To say the Internal Revenue Code is complex is like saying a virus is hard to see. It understates the obvious. NSS. Today the Tax Court teaches us one consequence of that complexity: the meaning and scope of one statute (§6103) can be altered by the later addition of another statute (§7623(b)). The former is the statute that requires the IRS to keep taxpayer information confidential. The latter is the statute that allows whistleblowers to obtain Tax Court review of a denial of a whistleblower award.
In Whistleblower 972-17W v. Commissioner, 159 T.C. No. 1 (July 13, 2022) (Judge Toro), the Court said the IRS had to give a whistleblower the unredacted returns and return information of three taxpayers that the whistleblower informed on. Folks, this is a reviewed opinion and all 15 of the reviewing judges agreed with Judge Toro’s decision (one judge did not participate). While the decision is rational, its conclusion is certainly not a slam dunk. IMHO it misses the forest for the trees, resting on a curious presumption about the statutory text in 6103. Whether or not readers agree with that, we can all agree this case illustrates how a later statute may give new meaning to the words in an older statute. That is an inherent difficulty in interpreting statutory language that is part of such a wickedly complex Code.
Trigger warning: today’s post runs a bit longer than normal. So the refresh rate will likely bother those who click through. I am so sorry for that! But this lesson is really just so cool that I hope you will persevere.
Before 1976, the general rule was that tax returns were public documents and their disclosure was left to the discretion of the Executive branch. See generally, Charles Davenport, Administrative Procedures of the Internal Revenue Service, 94th Cong., 2d Sess. S. Doc. 94-266 (1975) at 372-378 (recounting history). As Professor Michelle Kwon explains in her Really Useful Article Whistling Dixie About the IRS Whistleblower Program Thanks to the IRC Confidentiality Restrictions, 29 Va. Tax Rev. 447 (2010), “In practice, the Service treated tax returns and other return information as a "generalized governmental asset" that was widely disseminated to federal, state, and local government officials.” Id. at 470. But not to the public at large or to other taxpayers. Professor Kwon explains that the regulations created significant barriers to release of taxpayer information.
This pre-1976 rule, and its operation, was sharply criticized by many as an “outwardly contradictory and confusing concept that tax returns are to be ‘public’ records but are to be made available only at the order of [the IRS].” Davenport, supra, at 372. Treasury regulations were criticized as being inconsistent and contradictory. Id.
In 1976, Congress flipped the rule. Thus, ever since 1976, the general rule in §6103(a) has been that “[r]eturns and return information shall be confidential ... except as authorized by this title.” Notice this means Congress has reserved for itself the discretion to permit disclosure. It’s no longer up to the IRS. Congress will control the exceptions.
This new general rule of no disclosure is very broad, mostly because the term “return information” basically means anything in the IRS computers or files. Mallas v. U.S., 993 F.2d 1111 (4th Cir. 1993) is a good example. Mr. Mallas had been convicted of promoting an illegal tax evasion scheme. After his conviction the IRS included that information in various Revenue Agent Reports it sent out as part of the audit of various of his investors. However, after Mr. Mallas’ conviction was overturned on appeal, the IRS continued to send out the information. Mr. Mallas sued for damages and one defense the IRS raised was that it had not disclosed his “return information.”
The Circuit Court disagreed. It held that disclosure of Mr. Mallas’ name in a document that had nothing to do with his tax liability was still his “return information” because it was information the IRS had in its files. So disclosure of that information was prohibited unless disclosure fit within one of the statutory exceptions. See also Landmark Legal Foundation v. I.R.S, 267 F.3d 1132, 1135 (D.C. Cir. 2001) (agreeing that tax return information was “virtually any information collected by the Internal Revenue Service regarding a person's tax liability."). See also Allan Karnes & Roger Lirely, Striking Back at the IRS: Using Internal Revenue Code Provisions to Redress Unauthorized Disclosures of Tax Returns or Return Information, 23 Seton Hall L. Rev. 924, 933 (1993) (no free link, sorry)).
So everything is return information and the general rule is that it may not be disclosed unless you find a statutory exception. Again, this means Congress has reserved for itself the discretion to permit disclosure. And §6103 is thickly branched with subsections where Congress has created specific exceptions to the general rule, spelling out exactly when disclosures can be made, to whom, and how much. It’s complex, but everyone recognizes that Congress is trying to balance the need for the legitimate use of taxpayer information with the need to protect taxpayer privacy. To enforce the balances it created, Congress has also enacted a slew of penalties, enforceable against both the IRS and individual IRS employees. See e.g. §7213 (criminal penalties); §7431 (civil fines). Professor Kwon gives the detail in pages 472-473 of her Really Useful Article.
