Can the House Obtain and Release President Trump’s Tax Returns?

Guest poster Stu Bassin continues the discussion about possible ways that President Trump’s tax returns may see the light of day. In this post Stu suggests an approach that does not rely on the Congressional right within Section 6103(f) but instead looks to the possibility of serving a subpoena on advisors. Les

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.

Most of the commentary has focused upon the Section 6103(f) exception to the prohibition against disclosure which authorizes Congress to obtain returns and return information.  Under the statute, the Service must provide the Chairman of the House Ways and Means Committee any returns and return information specifically requested in writing, presumably including the President’s returns and any related audit files.  The statute provides that any information in those documents identifying the taxpayer (i.e., the President) can be provided to the committee only when it is sitting in closed executive session.  Interestingly, the statute does not contain any prohibition against further disclosure of the documents to the remainder of the Congress or disclosure of the information by the Congress to the general public.  And, as Professor Yin has reported,Congress has occasionally read the statute as allowing it to disclose returns and return information to the public. Less formally, the documents might “leak.”


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.

Stay tuned.

Ninth Circuit Reconsideration in Altera v. Commissioner

We welcome back guest blogger Stu Bassin. Stu has blogged with us on several occasions. He is a practitioner based in DC with an extensive controversy practice and provided a discussion of the Altera case earlier here. Les

Last week bought the latest twist in the saga of a challenge to a critical transfer pricing regulation—a rehearing by the Ninth Circuit of a since-vacated ruling upholding the regulation. The original unanimous reviewed decision by the Tax Court in Altera Corp. v. Commissioner, 145 T.C., No. 3 (2015), invalidated the regulation. A divided panel in the Ninth Circuit reversed, upholding the validity of the regulation over a strong dissent. The majority opinion was soon vacated and the case was reargued on October 16, 2018. Given the importance of the specific regulation at issue in transfer pricing cases, as well as the continuing discussion regarding questions concerning Administrative Procedure Act challenges to IRS regulations, the reargument has generated substantial attention in the tax community.


The underlying dispute involves a cost-sharing agreement governing allocation of stock-based compensation costs between entities related to the taxpayer and invocation by the IRS of Section 482 to recharacterize the terms of that agreement. Section 482 provides:

In any case of two or more organizations . . . owned or controlled directly or indirectly by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions, credits, or allowances between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses. In the case of any transfer (or license) of intangible property (within the meaning of section 936(h)(3)(B)), the income with respect to such transfer or license shall be commensurate with the income attributable to the intangible.

The taxpayer relied upon the undisputed fact that the terms of its cost-sharing agreement were consistent with the prices which unrelated parties would employ in comparable arms-length agreements, thereby satisfying the legal standard historically applied in evaluating cost-sharing agreements under Section 482. The IRS recharacterized the terms of the agreement, relying upon a regulation which specifically required affiliates to share stock-based compensation costs in a manner “commensurate with the income attributable to the intangible.” The taxpayer disagreed, contending that the regulation was invalid under the APA because it deviated from the comparable arms-length transaction test.

The Tax Court unanimously ruled in favor of the taxpayer, invalidating the regulation and rejecting the proposed Section 482 adjustment, focusing upon the second stage of the regulation validity inquiry mandated by Mayo Foundation v. United States, 562 U.S. 44 (2011) — whether the determinations reflected in the regulation were arbitrary and capricious. The opinion concluded that the regulation was invalid because the IRS failed to engage in actual fact-finding, failed to provide factual support for its determination that unrelated parties would share compensation costs in their cost-sharing agreements, failed to respond to significant comments, and acted contrary to the factual evidence before Treasury.

The IRS appeal to the Ninth Circuit was initially heard by a panel consisting of Chief Judge Thomas, Senior Judge Reinhardt, and Judge O’Malley of the Federal Circuit. Judge Thomas, joined by Judge Reinhardt, wrote the opinion for the court reversing the Tax Court opinion and upholding the validity of the regulation. He reasoned that the 1986 amendment of Section 482 (which added the language containing the “commensurate with income” standard) mandated that the IRS adopt regulations employing the commensurate with income standard in addition to the comparable arms-length transaction standard. Judge O’Malley dissented, urging invalidation of the regulation because it deviated from the arms-length standard.

