United States District Court, Central District of Illinois, Springfield Division
January 18, 1989
THOMAS J. SMITH, PLAINTIFF,
UNITED STATES OF AMERICA, DEFENDANT.
The opinion of the court was delivered by: Richard Mills, District Judge:
This is a unique case — presenting a singular scenario.
The Court has found no case law dispositive of the issues
posited. The uncommon facts here involve the disclosure of tax
return information by a federal government tax official to a
state tax official; and the matter is before the Court on
cross-motions for summary judgment.
I — Facts
At the time of the disclosure, Ira Loeb was, and is still,
the District Director for the Springfield District of the
Internal Revenue Service. As such, he is the federal official
chiefly responsible for the administration of the federal tax
laws within the district. Plaintiff, Thomas Smith, was
employed by the Illinois Department of Revenue and acted as
the liaison official for the Federal-State Exchange Program
(Program). The Program facilitates the exchange of
confidential tax information between the IRS and the State of
Illinois Department of Revenue (Revenue). As the liaison
official, Smith was the contact point between the IRS and
Revenue. During the relevant period, J. Thomas Johnson was the
Director of the Illinois Department of Revenue.
In mid-October of 1984, information regarding Mr. Smith's
tax delinquencies was brought to the attention of Mr. Loeb.
Subsequently, Mr. Loeb received a memorandum from Eugene
Winston, Chief of the Collection Division for the District,
dated October 29, 1984. This memorandum stated that Mr. Smith
had not filed a federal tax return for the years 1982 and 1983
and that he had outstanding liabilities for the tax years 1980
and 1981. After receiving this information, Mr. Loeb
determined that it indicated a potential state tax violation
by Mr. Smith and that this delinquency reflected poorly on Mr.
Smith's ability to carry out his liaison responsibilities. Mr.
Loeb then decided that the IRS should request that Mr. Smith
be relieved of his position as the liaison official.
To accomplish his goal, Mr. Loeb determined that the
Director of the Department of Revenue of Illinois should be
contacted directly. Cognizant of disclosure laws, however, Mr.
Loeb consulted IRS counsel for their opinion of whether the
disclosures about Mr. Smith could be made. It was determined
by counsel that the disclosure could be made lawfully under
26 U.S.C. § 6103(d) of the Internal Revenue Code.*fn1 Counsel
further advised Mr. Loeb on the implications of disclosure in
light of Rueckert v. Gore, 587 F. Supp. 1238 (N.D.Ill.
1984),*fn2 which involved disclosures of federal tax return
information to the Illinois Department of Revenue. After
receiving clearance from the IRS counsel, Mr. Loeb personally
provided Mr. Johnson, the Director of Revenue, with the Winston
memorandum and requested that Mr. Smith be relieved of his
liaison responsibilities. The filing of Mr. Smith's complaint
II — Cross-Motions for Summary Judgment
Pursuant to Fed.R.Civ.P. 56(c), both parties have moved for
summary judgment. Rule 56(c) mandates that summary judgment
should be entered "if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with
affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to a
judgment as a matter of law." The fact that cross-motions for
summary judgment have been filed does not per se entitle the
Court to dispense with the determination of whether questions
of material fact exist. We must give no less careful scrutiny
to the facts here than we would had only one litigant moved
for summary judgment. See Lac Courte Oreilles Band of Lake
Superior Chippewa Indians v. Voigt, 700 F.2d 341, 349 (7th
Cir.), cert. denied, 464 U.S. 805, 104 S.Ct. 53, 78 L.Ed.2d 72
(1983). Having done so, however, we conclude that this cause is
properly decided as a matter of law.
III — Section 6103(d) Violation
The parties agree, and the Court concurs, that the operative
section of the Code is section 6103. The pertinent subsections
of that section state:
(a) General Rule. — Returns and return
information shall be confidential, and except as
authorized by this title —
(1) no officer or employee of the United States
shall disclose any return or return information
obtained by him in any manner in connection with
his service as such an officer or an employee or
otherwise or under the provisions of this
section. For purposes of this subsection, the
term "officer or employee" includes a former
officer or employee.
