LeBaron v. US

• Decision Date: 13 January 1992
• Docket Number: No. CV 91-3847 SVW (Ex).,CV 91-3847 SVW (Ex).
• Citation: 794 F. Supp. 947
• Parties: Jennifer LEBARON, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Central District of California

794 F. Supp. 947

Jennifer LEBARON, Plaintiff, v. UNITED STATES of America, Defendant.

No. CV 91-3847 SVW (Ex).

United States District Court, C.D. California.

January 13, 1992.

Kendrick L. Moxon, William D. Katz, Bowles & Moxon, Hollywood, Cal., for plaintiff.

Lourdes G. Baird, U.S. Atty., Mason C. Lewis, Asst. U.S. Atty., Chief, Tax Div., Los Angeles, Cal., Margaret M. Earnest, Robert K. Coulter, Trial Attys., Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant.

ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

WILSON, District Judge.

INTRODUCTION

This is a suit brought by an individual who took courses offered by the Church of Scientology Flag Service Organization ("FSO") against the United States for disclosure of Plaintiff's tax return information in violation of the confidentiality provision of the Internal Revenue Code. 26 U.S.C. § 6103 (Supp.1991). This Court has jurisdiction pursuant to 26 U.S.C. § 7431(a). On Defendant's Motion to Dismiss, or in the alternative for Summary Judgment, the Court will award summary judgment to the Defendant for the reasons stated herein.

BACKGROUND

The essential facts are undisputed. The United States Internal Revenue Service (the "Service" or "IRS") issued a summons upon FSO as part of an investigation into FSO's continuing status as a tax exempt organization. FSO refused to comply with the summons, and the IRS instituted a summons enforcement proceeding in federal court. In that proceeding, District Judge Castagna referred two issues to Magistrate Judge Jenkins; whether each of the items requested in the summons were necessary to the Service's investigation, and whether FSO should be allowed to depose various members of the Service in an attempt to show bad faith. United States v. Church of Scientology Flag Service Organization, Inc., 90-1 U.S.T.C. para. 50,019 (M.D.Fla.1989).

On January 25, 1990 the IRS proffered to the Magistrate Judge an exhibit containing certain information regarding Plaintiff's taxes. On April 12, 1990, the exhibit was admitted into evidence in that action. The disclosed information included two letters from Plaintiff's accountants to the Service and a receipt from FSO in the amount of $4000 for counseling services. For the most part, the letters reasserted (after the Service initially denied) Plaintiff's claim to certain business expense deductions for counseling and "job training" services provided by FSO. One letter (the "Greenberg letter") also mentioned a negligence penalty the Service had assessed against Plaintiff and a deduction that Plaintiff had claimed for building supplies unrelated to FSO. Plaintiff's name and social security number were redacted from each of the disclosed documents.

STANDARD OF REVIEW

Summary judgment is proper where "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R.Civ.P. 56(c). The moving party has the burden of demonstrating the absence of a genuine issue of fact for trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 2514, 91 L.Ed.2d 202 (1986). Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Id.

DISCUSSION

The Internal Revenue Code establishes a civil cause of action and provides for damages "if 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." 26 U.S.C. § 7431(a). Section 6103(a) provides that "returns and return information shall be confidential ... except as authorized by this title...." 26 U.S.C. § 6103(a). The parties agree that the information disclosed here qualifies as "return information" under the statute,¹ irrespective of the fact that Plaintiff's name and social security number were redacted. Church of Scientology of California v. Internal Revenue Service, 484 U.S. 9, 108 S.Ct. 271, 98 L.Ed.2d 228 (1987) (holding that removal of identification from return information does not deprive that information of protection under section 6103); Long v. Internal Revenue Service, 891 F.2d 222 (9th Cir.1989).

Defendant's primary contention in support of the Motion is that the disclosure was authorized under Internal Revenue Code section 6103(h)(4), subsections (B) and/or (C), which exempt certain disclosures made in proceedings pertaining to tax administration from the general section 6103(a) prohibition against disclosure:

(4) A return or return information may be disclosed in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only —

. . . . .

