Barrett v. U.S., 93-2280

Decision Date20 April 1995
Docket NumberNo. 93-2280,93-2280
Citation51 F.3d 475
Parties-1993, 95-1 USTC P 50,232 Bernard M. BARRETT, Jr., M.D. and Plastic & Reconstructive Surgeons, P.A., Plaintiffs-Appellants, v. UNITED STATES of America, et al., Defendants, United States of America, Defendant-Appellee.
CourtU.S. Court of Appeals — Fifth Circuit

Edward D. Urquhart, Silvia T. Hassell, Charles J. Escher, Urquhart & Hassell, Houston, TX, for appellants.

Sally J. Schornstheimer, Gary R. Allen, Jonathan S. Cohen, Appellate Secretary, Tax Div., Dept. of Justice, Stuart D. Gibson, Trial Atty., Washington, DC, Lawrence Finder, Acting U.S. Atty., Paula Offenhauser, Asst. U.S. Atty., Houston, TX, for appellee.

Appeal from the United States District Court for the Southern District of Texas.

Before KING and BENAVIDES, Circuit Judges, and LEE 1, District Judge.

BENAVIDES, Circuit Judge:

In one form or another, this case has been before this Court on five prior occasions. 2 This appeal is taken from the district court's judgment in favor of the Internal Revenue Service ("IRS") following a bench trial held pursuant to a prior order of remand from this Court. The district court found that the IRS did not violate sections of the tax code which prohibit the unlawful disclosure of tax return information during a civil or criminal investigation. Because we conclude that the district court erred, we reverse the judgment and remand for a determination of Dr. Barrett's damages.

I. Background and Procedural History

Dr. Barrett is the president of an unincorporated Houston medical practice specializing in plastic and reconstructive surgery ("PARS"). In 1979, the IRS began an audit of Dr. Barrett's personal and corporate tax returns for the years 1977 and 1978. When the initial investigation revealed a $100,000 discrepancy between Dr. Barrett's books and his bank records, the IRS transferred the case from its civil division to its criminal division.

IRS Agent Hanson, to whom the case was transferred, determined that it would be necessary to find out from Dr. Barrett's patients the amount each had paid and whether any part was paid in cash. Two informants who were Dr. Barrett's former employees, Dr. Michael Kelly and Beverly Redick Kelly, had informed the IRS that Dr. Barrett was "skimming" cash payments received from his patients. 3

On June 17, 1982, Agent Hanson sent a summons to PARS, calling for PARS' books and records. Five days later, Dr. Barrett advised that PARS would not comply with the summons, asserting his constitutional rights under the Fourth and Fifth Amendments. Agent Hanson then sent summonses to the hospitals where Dr. Barrett performed surgery and one to Dr. Barrett individually. All but four of the sixteen hospitals complied with the summonses. The responses from the complying hospitals provided Agent Hanson with 386 names and addresses of Dr. Barrett's patients.

Nine months later, Agent Hanson sent a "circular letter" to each of the 386 patients, informing them that Dr. Barrett was being investigated by the Criminal Investigation Division of the IRS and requesting information regarding the nature and amount of the fees paid to Dr. Barrett. In addition to the years under investigation, the letters were mailed to patients treated in 1976, 1979, and 1980, years in which no IRS Examination Division work or Criminal Investigation Division work has been performed. One hundred and twenty-six letters were returned as undeliverable.

Six months later, on November 29, 1983, Dr. Barrett commenced this action in district court against the IRS, alleging violations of 26 U.S.C. Sec. 6103 and 26 U.S.C. Sec. 7431. 4 In short, these sections authorize a taxpayer to bring suit for unlawful disclosures of tax return information during a civil or criminal investigation. Dr. Barrett alleged that the IRS violated these sections by unnecessarily informing his patients, through the circular letters, that he "is currently under investigation by the Criminal Investigation Division of the Internal Revenue Service." It is undisputed that this particular disclosure to Dr. Barrett's patients constitutes the disclosure of "tax return information."

In an initial attempt to dispose of Dr. Barrett's suit against the IRS, the district court granted the IRS a summary judgment. The district court concluded that the IRS was authorized to disclose this information because of its strong interest in choosing the source of information it sought and because Dr. Barrett's bank records were, as a matter of law, not a source of information "otherwise reasonably available" pursuant to the exception to the rule of nondisclosure contained in 26 U.S.C. Sec. 6103(k).

