Sixth Circuit Requires IRS to Disclose Return Information of Non-Parties in Tea Party Exempt Organization Litigation

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Tea Party Imageprivacy imageToday we welcome back guest blogger Stuart Bassin, principal at the Bassin Law Firm. Stu is a former Department of Justice Tax litigator with a deep and varied experience in tax litigation. In this post he discusses last week’s Sixth Circuit’s rebuke of the government’s position in the NorCal Tea Party Patriots case. 

Last week, the Sixth Circuit rejected a government mandamus petition seeking to overturn a trial court discovery order requiring the Service to disclose the names of non-party organizations whose applications for tax exempt status were allegedly treated improperly because of the organization’s political views. In re United States; United States v. NorCal Tea Party Patriots, Case No. 15-3793 (March 22, 2016).

The underlying case arose out of allegations that the Service discriminated against conservative organizations in reviewing applications for tax-exempt status.  According to the plaintiffs, the Service gave increased scrutiny to some organizations in reviewing their applications and, in some cases, requested additional and unnecessary information from the applicants to delay review of their applications.  Substantively, the plaintiffs’ legal claims assert violations of the First Amendment and the Section 6103 prohibition against disclosure of taxpayer return information.   Earlier this year, the trial court certified the case as a class action, a development I discussed in an earlier post in Procedurally Taxing.

The dispute before the Court of Appeals involved a discovery order issued by the trial court requiring the Service to identify other taxpayers whose applications for exempt status received comparable scrutiny–information the taxpayers sought in hopes of identifying attentional class action plaintiffs. The Service resisted, contending that the disclosure was barred by Section 6103. The district court, expressing exasperation with the Service’s interference with the case’s development, ordered production of the information, ruling that disclosure was authorized under Section 6103(h)(4)(B) because the information was reflected in a return “directly related to the resolution of an issue” in litigation. The Government then filed its petition for writ of mandamus.

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The Court of Appeals ultimately affirmed the order allowing the discovery, taking several opportunities to criticize the Service’s actions and the Justice Department’s advocacy. The court rejected the trial court’s reading of Section 6103(h)(4)(B), but concluded that most of the requested information could be disclosed under Section 6104, which generally makes successful applications for tax exempt status, along with supporting information, open for public inspection.   While Section 6104 would not authorize release of information relating to unsuccessful applications, the court concluded that disclosure was not prohibited under Section 6103. According to the court, an application for exempt status is not a “return” or “return information” and is therefore not protected from disclosure by Section 6103.

The ruling is noteworthy primarily because of its narrow reading of the terms “return” and “return information.” Practitioners often think that Section 6103 protects virtually anything submitted to the Service from disclosure. Here, the court narrowly construed the literal statutory language of Section 6103(b)(1), which defines “return” as “any tax or information return, declaration of estimated tax, or claim for refund,” concluding that an application for exempt status is outside the statutory definition. The question left unanswered by the opinion is what other types of submissions to the Service will not be treated as returns and return information protected by Section 6103.

One issue which has yet to be addressed in the litigation is the interplay between the substance of the plaintiffs’ claims and the available legal remedies. The plaintiffs’ factual claims focus upon the Service’s internal processing of the plaintiffs’ applications for tax-exempt status and the Service’s communications with the plaintiffs.  Yet, the legal basis for the claims being asserted by the plaintiffs is a wrongful disclosure of return information by the Service.  How the taxpayers will argue that the Service’s internal actions amount to an improper disclosure remains to be seen.

Nonetheless, the tone of the opinion should be of great concern to the Government. Both the appellate panel and the trial court have made clear their impatience with, and distaste for, the Government’s procedural challenges to the taxpayer’s claims. Every indication is that the courts are willing to rule against the Government if the taxpayers’ assertions of disparate treatment are proven at trial, although it will be interesting to see what remedy will be allowed. The Government can continue fighting, but that seems to be an uphill battle and a battle which may produce further precedent that the Service will not like.