Again, the default rule is “no disclosure.” The trunk of the tree, the core rule, is “no disclosure.” It is only against that fundamental decision by Congress—a decision that flipped the prior statutory scheme—that courts have generally interpreted the statutory exceptions to §6103. They read the statute as a whole against disclosure unless Congress has made the exception very clear.
The Mallas case helps here as well. There the government argued for a common law exception: disclosure of information already in the public domain did not violate §6103 because the term “disclosure” should be construed to mean release of non-public, confidential, information. The Fourth Circuit rejected that argument with this forceful reminder of how Courts approach interpreting §6103:
“Congress strictly circumscribed the contexts in which Government officers or employees may disclose such information. Unless the disclosure is authorized by a specific statutory exception, section 6103(a) prohibits it. The Government points to no such exception—and we are aware of none—permitting the disclosure of "return information" simply because it is otherwise available to the public.” 993 F.2d at 1120. (emphasis supplied).
The government also argued that the disclosure did fall within the §6103(h)(4) exception for disclosures made as part of an “administrative proceeding.” Since that is the statute at issue in today’s case, let me set it out in full.
Section 6103(h)(4) provides as follows (emphasis added):
“(4) Disclosure in judicial and administrative tax proceedings: A return or return information may be disclosed in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only—
“(A) if the taxpayer is a party to the proceeding, or the proceeding arose out of, or in connection with, determining the taxpayer’s civil or criminal liability, or the collection of such civil liability, in respect of any tax imposed under this title;
“(B) if the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding;
“(C) if such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding; or
“(D) to the extent required by order of a court pursuant to section 3500 of title 18, United States Code, or rule 16 of the Federal Rules of Criminal Procedure, such court being authorized in the issuance of such order to give due consideration to congressional policy favoring the confidentiality of returns and return information as set forth in this title.
“However, such return or return information shall not be disclosed as provided in subparagraph (A), (B), or (C) if the Secretary determines that such disclosure would identify a confidential informant or seriously impair a civil or criminal tax investigation.”
In Mallas the government argued that it was covered by the bolded language: it had disclosed the information about Mr. Mallas in “administrative proceeding pertaining to tax administration.” But that language was not defined in §6103 or elsewhere. The government argued for a broad interpretation of the phrase to include the audit process, taken as a whole.
The Circuit Court refused to give a broad interpretation to the exception language. It emphasized that the Court needed to be careful not to exceed the boundaries Congress put on disclosure and the main boundary was the one in §6103(a). Since Congress had elsewhere characterized audits as “investigations” and not “administrative proceedings” the Court refused to read the exception in (h)(4)(A) broadly to conflate the two ideas. It interpreted the phrase “administrative proceedings” in light of structure and purpose of §6103 and against the strong presumption created by §6103(a).
While the IRS has long been authorized to give awards to informants, a/k/a whistleblowers, Congress did not add a judicial review provision until 2006. Before then informants unhappy with their awards had a hard time obtaining judicial review. In 2006 Congress enacted §7623(b)(4), permitting whistleblowers to ask the Tax Court to review “any determination regarding an award.” §7623(b)(4). Tax Reform and Health Care Act of 2006, 120 Stat. 2922, 2959. At that time Congress made no alteration to §6103(h).
A whistleblower’s submission must survive a 3-stage process before the whistleblower becomes eligible for an award under §7623(b). The availability of judicial review depends in part on at what part of the process the IRS decides to ignore the Whistleblower’s information.
The three-step review process is governed by both the IRM and the Treasury Regulations. For details, see Lesson From The Tax Court: The Slippery Slope Of Tax Court Review, TaxProf Blog (Oct. 12, 2020). Here’s a summary. I invite readers to pounce on any inaccuracies they spot!
Stage 1: Processing. First, the WBO office evaluates both the form and content of the information the whistleblower has submitted to see if it meets applicable requirements to even pursue. Generally this means reviewing the Form 211 and attachments. If the submission is incomplete or otherwise not in conformance with the regulations, the WBO will reject the submission. The Tax Court has held it had jurisdiction to hear a whistleblower’s complaint about a Stage 1 rejection. See Lesson From The Tax Court: How The Court Reviews Whistleblower Office Decisions, TaxProfBlog (Dec. 2, 2019) (blogging Lacey v. Commissioner, 153 T.C. No. 8 (2019)). However, the D.C. Circuit recently overruled Lacey and held that the Tax Court does not have jurisdiction to review a Stage 1 rejection. See Li v. Commissoner, 22 F.4th 1014 (D.C. Cir. 2022).