Because the decisive vote was cast by Judge Reinhardt, who died after the argument and roughly 100 days before the opinion was issued. A footnote to the opinion states that “Judge Reinhardt fully participated in this case and formally concurred in the majority opinion prior to his death.” A procedural issue arose when Altera petitioned for rehearing. The remaining members of the panel were deadlocked, so the court withdrew the original opinion, assigned Circuit Judge Susan Graber (a Clinton appointee) to replace Judge Reinhardt on the panel, and scheduled the case for reargument last week.

At the argument, Judge Thomas was silent and Judge O’Malley appeared to reiterate the position stated in her dissent. So, all eyes focused upon Judge Graber, who was new to the panel and the likely decisive vote on the merits. She focused her inquiry upon statutory construction issues and the relationship between the historic standard of “comparable arms-length transactions” embodied in the first sentence of Section 482 and the “commensurate with income” standard embodied in the second sentence of Section 482. Noting that the statutory language of the second sentence applies only to “the income with respect to such transfer or license [of intangible property],” she questioned whether the cost sharing agreement was a “transfer or license” within the meaning of the statute. The taxpayer argued that its cost-sharing agreement was not a narrow “transfer or license” and that the second sentence’s “commensurate with income” standard was therefore inapplicable. In contrast, the government contended that the indirect role of the cost-sharing agreement in establishing the pricing on the arrangement between the two subsidiaries was sufficient to render the “commensurate with income” standard applicable and controlling.

Judge Graber also asked a series of questions focused upon reconciling the commensurate with income standard with the general requirement under Section 482 that the IRS must allocate costs in a manner consistent with the arms- length standard. The government argued that the legislative history reflects a congressional policy judgment and determination that, in those cases involving transfers of intangible property, only an allocation based upon the “commensurate with income” standard would satisfy the arms-length standard. The taxpayer countered by stating that the legislative history did not support such a construction and observed that, if the government’s construction were adopted, relatively few transactions would remain governed by the traditional arms-length standard.

Finally, Judge Graber inquired whether there was a factual basis or economic theory which supported the regulation’s finding that stock-based compensation costs must be allocated in a manner   commensurate with income to satisfy the arms-length standard. The taxpayer noted the absence of a factual record or economic theory supporting the IRS findings, arguing that the only evidence before the agency supported a finding that comparable arms-length transactions did not allocate stock-based compensation costs in the manner required by the IRS. In contrast, the government stated that such evidentiary support was not required to support the IRS determination.

Interestingly, the argument gave relatively little attention to the second stage of the Mayo analysis—the arbitrariness of the IRS determination. The degree of deference accorded regulations under Chevron was hardly discussed. Both sides and the court focused upon the statutory authority for the regulation. They all seemed to agree that, if the statute authorized the IRS to deviate from the arms-length standard, the regulation would survive.   Otherwise, the regulation was invalid.

The panel gave no indication of when it would render its decision. Full opinions on appeals to the Ninth Circuit tend to take a long time and the initial panel decision was not released until nine months after the argument. So, it seems likely that a decision will not be issued until early 2019.


Wells Fargo Decision Answers Economic Substance Question

Photo: Associated Press

We welcome back guest blogger Stu Bassin. Stu is a solo practitioner in Washington, D.C. who specializes in tax controversy work. Today he talks about the recent Wells Fargo decision which explores the economic substance doctrine. Keith



Practitioners have debated the parameters of the economic substance doctrine for decades. A recent district court opinion in Wells Fargo & Co. v. United States, No. 09-CV-2764 (D. Minn. May 24, 2017), addressed and resolved one of the more interesting undecided questions regarding the relationship of the so-called objective and subjective prongs of the doctrine. The ruling rejected a Government argument for disallowance of interest expense deductions under the economic substance doctrine based solely upon a finding that the transaction was undertaken solely for tax-related purposes, notwithstanding a separate jury finding that the transaction had objective pre-tax profit potential.


Since the 1980s, courts have generally made two inquiries in analyzing Service challenges of transactions based upon a lack of economic substance. The objective prong of the analysis considered whether a transaction had a real potential to produce an economic profit after consideration of transaction costs and without consideration of potential tax benefits. The subjective prong of the analysis considered whether the taxpayer had a non-tax business purpose for the transaction.

