1 District Judge of Southern District of Mississippi, sitting

by designation.

1 UNITED STATES COURT OF APPEALS

For the Fifth Circuit

No. 93-2280

BERNARD M. BARRETT, JR., M.D. and

PLASTIC & RECONSTRUCTIVE SURGEONS, P.A.,

Plaintiffs-Appellants,

VERSUS

UNITED STATES OF AMERICA, ET AL.,

Defendants,

UNITED STATES OF AMERICA,

Defendant-Appellee.

Appeal from the United States District Court

for the Southern District of Texas

(April 20, 1995)

Before KING and BENAVIDES, Circuit Judges, and LEE 1

, District

Judge.

BENAVIDES, Circuit Judge:

In one form or another, this case has been before this Court2 U nited States v. Barrett

, 837 F .2d 1341 (5th Cir. 1988);

United States v. Barrett

, 804 F.2d 1376 (5th Cir. 1986); Barrett v.

United States

, 795 F.2d 958 (5th Cir. 1986); United States v.

Barrett

, 787 F.2d 958 (5th Cir. 1986); United States v. Texas Heart

Institute , 755 F.2d 469 (5th Cir. 1985).

2 on five prior occasions. 2 This appeal is taken from the district

court's judgment in favor of the Internal Revenue Service ("IRS")

f ollowing a bench trial held pursuant to a prior order of remand

from this Court. The district court found that the IRS did not

violate secti ons of the tax code which prohibit the unlawful

disclosure of tax return information during a civil or criminal

investigation. Because we conclude that the district court erred,

we reverse the judgment and remand for a determination of Dr.

Barrett's damages.

I. Background and Procedural History

Dr. Barrett is the president of an un incorporated Houston

medical practice specializing in plastic and reconstructive surgery

("PA RS"). In 1979, the IRS began an audit of Dr. Barrett's

personal and corporate tax returns for the years 1977 and 1978.

When the initial investigation revealed a $100,00 0 discrepancy

between Dr. Barrett's bo oks and his bank records, the IRS

transferred t he case from its civil division to its criminal

division.

IRS Agent Hanson, to whom the case was transferred, determined

that it would be necessary to find out from Dr. Barrett's patients

the amount each had paid and whether any part was paid in cash.

Two informants who were Dr. Barrett's former employees, Dr. Michael

Kelly and Beverly Redick Kelly, had informed the IRS that Dr.3 In the 1989 joint pretrial order, the IRS admitted that Dr.

Barrett was no longer the target of any criminal investigation

involving the IRS or Agent Hanson and that no criminal charges or

indictment were ever brought against Dr. Barrett as the result of

the IRS investigation. Agent Hanson also testified that Dr.

Barrett was no longer under any type of criminal investigation and

had never been charged or indicted.

3 Barrett was "skimming" cash payments received from his patients. 3

On June 17, 1982, Agent Hanson sent a summons to PARS, calling

for PARS' books and records. Five days later, Dr. Barrett advised

that PARS would not comply with the summons, asserting his

constitutional rights under the Fourth and Fifth Amendments. Agent

Hanson then sent summonses to the h ospitals where Dr. Barrett

performed surgery and one to Dr. Barrett individually. All but

four of the sixteen hospitals complied with the summonses. The

responses from the complying hospitals provided Agent Hanson with

386 names and addresses of Dr. Barrett's patients.

Nine months later, Agent Hanson sent a " circular letter" to

each of the 386 patients, informing them that Dr. Barrett was being

investigated by the Criminal Investigation Division of the IRS and

requesting information regarding the nature and amount of the fees

paid to Dr. Barrett. In addition to the years under investigation,

the letters were mailed to patients treated in 1976, 1979, and

1980, years in which no IRS Examination Division work or Criminal

Investigation Division work h as been performed. One hundred and

twenty-six letters were returned as undeliverable.

Six months later, on November 29, 1983, Dr. Barrett commenced

this action in district court against the IRS, alleging violations4 26 U.S.C. § 6103(k)(6) provides: An internal revenue

of ficer or employee may, in connection with his official duties

relating to any audit, collection activity, or civil or criminal

tax investigation or any other offense under the internal revenue

laws, disclose return information to the extent that such

disclosure is necessary in obtaining information, whi ch is not

otherwise reasonably available, with respect t o the correct

determination of tax, liability for tax, or the amount to be

collected or with respect to the enforcement of any other provision

of this title. Such disclosures shall be made only in such

situations and under such conditions as the Secretary may prescribe

by regulation.

