SUIT FOR WRONGFUL DISCLOSURE AND COLLECTION DISMISSED.

                             JOAN NOSKE,

The above-entitled matters are before the court upon the motion of defendant United States of America (the government) for summary judgment. Pursuant to Federal Rule of Civil Procedure 78, the motion has been considered on the briefs, without oral argument. For the reasons set forth below, the government's motion is granted.

The complaints in these two cases are similar but not identical. Both complaints consist of two counts. Count I of the complaints asserts a claim under 26 U.S.C. section 7431 for wrongful disclosure of tax information. Count II asserts a claim for damages due to wrongful collection activity in violation of 28 U.S.C. section 7433. The court will discuss the complaints together except where material differences exist

I. WRONGFUL DISCLOSURE CLAIMS

A. FACTS

The Noskes' claims of wrongful disclosure of tax information focus primarily on disclosures of their return information by Internal Revenue Service Officer Alfred E. Cleland during and after the trial in the case entitled Xemas, Inc. v. United States. 689 F. Supp. 917 (D. Minn. 1988), aff'd without opinion 899 F.2d 1091(8th Cir. 1989), cert. denied, 110 S. Ct 1472 (1990).

The Xemas trial was a wrongful levy suit filed by Xemas, Inc. against the United States. The IRS had levied upon property of Xemas, Inc. to satisfy taxes owed by Roman and Imelda Spaeth. The government contended that the Spaeths, aided and assisted by the Noskes, had transferred the subject property to Xemas, Inc. through a series of fraudulent conveyances in an effort to evade payment of taxes. Specifically, one of the defenses of the government was that the property was transferred with actual intent to defraud the Spaeths' creditors, including the United States, and was therefore subject to levy. The United States ultimately prevailed on this theory. The government contended, and the court ultimately found, that the Noskes were the true masterminds behind the fraudulent conveyance scheme. Consistent with its theory, the government offered evidence that the Noskes as well as the Spaeths acted with intent to defraud creditors in structuring the transactions. In an effort to prove the intent of the Noskes, the government offered evidence, through the testimony of IRS officer Cleland, that neither Joan nor James Noske had filed a tax return "in the normal sense" since 1977. The Noskes dispute the accuracy of this testimony, and contend Cleland knowingly testified falsely.

After the Xemas trial, IRS Officer Cleland submitted an affidavit in which he stated that his testimony at trial about the Noskes was partially mistaken in that, upon further review of IRS documents, he determined that James and Joan Noske had filed tax returns for the years 1985 and 1986, but not for the years 1978 through 1984. The Noskes contend this was a wrongful disclosure of tax information as well. The Noskes appear to contend that they both either filed returns or were audited for all years between 1977 and 1987.

The Noskes assert claims for additional wrongful disclosures as follows. Both claim publication of the court's findings in the Xemas, case, and a newspaper article in the St. Cloud, Minnesota newspaper reporting the court's findings, constitute wrongful disclosures. Both allege that IRS Officer Cleland, and other agents of the IRS, made other wrongful disclosures, on other unspecified occasions, with respect to unspecified items of return information. Joan Noske's complaint also alleges wrongful disclosures were made to several individuals, including wrongful disclosures to her brother James Noske, disclosures to the Zapp Abstract Company, and disclosures to Daniel P. Strohmeier, Cyril Mader, and Steven Kotten. The Noskes have never produced evidence indicating specifically what information, if any, was disclosed in these instances, when it was disclosed, or under what circumstances it was disclosed. The time period for discovery in this case has now lapsed.

B. DISCUSSION.

28 U.S.C. section 7431 creates a civil action for damages based upon disclosure of tax return information by an officer or employee of the United States in violation of 28 U.S.C. section 6103. ¹ Under section 6103, an individual's tax return information must remain confidential and cannot be disclosed except as specifically authorized. Section 6103(h)(4)(C) authorizes disclosure of tax return information in a federal judicial proceeding pertaining to tax administration "if such return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly effects the resolution of an issue in the proceeding." This provision can be analyzed as involving four elements.