Practitioners, the Service, and the courts have long debated the relationship between the two prongs of the economic substance doctrine.   Some argued for application of the prongs disjunctively; a transaction would pass muster if it satisfied either the subjective or the objective prong. Others argued for application of the prongs conjunctively; a transaction would survive scrutiny only if it satisfied both the objective and the subjective prongs. When Congress codified the economic substance doctrine in 2010, it adopted a conjunctive formulation—denying tax benefits to a transaction if it failed to satisfy either prong.

The courts, probably recognizing that few transactions lacking a reasonable prospect of economic profit are motivated by non-tax business purposes, have generally viewed the subjective and objective prongs as part of a single unified inquiry.   Indeed, most (if not nearly all) of the reported decisions have concluded that the disputed transaction either satisfied or failed both prongs of the analysis. As noted by the Wells Fargo decision, “there is a gap between what courts say and what courts do: Although courts may say that a subjective non-tax business purpose is essential, courts in fact have been reluctant to disregard economically substantive transactions solely on the basis of the taxpayer’s subjective motives.”

The unique procedural posture of Wells Fargo required the court to confront directly the question that the courts had been avoiding.   The case involved a jury trial concerning a STARS foreign tax credit generator transaction with two components—a trust structure which produced disputed foreign tax credits and a loan structure which generated disputed interest deductions. In response to jury interrogatories, the jury found that the trust structure and loan structure were separate, independent transactions and that the trust transaction failed both the objective and subjective prongs of the economic substance analysis. With respect to the loan transaction, however, the jury found that the transaction passed the objective prong by providing a reasonable possibility of a pre-tax profit, but that the taxpayer entered into the transaction “solely for tax-related reasons.”

With this background, the court turned to the question of whether a transaction with objective profit potential will fail the economic substance doctrine if the taxpayer undertook the transaction solely for tax purposes. The Wells Fargo court concluded that interest deductions from the loan transaction passed muster under the economic substance doctrine notwithstanding the jury’s finding that Wells Fargo entered into the transaction solely for tax reasons, adopting what it described as a flexible approach in applying the economic substance doctrine. It distinguished between examination of the taxpayer’s “actual subjective motivation” and examination of what a reasonable taxpayer’s purpose would be in view of the objective features of the transaction—employing the latter approach in its analysis. Refusing to be influenced by evidence concerning the taxpayer’s actual motivation, the court observed that it would be an “absurd result” if two identical transactions were treated differently for tax purposes based solely on the subjective motivations of the participating taxpayers. Similarly, the court was not persuaded by the government’s characterization of the transaction as a “sham” and its argument that the transaction was the type of economically unproductive activity which should be discouraged.

The Wells Fargo decision leads this blogger to several observations. First, the ruling appears to be correct; the tax law ought to be based upon the objective facts concerning a taxpayer’s transactions, not a nebulous effort to determine the taxpayer’s “real” motives. Second, the ruling suggests largely eliminating the subjective prong of the economic substance doctrine; an examination of the taxpayer’s purpose is superfluous if it is based upon determination of what a reasonable taxpayer’s purposes would be under the objective facts. Third, the subjective prong of the statutory economic substance doctrine is susceptible to a similar approach; the statutory language does not explicitly mandate an examination of factual evidence concerning the taxpayer’s “real” motives and courts might reasonably focus upon evaluation of a reasonable taxpayer’s purposes under the objective facts. Fourth, one would expect relatively little change in the results of cases applying the economic substance doctrine; very few (if any) cases have ever been decided based upon judicial or jury findings that only one prong of the economic substance doctrine had been satisfied and the Wells Fargo decision does not encourage future courts to make comparable findings.

Finally, the ruling may signal the death knell for several lines of cases employing a separate “business purpose” rule. Employing the rule, the Service has, in several different contexts, challenged transactions under an amorphous business purpose rule which disallowed tax benefits from transactions which lacked a sufficient non-tax business purpose. However, the Government has almost never prevailed solely under the business purpose rule in cases where an economic substance challenge would not have resulted in a comparable conclusion. Perhaps, it is time to finally jettison allusions to the existence of a separate business purpose rule and to focus analysis where it belongs—the objective prospect of a pre-tax economic profit.

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

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.


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.