Wilkerson v. U.S.

• Citation: 67 F.3d 112
• Decision Date: 23 October 1995
• Docket Number: No. 94-40713,94-40713
• Parties: -6902, 95-2 USTC P 50,569 Rhonda K. WILKERSON, d/b/a Forstar Trailers, Plaintiff-Appellee, Cross-Appellant, v. UNITED STATES of America, Defendant-Appellant, Cross-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 112

67 F.3d 112

76 A.F.T.R.2d 95-6902, 95-2 USTC P 50,569

Rhonda K. WILKERSON, d/b/a Forstar Trailers Plaintiff-Appellee, Cross-Appellant, v. UNITED STATES of America, Defendant-Appellant, Cross-Appellee.

No. 94-40713.

United States Court of Appeals Fifth Circuit.

Oct. 23, 1995.

Sally J. Schornstheimer, Gary R. Allen, Chief Appellate Sect., Tax Div., Dept. of Justice, Washington, DC, Jonathan S. Cohen, Joseph A. Pitzinger, II, Dept. of Justice, Tax Div., Dallas, TX, for appellant.

Robert Mark Karnes, William Benjamin Hickman, Dallas, TX, for appellee.

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

Before JOLLY, DAVIS and EMILIO M. GARZA, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

The government appeals the district court's award of damages for wrongful levy and wrongful disclosure flowing from tax collection activities aimed at the assets of Plaintiff Rhonda K. Wilkerson. The government also appeals the district court's award of attorney's fees and costs. Wilkerson cross-appeals asserting that the district court improperly denied her Fifth Amendment claims. We affirm in part, reverse in part, vacate in part, and remand for further proceedings.

I

This suit grows out of the Internal Revenue Service's efforts to collect Robert D. Forsyth's delinquent income taxes. Based on information received from various sources, the IRS began to investigate Forsyth's relationship with Rhonda Wilkerson. Wilkerson had just started Forstar Trailers ("Forstar"), a trailer manufacturing business of the same type that Forsyth had been involved in prior to his relationship with Wilkerson. The IRS suspected that Wilkerson might be sheltering Forsyth's assets and income in her name. After further investigation, the IRS found what it believed to be credible evidence that Wilkerson and Forsyth were common-law married. Besides sharing a residence, Wilkerson and Forsyth had represented to family members that they were married, and Wilkerson had endorsed several checks made out to "Rhonda Forsyth" by signing that name. Neighbors and acquaintances confirmed that the two were married, and Wilkerson and Forsyth were expecting a child. Based on this evidence, the IRS issued one Notice of Levy on Wilkerson's bank account, and thirty-seven Notices of Levy to persons believed to be customers and suppliers of Wilkerson's trailer business. ¹ Although both Forsyth and Wilkerson continued to deny that they were married, IRS supervisors felt that they had sufficient evidence to pursue a portion of Wilkerson's assets.

After subsequent communication with the IRS, Wilkerson's bank complied with the Notice of Levy and forwarded $2,469.39 to the IRS which the IRS applied to Forsyth's tax debt. The IRS collected no other funds from Wilkerson. As a result of the Notices, however, Wilkerson's business began to falter. Wilkerson's customers and suppliers were reluctant to continue dealing with Forstar. After Forstar went out of business, Wilkerson filed administrative claims with the IRS. The IRS denied Wilkerson's claims by letter, and Wilkerson filed suit in the district court.

Wilkerson brought claims against the IRS for wrongful levy under 26 U.S.C. Sec. 7426 and Sec. 7433 (for reckless or intentionally wrongful collection activities); wrongful disclosure of her tax return information under 26 U.S.C. Sec. 7431; violation of the Privacy Act, 5 U.S.C. Sec. 552(a); violations of the Federal Tort Claims Act, 28 U.S.C. Secs. 1346(b), 2671-2680; violations of the Administrative Procedure Act, 5 U.S.C. Secs. 701-706; and violation of her Fifth Amendment rights. The district court concluded that Wilkerson and Forsyth were not common-law married and that the IRS was negligent in assuming so. Accordingly, the district court awarded $2,469.39 in damages for the wrongful levies. The district court also concluded, based on the wrongfulness of the levies, that the IRS had wrongfully disclosed Wilkerson's tax return information and awarded her $209,547.19 for the value of Forstar, and $20,000.00 for emotional distress. The district court denied recovery on all other grounds, but awarded Wilkerson attorney's fees and costs under 26 U.S.C. Sec. 7430. Neither party appeals the district court's finding that the levies were wrongful nor the award of $2,469.39 in damages for the levies. The government appeals the district court's award of damages for wrongful disclosure, and the district court's award of attorney's fees and costs. Wilkerson cross-appeals on her Fifth Amendment claims.

