US v Clarke Remand: Allegations of Bad Faith Still Face A High Hurdle

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Late last month, the district court for the Southern District of Florida weighed in on the merits in the summons case of US v Clarke (free link not available; Case No. 11-80456, Feb 18, 2015). In a guest post last year, Stu Gibson previously discussed the 2014 Supreme Court Clarke case, where the Court reined in the 11th Circuit’s more expansive approach to allowing evidentiary hearings in light of improper purpose allegations. The case involved allegations of retaliatory summons issuance following a failure to extend (for a third time) the statute of limitations and allegations that the summons was a way to avoid discovery limitations in a Tax Court TEFRA proceeding that was commenced after the summons was issued.

The district court viewed its task as to “determine whether Respondents [the taxpayers] point to specific facts or circumstances that plausibly raise an inference of improper purpose and to determine whether the improper purposes alleged by Respondents are improper as a matter of law.”

The district court held that the respondents fell short in plausibly raising an inference of an improper purpose. It also offered its views on some of the legal questions the 2014 Supreme Court Clarke opinion declined to consider, including whether some of the allegations of improper purpose were improper as a matter of law.

I’ll discuss the district court opinion below.


Summary of Facts and Law

To refresh our memory, the district court summarizes the facts as follows:

The Government examined the tax returns of Dynamo Holdings Limited Partnership (“DHLP”) for the years ended December 31, 2005, 2006 and 2007 and proposed adjustments to debt and interest items claimed on those returns. The IRS requested and received an agreement from DHLP to extend by two year-long extensions the three year limitations period for determining tax liability. In 2010, DHLP refused to grant a third extension. The IRS issued summonses to the respondents on September and October 2010. In December 2010, still within the extended limitation period, the IRS issued a Final Partnership Administrative Adjustment (“FPAA”) that proposed changes to DHLP’s returns that would increase DHLP’s tax liability. DHLP filed suit in the United States Tax Court in February 2011 to challenge the adjustments. The IRS filed this action in April 2011 to force compliance with the summonses.

Last year the Supreme Court in Clarke reframed the standard for alleging bad faith:

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.

Rewritten Saltzman and Book Chapter 13 discusses the Clarke standard, emphasizing that the “trial court’s decision on the question of retaliation would be entitled to deference only if it asked and answered the relevant question whether respondents pointed to specific facts or circumstances plausibly raising an inference of improper motive.”

The district court in Clarke did not think the allegations pointed to specific facts or raised an inference of improper motive. To that end, it discounted the allegations relating to the IRS’s issuance of a summons to sidestep the Tax Court’s discovery proceedings. The Tax Court matter arose after the IRS issued the summons. According to the court,“[t]he validity of a summons is tested at the date of issuance, and events occurring after the date of issuance but prior to enforcement should not affect enforceability.”

As to allegations relating to the summons as being issued to punish the taxpayer for declining to extend the statute of limitations, it stated that “[i]f information remains to be gathered and the statute of limitation has expired, the IRS has no alternative but to institute a formal summons process.”

The district court also “declined to create a new rule akin to Bankruptcy Rule 2004 that bars summons enforcement once a Tax Court case or other litigation is commenced that concerns the subject of the summons.” In failing to create the rule, the district court noted the difference between TEFRA Tax Court proceedings and district court summons enforcement jurisdiction:

This proceeding and the Tax Court proceeding are not identical, however. The Tax Court proceeding involves a challenge to the adjustments to DHLP’s partnership items under IRC § 6226. The Tax Court does not have jurisdiction to consider summons enforcement proceedings, IRC § 7604(a); Ash v. Comm’r, 96 T.C. 459, 462 (1991), and the district court, in a summons enforcement proceeding, does not have jurisdiction to consider the FPAA adjustments to DHLP’s tax reporting.

In line with its inquiry, the district court considered allegations that the IRS may have acted contrary to the intent of the IRM relating to the timing of the summons: “Respondents claim that the mere timing of the enforcement proceedings relative to the issuance of the FPAA and the initiation of the Tax Court case is suspicious.” The court discounted that argument stating that they failed to offer any evidence, and that even if there was an allegation that went to violating the IRM itself the IRM generally does not create enforceable rights.


As revised Saltzman & Book opines, it does not appear that the “calculus in Clarke significantly alters the procedural terrain in summons enforcement cases.” The district court’s opinion on the remand of Clarke itself suggests that the initial view is correct. Undoubtedly, there will be more cases, and as Stu Gibson observed in his initial post on PT, the standard does give district court judges some leeway. Clarke is a useful reminder, however, that the IRS is the party with the greatest leeway when it issues a summons, with most judges loathe to turn what is largely an inquisitorial process into a full blown adversarial one.

Avatar photo About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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