Source: https://procedurallytaxing.com/category/disclosure/
Timestamp: 2019-04-18 22:28:27+00:00

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Can the House Obtain and Release President Trump’s Tax Returns?
Minutes after the networks announced that the Democrats had retaken the House of Representatives, the commentators began discussing whether the Democrats in control of the House could obtain and release President Trump’s tax returns. Recognizing that the discussion focused upon one of my favorite obscure tangents of the tax law, I pulled out my tattered copy of the Internal Revenue Code and looked for an answer.
I have previously explained on Procedurally Taxing that the Section 6103 prohibition against disclosure of tax returns and return information provides only limited protection for the President’s tax returns. Section 6103 (b) establishes that the only protected returns and return information are those filed with the Service. Identical copies of the same documents which are not filed with the Service are not protected. Further, the statute establishes many detailed exceptions to the prohibition against disclosure.
Given the sensitivity of this information, one can imagine a scenario where the President (or his appointees at Treasury and the Service) refused to produce the requested documents, contending that Section 6103 protected the documents from disclosure. I see no merit in such an argument because the statute is clear on its face. Even if they objected, the Committee and the House would likely seek to enforce its request and find the administration in contempt. The dispute would likely find its way into the courts, years of political debate would ensue, and the courts would be asked to sort out the statutory construction issues (along with any related separation of powers issues).
I believe, however, that the House has another alternative which could fast-track resolution of the disclosure. It could serve document subpoenas upon the accounting firm which prepared the returns and the law or accounting firms representing the President in his audit disputes with the Service. The firms (and the President) could not assert Section 6103 to resist the subpoena because copies of the returns and audit documents in their possession are not protected by the statute. Likewise, any attorney-client privilege claim would be deemed waived because identical copies of the returns and audit documents had already been disclosed to the Service—an entity outside any privileged relationship. Further, an effort to quash the subpoena as politically motivated would almost surely fail because decades of summons enforcement case law establishes an almost insurmountable legal burden for taxpayers asserting such claims. The House could persuasively defend its inquiry as a proper investigation of potential conflicts of interest of an executive branch employee (i.e., the President).
Finally, even if the President attempted to intervene in the court to assert a separation of powers argument, this blogger’s inclination is that the President’s argument would fail. The documents subject to the subpoena have nothing to do with the President’s conduct of his official functions. Even if the documents dealt with Presidential conduct, the Supreme Court decision in United States v. Nixon 418 U.S. 663 (1974) would appear decisive. The Constitution simply does not protect documents unrelated to the conduct of official business and which are possessed by people outside the government, even if they refer to the conduct of the President.
We recently celebrated the 20th anniversary of the Restructuring and Reform Act of 1998 (RRA 98). That legislation requires the Treasury Inspector General for Tax Administration (TIGTA) to perform a number of annual audits to determine if the IRS complies with specific provisions of the Internal Revenue Code. One of the matters that TIGTA must review and report on each year concerns compliance by the IRS with the requirement that the IRS provide information to spouses about collection from the other spouse or former spouse on an account resulting from a joint return. TIGTA has recently issued its 20th annual report on this topic which shows that 22 years after enactment of the law requiring disclosure to the other spouse and 20 years after requiring an annual review a high percentage of IRS employees do not understand the law and the guidance in the Internal Revenue Manual (IRM) does not adequately guide.
For anyone who has asked the IRS for information about a spouse or former spouse regarding a liability stemming from a joint return, the TIGTA report will not come as a surprise. Maybe the civil and criminal penalties IRS employees face for making a wrongful disclosure, in addition to the employee sanctions, should cause us to expect that if you ask for information about someone other than yourself the IRS employee’s knee jerk reaction will be no since not providing the information will almost never get the employee into trouble but providing it when they should not has a high likelihood of creating a personal problem for the employee. The IRS generally does a good job of not disclosing. Ask President Trump who should be a big fan of the IRS and its compliance with disclosure laws. We have not seen his returns despite a lot of curiosity about them. The lack of a leak speaks highly of the IRS ability to follow the disclosure provisions.
When Congress has created an exception to the general rule of non-disclosure, the IRS does not get high marks. Part of the problem stems from the complexity and length of IRC 6103. Anyone taking the time to read that statute from end to end knows that it is not only one of the longest sections in the code but is also quite complex. Still, the subsection added in 1996 to allow one spouse to find out what is happening regarding collection from the other spouse (or former spouse) should not create too difficult a technical barrier to compliance. Yet, a relatively high percentage of the employees at the IRS cannot get it right.
