Tax Exempt Organizations: The Identity of Applicants for Tax-Exempt Status is Not Confidential Return Information Protected Under the Internal Revenue Code

teapartyIn 2013, a major scandal broke over the treatment of “Tea Party” groups that applied for tax-exempt status, as the public learned that the IRS had singled out certain groups for special scrutiny that created long delays in processing their applications. Shortly after the scandal broke, a class action was filed against the United States, seeking damages. Complaint, NorCal Tea Party Patriots v. IRS, No. 1:13-cv-00341-SJD (S.D. Ohio).

On March 22d, the Sixth Circuit addressed a discovery dispute over the confidentiality of the names of the groups that were members of the plaintiff class, denying a mandamus petition filed by the government and ordering it to comply with the district court’s prior orders to produce the information. United States v. NorCal Tea Party Patriots, No. 15-3793, 2016 U.S. App. LEXIS 5213 (6th Cir. Mar. 22, 2016).

Part of a broader range of discovery problems, the dispute involved the plaintiffs’ request for internal lists of targeted organizations, which would permit them to identify the other members of the class. NorCal, 2016 U.S. App. LEXIS 5213 at *14. The IRS had refused to produce the information and had sought a protective order, arguing that “any information in an application for tax-exempt status, including the applicant’s name, is confidential ‘return information’” that was protected from disclosure. Id. at *14-*15. After the district court rejected this argument and denied a motion for reconsideration, the government filed a petition for a writ of mandamus with the Sixth Circuit.

NorCal turned on the construction of Section 6103 of the Internal Revenue Code, which generally makes both “returns” and “return information” confidential, subject to a variety of exceptions. A “return” is defined as “any tax or information return, declaration of estimated tax, or claim for refund.” I.R.C. § 6103(b)(1). The Code defines “return information” to include “a taxpayer’s identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments . . . .” I.R.C. § 6103(b)(2). The distinction between a return and return information is important under Section 6103 because some of the statutory exceptions authorize the disclosure of returns, while others authorize the disclosure of both returns and return information.

The parties and the district court had agreed that that the applications for tax-exempt status were not returns; they also had agreed that the applicants’ names were return information. NorCal, 2016 U.S. App. LEXIS 5213 at *18. The district court had ordered that the lists of affected applicants be produced based upon an exception that authorized disclosure in a judicial proceeding; specifically, Section 6103(h)(4)(B), which provides for disclosure in a judicial proceeding “if the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding.” I.R.C. § 6103(h)(4)(B) (emphasis supplied). The Sixth Circuit accepted the government’s argument that this particular exception did not supply authority to disclose the relevant lists since it was restricted to “returns” and did not reach “return information.” NorCal, 2016 U.S. App. LEXIS 5213 at *19-*21.

The court nonetheless denied the petition for mandamus because Section 6103(h)(4)(B) “provides neither the first word nor the last on the question whether the names of applicants for tax-exempt status are subject to disclosure as ordered by the district court.” Id. at *22. The Sixth Circuit began with a very basic point: the IRS application forms explicitly indicated that the application would be open for public inspection, which would obviously include the applicant’s name. Id. (“The first word is on the front of the IRS application forms themselves”).

The court then turned to “two provisions that the IRS fails to mention in its petition,” Sections 6104 and 6103(b)(6) of the Code. Id. While the IRS sought mandamus relief because it was purportedly precluded from disclosing the identity of applicants for tax exempt status, the court noted that “§ 6104 mandates precisely the opposite for applicants whose applications are granted.” Id. Since Section 6104 required that any successful application be available for public inspection, “the name of every successful applicant for tax-exempt status is indisputably public in character.” Id. at *23. Accordingly, after observing that “the IRS failed to mention this elementary legal truth in the district court or in its petition for extraordinary relief from this court,” the Sixth Circuit held that the identity of successful applicants was public information and that the contrary position of the IRS was “patently meritless.” Id. at *23-*24.

Next, the Court of Appeals turned its attention to the identities of applicants whose applications were pending, denied, or withdrawn. The NorCal Court focused first on the definition of “return information” under Section 6103(b)(2), which includes “taxpayer identity;” the court then turned to the statutory definition of that term, which included the name of a taxpayer “with respect to whom a return is filed.” Id. at *25 (quoting I.R.C. § 6103(b)(6)). The Sixth Circuit held that this definition was dispositive: “applicants file applications, not ‘returns’; and thus the name of an applicant for tax-exempt status does not fall within a ‘taxpayer’s identity.’” Id. The court also rejected the government’s alternative argument that the identities were protected return information because they were “‘other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary . . . with respect to a return or with respect to the determination of the existence, or possible existence, of liability’ for a tax,” id. at *26 (quoting I.R.C. § 6103(b)(2)(A)), because construing this provision to reach the names of applicants and taxpayers would make the definition of “taxpayer identity” superfluous. Id. Consequently, the Sixth Circuit held that “the IRS’s assertion that applicant names are return information is meritless.” Id.

The Court of Appeals found additional support for its holding in Section 6104(c) of the Code, which authorizes the IRS to make disclosures to state officials, including “the names, addresses, and taxpayer identification numbers of organizations which have applied for recognition as organizations described in section 501(c)(3).” I.R.C. § 6104(c)(2)(A)(iii). The court noted that another provision of the statute authorized additional disclosures to state officials, including “returns and return information of organizations.” NorCal, 2016 U.S. App. LEXIS 5213 at *27 (quoting I.R.C. § 6104(c)(2)(B)) (emphasis by the court). The NorCal Court concluded that the authorization to release the names of applicants in Section 6104(c)(2)(A)(iii) would be completely unnecessary if the applicants’ names were “return information” because disclosure would be authorized under Section 6104(c)(2)(B). Id. at *27-*28.

Accordingly, the NorCal Court rejected the government’s mandamus petition, noting that “Section 6103 was enacted to protect taxpayers from the IRS, not the IRS from taxpayers.” Id. at *29. The Sixth Circuit’s opinion reflects palpable anger at the Justice Department for the positions it adopted; while the court’s language is heated, its analysis seems sound.

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