Payne v. U.S., 00-20107.

• Decision Date: 07 May 2002
• Docket Number: No. 00-20107.,00-20107.
• Citation: 289 F.3d 377
• Parties: Jerry S. PAYNE; et al., Plaintiffs, Jerry S. Payne, Plaintiff-Appellee-Cross-Appellant, v. UNITED STATES of America; et al., Defendants, UNITED STATES of America, Defendant-Appellant-Cross-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

289 F.3d 377

Jerry S. PAYNE; et al., Plaintiffs Jerry S. Payne, Plaintiff-Appellee-Cross-Appellant, v. UNITED STATES of America; et al., Defendants UNITED STATES of America, Defendant-Appellant-Cross-Appellee.

No. 00-20107.

United States Court of Appeals, Fifth Circuit.

May 7, 2002.

Jerry Stephen Payne (argued), Payne & Associates, Houston, TX, pro se.

Robert J. Branman (argued), Jonathan S. Cohen, U.S. Dept. of Justice, Tax Div., Washington, DC, for U.S.

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

Before POLITZ and EMILIO M. GARZA, Circuit Judges, and KAZEN, District Judge.^*

KAZEN, Chief Judge:

The United States appeals the verdict of the district court following a bench trial in which the court found the United States liable for a violation of I.R.C. § 7431. The district court's findings of fact and conclusions of law are set forth at 91 F.Supp.2d 1014 (S.D.Tex.1999). In sum, the trial court determined that IRS Special Agent David Batista made unlawful disclosures of taxpayer Jerry S. Payne's confidential return information in violation of I.R.C. § 6103, and that these violations were not the result of a "good faith, but erroneous" interpretation of law. I.R.C. § 7431(b). The court awarded Payne $1,536,680 in actual damages, $1,000 in punitive damages, and $105,361 in attorneys fees and costs. For reasons hereinafter discussed, we REMAND for further findings.

I. Factual Background

In the fall of 1989, the Internal Revenue Service began a civil audit of 2618, Inc., a Texas corporation that operated a topless dance club under the name Caligula XXI. Jerry Payne, an attorney, became the owner of 2618, Inc. in 1988 as compensation for legal services for the then-owner, Gerhard Helmle. The IRS agent conducting the audit, Colin Levy, suspected fraud and referred the case to the IRS Criminal Investigation Division. The investigation of Payne was assigned to Special Agent Batista.

In October 1991, Batista and Levy arrived unannounced at Payne's law offices to inform Payne of the initiation of the investigation. At that time, Batista produced a summons for business and financial records associated with 2618, Inc. In response, Payne declared his willingness to cooperate fully and to provide the requested information in a timely manner. Batista was satisfied with the sincerity of Payne's stated intent to cooperate.

In December 1991, Batista began to contact third-parties seeking information regarding payments to Payne. For example, on December 19, 1991, Batista contacted the Texas Lawyers Insurance Exchange to inquire about a $36.00 payment it had made to Payne. Batista conceded that he could have obtained this information from Payne and that doing so would not have prejudiced his investigation. At trial, Batista admitted to making other third-party contacts as early as December 1991, and that he began to inquire into allegations of Payne's involvement with illegal drugs. Although Payne voiced concern over these contacts, he and Batista agreed on January 16, 1992 to a timetable for the voluntary production of 2168, Inc.'s records. A week later, Batista and Levy came to Payne's office to review and microfilm documents. Batista testified that, as of this date, he was happy with Payne's performance, cooperation, and his efforts to produce needed information.

From October of 1991 to July of 1992, Payne sent numerous letters to Batista requesting him to clarify the issues under investigation. The gist of these letters was that Payne wanted to know the scope of the inquiry so that he could provide Batista with relevant information in a manner that would preserve the confidentiality of the investigation. In his correspondence, Payne repeatedly conditioned his continued cooperation on Batista's agreeing to more specifically define the scope of his inquiry. Batista never responded to Payne's requests for a listing of specific areas of concern. On March 2, 1992, Batista and his supervisor Swayzine Fields met with Payne at Payne's office. During this meeting, Batista requested any work papers for Payne's 1987 and 1988 personal tax returns. Payne agreed to provide them. This was the first and only documented request for information relating to Payne's personal tax returns, although Batista testified that he made a previous oral request for the papers. Payne later informed Batista that he did not have any work papers for those returns.