 

Comments

  1. Eric Rasmusen says:

    This case presents an interesting pleadings question. I haven’t seen the complaint. The allegation that the IRS improperly revealed information does seem nullified by the holding that application information isn’t “return information”, sensible tho that holding may be. Without that holding, under the Trial Court’s theory, I imagine that the allegation would have to be that the IRS revealed the information to the White House. That’s very plausible. Are the reasons it’s plausible sufficient for pleading, though? They are that the White House has refused to provide relevant emails, that Justice refused both to give Lois Lerner immunity and to present her contempt charge to the grand jury (thus making it appear that they wished to be able to punish her if she spilled the beans and reward her if she didn’t), and that the IRS has been stonewalling the present case. But this is evidence that some deed is being hidden, not specifics. Is that enough? I don’t know what happened with the Watergate tapes,but it seems similar— people reasonably thought the tapes had something incriminating in them, but didn’t know exactly what.

  2. Jack Townsend says:

    I have some questions which I will present in this and other comments. I think the courts bought into the focus of the original TIGTA report that there had been some special negative treatment (slow-walking and additional, perhaps unnecessary questions) to conservative organizations seeking formal recognition of 501(c)(4) status. But, I think that there were later indications that liberal organizations received that type of treatment as well. Would creating a BOLO list be improper if the entries on the list were selected by criteria that identified liberal and conservative organizations? Thus to use an extreme example, if two applications came in with one called the tea party advocacy group and the other the anti-tea party advocacy group, and only the tea party group was identified for special scrutiny, that would be inappropriate. But if the selection criteria picked them both up, would that be inappropriate? My understanding was that there were more conservative organizations trying to push the envelope on 501(c)(4) status than liberal, so that necessarily even with relatively neutral criteria, more conservative organizations would be identified. If that is true, then would the court’s order require the IRS to identify all organizations selected for special scrutiny and thus permit some type of analysis to see whether there was some type of political bias involved?

  3. Jack Townsend says:

    2. Do you read the opinion as saying that the name and taxpayer identification are not a return or return information during the time that the application is pending? Only as to applications granted does the information become public information, but, until that point, as I read the court’s opinion, the information is not a return or return information. And, if it is neither return nor return information, does Section 6103 bar the IRS from disclosing it to anyone – including the White House?

  4. Jack Townsend says:

    3. More narrowly, as to applications withdrawn or denied, can the IRS disclose to anyone.

  5. Jack Townsend says:

    4. And, to the extent that the IRS can disclose the identities of withdrawn or rejected organizations, I suppose that it must disclose in a FOIA suit because 6103 does not apply. So could a FOIA suit request all documents submitted by applicants that withdraw the application or denied the status requested?

  6. Jack Townsend says:

    5. One of the commenters on the TaxProfBlog said that the IRS and DOJ were between a rock and a hard place on this one because, had they disclosed the information without a fight in the district court and on appeal, they might have been subject to wrongful disclosure suits by the organizations whose names were disclosed. By putting up the good fight, they arguably are insulated for such suits. But, I suppose that organizations whose identities are disclosed could sue in other forums which might be willing to treat the information as return information. That might be a good reason for the IRS ultimately to fight this all the way to the Supreme Court, although I am not sure that seeking cert from a mandamus denial could be done. What is the appropriate remedy if the plaintiffs win the law suit but, in later appeals then perhaps to the Supreme Court, it is determined that the organizations’ identities should not have been turned over?

  7. My impression was that the internal circulation of donor data and other information that typically is not gathered in the application process was the predicate for the claimed 6103 violation, not the identity of the targeted groups. I also believe they had constitutional claims in the mix.
    This stands out as one of the rougher opinions I have seen aimed at the DOJ that did not involve some allegation of an ethical violation. The oral argument must have been quite something.

  8. Any word on whether government will comply with decision or appeal?

    It’s been two weeks and no word of follow-up. Note: The New York Times has not reported the March 22 decision. Apparently, the Sixth Circuit decision, criticizing the Obama IRS, is deemed “not fit to print” at the Times.

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