One of the issues that regularly tripped up IRS employees was mirrored accounts. We recently discussed the misinformation delivered by IRS regarding a mirrored account and that case did not involve the disclosure exception in IRC 6103(e)(7) or (8). The TIGTA report shows that when the IRS creates mirrored accounts, as it will do when there is an innocent spouse request or a Tax Court or bankruptcy petition by just one party to a joint return, IRS employees become even more reluctant to disclose information about the other party to the joint return. For anyone not familiar with the term mirrored account discussed in the TIGTA report, read our post here, which provides a brief explanation of the IRS master file system and the non-master file, or mirrored system of accounts, created in certain circumstances where the accounts of taxpayers on one master file assessment, typically a joint return assessment, move in different directions and require special handling.
The TIGTA report not only shows that IRS employees do not understand how to respond when the IRS creates a mirrored account but also that the IRS has done a poor job of writing the IRM to guide its employees on how to handle requests for information from one spouse about another. Helpfully, the IRS does not require the request to be made in writing; however, in far too many cases taxpayers requesting information about their spouse or former spouse simply get turned away and told they do not have access to such information. Anyone trying to obtain this information on behalf of a client may not be able to convince the IRS employee by citing them to an IRM provision – the normal place to start any discussion with an IRS employee – since the IRM has not provided clear guidance.
In March, the IRS attempted to address this problem by putting a number of examples in the IRM to guide its employees to the right answer. Look at IRM 5.19.5.4.11.1 (Mar. 9, 2018). Perhaps the new IRM provisions will help to clear up the problem either by making IRS employees more informed in the first place or making them comfortable when the taxpayer or the representative cites the IRS to the new IRM provision in support of releasing the information. Anyone who has sought to convince an IRS employee of the law knows that citing to the Code is a waste of breath. The only thing that matters to 99% of IRS employees is the guidance in the IRM. The TIGTA report did not test IRS employees after the release of the new IRM provisions. Perhaps spouses seeking information in the future will have better luck. My guess is that they will not but with the new IRM provisions perhaps knowledgeable representatives will have more success in citing to the IRM.
Did the IRS Just Buy Off the Tea-Party?
You may have missed the small item in the tax press describing the latest embarrassment for the Service arising out of the agency’s handling of applications for tax exempt status submitted by “tea party” organizations. The taxpayers, their supporters in the press, and many in Congress have long contended that the IRS action was politically motivated and evidence of an agency running amok. Meanwhile, the Service bungled its response, adding fuel to the fire. While public discussion of the scandal has subsided in recent months, we learned last week that the Government had settled a class action brought by the Tea-Party organizations with a $3.5 million payment from the Treasury. NorCal Tea Party Patriots v. Internal Revenue Service, No. 13-cv-00341 (Order of April 4, 2018).
For any of you who do not know remember the back story, the underlying dispute began nearly a decade ago with filing of a spate of applications for tax-exempt status by organizations with political agendas, including many organizations associated with the Tea Party movement. The applications attempted to skirt the prohibition against political activities by tax-exempt organizations, although the political focus of the applicants was readily apparent. The exempt organizations specialists within the Service’s National Office, headed by Lois Lerner, eventually transferred the applications to a small office in the Cincinnati Service Center, where they largely languished in inaction. The motive for the Service’s action is a subject of dispute—many have contended that the Service was implementing the political agenda of the Obama administration. The official explanation of what happened provided by senior Service officials kept changing, Ms. Lerner refused to testify at Congressional hearings, the Service “lost” the data from Ms. Lerner’s computer, and IRS Commissioner Koskinen’s appearances before congressional committees only added to fears of political wrongdoing. Years later, several senior Service officials have left office with their reputations damaged, the public standing of the Service has declined even further following congressional hearings, and many of the complaining organizations have quietly received tax-exempt status.
Naturally, the scandal generated a substantial amount of litigation, little of which has gone well for the Government. The Nor-Cal case was brought as a class-action by one of the disappointed applicants for tax-exempt status. According to the plaintiffs, the Service gave increased scrutiny to applications submitted by the taxpayer and other politically conservative groups, delayed action on some of the applications and, in some cases, requested additional and unnecessary information from the applicants to delay review of their applications. Substantively, the plaintiffs’ legal claims asserted violations of the First Amendment and the Section 6103 prohibition against disclosure of taxpayer return information.
