District Court Certifies Class Action in Tea Party Challenge to IRS

Today we welcome as a 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. He is also taking the lead oar in the rewrite of the content on unauthorized disclosures of taxpayer information in the revised Saltzman and Book treatise IRS Practice and Procedure. In today’s post, Stu discusses some of the issues relating to NorCal Tea Party Patriots v IRS, the litigation alleging that the IRS improperly disclosed confidential taxpayer information that stems from the widely-publicized allegations that IRS discriminated against conservative applicants seeking tax-exempt status. As Stu discusses, it is unusual to have a class action lawsuit against the IRS and even more unusual for a court to certify the class (though in fact just this week another district court certified a class in a challenge to the IRS’s charging user fees for PTINS). He also explains how the legal theory presented by the taxpayers raises some still unresolved issues regarding Section 6103 and civil actions for wrongful disclosure. Les

The Southern District of Ohio recently certified a class action against the Service in a lawsuit brought by taxpayers claiming that they were denied tax exempt status because of their conservative political views.  NorCal Tea Party Patriots v IRS, Case No. 1:13-cv-341 (S.D. Ohio Jan. 19, 2016).

The 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.  The plaintiffs’ remaining claims assert violations of the First Amendment and the Section 6103 prohibition against disclosure of taxpayer return information.   Plaintiffs, however, only sought class certification with respect to the alleged Section 6103 violations.

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The court’s opinion certified two subclasses of plaintiffs—a principal class consisting of all groups which had been identified for increased scrutiny by the Service under specified targeting criteria and a subclass of groups which had received unnecessary requests for information such as the names of donors.  The court applied the traditional FRCP 23 criteria for class certification.   The court rejected one of the principal arguments raised by the government, challenging the typicality or commonality of the proposed class members because the facts relating to review of individual group’s applications would necessarily differ.  The other government argument rejected by the court involved a challenge to the role being played by an advocacy group in funding and directing the litigation.

The ruling is noteworthy because tax cases are almost always prosecuted by individual taxpayers and that certification of a class action against the Service is rare.  The government has usually been successful in asserting that class actions are inappropriate for tax suits because the facts concerning the existence of jurisdiction in refund suits and deficiency proceedings are almost always unique to individual taxpayers.  As this case was not subject to similar jurisdictional limitations, that argument would not prevent class certification in this case and other disputes which do not arise through the typical refund claim or audit deficiency context.

The opinion did not address the interplay between the substance of the plaintiffs’ claims and the class action allegations.  The plaintiffs’ factual claims appear to focus upon the Service’s internal processing of applications for tax-exempt status and their 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.  An interesting problem likely to arise in further litigation of this case is identification of how the Service’s actions involved an improper disclosure.

Finally, another problem likely to arise in the future conduct of this litigation also involves Section 6103.  Under the court’s order, taxpayers who are not named plaintiffs in the case are now part of this litigation and presumably a proper topic for discovery litigation.  The question will arise regarding whether the Service will be allowed or required to identify other organizations whose tax exemption applications received heightened scrutiny.  Likewise, if the Service identifies these organizations, will they have a claim against the Service for wrongful disclosure?