Stage 2: Classification. Classification is basically a second look at the claim and the information to see if it is worth pursuing. Here, the WBO passes the submitted information to an IRS subject matter classifier in the relevant Operating Division (e.g. SB/SE or LBI, etc.). That classifier gives the information a second review to see if it is worth passing on to an Exam or Collection function within the Operating Division to use in an existing case or to create a new case. IRM 188.8.131.52 emphasizes that “classification’s role is only to determine if the information on the Form 211 warrants further review. It is not classification’s responsibility to determine whether a whistleblower is entitled to an award.”
But a classifier’s decision might result in either a rejection or a denial, depending on the reason for refusing to move the information forward. That ambiguity has led the Tax Court to find that it has jurisdiction to hear a whistleblower’s petition after a Stage 2 determination. See Lesson From The Tax Court: The Slippery Slope Of Tax Court Review, TaxProf Blog (Oct. 12, 2020) (blogging Worthington v. Commissioner, T.C. Memo. 2020-141). The D.C. Circuit has not overruled this interpretation.
Stage 3: Final Determination. If the information submitted on Form 211 and attachments survives the operating division’s Classification step, then a field employee called a Subject Matter Expert (SME) reviews the information one more time “to determine whether it may materially contribute to the identification, development or resolution of taxpayer liability or collection issues.” IRM 184.108.40.206.1. If the SME finds a fit, the SME then sends the information on to the appropriate Exam or Collection function and any further decision regarding an award will be subject to judicial review. As with Stage 2, however, if the SME decides not to send the information to the Exam or Collection function, that might be either a rejection of the whistleblower’s claim or a denial of the claim. It just depends on the reason.
Law: The Awkward Fit of §6103 and the Whistleblower Program
Professor Kwon does a masterful job in explaining the problems that a strict construction of §6103 presents for the IRS in working with Whistleblowers. I just want to make two points here.
First, the administrative part of Whistleblower program was in existence when Congress flipped the basic rule in §6103 from “disclosure at discretion of the IRS” to “no disclosure unless Congress says so.” And yet Congress did not create any statutory exception to the prohibition in §6103(a) for disclosure to whistleblowers. Eventually, in 2019, Congress amended §6103(k) to permit limited disclosure to Whistleblowers as necessary to work the case against the target taxpayers. Additionally, when necessary, the IRS has put whistleblowers under a tax administration contract and thus authorized disclosure under §6103(n). See generally Treas. Reg. 301.6103(n)-2 and IRM 220.127.116.11. Those tax administration contracts operate to extend the §6103(a) prohibition to the contracting party, so that provides protection to taxpayer information.
Second, the judicial review part of the Whistleblower program did not exist in 1976 when Congress flipped the rule in §6103. That means when Congress wrote the statutory exception in §6103(h)(4) permitting disclosure in judicial or administrative proceedings, there was no ability for Whistleblowers to initiate a judicial proceeding. More on that in the Lesson.
But first, lets look at the facts of the case.
The Whistleblower gave the IRS information about three taxpayers. The information went to Stage 3 and was included in an ongoing investigation, but ultimately the IRS said it made no use of it, even though the IRS did pursue all three taxpayers and did collect proceeds. When all the actions against the taxpayers had concluded, the Whistleblower Office (WBO) explained that the Whistleblower's information “did not result in the assessment of additional tax, penalties, interest or other amounts with respect to the issues you raised.” Op. at 3. The WBO rejection also said “[t]he IRS did assess additional tax, penalties, interest or additional amounts but the information you provided was not relevant to those issues.” Id.
The Whistleblower petitioned Tax Court. To give a proper review, the Tax Court said it needed to see the files. It ordered the IRS to provide both redacted and unredacted copies of the WBO’s files. The IRS provided a redacted file but refused to provide the Court with an unredacted file, citing §6103(a). The Tax Court insisted that the IRS give the Court the unredacted file along with the proposed redactions for review in camera.
The IRS again refused. It believed that the statutory exception in §6103(h)(4)(B) permitted it to disclose the parts of the file that were “directly related to the resolution of an issue in the proceeding” but no other part of §6103(h)(4) applied. So the Tax Court ordered briefing on the issue.
