Public Records Exception to IRC 6103

In his expert report, the expert witness writes:

I have been retained by the United States to provide testimony as to the nature of various life insurance products, particularly whole-life insurance contracts and term life contracts, and how such contracts operate and are administered. I have also been asked to analyze the particular insurance contract at issue in this case, and to provide an actuarial analysis as to the amount required to provide the death benefits offered to Plaintiffs in connection with the transaction at issue. Additionally, I have been asked to provide testimony as to employee welfare benefit plans and how such arrangements make use of life insurance policies.

In my experience, I have seen that designers and promoters of these purported EWBPs have put a great deal of effort into designing programs that would permit the use of cash value life insurance products on a tax deductible basis. This has been done by attempting to fit within particular Internal Revenue Code subsections regarding sharing of risk among companies by concealing the build-up of cash value through the use of special policies, or by the use of trusts to hold the insurance policies and to temporarily limit the ability of either the company or the insured individual to access the case value.

DeWeese’s [the expert] CV lists 27 prior cases in which he served as an expert.

Plaintiffs have some concern that his experience in 27 previous cases impacted his opinion in their case and they want information so they can pursue that theory.

The three Tax Court cases on which Plaintiffs sought testimony from DeWeese are Booth v. Comm’r of Internal Revenue, 108 T.C. 524 (1997); Neonatology Assoc., P.A. v. Comm’r of Internal Revenue, 115 T.C. 43 (2000); and V.R. DeAngelis M.D.P.C. v. Comm’r of Internal Revenue, 94 T.C.M. (CCH) 526 (2007).

The opinion lists the questions plaintiff sought to ask and the objections based on 6103 made by the IRS.  In analyzing whether the expert can answer the questions asked, it cites to the general prohibition on disclosure in 26 U.S.C. §6103(b)(2) as well as to the exceptions provided in 26 U.S.C. §6103(h)(4).  Plaintiffs argue their questions do not address tax return information but rather the structure of the insurance plans at issue.

The court cites to the conflicting opinions regarding the public records exception to disclosure:

The §6103 definition of return information is broad, and confidential return information “remains such even when it does not identify a particular taxpayer” — that is, even if a taxpayer’s identity can be redacted, the return information still cannot be disclosed. Church of Scientology of Calif. v. I.R.S., 484 U.S. 9, 10 (1987). But the Sixth Circuit has held “once a taxpayer’s return information becomes part of the public domain through the filing and recording of a judicial lien, it loses its confidentiality and is not protected by Section 6103 if republished by the Internal Revenue Service for tax administration purposes.” Rowley v. U.S., 76 F.3d 796, 801 (1996). When information is “clearly already a part of the public domain”, it is no longer confidential.

The court finds that if the expert answers the questions about the insurance plans it would:

almost certainly comprise “the nature, source, or amount of [a taxpayer’s] income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments,” and would therefore be confidential return information. 26 U.S.C. §6103(b)(2)(A). Though Plaintiffs insist their questions deal “solely with the structure and operation of the plan[s] at issue” (Doc. 87, at 5), the Court finds the structure and operation of such plans — as income, payments, and deductions — are return information under the §6103 definition.

Having found that the questions would elicit tax return information covered by the disclosure prohibitions in 6103, the court goes on to find that the return information is already public and was disclosed in Tax Court opinions.  It finds:

While the publication of this return information did not occur under precisely the same circumstances as in Rowley, the information within these three cases is “clearly already a part of the public domain”; the return information at issue has not been confidential for more than twenty years. Rowley, 76 F.3d at 801. The protection of this information under §6103 is therefore futile.¹ Testimony from DeWeese regarding his experience with and analysis of this return information would speak to his qualifications without revealing additional return information.

From a discovery standpoint, the court finds the information sought part of a legitimate inquiry.  It ends by placing a limitation on the scope of his testimony:

As long as Plaintiffs do not elicit — and DeWeese does not reveal — factual information not made public by the texts of the Booth, Neonatology, and DeAngelis opinions, their questioning of DeWeese on his impressions and experiences with the information in the opinions does not violate §6103 and is permitted.

I don’t know if the IRS will appeal this decision.  The scope or even the existence of the public records exception is something not well settled.  This causes consternation for IRS employees and others dealing with return information that has made its way into the public domain.  I agree with the decision here but would like more definition regarding the limitations on use of information in the public domain, if any.

For more on the public records exception to disclosure see IRS Practice and Procedure at ¶ 4.08[1][b][ii][D].