1. Disclosure must occur in the course of a judicial or administrative tax proceeding;

2. A party to the proceeding has a transactional relationship to the taxpayer whose return information is disclosed;

3. The transactional relationship must directly affect the resolution of the proceeding; and

4. The disclosure must directly relate to the transactional relationship between the party and the taxpayer.

See Datamatic Services Corp. v. United States, 88-1 USTC paragraph 9163 (N.D. Cal., Dec. 14, 1987).

Applying these elements to the disclosures of IRS Officer Cleland in connection with the Xemas case, it is clear that the disclosures were authorized by section 6103(h)(4)(C). The disclosures obviously occurred in the course of a judicial tax proceeding. The evidence at the trial, as the findings of the Xemas court reveal, established that the Noskes had a transactional relationship with the Spaeths and Xemas, Inc. -- the Noskes took part in structuring a series of fraudulent conveyances which ultimately left title to the property in the hands of Xemas, Inc. The transitional relationship between the Noskes and Xemas obviously directly affected the resolution of the Case, as the conveyances were the primary focus in the lawsuit Finally, the disclosure of the Noskes' history of failing to file tax returns directly related to the transactional relationship. Because the Noskes were actively involved -- indeed the court found that the Noskes were "principal participants" in the scheme -- ² the Noskes' intent, as well as the Spaeths', was directly at issue in the Xemas case. The Noskes' tax history was probative evidence tending to indicate an intent to defraud the United States and avoid payment of taxes. Accordingly, the court concludes that the disclosures by Officer Cleland in connection with the Xemas case were authorized by section 6103(h)(4)(C).

The Noskes assert in the alternative that inaccuracies in Officer Cleland's disclosures rendered them actionable even if section 6103(h)(4)(C) authorized ACCURATE disclosure of return information under section 7431. At least one court has indicated that section 7431 makes actionable only disclosures which are unauthorized, and not simply inaccurate. See Traxler v. United States, 88-2 USTC paragraph 9627 (E.D. Cal., Nov. 23, 1988). In enacting sections 6103 and 7431 Congress sought to protect a taxpayer's reasonable expectation of privacy in information submitted to the government Congress balanced this interest against the legitimate need of the government to use tax information for legitimate purposes. See Flippo v. United States 670 F. Supp. 638 (W.D.N.C 1987), aff'd 849 F.2d 604 (4th Cir. 1988). To impose liability for misstatements made in the course of authorized disclosures would upset the balance Congress has struck, and would be contrary to the language of these provisions as well.

A case involving intentional or knowing misstatements may present a different issue. Absent evidence that IRS Officer Cleland intentionally or knowingly misstated their tax return information, however, the Noskes have no claim under section 7431.

The Noskes have failed to come forth with evidence sufficient to create a genuine issue of fact as to whether Officer Cleland intentionally or knowingly misstated any tax return information. IRS Officer Cleland has stated under oath on three separate occasions (at the Xemas trial, in his deposition in this case, and in his post- trial declaration in Xemas) that he researched the appropriate records prior to making the disclosures. That Cleland overlooked the 1985 and 1986 returns of the Noskes shows Cleland may have been negligent but does not show intentional misrepresentation on his part. The Noskes seize on one answer in Cleland's deposition in which Cleland appears to indicate he is not sure if he researched the Noskes' history before or after he testified Later in the deposition, however, Cleland clarifies that he in fact did the research before he testified. This minor discrepancy does not create a genuine issue for trial. Moreover, despite their insistence that they filed returns or were audited every year between 1977 and 1987, the Noskes have not placed into the record a single tax return from that period. The Noskes' claim is therefore doubtful at best The Noskes' claim based upon Officer Cleland's disclosures in the Xemas case must he dismissed.