For several years, the Government vigorously (and unsuccessfully) defended the case. It objected to certification of the case as a class action and vehemently resisted discovery of documentation from the Service’s files. The courts rejected the Government’s technical legal arguments, certified the case as a class action involving any disappointed applicant for tax-exempt status, and required very broad production of Service documents regarding the processing of applications for exempt status submitted by taxpayers who were not parties to the case. Overall, the courts made it quite clear that they did not approve of the Service’s conduct of the whole affair and might well rule for the taxpayers on the merits.
The recent settlement of the Nor-Cal case almost went unnoticed, although the Government agreed to pay damages of $3.5 million to members of the class. (The bland settlement agreement filed in court did not mention the amount of damages, but subsequent reporting disclosed the payment.) While other cases brought by similar taxpayers had previously had been settled, this appears to be the first case resulting in a payment of damages by the government.
Given the uncertainty regarding the bounds between permissible educational advocacy and impermissible political activity, had the taxpayers established that they would have been entitled to tax-exempt status absent the alleged misconduct?
Was there any specific evidence that the Service had violated Section 6103 by improperly disclosing any taxpayer’s tax return information to anyone—the only conduct barred by Section 6103?
Assuming that the Service had delayed approval of the taxpayers’ applications for tax exemption because of their politics, is that conduct sufficient to establish a constitutional violation actionable under Bivens, particularly given the extensive authority rejecting Bivens claims under outrageous factual circumstances?
Recognizing that the taxpayers were asserting that the Service had delayed (not rejected) their applications, when does delay in processing a request for a ruling become a constitutional violation, particularly recognizing that the wheels of government bureaucracy (and especially the IRS ruling process) often grinds slowly?
What damages could the taxpayers establish resulted from an improper delay in granting tax-exempt status?
Given the case law drastically limiting the availability of class actions in cases involving taxation, why weren’t the varying facts regarding the applications of various class members an insurmountable barrier to class certification?
These issues do not appear to have been fully litigated (at least not at the appellate level).
Under the circumstances, the Government’s willingness to settle the case by paying damages to the class is remarkable. This blogger’s experience has been that the procedures employed by the Government for reviewing settlement proposals of tax cases involving multi-million dollar payouts from the Treasury would have required formal written review by several officials in the Justice Department’s Tax Division, including the Acting Assistant General. Several Service employees would also have reviewed the proposal, with formal written approval given by someone acting on behalf of the current Acting Chief Counsel. Depending upon application of some nuances in the procedures governing settlements, a review by the Congressional Joint Committee on Taxation may have been required under Section 6405.
So, this blogger asks: What induced these officials to approve the settlement and the multi-million dollar payout? Did the Government’s evaluation of the litigating hazards (likelihood of success multiplied by potential damage award) justify a payment of $3.5 million to the class? Or, was the payment justified by other considerations (e.g., a desire to buy a quiet resolution to embarrassing litigation)? And, if so, is that a proper reason for the government to pay litigants? As much of that process was conducted internally within the government and is privileged, we will all be left to ponder the possibilities.
Perhaps I am the last person on the planet to know about this case, but in an opinion issued on March 9, 2018, Judge Burroughs of the District of Massachusetts found that the broadcasting of a conversation between a taxpayer and an IRS collector working at its Automated Call Site (ACS) did not give rise to a claim against Howard Stern nor could that taxpayer seek a claim against the IRS under the Federal Tort Claim Act; however, the case can move forward as a violation of the disclosure laws under IRC 6103. For anyone with a curious nature and the love of an amazing story, find the opinion in Barrigas v. United States here.
When I read the opening lines of the case I wondered how in the world would someone calling ACS have their conversation broadcast on a radio show. Not long into the opinion I found out. Truth is stranger than fiction and no one could have made up a case like this. An ACS employee decided that it would be a good idea while he was working to give a call to the Howard Stern radio show. His call was placed on hold by the show (some poetic justice there) and he remained on hold for some unspecified time. While on hold with the Howard Stern show, he received a call from a taxpayer concerning her account. The taxpayer had a payment plan, and while paying on the plan the IRS offset her current year tax return.