I almost titled this Lesson “Hogs Get Slaughtered.” That is because the IRS ended up in a seemingly worse position than if it had just obeyed the Tax Court’s initial request, to review the file in camera. By sticking to its guns, the IRS ended up having to hand over the entire WBO file to the Whistleblower and not just to the Court for in camera review! The reason for that is today’s lesson.
Lesson: §6103(h)(4) Exception to Disclosure Applies to §7623(b)(4) Whistleblower Review
The Tax Court decided that the statutory exception in §6103(h)(4) meant that “the Commissioner may not resist disclosure by appealing to section 6103(a).” Op. at 26. Thus the Tax Court ordered the IRS to disclose the entire unredacted WBO file to the Whistleblower, subject to the IRS coming up with other specific reasons to redact, as permitted by Tax Court rules, or maybe parts of §6103 other than the broad general rule of non-disclosure.
Let’s take a second look at that statutory exception; the language at issue in today’s case is bolded:
“(4) ... A return or return information may be disclosed in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only—
“(A) if the taxpayer is a party to the proceeding, or the proceeding arose out of, or in connection with, determining the taxpayer’s civil or criminal liability, or the collection of such civil liability, in respect of any tax imposed under this title;
All parties agreed that Tax Court review of WBO award was a judicial proceeding for purposes of the §6103(h)(4) exception. And no one disputed that the three taxpayers were not parties. So the issue was whether this judicial proceeding “arose out of, or in connection with” a determination of the three taxpayers’ liability or the collection of their liability.
The Tax Court said it was "in connection with" a determination or collection, for three reasons. First, looking at the text in isolation, Judge Toro concludes that the phrase “in connection with,” had a very broad meaning in 1976. He relies on the definitions of the phrase contained in dictionaries in 1976. He also relies on past judicial decisions interpreting the phrase in other contexts, other statutes, other subject areas. He concludes the phrase “can bear a broad interpretation.” Op. at 14 (quoting a Supreme Court case).
From that start he appears to assume that because the phrase “can” bear a broad meaning, is does have a broad meaning, unless there is some reason other than text to limit it.
Second, there is no other reason to limit the text. Judge Toro says “we must as always consider the structure of the statute and its other provisions.” Op. at 15. Notably, however, he then looks to see whether anything in the statutory scheme narrows the presumptively broad interpretation of the phrase he has just created. He finds nothing. To the contrary, he finds that Congressional modification in 2019 of a different part of §6103, §6103(k)(13) as doing nothing to limit the presumptively broad reading of the disputed phrase over in §6103(h)(4)(A). Op. at 24, note 24 (concluding that “the adoption of section 6103(k)13) did not affect the authority under section 6103(h)(4)”)
Third, and perhaps most importantly, Judge Toro then finds that the Whistleblower judicial review proceeding was “in connection with” the determination and collection of the three taxpayers’ liabilities using a "but-for" causality chain. First, procedurally, there would be no judicial proceeding but for the IRS actually taking action against these three taxpayers. Second, the merits of the Whistleblower’s case was dependent on what actions the IRS took or did not take against the three taxpayers. Therefore, “it is hard to see how one can resist the conclusion that this judicial proceeding arose in connection with...the target taxpayers’ liabilities....” Op. at 17.
The result? The Court finds that because §6103(h)(4)(A) is an exception to the §6103(a) general rule of non-disclosure, the government must disclose all the redacted materials directly to the Whistleblower, unless the government can come up with a better reason to preserve the redactions.
Comment 1: Where To Start?
One aspect of this opinion that jumps out to me is its starting presumption. It starts by attempting to define the phrase “in connection with” in the abstract (and it pretends to find the “meaning” of the phrase in 1976!). Finding that there were some broad dictionary definitions back in 1976, the opinion concludes that the phrase must be interpreted broadly unless there was some good reason not to do so. In short, the Court says it must construe the exception broadly unless the party seeking to protect disclosure shows that Congress meant otherwise. Writes Judge Toro: “If Congress had meant to limit the exception as the Commissioner suggests, it could have used more exacting language and given different textual and structural clues.” Op. at 26.
That’s a passing strange way to go at §6103. Courts have generally taken the opposition interpretive approach: the general rule of non-disclosure—the trunk—is very strong. The exceptions are to be read narrowly, unless there is some good reason to interpret them otherwise. Even with that, the Court's belief that the Congressional failure to amend §6103(h)(4) in 2019 supports it reading is difficult to follow. When Congress amended §6103(k)(13), it provided for limited disclosure “only to the extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably available, with respect to the correct determination of tax liability for tax, or the amount to be collected with respect to the enforcement of any other provision of this title.” I do not see how that amendment supports the Tax Court’s conclusion that (h)(4)(A) permits unlimited disclosure in a judicial review proceeding.