II

We review the district court's findings of fact under the clearly erroneous standard. Barrett v. United States, 51 F.3d 475, 478 (5th Cir.1995) (citing Robicheaux v. Radcliff Material, Inc., 697 F.2d 662, 666 (5th Cir.1983)). The legal conclusions based upon those facts, however, we review de novo. Id. Wilkerson's claim of wrongful disclosure turns on a proper interpretation of the Internal Revenue Code and as such is a question of law reviewable de novo. Estate of Moore v. Commissioner, 53 F.3d 712, 714 (5th Cir.1995).

A claim of wrongful disclosure under Sec. 7431 requires (1) that the IRS disclosed confidential tax return information either knowingly or negligently, and (2) that this disclosure was not authorized by Sec. 6103 of the Internal Revenue Code. 26 U.S.C. Secs. 6103(a), 7431(a)(1). ² Recovery will be denied however, if the IRS acted on a "good faith but erroneous interpretation" of Sec. 6103. 26 U.S.C. Sec. 7431(b). There is no dispute that the IRS disclosed Wilkerson's confidential tax return information. ³ The issues before this court are whether Sec. 6103(k)(6) authorized the disclosures, and whether the government made the disclosures based on a good faith interpretation of Sec. 6103. Because we find that Sec. 6103(k)(6) authorized the disclosure of Wilkerson's tax return information, we decline to reach the defense of good faith.

The district court, interpreting Sec. 6103 of the Internal Revenue Code, concluded that disclosure of Wilkerson's tax return information was unnecessary to collect Forsyth's delinquent taxes, because in actuality Wilkerson owed no taxes and was not in fact liable for Forsyth's tax debt. As the district court reasoned, because the levies themselves were not authorized by statute, the corresponding disclosures were unnecessary and unauthorized by Sec. 6103(k)(6). Currently a split exists among the circuits on whether the illegality of the underlying collection activity has an effect on the legality of the disclosures flowing out of such activity. ⁴ The district court followed the Eighth Circuit which has held that "a disclosure in pursuance of an unlawful levy violates the confidentiality requirements of section 6103(a) and is not authorized under section 6103(k)(6)." Rorex v. Traynor, 771 F.2d 383, 386 (8th Cir.1985); see Husby v. United States, 672 F.Supp. 442, 445 (N.D.Cal.1987) (following Rorex ). The Rorex court determined that allowing the IRS to avoid liability for its wrongful disclosures by simply including them in a notice of levy would substantially defeat the confidentiality requirement of Sec. 6103. Rorex, 771 F.2d at 386. Because we feel that this interpretation misreads the provisions in question, we decline to follow Rorex.

The plain language of the Internal Revenue Code supports the government's contention that the validity of the underlying collection activity is irrelevant in determining whether a disclosure is wrongful. Section 6103 sets forth the general rule that the government may only disclose tax return information in certain narrow instances. ⁵ Section 6103(k)(6) provides for disclosure "in connection with collection activity ... or with respect to the enforcement of any other provision of this title." 26 U.S.C. Sec. 6103(k)(6). ⁶ Pursuant to this provision, the Secretary of the Treasury promulgated regulations permitting disclosures in applying "the provisions of the Code relating to establishment of liens against [a taxpayer's] assets, or levy on, or seizure, or sale of, the assets to satisfy any [outstanding tax] liability." 26 C.F.R. Sec. 301.6103(k)(6)-1(b)(6). At no place in the Internal Revenue Code does Congress make the propriety of those disclosures conditional upon the ultimate propriety of the levy. The plain language of these sections authorizes disclosures to the extent necessary to effectuate a levy. Venen v. United States, 38 F.3d 100, 106 (3d Cir.1994).

The statutory scheme further supports the government's position. Congress enacted separate and distinct provisions concerning collection activities and information handling. When the IRS issues a wrongful levy on a taxpayer's property, Sec. 7426 provides damages which are distinct from those allowed under Sec. 7431 for wrongful disclosures. Section 7426 allows recovery of what the IRS actually received or "seized" from its wrongful levies. 26 U.S.C. Sec. 7426(b)(2). ⁷ See Three "M" Investments, Inc. v. United States, 781 F.2d 352, 353 (10th Cir.1986) (noting that section 7426(b)(2) was not meant to be compensatory); Hammond Co. v. United States, 568 F.Supp. 309, 313 (S.D.Cal.1983) (same). Section 7431 covering wrongful disclosures, however, allows recovery of compensatory damages. 26 U.S.C. Sec. 7431(c)(1)(B)(I). If Congress had intended to allow recovery of compensatory damages in the ordinary wrongful levy case, they would have so stated in Sec. 7426. Holding that disclosures necessary to effectuate a levy automatically become wrongful upon a finding that the levy was deficient in some way, would effectively read out of the Internal Revenue Code the distinct damage remedies that Congress provided. ⁸

The foregoing analysis indicates that Congress intended collection activities, such as levying, to be distinct from information handling. We see no reason to conflate them. As the Third Circuit noted, "[t]hese two bodies of law must remain distinct." Venen, 38 F.3d at 106. Accordingly, we...