(d) Disclosure to State tax officials. — Returns
and return information with respect to taxes
imposed by chapters 1, 2, 6, 11, 12, 21, 23, 24,
31, 44, 51, and 52 and subchapter D of chapter 36,
shall be open to inspection by or disclosure to any
State agency, body, or commission, or its legal
representative, which is charged under the laws of
such State with responsibility for the
administration of State tax laws for the purpose
of, and only to the extent necessary in, the
administration of such laws, including any
procedures with respect to locating any person who
may be entitled to a refund.
Such inspection shall be permitted, or such
disclosure made, only upon written request by the
head of such agency, body, or commission, and
only to the representatives of such agency, body,
or commission designated in such written request
as the individuals who are to inspect or to
receive the return or return information on
behalf of such agency, body, or commission. Such
representatives shall not include any individual
who is the chief executive officer of such State
or who is neither an employee or legal
representative of such agency, body, or
commission nor a person described in subsection
Section 7431 of the Code*fn3
authorizes suit against the
United States where "any officer or employee of the United
States knowingly, or by reason of negligence, discloses any
return or return information with respect to a taxpayer in
violation of any provision of section 6103. . . ."
Id. § 7431(a)(1). However, the section provides that no
liability will arise if the disclosure results from "a good
faith, but erroneous, interpretation of section 6103." Id. §
Thus, section 6103 has three requirements: (1) disclosures
are made only to the extent necessary for the administration
of state tax laws; (2) disclosures are made only upon written
request by the head of the agency charged with the
administration of the state tax laws; and (3) disclosures are
to be made only to the designated representative of the
There is no dispute as to the first and third requirements.
The disclosure here was made in furtherance of the
administration of the state tax laws. Plaintiff does not argue
otherwise. The third requirement provides a peculiar situation
in this cause but is resolvable. The third requirement
necessitates that disclosures be made to the designated
representative of the requesting agency. Here, that designated
agent was Plaintiff. Mr. Loeb provided the information
directly to Mr. Johnson, thus bypassing Plaintiff. This is a
situation which simply was not anticipated by section 6103. As
Plaintiff is the designated agent of Mr. Johnson and because
Plaintiff was the target of the disclosure, the Court finds no
violation of section 6103 on the part of Mr. Loeb in making
the disclosure directly to Mr. Johnson (subject to compliance
with the second requirement). We must emphasize, however, that
this deviation from the requirements of section 6103(d) is
condoned only in consideration of the peculiar facts of this
The contentions of the parties mainly focus on the second
requirement of section 6103(d) — that disclosures be made only
upon written request by the head of the agency charged with the
administration of the state tax laws. The Government contends
that this requirement is met by the Agreement on Coordination
of Tax Administration (Coordination Agreement) and the
Implementation Agreement Between the Illinois Department of
Revenue and the Internal Revenue Service (Implementation
Agreement). The IRS Disclosure of Official Information Handbook
(1987) defines the Coordination Agreement as "[t]he `basic'
agreement [which] provides for the mutual exchange of tax data
between a specific State tax agency and the Service. Its
provisions encompass the required procedures and safeguards.
Arrangements for continuing disclosures are made by means of an
`implementing agreement'. . . ." Id.
at 1272-382, ¶ (33)-41(1). The Handbook further provides that
an "implementing agreement will be developed and negotiated
with each State tax agency which wishes to receive Federal
returns and return information on a continuing basis pursuant
to a basic agreement. It will supplement the basic agreement by
specifying the detailed working arrangements and items to be
exchanged. . . ." Id. at 1272-383, ¶ (33)-42.1(1).
The Government contends that section 6103's written request
requirement is met by the Coordination Agreement and the
Implementing Agreement which "constitute standing written
requests for certain types of information." This is correct,
in that these agreements were promulgated in response to
Congress' mandate in section 6103(d) that disclosures be made
to state tax officials only under certain conditions. However,
having invoked the agreements as satisfying one of section
6103(d)'s requirements, the Government must show that the
agreements' requirements were followed in the same way section
6103(d)'s requirements must be followed. In essence, the
agreements have become part and parcel of section 6103(d);
thus, failure to follow the requirements of the agreements is
a failure to follow the requirements of section 6103(d)
— thereby constituting a violation of that section.
