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

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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).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).

TPThe 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 ications 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.