The Noskes's claims for wrongful disclosure based on publication of the Xemas court findings must also be dismissed as a matter of law. Clearly, if the testimony of Officer Cleland was authorized, publication of that testimony is a1so proper. "Once . . . tax return information is properly in the public record of a judicial proceeding, the information is no longer confidential. Plaintiffs no longer have a reasonable expectation of privacy respecting the return information." Solargistics Corp. v. United States, 89-2 USTC paragraph 9610 (N.D. Ill., Oct. 6, 1989).

The balance of plaintiffs' claims for wrongful disclosure must be dismissed for lack of evidence. A party opposing a motion for summary judgment must set forth specific facts showing that there is a genuine issue for trial on each claim asserted. This showing must be made through affidavits in conformance with Rule 56(e) or other evidence that would be admissible at trial Fed. R. Civ. P. 56(e); Celotex Corp. v. Catrett, 477 US. 317, 322-23 (1886). Plaintiffs have failed to meet this burden. Accordingly, summary judgment is appropriate.

The Noskes contend they have been prevented from meeting their burden under Rule 56 because the government has seized from their residence, and refused to return a number of documents and audio tapes pursuant to a search warrant. Magistrate Judge Noel has ruled that the government must make some of this material available to plaintiffs if plaintiffs' cases survive the instant summary judgment motion. By affidavit, the Noskes state the seized documents and tapes contain evidence of disclosure of Joan Noskes tax information to James Noske, and evidence of "many disclosures outside of the Xemas. Inc. case." Plaintiffs Exhibit A, Declaration of James Noske. As to the disclosure of Joan's tax information to James, the lack of the tape is immaterial because a claim for damages based on such a disclosure is patently frivolous. As to the other alleged disclosures, even absent the allegedly confiscated evidence the Noskes could have obtained affidavits or deposition testimony from those who allegedly received the information. Thus, even without the seized material the Noskes could have, if the facts alleged are true, successfully opposed the government's summary judgment motion.

II. WRONGFUL COLLECTION CLAIMS

The allegations under Count II of both complaints are identical in all material respects. The Noskes allege that the IRS, primarily through IRS Officer Cleland, committed numerous acts which they contend were committed with reckless or intentional disregard of the Internal Revenue Code and Regulations promulgated thereunder. The Noskes seek damages for these alleged wrongful acts under 26 U.S.C. section 7433.

Although its motion is framed as one for summary judgment, the government seeks dismissal of Count II primarily on the ground that Count II fails to state a claim upon which relief can be granted. The Court agrees with the government that much of the conclude complained of in Count II is dearly not actionable under 26 U.S.C. section 7433. Accordingly, the Court will not tarry over a detailed recitation of all the ads alleged in Count II.

26 U.S.C. section 7433 creates a civil action for damages against the United States "if, in connection with any collection of Federal tax with respect to a taxpayer, any officer or employee of the Internal Revenue Service recklessly or intentionally disregards any provision of this title, or any regulation promulgated under this title." Enacted in 1988, section 7433 covers only conclude occurring after November 10, 1988. See Technical Miscellaneous Revenue Act of 1988, P.P.L. 100-647, section 6241. Both the plain language and the statute and the legislative history of section 7433 indicate that the section 7433 cause of action is limited to (1) collection-related (but not assessment-related) activities which are (2) reckless or intentional (but not merely negligent) (3) violations of the Internal Revenue Code or regulations. ³

All of the allegations in Count II must be dismissed for failure to meet one or more of the above limitations.

The Court finds one issue raised by the Noskes worthy of discussion. The Noskes allege that IRS Officer Cleland intentionally pursued collection activities relating to the penalties assessed against the Noskes under 26 U.S.C. section 6700 even after the Noskes had paid the requisite 15 percent of the penalties and filed an administrative claim for refund. Under 26 U.S.C. section 6703(c), these additions entitle the Noskes to a stay of further collection on the penalties. This allegation asserts a facially valid claim. A review of the facts underlying this claim, however, reveals that the allegation is without merit.