Therefore, the pertinent section of the Implementing
Agreement must be examined to determine whether its
requirements were complied with. The parties agree that the
operative section of the Implementing Agreement is section
II(A)(6) which states:
When the IRS official has a Federal return and/or
return information which will not be transmitted
to the agency under other provisions of this
agreement but which may be evidence of any
intentional or inadvertent understatement or
violation of any State tax described in Section 3
of the Agreement on Coordination of Tax
Administration, the IRS liaison official
shall, if the understatement of tax potentially
exceeds [certain threshold amounts], or if the
understatement or violation is potentially a
criminal tax violation, contact the Agency liaison
official and describe the return and/or return
information (without disclosing identifying
information) in sufficient detail to ascertain the
agency's need and potential use of the return or
return information. If, in the judgement of the IRS
liaison official, the Agency has a need and use of
the return and/or return information, he/she shall
then provide the agency liaison official sufficient
information, including identifying information, to
make a specific request for the return and/or
return information as provided by section 8 of the
Agreement on Coordination of Tax Administration and
by section VIII of this implementing agreement.
First, we note the mandatory language of the section through
the use of the word "shall" in two operative places within the
section. Second, the Court counts no less than seven
requirements within the section: (1) the IRS liaison official
must contact the state agency liaison official; (2) describe
the return information; (3) without disclosing identifying
information; (4) to ascertain the agency's need and potential
use of the information; (5) then determine whether the agency
has a need and use of the information; (6) then the IRS
official must convey identifying information to the state
agency; (7) such that the state agency may make a specific
request for the information. This may all seem a rather
cumbersome approach to the transmittal of return information.
However, it is the IRS which developed this procedure in
response to the Congressional mandate to do so.
28 U.S.C. § 6103(p)(1) ("Requests for the inspection or disclosure of a
return or return information and such inspection or disclosure
shall be made in such manner and at such time and place as
shall be prescribed by the Secretary."). Its purpose is to
protect the privacy of individuals from unwarranted intrusion
into their tax matters and to create a "paper trail" where such
intrusion is made or attempted.
By his own admission, in his affidavit, Mr. Loeb ignored
every one of these requirements. He states that he was
that this matter would require a determination that disclosure
of Mr. Smith's Federal return information to the Illinois
Department of Revenue was authorized by I.R.C. § 6103(d) and
the exchange of the agreements thereunder. . . ." Declaration
of Ira Loeb, at 3, ¶ 9 (Dec. 2, 1987). He further states that
he consulted with IRS counsel who determined that
a proper basis for disclosure was authorized
under I.R.C. § 6103(d), which provides for
disclosure of Federal return information to a State
tax agency for the purpose of the administration of
the State tax laws, and Section IIa6 of the
Implementing Agreement which sets out the
procedures to be followed in making a disclosure
under I.R.C. § 6103(d).
Id. ¶ 10.
Thus, Mr. Loeb was fully aware of the requirements to be
followed in a disclosure situation involving section 6103(d)
of the Code and section II(A)(6) of the Implementing
Agreement. Yet, instead of following these procedures, he
simply "personally provided on October 29, 1984, Mr. Johnson,
Director of the Illinois Department of Revenue, with a copy of
Mr. Winston's memorandum discussing Mr. Smith's Federal tax
information. . . ." Id. at 4, ¶ 13.
We discern no ill-motive in Mr. Loeb's action. In fact, his
watchdog sense of responsibility is entirely laudible — yet
his plan of action was ill-conceived. The IRS must be held
accountable for compliance with its own rules — particularly
in an area such as this where the privacy rights of individual
citizens are at stake and can fall in harm's way.
In defense of Mr. Loeb's actions, the Government first
argues that "Mr. Loeb did not need to make a preliminary
disclosure (without identifying information) because he knew
that the disclosure was authorized for tax administration
purposes." This argument is meritless because it assumes Mr.
Loeb has the discretion to make such a determination. The
plain language of the Implementation Agreement leaves no doubt
that Mr. Loeb is without such discretion. The Agreement makes
the preliminary disclosure mandatory.