So, the ACS employee and the taxpayer begin a 53 minute conversation about her issue and at some point in that conversation the ACS employee comes off of hold with the Howard Stern show and goes live. Now the conversation, at least the ACS’ employee’s side of the conversation, gets broadcast to the listeners of the Howard Stern show. Mr. Stern is puzzled by the conversation taking place. He and another gentleman make comments about it and apparently tried without success to get the attention of the ACS employee. At the end of the three minute portion of the conversation which was broadcast (the transcript of which is spelled out in the opinion), the ACS employee provides the telephone number of the taxpayer. The providing of that telephone number apparently allowed alert listeners of the show to light up the phone of the taxpayer.
The taxpayer was not happy or amused that her conversation with ACS was partly broadcast over the radio, and available for some time thereafter on its web site, so she brought suit against the IRS and Howard Stern. We do not learn from the case the fate of the ACS employee. One suspects that the manager of the ACS employee will be writing memos for the remainder of their career. The career of the ACS employee may be cut short by this episode. Look for a new provision in the IRM directing ACS employees not to call talk radio shows while on duty.
Reading this post will not bring you much tax knowledge, but how could we not write about such a case. It’s probably best to read the opinion rather than the post but I will provide you with a distilled version of the legal issues and the approach the court took to those issues. For me, the most important thing about the case is that it could exist at all.
The first issue addressed is the taxpayer’s claim against the IRS using the Federal Tort Claims Act. This Act provides a limited waiver of sovereign immunity. Although the Act waives sovereign immunity, it includes a specific exception to the waiver for tax matters for “”[a]ny claim arising in respect of the assessment or collection of any tax or customs duty. . . .” 28 U.S.C. § 2680(c). In the end, the court finds that the exception applies to this situation. This determination keeps the IRS from having liability for damages to the taxpayer arising out of the on air conversation. The taxpayer argued that the phone call by the ACS employee was clearly outside of his duties as an IRS employee and that created an exception to the rule limiting the waiver of sovereign immunity. The court found that basically every time the IRS would get into a bad situation, the agent would be acting outside the scope of their duties since the IRS was not going to give them duties that would harm people in a tortious manner. In this section of the court’s discussion, it did cite to another case in which an IRS employee checking out a casualty loss on a taxpayer’s property took a picture that captured someone standing in a house adjacent to the property in question in less clothes than the individual wanted to be caught on camera. That case provides just another example of the many ways one could not predict that trouble could arise.
She alleged that Mr. Stern was negligent in broadcasting the information. Here, the court found ‘[p]laintiff has failed to state a claim under the Massachusetts Privacy Act because, among other things, the disclosed information was not sufficiently personal or intimate in nature.” Most of the conversation disclosed no information about her because the radio show only picked up what the IRS employee was saying and not what the taxpayer was saying. This was not a conference call situation. The data available from the one-sided conversation provided little information about the taxpayer and if the IRS employee had not mentioned her phone number would have provided no information about her.
Her last claim was for intentional infliction of emotional distress. Here again, the court could not find the intent on the part of Mr. Stern necessary for her to succeed. So, it dismissed this count as well and dismissed Mr. Stern and his company from the case.
What remains after this opinion is the cause of action seeking damages for the IRS disclosing tax return information. The court did not discuss the disclosure violation aspect of the lawsuit other than to say that it was not dismissing that part of the case. I will be surprised if we ever see an opinion on that part of the case because I expect that the IRS will work hard to settle that aspect of the case. If it does not, however, we will get the chance for another interesting blog post.
Working for over three decades for Chief Counsel’s office, one of my goals was to avoid disclosure issues both on a personal and professional level. On a personal level, I wanted to know enough to keep out of trouble and on a professional level I wanted to avoid getting labeled as someone who knew disclosure law because that could lead to more assignments regarding disclosure issues which I did not want. At Chief Counsel’s office, FOIA was lumped in with IRC 6103 and the Privacy Act. Practicing at a clinic, I only want to know enough about the Office of Professional Responsibility (OPR) to avoid having contact with it. Just as I did not want to know more about section 6103 than I needed in order to avoid trouble while working at Chief Counsel’s office, I do not want to learn more about OPR. I want to know the ethical rules but not what happens when you break them, because I hope that is knowledge I will never need.