The Court recognizes the obvious: language as fuzzy as “in connection with” may have a broad or narrow application. It just puzzles me why the Court chooses to go at interpreting §6103 to presume exceptions should be read to trump the general rule. That’s just a strange place to start.
Comment 2: Palsgrafting Congress
A second aspect of this opinion I find striking—even startling—is its reliance on Congressional omniscience. As Professor Kwon explains in her Really Useful Article, the (h)(4)(A) exception as originally written in 1976 applied only when taxpayers were parties. Two years later, however, Congress added the “in connection with” language to deal with non-taxpayer judicial proceedings where the government was seeking information or money from third parties, such as a summons enforcement proceeding against a third-party recordkeeper, or an ex-parte application for a John Doe summons, or an action against a transferee, alter ego, or nominee of the taxpayer. See Kwon, supra, at 486.
More importantly, when Congress enacted the current version of §6103(h)(4) in 1978, it had no idea that some 30 years later a different Congress would create a brand-spanking new judicial proceeding for Whistleblowers. Nope. It was just not foreseeable.
In first year torts we read about a case called Palsgraf v. Long Island R.R. Co., 248 N.Y. 339, 162 N.E. 99 (N.Y. 1928), where a series of unfortunate events on a rail station platform caused injury to a passenger. It’s a case exploring the limits of what is reasonably foreseeable. The lower courts in Palsgraf would have required the defendant to be extraordinarily prescient. The New York Court of Appeals shut that down, finding that the defendant was required only to be responsible for what was reasonably foreseeable.
The Tax Court here imputes omniscience to the Congress by demanding that Congress have foreseen the very dispute that arose in this case and have drafted language to address it. It believes Congress is extraordinarily prescient.
I think the more realistic approach is to acknowledge that Congress knows diddly. Everyone is just stuck with the chosen language and it’s up to the Court to figure out how and why that language should apply in situations that were simply not reasonably foreseeable at the time the language was written. That does not mean that future events have no impact on long-standing statutory text. As Justice Gorsuch wrote in Bostock v. Clayton County, 590 U.S. ___ (2020), “few in 1964 would have expected Title VII to apply to discrimination against homosexual and transgender persons,” So it's not that the meaning of statutory text cannot change. But it's a question of whether subsequent events justify the change. Here, the Court’s presumption of an all-knowing Congress imputes a degree of foreseeability similar to what the lower courts did to the defendant in Palsgraf. I do not think that's a strong approach to interpreting text.
Comment 3: The Wrong Causality
The third aspect of the Court’s opinion that makes me SMH is its “but-for” causality analysis. To say that a Whistleblower’s claim for an award is “in connection” with the determination or collection of the target taxpayer’s liability is...oh...let’s say counter-intuitive. By the time the Whistleblower is complaining about the paltry amount of their award, the target taxpayer’s liability has been long since determined. The collection has happened. All that is left is fighting over the carcass. Splitting up the loot. Dividing the treasure. Call me stupid (many do!) but I do not see how that proceeding has anything to do with determining or collecting tax. The timeline is all wrong. More technically, I would read the required causality as being related to an ongoing determination or collection effort. After all, that was the idea in 1978: to help the IRS in its ongoing efforts to determine or collect tax. And that's consistent with reading the broad rule of non-disclosure broadly and reading exceptions narrowly.
Comment 4: Judicial Ad-Hockery.
Professor Kwon’s Really Useful Article does more that explain all the problems that the strong confidentiality rule in §6103(a) presents to an effective and well-implemented Whistleblower program. She proposes solutions. And Congress did modify §6103 in 2019 to improve the program during its administration phase and permit limited information sharing by the IRS. But it did not modify the judicial proceedings or the 6103(h) langauge.
I end with where I started. Section 6103(a)’s strong confidentiality rule is subject to Congressional modification. In this case, the Tax Court has taken it upon itself to broadly interpret statutory text enacted in 1978 in reaction to statutory text enacted in 2006. Congress did not change the text. The Tax Court is doing that. I actually think there are good policy reasons to support limited disclosure as part of judicial review process, but that exception should come from Congress, not the Tax Court.
Bryan Camp is the George H. Mahon Professor of Law at Texas Tech School of Law. He invites readers to return each Monday (or Tuesday, if Monday is a federal holiday—like Labor Day!) for another Lesson From The Tax Court here at TaxProf Blog.