United States v. Clarke

The Internal Revenue Service (IRS) (plaintiff) suspected that Dynamo Holdings Limited Partnership (Dynamo) overstated its interest expenses for 2005 through 2007. Dynamo agreed to two extensions of the statute of limitations for the IRS to assess its tax liability but rejected the IRS’s third extension request. Soon thereafter, the IRS issued summonses to Michael Clarke and three other Dynamo-associated individuals (collectively, Clarke) (defendants). Clarke did not comply with the summonses. The IRS then issued proposed adjustments to Dynamo’s tax returns that would increase Dynamo’s tax liability. Dynamo challenged the proposed adjustments in the United States Tax Court in a still-pending challenge. Several months later, the IRS sued Clarke in the district court, seeking to enforce the summonses. The IRS supported its request with a declaration averring that the information it sought was necessary to properly investigate Dynamo’s tax reporting and that it did not issue the summonses for an improper purpose. Clarke responded that the IRS issued the summonses to punish Dynamo for refusing to further extend the limitations period and that the IRS sought to enforce the summonses to gain an unfair advantage in the Tax Court by evading the Tax Court’s discovery limitations. Accordingly, Clarke requested permission to interview the IRS about its motives regarding the summonses. The district court rejected Clarke’s request and ordered Clarke to comply with the summonses. Per the district court, Clarke’s statute-of-limitations theory was mere conjecture, and Clarke’s unfair-advantage theory was meritless because the propriety of a summons was determined as its issuance, which was before the Tax Court litigation commenced. The United States Court of Appeals for the Eleventh Circuit reversed, ruling that Clarke was entitled to question the IRS because Clarke alleged that the IRS was motivated by an improper purpose. The IRS appealed.