Today’s case takes me into the confluence of two things I try to avoid and yet the case has important lessons worth discussion. In Waterman v. IRS, 121 AFTR2d 2018-__(D.D.C. 1-24-2018), the issue before the court is a request for records from OPR regarding an investigation of an attorney. The attorney, Brad Waterman, practices in D.C. and has for several decades. He graduated from my law school the year before me and we have met on several occasions. He has an excellent practice and the last time we met he was splitting his time between D.C. and Florida, depending on the season. The fact that he is seeking records from OPR concerning an investigation does not mean he engaged in inappropriate behavior. I know nothing about the investigation other than it was quickly closed which, it turns out, is his problem in this case. His case caused OPR to change its procedures despite, or maybe because of, his FOIA difficulties to make it easier for someone in his situation to obtain records from OPR.
In representing a client in a matter involving a tax exempt bond, Mr. Waterman caused the revenue agent in the IRS Tax Exempt Bond office to feel that Mr. Waterman engaged in misconduct. The revenue agent, through his manager, made a referral to OPR. After investigation, OPR determined that “the allegation against Waterman did not warrant further inquiries or action.” I recently attended the ABA Tax Section meeting, at which I attended the Standards of Practice committee meeting in an effort to keep up on ethical issues. At that meeting, the director of OPR, Steve Whitlock, spoke and he talked about this case. I began writing this post on the plane to San Diego to attend the meeting. So, when the director started talking about this case, I woke up from my normal meeting stupor and started listening carefully. I hope I heard and understood him correctly.
Apparently, OPR decided not to pursue this case without sending out a letter to Mr. Waterman asking him for information. OPR regularly determines that many of the referrals it receives do not warrant further investigation and do not require making the referred individual submit material. When it makes this decision at the internal investigation stage, the case is closed with a letter to the individual informing the individual of the closure of the case without need for input from the individual. This was the normal procedure at the time OPR closed Mr. Waterman’s case. It was also, and still is I believe, the normal procedure for the OPR letter informing the individual of its conclusion to also inform the individual that OPR would retain the file on the matter for 25 years and that it reserved the right to reference the file in any future OPR investigations. Ouch. I suspect that receiving such a letter with the language about retention drove Mr. Waterman to want to know as much about the referral and investigation as possible in the event that it might have future ramifications.
The problem Mr. Waterman faced in trying to obtain information about the referral is that because OPR closed its investigation at the time of the sending of the letter, he could not use the section 6103 procedures, see here and here, that OPR suggests individuals use to obtain information about the referral. Had his case not been closed with an early letter, he would have instead received a far more ominous letter informing him of the investigation and asking him to respond to the allegations. In that situation, OPR would not have a closed investigation but a very open one. During an open investigation, OPR suggests that individuals use the section 6103 process to obtain information about the investigation. Because his investigation was closed by the time Mr. Waterman knew he wanted information, he could not use the section 6103 procedure and instead had to revert to FOIA in order to try to obtain the information.
The OPR director stated at the ABA meeting that because of this case, OPR was changing its procedures. Now, instead of issuing the one letter and closing the case immediately, it is going to issue a preliminary letter giving the target individual 60 days to make a statement to OPR and to obtain information about the investigation through section 6103. See the following paragraph for a link to this letter. Now, a recipient of this “good” OPR letter, if there is such a thing, can use the section 6103 procedures for obtaining information before OPR closes its case 60 days later. If someone receiving this good letter fails to ask for information about the investigation under section 6103 during that 60 day period, then they will face the same FOIA obstacles which Mr. Waterman encountered and which I will discuss below. I hope that neither I nor any reader will need the benefit of this knowledge, but just in case I provide it for any who have the misfortune of a referral.
Attached to the outline created by the director of OPR for his presentation at the ABA meeting were samples of the three letters sent by OPR. The first letter is called the pre-allegation letter. This is the letter alerting the recipient of an OPR investigation that is not being dropped after the initial internal review by OPR. The second letter is called the “soft conduct letter – initial” This is the letter giving the recipient the chance to request information from OPR using IRC 6103 and avoiding the problems faced by Mr. Waterman. This letter would be sent to someone that OPR determines not to investigate further after reviewing the incoming allegations. The third letter is called the “soft conduct letter” which should be sent about 60 days after the initial soft conduct letter and which would inform the recipient that OPR was closing its investigation.