On appeal, this Court reversed the district court's summary judgment, holding that there was a fact issue concerning whether the disclosures in the circular letters to Dr. Barrett's patients were necessary and whether the information sought was otherwise reasonably available. See Barrett v. United States, 795 F.2d 446 (5th Cir.1986).

[A] genuine issue of material fact has been raised as to whether disclosure of the return information that the taxpayer was under investigation, particularly criminal investigation, was "necessary." We recognize that this may be a mixed question of law and fact; that is, the district court must interpret section 6103(k)(6) and the relevant IRS regulations in the light of the facts developed.

Id. at 451.

Consequently, the case was remanded for trial to determine whether it was necessary for Agent Hanson to disclose that Dr. Barrett was currently under criminal investigation to each, or any, of Dr. Barrett's patients and, if so, whether the disclosure might have been avoided by reviewing and analyzing the bank records. The panel emphasized that the question was not whether the information sought was necessary; rather, the question was whether the disclosure was necessary to obtain the information and, if it was, whether the information sought was "otherwise reasonably available." On this appeal, we consider Dr. Barrett's appeal from the bench trial, occasioned by our previous remand, in which the district court found that the disclosure in Agent Hanson's circular letters did not violate 26 U.S.C. Sec. 6103 and 26 U.S.C. Sec. 7431.

II. Necessity of Disclosure

With respect to the district court's underlying fact-findings and inferences deduced therefrom, we are bound by the clearly erroneous standard of review. Robicheaux v. Radcliff Material, Inc., 697 F.2d 662, 666 (5th Cir.1983). However, with regard to the legal conclusions reached by the district court based upon factual data, we review these conclusions de novo, as an issue of law. Id.

In regard to the question of whether it was necessary to disclose in the circular letters the fact that Dr. Barrett was currently under investigation by the Criminal Investigation Division of the Internal Revenue Service, the district court concluded:

It was "necessary" for Mr. Hanson to identify himself, his title and his division, the name of the taxpayer about whom he was requesting information, the nature of his inquiry, and sufficient facts about the information he was seeking to permit the recipients of the letters to comply with his request, in order to obtain the information he sought by sending the letters, which was "information not otherwise reasonably available."

(R. Vol. 1; 3213) (emphasis added). While the district court concluded that it was necessary to provide sufficient information to permit the recipients to comply, the district court did not specifically address the question of whether it was necessary to disclose that Dr. Barrett was under criminal investigation.

The IRS argues that disclosing the fact of a criminal investigation is necessary to obtain meaningful responses from third parties. Without referring to any evidence adduced at trial, the IRS argues that disclosing the criminal nature of the investigation is necessary because it apprises the third parties of the potential severity of the consequences of the investigation, which may encourage them to exercise appropriate care in responding to the inquiry. To the contrary, the IRS's own expert witness, Mr. Eugene "Pete" Twardowicz, testified on cross-examination that it was not necessary to include the first paragraph in the letter which disclosed "[t]he above-named individual is currently under investigation by the Criminal Investigation Division of the Internal Revenue Service." Specifically, Twardowicz testified:

Q: Now isn't it true, Mr. Twardowicz, that the absence of the first paragraph in that letter would not have detracted from the effectiveness of the letter?

A: Well, I again, I think it would have detracted, and, you know, instead of beating around the bush here, does it need Criminal Investigation Division there, no, it doesn't need that, but I think it needs in there that he is under investigation. Now the question is does the addition of Criminal Investigation Division hurt it, and I think that's up to your Honor to decide that. In may judgment, it doesn't.

The IRS offered no evidence that disclosing the fact that a taxpayer is under criminal investigation is necessary to obtain the information sought by sending the letters. Cf. Diamond v. United States, 944 F.2d 431, 435 (8th Cir.1991) (as a matter of law, IRS agent did not need to identify himself in circular letters as a member of the Criminal Investigation Division to secure the desired information).

The IRS previously took a conflicting position on what is relevant to the proposition that disclosing the fact of a criminal investigation promotes third-party compliance. At trial, the IRS successfully objected on relevancy grounds to the admission of evidence showing how many patients actually replied or sent back information in response to the circular letters. As further evidence that the disclosure was unnecessary, the formal IRS summonses for information sent out by Agent Hanson...

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