(B) if the treatment of an item reflected on such return² is directly related to the resolution of an issue in the proceeding; or

(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;

26 U.S.C. § 6103(h)(4)(B) and (C). Even if the disclosure was not authorized under either of these exceptions, however, Defendant argues further that the United States would not be liable for damages because the disclosure "resulted from a good faith, but erroneous, interpretation of section 6103." 26 U.S.C. § 7431(b).

The Court will address each of these grounds for Defendant's motion in turn; first as they apply to disclosure of Plaintiff's deductions for FSO services and, second, as they apply to disclosure of other information contained in the same documents.

I. THE DEDUCTIONS FOR FSO SERVICES

A. Section 6103(h)(4)

Under both relevant subsections of section 6103(h)(4), the government may properly disclose tax information only in proceedings "pertaining to tax administration." 26 U.S.C. § 6103(h)(4). "Tax administration" includes enforcement and litigation functions under the internal revenue laws. 26 U.S.C. § 6103(b)(4). In this case, Plaintiff's tax information was disclosed to a Magistrate Judge considering certain issues in a proceeding brought by the Service to enforce a summons issued upon FSO. The summons was issued as part of the Service's investigation of FSO's continuing status as a tax exempt organization. Clearly, that proceeding "pertained to tax administration" within the meaning of the statute.

Under subsection (C) of section 6103(h)(4), the tax information must also directly relate to a "transactional relationship" between the taxpayer (Ms. Lebaron) and a party to the relevant tax proceeding (FSO) before the government may disclose it. 26 U.S.C. § 6103(h)(4)(C). In this case, the disclosed receipt shows that Plaintiff and FSO engaged in a transaction in which Plaintiff paid four thousand dollars for FSO services. The disclosed letters describe the benefits Plaintiff gained from those services and show Plaintiff's tax treatment of the payments as business expense deductions (and reflect that the Service had twice disallowed those deductions). Each of the disclosed items clearly relates to this transaction between Ms. Lebaron and FSO, the party in the relevant proceeding.

Having cleared these preliminary hurdles, the key question under subsection (C) becomes whether this transactional relationship between Ms. Lebaron and FSO, as described in the disclosed documents, "directly affects" the resolution of an issue in the summons enforcement proceeding. See First Western Govern. Sec., Inc. v. United States, 578 F.Supp. 212, 218 (1984) ("The statute does not require that the disclosure be `necessary' to the resolution of the proceeding ... only that the disclosure affect the resolution of the issues in the proceeding."), aff'd. 796 F.2d 356 (10th Cir.1986). Similarly, under subsection (B), the question is whether Plaintiff's tax treatment of her payments to FSO as business expense deductions is "directly related to" the resolution of an issue in that proceeding.

(1) Subsection (B)

There were two issues before the Magistrate Judge to whom the government disclosed Plaintiff's tax information. The first issue was whether FSO should be allowed to depose various members of the Service in preparation for showing that the Service had initiated its tax examination in bad faith "as part of a nationwide conspiracy to discredit and destroy the Scientology movement." Flag Service, 90-1 U.S.T.C. para. 50,019.

To be allowed that discovery, FSO had to make a substantial demonstration, based on meaningful evidence, that the Service abused its discretion when it decided to investigate FSO. Magistrate's Report and Recommendation at 8, citing In re E.E.O.C., 709 F.2d 392, 399 (5th Cir.1983). Conversely, the government's task, in persuading the Magistrate Judge to not allow the discovery, was to show that the Service had a basis for investigating FSO. Judge Castagna's earlier ruling on another issue in the case (made before he referred these two issues to the Magistrate Judge) aided the government in this endeavor. Judge Castagna had ruled that the Internal Revenue Code unambiguously provides that churches may not challenge the reasonableness of the Service's belief that a tax examination is appropriate. Flag Service, 90-1 U.S.T.C. para. 50,019, citing 26 U.S.C. § 7611(e)(1) and (2). Therefore, it appears that something less than a full showing of "reasonableness" would have been sufficient to persuade the Magistrate Judge to not allow the depositions sought by FSO. Accordingly, any evidence suggesting that the Service had some sort of reason for wanting to investigate FSO could impact the Magistrate Judge's resolution of the discovery issue. The question then is whether the tax information the government disclosed in that action tends to suggest that the Service had...