In the FOIA case, Mr. Waterman agreed that the IRS search for the requested records was adequate. I want to take a brief detour here to mention another recent FOIA case, Ayyad v. IRS, No. 8-16-cv-03032 (D. Md. 2-2-2018). In the Ayyad case, the requester did not agree that the search for the records was adequate and for good reason. An examination of the taxpayer was pending for about a decade when they filed the FOIA request seeking records, which included the administrative file developed by the revenue agent including all written correspondence relating to the examination. With relatively amazing speed for a FOIA case, the IRS identified 2,885 pages of responsive records but did not produce a Vaughn index detailing the redacted and withheld records. After the taxpayers filed their FOIA suit, the IRS informed the Court it found an additional 872 pages. Later, after the taxpayer stated records were still missing, the IRS found another 6,568 pages. Needless to say, the IRS did not cover itself in glory in this case and did not prevail. Its inadequate searches and its failures to submit proper Vaughan indices resulted in an unfavorable FOIA decision. So, it is not unimportant that Mr. Waterman agreed with the IRS search. His case was much less involved and he undoubtedly knew what records were out there, but the Ayyad case provides a note of caution in relying on the first submission of records from the IRS.
In Mr. Waterman’s case, the court found that the Vaughn index properly described the withheld documents and the basis for the exemption (also a major issue in the Ayyad case). The documents at issue were pre-deliberative and involved material created by the revenue agent who made the referral, his manager, preliminary findings of the OPR investigator, and an email between OPR and counsel. The court finds all of the documents meet the test under FOIA exemption 5. If I understood Mr. Whitlock correctly, Mr. Waterman would have received the referring documents under a section 6103 request made during an open OPR investigation. I do not believe he would receive the other two documents under section 6103.
I am very sympathetic with Mr. Waterman’s right to know the basis for the investigation. Because OPR is retaining the records for 25 years, he has genuine concerns. I applaud OPR for changing its procedures to allow other similarly situated individuals to obtain records under the more friendly section 6103 procedures. I hope the information in this post is information you and I will never need to know.
On April 5, 2017, the Tax Court rendered a fully reviewed T.C. opinion in the case of Mescalero Apache Tribe v. Commissioner, 148 T.C. No. 11. We do not often have two disclosure cases in one week. It doesn’t get much better than this.
After President Nixon tried to run roughshod over the tax information of his enemies and Congress reacted with the new, extremely beefed up section 6103 in 1976, Chief Counsel, IRS soon thereafter created the Disclosure Division. As you might imagine, new attorneys did not flock to that Division as their first (or second or third) choice. So, Chief Counsel’s office created a rule that if you worked in the Disclosure Division for three years, you got first choice on any opening in the country. That rule suggests how sought after a career focused on the disclosure laws was, at least with lawyers in Chief Counsel’s office; however, the disclosure provisions, despite their non-glamorous reputation, contain many important policy issues a number of which have split the circuits. The Mescalero Apache Tribe case demonstrates one of the interesting issues that can lurk in the disclosure provisions.
Before I move on to the disclosure issue, I want to pause and discuss an issue that the Court discusses in a footnote – appellate venue in cases brought by Indian tribes. The issue of appellate venue in Tax Court cases has importance to the outcome of the case at the trial level because of the Golsen rule under which the Tax Court will follow the law of the circuit to which the case will be appealed. The failure to update the appellate venue rules in 1998 when Congress created several new ways to obtain Tax Court jurisdiction led to some interesting issues we have blogged here and here. In this case the Tax Court notes that the rules of appellate venue discuss individuals and corporations but not Indian tribes which have a sovereign nation like status. So, the appellate venue for a Tax Court case involving a tribe put the court in uncharted waters. It defaulted to looking to the law of the 10th Circuit which is the circuit where the tribal lands of the tribe appearing before the court are located. I suspect that most readers will have few cases in which they represent an Indian tribe in Tax Court but the case points out in yet another context a hole that exists in the appellate venue of the Tax Court and how that hole can impact the resolution of the case when a circuit split exists on an issue.
