the Court of Appeals must
consider the respond-ents’ submissions in light of the
standard we have stated.
That consideration must
as well give appropriate deference to the District Court’s
ruling. An appellate court, as the Eleventh Circuit noted, reviews
for abuse of discretion a trial court’s decision to
order—or not—the questioning of IRS agents. See 517
Fed. Appx., at 691, n. 2; Tiffany Fine Arts, Inc. v. United
States, 469 U. S. 310 , n. 7 (1985). That standard of
review reflects the district court’s supe-rior familiarity
with, and understanding of, the dispute; andit comports with the
way appellate courts review related matters of case management,
discovery, and trial prac-tice. See, e.g., Hoffmann-La Roche Inc.
v. Sperling, 493 U. S. 165 –173 (1989); Crawford-El v.
Britton, 523 U. S. 574 –601 (1998). Accordingly, the
Court of Appeals must take into account on remand the District
Court’s broad discretion to determine whether a tax-payer has
shown enough to require the examination of IRS investigators.
But two caveats to that
instruction are in order here. First, the District Court’s
decision is entitled to deference only if based on the correct
legal standard. See Fox v. Vice, 563 U. S. ___, ___ (2011)
(slip op., at 11) (“A trial court has wide discretion when,
but only when, it calls the game by the right rules”). We
leave to the Court of Appeals the task of deciding whether the
District Court asked and answered the relevant question—once
again, whether the respondents pointed to specific facts or
circumstances plausibly raising an inference of improper
motive.
And second, the
District Court’s latitude does not extend to legal issues
about what counts as an illicit motive. As indicated earlier, one
such issue is embedded in the respondents’ claim that the
Government moved to enforce these summonses to gain an unfair
advantage in Tax Court litigation. See supra, at 4. The Government
responds, and the District Court agreed, that any such purpose is
irrelevant because “the validity of a summons is judged at
the time” the IRS originally issued the summons, and here
that preceded the Tax Court suit. Tr. of Oral Arg. 7; see Reply
Brief 19–20; App. to Pet. for Cert. 15a. Similarly, with
respect to the respondents’ alternative theory, the
Government briefly suggested at argument that issuing a summons
because “a taxpayer declined to extend a statute of
limitations would [not] be an improper purpose,” even
assuming that happened here. Tr. of Oral Arg. 6. We state no view
on those issues; they are not within the question presented for our
review. We note only that they are pure questions of law, so if
they arise again on remand, the Court of Appeals has no cause to
defer to the District Court. Cf. Koon v. United States, 518
U. S. 81, 100 (1996) (“A district court by definition
abuses its discretion when it makes an error of law”).
For these reasons, we
vacate the judgment of the Court of Appeals and remand the case for
further proceedings consistent with this opinion.
It is so ordered.