By March of 1992, Batista apparently decided that Payne did not sincerely intend to cooperate with the investigation. At trial, Batista initially could not recall any specific incident that led him to this conclusion, but he eventually testified that the tone of Payne's letters gave him the sense that Payne would not fully disclose information without the imposition of untenable conditions. The district court concluded that Batista "had no rational explanation" for this conclusion. Payne, 91 F.Supp.2d at 1029. In any event, Batista accelerated the pace of his investigation during and after March 1992. In that month, Batista sent out ten summonses to various corporations and banks seeking bank statements, canceled checks, deposit slips and deposited items, loan applications/agreements and related records. During and after that month, Batista interviewed employees and officers of 2618, Inc. in person, introducing himself as a criminal investigator with the IRS who was investigating Payne's possible violation of criminal revenue laws. Batista asked some of the employees and some of Payne's relatives if they knew whether Payne used or sold illegal drugs. Batista contacted Payne's clients and former clients mostly by mail, issuing summonses for copies of any retainer agreements, expense reimbursement statements, or cancelled checks of payment. Batista also spoke with some of these clients over the telephone and interviewed some in person. During the course of the investigation, Batista issued a large number of summonses and letters to third-parties that disclosed on their face that Payne was under criminal investigation, and he revealed that fact during his in-person interviews.

In March of 1993, Batista terminated his investigation of Payne and recommended the case to the Justice Department for criminal prosecution. For the first time, an attorney for the Justice Department informed Payne of particular issues of concern, and in response Payne provided information that led the United States to conclude that criminal prosecution was not warranted for all the matters recommended by Batista. In 1995 Payne was indicted on two counts of violating I.R.C. § 7206 relating to tax fraud and three counts of violating I.R.C. § 7203 relating to failure to file tax returns. The trial court dismissed the § 7206 charges, and a jury acquitted Payne of the § 7203 charges.

Following the criminal trial, the IRS completed its civil examination and issued Payne a notice of deficiency for 1987 and 1988 individual income taxes and civil fraud penalties. The United States Tax Court entered a decision determining Payne's individual income tax for those years, and sustaining the fraud penalties. Payne v. Commissioner, 75 T.C.M. (CCH) 2548, 2565 (1998). This court reversed. Payne v. Comm'r of Internal Revenue, 224 F.3d 415, 424 (5th Cir.2000). The panel found that the tax court erred in ruling that the United States had proven fraud by "clear and convincing" evidence and thus erroneously relied on the statutory fraud exception to prevail over the applicable statute of limitations. Id.

Payne then filed this suit in the district court, seeking damages from the United States and several IRS agents for their actions in conducting the investigation. The district court dismissed all defendants other than the United States, and all claims other than the wrongful disclosure of tax information claim. This claim was tried to the court, and at the conclusion of the trial, the court held as follows: (1) Batista made a large number of third-party contacts in the course of his investigation of Payne without first determining whether the information sought was otherwise reasonably available; (2) Batista did not consider himself under any obligation to seek necessary information from Payne; (3) Batista disclosed numerous items of return information to these third parties, including the fact that Payne was subject to a criminal investigation; (4) there was no evidence that any of the disclosures of return information were necessary to obtain the information Batista sought; (5) Batista's disclosures did not result from a good faith but erroneous interpretation of the applicable statutory provision; (6) Batista's improper disclosures damaged Payne's law practice; (7) Batista grossly abused his discretion in making the numerous third-party contacts without first affording Payne the opportunity to provide the needed information, and in particular by inquiring about Payne's involvement with illegal drugs; and (8) the United States' litigation position was unreasonable given that Batista made no determination as to whether the information he sought was otherwise reasonably available.

II. Standard of Review

We review the district court's findings of fact for clear error and conclusions of law de novo. Dunbar Medical Systems, Inc. v. Gammex Inc., 216 F.3d 441, 448 (5th Cir.2000). Similarly, as to mixed questions of law and fact, we review the district court's fact findings for clear error, and its legal conclusions and application of law to fact de novo. Sugar Busters, LLC v. Brennan, 177 F.3d 258, 269 (5th Cir.1999). In reviewing factual findings for clear error, we defer to the findings of the district court unless we are left with a definite and firm conviction that a mistake has been committed. United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948); Dunbar Medical Systems, 216 F.3d at 453.

III. Statutory Framework

I.R.C. § 7431(a) creates a...