The taxpayer is an Indian tribe that hired workers. At issue in the Tax Court case is the classification of those workers as independent contractors or employees. The tribe classified the works as independent contractors and the IRS seeks in the case to obtain a determination that the workers were employees. If the IRS wins this argument, the tribe would owe the taxes on the workers under the theory that its failure to properly classify the workers and consequent failure to withhold taxes with each payment caused the non-payment of the taxes. Section 3402(d) allows a company deemed to have employees rather than independent contractors to avoid the additional liability to the extent that the company can show that the workers independently paid the taxes to the IRS. This offers a significant way out of what could be a heavy tax liability; however, there is one catch – the payment by the employees of their taxes is return information under IRC 6103 and return information, like tax returns themselves, comes under the broad umbrella of the protection from disclosure.
The structure of 6103 basically sets out the broad general rule at the outset that returns and return information is covered by the disclosure provisions and cannot be disclosed by the IRS. The lengthy code section then has a multitude of exceptions. At issue in this case is the application of one or more of the exceptions. The case is a slightly unusual disclosure case in that both the IRS and the taxpayer before the court know the names of all of the individuals who worked for the tribe. So, the tribe does not want taxpayer identity information but simply whether the identified individuals paid their taxes for the years at issue so that the tribe knows if the defense available in 3402(d) protects it. Before seeking the information in discovery in the Tax Court case, the tribe sought to gather the information from the individuals who previously worked with it. Because of time and mobility of the work force and maybe because some of the former workers did not want to provide the information, the tribe was unable to get information about all of its former workers. So, it sent a discovery request to the IRS seeking to obtain information about a group of identified former workers and whether they paid taxes on the compensation they received. The IRS objected to the request citing the general rule that it may not disclose this return information. The tribe brought an action to enforce discovery citing to an exception in 6103(h) and the Tax Court, in a fully reviewed, unanimous opinion, holds that the tribe is entitled to the information through discovery.
This is a big deal for taxpayers who need information from the IRS in order to defend themselves in a tax matter. The decision here will not open the IRS records in every case but it does provide a model for seeking information in Tax Court cases. Because the Tax Court had not previously addressed this issue, it did so here through court conference.
As the Tax Court examined the issue of whether 6103(h)(4) provides an exception to the general rule of nondisclosure, it found the circuits were split. The 5th Circuit held that this subsection applied to disclosures to certain federal officers because of the title of the section; however, the 10th Circuit held the 6103(h)(4), unlike earlier subparagraphs of the subsection,” speaks specifically of disclosure in a judicial or administrative tax proceeding with no indication that disclosure should be limited to officials.” The Tax Court found that most courts had followed the 10th Circuit; however, the fact that (h)(4) created an opportunity for disclosure in a court proceeding did not mean that its language required or allowed disclosure in this circumstance. So, the Tax Court had to look further at the statute. Subparagraph (h)(4)(B) refers to returns and return information and another part refers only to returns. Without getting into a significant discussion of returns and return information, it is important to understand that these are two different classes of information protected by 6103 and the tribe wants return information. Two circuits found the subsequent reference to returns which omitted the phrase return information to create a limitation on the disclosure of return information. The 10th Circuit had two opinions which, in different contexts, did not impose that limitation.
The court found that the relationship met the necessary test, that the return information directly relates to this relationship and that the return information directly affects the resolution of an issue in the case. So, it found the return information disclosable but that did not end the matter because the IRS objected that even if it is disclosable “it is still not discoverable.” The IRS pointed to the fact that the tribe bore the burden of proof that the workers paid their taxes. This seems like a cruel argument if the IRS has the information that will allow the taxpayer to win their case and does not have to give it to the taxpayer because the taxpayer must prove their case. The Tax Court found that just because the tribe had the burden of proof does not mean that discovery cannot be had of the IRS citing to Tax Court Rule 70(b) which says parties can discover information “regardless of the burden of proof involved.” Keep in mind that sometimes the IRS has the burden of proof and it should be careful of arguments like this that could limit its ability to obtain information from the taxpayer through discovery.
In a case like this the IRS represents the interest of the 70 individuals whose return information will come out even though they have no voice in the matter. The IRS defense of disclosure makes sense but so does the Court’s determination that the information meets the exception in the statute. Failure to allow the information to come out could cause the tribe to pay a tax which its workers already paid. The competing policy interest of the protection of the worker’s return information and the tribe’s interests properly fall on the side of preventing the tribe from having to pay a tax it should not owe. The case does not talk about how the return information of the workers might be protected as the information is disclosed but that issue is present.
