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Clarke Case Finally Comes to End: Eleventh Circuit Orders Enforcement But Also Leaves Door Open For Allegations of Improper Purpose

Posted on Mar. 21, 2016

We have written a few times on the Clarke summons enforcement case, most recently when I discussed the district court’s 2015 opinion finding in favor of the government. As you may recall, following the 2014 Supreme Court Clarke decision, which rejected the 11th Circuit’s more permissive allowance of evidentiary hearings in summons enforcement cases, the 11th Circuit remanded the case to the district court to evaluate the merits of the challenge. The district court ordered the summoned parties to comply without an evidentiary hearing and found that that allegations of retaliation and misuse of summons power to circumvent Tax Court discovery did not as a matter of law amount to allegations of improper motive. On appeal, the 11th Circuit affirmed the district court’s holding that the parties failed to raise a plausible inference of improper motive but disagreed with the district court that none of the alleged improper purposes amounted to an improper motive to issue a summons as a matter of law.

I will briefly describe the holdings below; Jack Townsend Federal Tax Crimes also this past weekend posted on the case for those who want more.

Retaliation and circumvention of Tax Court discovery could be improper motive

Before finding in favor of the government and ordering the parties to comply with the summonses, 11th Circuit suggested that in limited circumstances, allegations relating to the IRS using the summons process to retaliate for a failure to extend the sol on assessment and to circumvent Tax Court discovery rules could amount to an improper purpose.

It addressed the retaliation issue first. While noting that IRS may have little alternative to issue a summons when a taxpayer neglects to extend the statute, it criticized the opinion below for failing to “meaningfully address the legal issue of whether issuing a summons only to retaliate against a taxpayer would be improper as a matter of law. We believe that it would.”

The challenge for parties alleging retaliation for failing to extend the sol is in the proof, and arguably the opinion below equated that difficulty with an impermissible blanket for the government:

The factual difficulty in differentiating between a retaliatory summons and a summons issued after a taxpayer’s refusal to extend the limitations period has no bearing on this legal question. We conclude that issuing a summons for the sole purpose of retaliation against a taxpayer would be improper as a matter of law.

The discussion of whether circumventing discovery through summons had a similar feel, noting the difference between questions of proof and a blanket conclusion that there could be no impermissible purpose when a summons is issued that may. The opinion notes that using a summons to circumvent Tax Court discovery rules “would clearly be an improper purpose for the IRS to issue a summons in bad faith outside a legitimate investigation….” Looking to law finding that the validity of the summons is tied to the date of issuance, and given the deference to IRS’s power to investigate, the circumstances under which a taxpayer could successfully allege improper circumvention of discovery are likely rare. Despite the narrow circumstances, the court did open the door slightly:

That the summoned information may assist the IRS in preparing for its case in the tax court is of no consequence… We stress that given our deference to the IRS’s broad authority to investigate, the circumstances under which a taxpayer could successfully allege improper circumvention of tax discovery are exceptionally narrow. However, we will not limit courts from examining distinct scenarios that may plausibly support such allegations. Accordingly, we conclude that issuing summons in bad faith for the sole purpose of circumventing tax court discovery would be an improper purpose as a matter of law.

The Challenge Failed to Raise Plausible Inferences of Improper Motive

In the second main part of the decision the Court declined to order the district court to hold an evidentiary hearing. The 11th Circuit applied the Supreme Court’s standard to the case at hand, and noted that the “submissions raise many allegations, but no plausible inference of improper motive.”

More on that finding:

First, the submission that the timeline of the issuance of the summonses supports an inference of retaliation by the IRS requires substantial conjecture that is both implausible and unsupported by the record. Further, none of Appellants’ submissions suggest that the summonses were issued in bad faith anticipation of tax court proceedings rather than in furtherance of Agent Fierfelder’s investigation. As conjecture and bare allegations of improper purpose are insufficient as a matter of law, we conclude that Appellants failed to meet their burden under Clarke and the district court did not abuse its discretion denying Appellants’ request for an evidentiary hearing.

The opinion included some more discussion of how the fact that the issuance of the summons may have assisted in the Tax Court proceedings did not in and of itself amount to improper purpose, including a discussion of how the TEFRA provisions explicitly state that nothing in TEFRA “shall be construed as limiting the authority granted to the [IRS] under section 7602 [the summons provision].”

At the end of the day Jack Townsend’s conclusion in his post  accurately encapsulates the post-Clarke world of improper purpose challenges:

The bottom line is that the opinion reinforces that avoiding summary enforcement once the IRS makes the Powell prima facie showing will be possible but extremely rare.  Necessarily, each case will be decided on its unique facts, but merely raising possible improper purposes is not the same as showing plausible inferences of improper purposes.

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