26 U.S.C. § 7431(a)(1) provides: If any officer or employee

of the United States knowingly, or by reason of negligence,

discloses any return or return in formation with respect to a

taxpayer in violation o f any provision of section 6103, such

taxpayer may bring a civil action for damages against the United

States in a district court of the United States.

4 of 26 U.S.C. § 6103 and 26 U.S.C. § 7431. 4 In short, these

secti ons authorize a taxpayer to bring suit for unlawful

d isclosures of tax return information during a civil or criminal

investigation. Dr. Barrett alleged that the IRS violated these

sections by unnecessarily informing his patients, through the

circular letters, that he "is currently under investigation by the

Criminal Investigation Division of the Internal Revenue Service."

It is undisputed that this particular disclosure to Dr. Barrett's

patients constitutes the disclosure of "tax return information."

In an initial attempt to dispose of Dr. Barrett's suit against

the IRS, the district court granted the IRS a summary judgment.

The district court concluded that the IRS was authorized to

disc lose this information because of its strong interest in

choosing the source of information it sought and because Dr.

Barrett's bank records were, as a matter of law, not a source of

information "otherwise reasonably available" pursuant to the5

exception to the rule of nondisclosure contained in 26 U.S.C. §

6103(k).

On appe al, this Court reversed the district court's summary

judgment, holding that there was a fa ct issue concerning whether

the disclosures in the circular letters to Dr. Barrett's patients

were necessary and whether the information sought was otherwise

reasonably available. See Barrett v. United States , 795 F.2d 446

(5th Cir. 1986).

[A] genuine issue of material fact has been raised as to

whether disclosure of the return informatio n that the

taxpayer was under investigation, particularly criminal

investigation, was "necessary." We recognize that this

may be a mixed question of law and fact; that is, the

district court must interpret section 6103(k)(6) and the

relevant IRS regulations in the l ight of the facts

developed.

Id. at 451.

Consequentl y, the case was remanded for trial to determine

whether it was necessary for Agent Hanson to disclose that Dr.

Barrett was currently under criminal investigation to each, or any,

of Dr. Barrett's patients and, if so, whether the disclosure might

have been avoided by reviewing and analyzing the bank records. The

panel emphasized that the question was not whether the information

sought was necessary; rather, t he question was whether the

disclosure was necessary to obtain the information and, if it was,

whether the information sought was "otherwise reasonably

available." On this appeal, we consider Dr. Barrett's appeal from

the bench trial, occasioned by our previous remand, in which the

district court found that the disclosure in Agent Hanson's circular

letters did not violate 26 U.S.C. § 6103 and 26 U.S.C. § 7431.6 II. Necessity of Disclosure

With respect to the district court's underlying fact-findings

and inferences deduced therefrom, we are bound by the clearly

erroneous standard of review. R obicheaux v. Radcli ff Material,

Inc. , 697 F.2d 662, 666 (5th Cir. 1983). However, with regard to

the legal conclusions reached by the district court based upon

factual data, we review these conclusions de novo , as an issue of

law. Id.

In regard to the question of whether it was necessary to

disclose in the circular letters the fact that Dr. Barrett was

currently under investigation by the Criminal Investigation

Division of the Internal Revenue Service, the distric t court

concluded:

It was "necessary" for Mr. Hanson to identi fy himself,

his title and his division, the name of the taxpayer

about whom he was requesting information, the nature of

his inquiry, and sufficient facts about the information

he was seeking to permit the recipients of the letters to

comply with his request

, in order to obtain the

information he sought by sending the letters, which was

"information not otherwise reasonably available."

(R. Vol. 1; 3213) (emphasis added). While the district court

concluded that it was necessary to provide sufficient information

to permit the recipients to comply, the district court did not

specifically address the question of whether it was necessa ry to

disclose that Dr. Barrett was under criminal investigation.