Next, the Government argues that since there was a standing
request for this type of information, Mr. Loeb knew that it
was wanted by the State. Again, this argument is without
merit. Mr. Loeb has no discretion to determine what
information is "wanted by the state." Further, the function of
the standing written request is only to set in motion the
transmittal procedures, not to authorize transmission (until
the procedures have been complied with).
Next, the Government contends that "there was no need for
any specific request from the State unless and until the State
wanted to obtain plaintiff's tax returns or audit
information." The agreement provides for the transmittal of
"return and/or return information." Clearly, that is the type
of information which Loeb gave to Johnson about Plaintiff.
From the plain language of the Agreement, identifying
information may be disclosed only after a need and use
evaluation has been made and only for the purpose of allowing
the state agency to make a "specific request." This serves the
purpose of creating the "paper trail" to establish the
legitimacy or illegitimacy of the disclosure and to keep the
disclosure to the minimum amount of information needed by the
state agency. See Handbook, at 1272-382, ¶ 33(30).
Lastly, the Government argues that, "while it may be useful
to require preliminary disclosures, any violation of the
statute must be based on the fact that the disclosure was made
of information that was not necessary in the administration of
the State tax laws." This argument typifies the cavalier
attitude of Mr. Loeb toward the required procedures. Not only
are the transmittal procedures "useful," they are mandatory by
their own terms. The IRS Handbook states: "Congress has
recognized the importance of this exchange program by
permitting the disclosure of certain confidential Federal tax
information to State agencies for tax administration purposes.
However, Congress balanced this disclosure authority with
additional requirements designed to safeguard Federal tax
information against misuse and unauthorized disclosure." Id. at
¶ 33(10(1). The Court cannot sit idly by while these safeguards
are openly ignored.
Finally, we disagree that a violation of section 6103(d) can
occur only under the "administration of the tax laws"
requirement. As found above, there are three requirements of
section 6103(d). A violation of any one constitutes a
violation of that section for section 7431 purposes.
IV — Good Faith Defense
As an alternative ground to avoid liability, the Government
argues that if there was a violation of section 6103(d), no
liability should arise because the disclosure resulted from a
good faith interpretation of section 6103(d). Code section
7431(b) provides: "No liability shall arise under this section
with respect to any disclosure which results from a good
faith, but erroneous, interpretation of section 6103." The
Government cannot avoid liability by virtue of the good faith
defense for two reasons. First, the section is inapplicable
because there was no good faith but erroneous "interpretation"
of section 6103. Mr. Loeb knowingly ignored a number of the
requirements necessary to make a proper disclosure. There was
no "interpretation" involved.
However, to the extent that it can be argued that Mr. Loeb
"interpreted" the section as not requiring the procedures he
ignored, the good faith defense is inapplicable. In
Huckaby v. United States Treasury Dep't, IRS, 794 F.2d 1041,
1048-49 (5th Cir. 1986), the court held that a party's good
faith should be judged by an objective standard. As here, the
Huckaby court had to decide "whether a reasonable IRS agent
would have known of the rights provided by the sections, and of
his own agency's applicable regulations and internal rules."
Id. at 1048. Here, the Implementing Agreement makes abundantly
clear the procedures which were to be followed.
Further, Mr. Loeb, by affidavit stated: "In accordance with
my overall responsibility for the management of the
Springfield District, I have often found it necessary to
address the confidentiality and disclosure provisions
contained in I.R.C. § 6103. This statute was enacted in 1976,
at a time when I held my current position." Obviously, Mr. Loeb
is no stranger to the disclosure procedures. "A reasonable IRS
agent can be expected to know the provisions of sections 6108
and 7431, as they may be further clarified by IRS regulations
and other IRS interpretations." Huckaby, 794 F.2d at 1049. As
Mr. Loeb knew of the disclosure procedures in the Implementing
Agreement and simply failed to follow them, his contrary
interpretation is not in good faith under section 7431(b).
Ergo, Plaintiff's motion for summary judgment is ALLOWED.
Conversely, Defendant's motion for summary judgment is DENIED.