The recent Second Circuit case of Minda v. United States, addresses the damages the IRS must pay when it sends detailed information about a taxpayer to an unrelated third party. The issues in the case did not involve whether a disclosure violation occurred but the appropriate amount of damages for the violation. The IRS prevailed in the sense that it limited the damages to the lowest possible amount. The court’s analysis provides insight for others who might find their tax information wrongfully disclosed. If you feel the IRS got off too lightly, the remedy may lie in stronger legislation.
The IRS examined the 2007 return of Gary Minda and Nancy Findlay Frost. The examination resulted in proposed adjustments which the revenue agent’s report (RAR) set forth. The RAR, as usual, contained a fair amount of information about the taxpayers, such as their social security numbers and financial information. All of this type of information fits under the definition of “return information” in IRC 6103. The IRS mailed the RAR to an unrelated third party in Ohio. I did not see in the opinion where Gary and Nancy live but assume from the fact they brought their wrongful disclosure action in the Eastern District of New York that the did not live in Ohio at the time of the mailing of the RAR report. The individual in Ohio who received the report gave it to his attorney who wrote to the IRS advising the IRS of the erroneous mailing. The attorney for the third party also sent a copy of the report to Gary and Nancy whose address, I assume, was a party of the many pieces of information in the RAR identifying them and their finances.
When Gary and Nancy brought suit in district court seeking damages for unauthorized disclosure the IRS conceded the unauthorized disclosure and conceded liability for statutory damages but denied that they should receive any other relief. The IRS moved for summary judgment contending that the damages were limited to $1,000 each. The EDNY granted the motion. The Second Circuit looked at 6103(b)(8) which provides that a disclosure is “the making known to any person in any manner whatever a return or return information” and then at 7431 which governs damages for wrongful disclosure. When the IRS makes a wrongful disclosure, taxpayers can bring a civil action in the appropriate district court which they did here. Section 7431(c) provides that the IRS is liable for the greater of “(A) $1,000 for each act of unauthorized inspection or disclosure of a return or return information with respect to which such defendant is found liable or (B) the sum of (i) the actual damages sustained by the plaintiff as a result of such unauthorized inspection or disclosure, plus (ii) in the case of a willful inspection or disclosure or an inspection or disclosure which is the result of gross negligence, punitive damages, plus (2) the cost of the action, plus…” reasonable attorney’s fees it the action met the criteria for (ii).
Because the IRS conceded that an unlawful disclosure occurred and petitioners conceded they had no actual damages, the issue before the court turned on whether the negligent or willful standard applied. In determining the amount of statutory damages the court had to decide what the statute meant when it said “each act.” Was the mailing of the RAR to the wrong person the act – meaning that a single act occurred and limiting the damages to that single act or did many acts occur because the single document contained many disclosures of return information. The court found that the statute description look at acts and did not say “for each item of return information disclosed.” The word “each” served as a modifier of act and not information. After going through its analysis of the statute, the Second Circuit also bolstered its determination with the statement that 7431 provides a waiver of sovereign immunity and those waivers must be strictly construed. So, the Second Circuit sustained the decision of the district court and limited the recovery of damages to $1,000 for each person based on the act of wrongfully mailing the document once.
Next, the court took up plaintiffs’ argument that they should receive punitive damages. Because plaintiffs must essentially rely on the investigation by TIGTA and did not have a way to conduct their own investigation (not that I am suggesting their own investigation would necessarily have led to a different conclusion), they are hamstrung on this part of their case. They really had no evidence that someone at the IRS engaged in aggravated conduct or that the action in mailing the RAR to the wrong place resulted from wanton or reckless disregard or their rights. So, they could get no traction on this issue. The government argued that a taxpayer can only receive a punitive damage award if the disclosure resulted in actual damages. The Second Circuit did not reach this issue but noted a split between the 4th and 5th Circuits on this interpretation.
The outcome here does not surprise me given that the wrongful disclosure did not result in actual damages. This type of wrongful disclosure may occur more frequently that we see litigation because the IRS will concede the violation and offer statutory damages. Not many taxpayers push for additional damages because doing so involves resources and costs. With the possibility that taxpayers in New York could have their case handled anywhere in the US, these types of mistakes will happen. The inability of TIGTA to get to the source of the problem is perhaps more troubling than the inability of the taxpayers to get a greater award. Without figuring out why the IRS system went wrong here, corrective action may not occur.

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