The IRS argues that d isclosing the fact of a criminal

investi gation is necessary to obtain meaningful responses from

third parties. Without referring to any evidence adduced at trial,

the IRS argues that disclosing the criminal natu re of the7

investigation is necessary because it apprises the third parties of

the potential severity of the consequences of the investigation,

which may encourage them to exercise appropriate care in responding

to the inquiry. To the contrary, the IRS's own expert witness, Mr.

Eugene "P ete" Twardowicz, testified on cross-examination that it

was not necessary to include the first paragraph in the letter

which disclosed " [t]he above-named individual is currently under

investigation by the Criminal Inves tigation Division of the

Internal Revenue Service." Specifically, Twardowicz testified:

Q: Now isn't it true, Mr. Twardowicz, that the absence

of the first paragraph in that letter would not have

detracted from the effectiveness of the letter?

A: Well, I again, I think it would have detracted, and,

you know, instead of beating around the bush here, does

it need Criminal Inves tigation Division there, no, it

doesn't need that, but I think it needs in there that he

is under investi gation. Now the question is does the

addition of Criminal Investigation Division hurt it, and

I think that's up to yo ur Honor to decide that. In my

judgment, it doesn't.

The IRS offered no evidence that disclosing the fact that a

taxpayer is under criminal investigation is necessary to obtain the

information sought by sending the letters. Cf. Diamond v. United

States

, 944 F.2d 431, 435 (8th Cir. 1991) (as a matter of law, IRS

agent did not need to identify himself in circular letters as a

member of the Criminal Investigation Division to secure the desired

information).

The IRS previously took a conflicting position on what is

relevant to the proposition that disclosing the fact of a criminal

investigation promotes third-party compliance. At trial, the IRS

successfully objected on relevancy grounds to the admission of8

evidence showing how many patients actually replied or se nt back

information i n response to the circular letters. As further

evidence that the disclosure was unnecessary, the for mal IRS

summonses for info rmation sent out by Agent Hanson before the

circular lett ers did not disclose that Dr. Barrett was under

criminal investigation.

Aside from the uncontradicted evidence presented through Mr.

Twardowicz at trial, we note that there are several statutes that

make it unlawful for third parties to giv e knowingly false

i nformation to an agent of the Internal Revenue Service, whet her

t he investigation is civil or criminal. S ee

, e.g.

, 18 U.S .C. §

1001; 26 U.S.C. § 7206(1); 26 U.S.C. § 7207; 26 U.S.C. § 7212.

Certainly, the existence of these criminal penalties sufficiently

encourages third parties to exercise appropriate care in responding

to inquiries from an employee of the Internal Revenue Service.

Ordinaril y, a district court's finding is clearly erroneous

when, although there is evidence to support it, the reviewing court

on the entire evidence is left with the definite and firm

conviction that a mistake has been committed. S ee United States v.

United States Gypsum Co.

, 333 U.S. 364, 395 (1948); Lewis v. Timco,

Inc.

, 736 F.2d 163, 166 n.2 (5th Cir. 1984). Here, there is no

evidence to support a finding that it was necessary to state in the

body of the letter that Dr. Barrett was currently under

investigation by the Criminal Investigatio n Division of the

Internal Revenue Service. In the context of our standard of

review, there are not two permissible views of the evidence. See5 26 U.S.C. § 7431(b) provides: No liability shall arise

under this section with respect to any disclos ure which results

from a good faith, but erroneous, interpretation of section 6103.

9 Anderson v. City of Besemer City, N.C. , 470 U.S. 564, 573 (1985).

Consequently, we hold that the district court's conclusion that

such disclosure was necessary is clearly erroneous and must be

reversed.

III. Existence of Good Faith

Despite our conclusion that the disclosure was not necessary,

no liability attaches to any disclosure which results from a good

faith, but erroneous, interpretation of 26 U.S.C. § 6103. See 26

U.S.C. § 7431(b). 5 Thus, we must determine if Agent Hanson was

acting in good faith when he wrongfully sent out the circular

letters. We determine the existence of good faith under this

section by applying an ob jective standard. H uckaby v. United

States Department of Treasury, Internal Revenue Service , 794 F.2d

1041, 1048 (5th Cir. 1986). Parenthetically, the district court's

failure to reach the good-faith defense issue under section 7431(b)

does not prevent this Court from resolving the issue by applying an

objective standard, as we did in Huckaby

.

A reasonable IRS agent can be expecte d to know statutory

p rovisions governing disclosure, as interpreted and reflected in

IRS regulatio ns and manuals. I d. at 1048. An agent's contrary

interpretation is not in good faith. Id. at 1049.

Agent Hanson admitted at trial that he did not review section

6103 or the applicable IRS manual provisions prior to mailing the

circular letters. Of paramount importance, however, the Chief of10

the Criminal Investigation Division had not approved the content of

the circular letters as required by Chapter 347.2 of the IRS

"Handbook for Special Agents." The relevant version of Chapter

347.2 required:

To ensure proper use of this technique, mail

circularization will not be under taken in any case

without t he prior approval of the Chief, Criminal

Investigation Division, including approval of the letters

to be sent out. Care must be exercised in approving mail

circularization to ensure tha t mail inquiries are sent

only to those third parties who, in the view of the

Chief, Criminal Investigation Division, are a likely

source of information; the information sought is

important to the investigation; and obtaining the

information by other means, if at all possible, would not

be practical because of either delays in investigation,

costs involved, or similar reasons. Caution must be

exercised not be [sic] damage the reputation of the

taxpayer by making th e letter either offensive or

suggestive of any wrongdoing by the taxpayer.

Appropriate wording could be "The Internal Revenue

Service is conducting an investigation of . . .". [sic]

When mailing circularizations, all such letters will be

signed by the special agent with prior approval of the

Chief, Criminal Investigation Division, indicated on the

file copy. The title "Special Agent" and Criminal

Investigation Division will be included in the signature

block.

Agent Hanson te stified that he was aware of this Chapter at the

time that he mailed the letters. Curiously, however, Agent Hanson

further testified that he did not recall any specifics of Chapter

347.2 when he prepared and mailed out the letters. As of the date

of trial, Agent Hanson had w orked as a special agent in the

Criminal Investigation Division of the IRS for 19 years. Yet, he

provided no explanation for his complete failure to follow the

mandates of Chapter 347.2. See Diamond , 944 F.2d at 438 n.3 (IRS

agent stated that a circular letter indicating in the body of the

letter that the investigation was criminal would not be approved by6 Interestingly, Agent Hanson also testified that he knew

that the relationship between Dr. Barrett and his patients was

personal and confidential. Directly contradicting his prior sworn

testimony during a related proceeding, Agent Hanson stated that he

did not think that Dr. Barrett's patients who had undergone plastic

or reconstructive s urgery would be embarrassed, humiliated, or

otherwise distressed by receiving the letters which would harm Dr.

Barrett's relationship with his patients. While this evidence does

not directly impact the question of objective, as opposed to

s ubjective, good faith, it is indicative of Agent Hanson's

willfulness or gross negligence.

11 a supervisor under Chapter 347.2). Finally, we note that the

investigation that was being conducted by Agent Hanson was for the

tax years 1977 and 1978. Nonetheless, Agent Hanson sent letters to

patients who were treated by Dr. Barrett in 1976, 1979, and 1980.

No work o r investigation whatsoever had been performed for these

years. 6

Applying an objective good-faith test to the uncontro verted

facts, can lead us to only one conclusion: that a rea sonable IRS

agent would not have violated the express provisions contained in

Chapter 347.2 of the IRS manual. Agent Hanson did not act in good

faith. We reverse the judgment of the district court; the IRS is

liable to Dr. Barrett under 26 U.S.C. § 6103.

IV. Conclusion

Because the district court erred in concludin g that the IRS

was not liable, it made no findings on the issue of Dr. Barrett's

damages. We acknowledge that Dr. Barrett presented uncontradicted

evidence of his damages during trial, and he urges this Court to

assess damages. We believe, however, that the trial level is the

appropriate site for the factual determ ination of the amount of

damages to be awarded to Dr. Barrett as a result of Agent Hanson's12

mailing of the circular letters. Accordingly, we REVERSE the

judgment of the district court and REMAND for a determination of

damages.