On December 16, 1985, the IRS sent the Noskes a notice assessing $186,000 in penalties under 26 U.S.C. section 6700 for "promoting an abusive tax shelter." Joan Noske paid $1,000 of the penalty against her to the IRS, James Noske paid $3,000, and each filed an administrative claim for refund of those amounts. Pursuant to section 6703, the Noskes followed those administrative claims with refund actions challenging the validity of the penalties. In their refund actions, the Noskes asserted jurisdiction under various federal statutes, including 26 U.S.C. section 6700, 6703, and 28 U.S.C. section 1346(a)1). In determining the amounts they paid prior to bringing their refund action, the Noskes treated the section 6700 penalties as "divisible" into 186 one thousand dollar units. Thus, they each paid at least the full amount of one unit of the penalty assessed. This treatment of the penalties was consistent with the existing IRS interpretations of section 6700. In its Answer, the IRS agreed that, by paying a divisible portion of the penalties, the Noskes had properly invoked the jurisdiction of the District Court.

While the Noskes' cases were pending in District Court, the Eighth Circuit held in Gates v. United States. 874 F2d 584 (8th Cir. 1989) that a section 6700 penalty is not divisible into separate transactions. Following Gates, the District Court sua sponte dismissed the Noskes' lawsuits for lack of subject matter jurisdiction, reasoning that the Noskes had not paid a sufficient portion of the non-divisible penalties. The Noskes appealed. On appeal, both the Noskes and the government argued that the District Court erred in dismissing the Noskes' lawsuits for lack of subject matter jurisdiction. The Eighth Circuit agreed, holding that the Gates non-divisibility holding should not be applied retroactively to the Noskes' case so as to divest the court of subject matter jurisdiction. Noske v. United States. 911 F2d 133, 137 (8th Cir. 1990). In light of this holding, it is now clear that the Noskes have properly invoked this court's jurisdiction under both section 1346(a)(1) and section 6703(c).

The Noskes do not contend, nor have they submitted evidence suggesting, that the IRS attempted to collect on the section 6700 penalties before the District Court dismissed their lawsuits for lack of subject matter jurisdiction. Rather, the Noskes contend that the IRS commenced collection activity after the District Court dismissed their cases and the IRS continued to attempt to collect on those penalties after the Eighth Circuit's reversal of the District Court.

There is no question that the government commenced collection activity against the Noskes shortly after the Noskes' challenge to the penalties was dismissed for lack of jurisdiction. However, this conclude was not in "reckless or intentional disregard" of the Internal Revenue Code. Once the Noskes' actions challenging the section 6700 penalties were dismissed, the prohibition on collection activities under section 6703(c) was no longer in forced Hence, the IRS had a right to begin collection.

If the IRS continued to collect on the section 6700 penalties after the Eighth Circuit's reversal, the government may well have violated the prohibition of section 6703(c). The Noskes have failed to substantiate this contention, however. The Noskes do not specifically allege in their complaints that the government continued collection activities after the Eighth Circuit's most recent decision. Nor do the Noskes submit any evidence tending to show that the government continued its collection activities after the Eighth Circuit decision. The Noskes simply assert this as a fact in their brief. Obviously, assertions of fact by party without support in the record are insufficient to withstand a summary judgment motion. Accordingly, the Noskes' claim of wrongful collection activity in violation of section 6703(c) must be dismissed. ⁴

Accordingly, upon the foregoing, and all the files, records and proceedings herein,

IT IS HEREBY ORDERED that

1. The government's motion for summary judgment is GRANTED;

2. The complaint of James Noske in Civil Action No. 3-90 Civ. 420 and the complaint of Joan Noske in Civil Action No. 3-89 Civ. 100 are DISMISSED with prejudiced.

3. The Clerk of Court shall enter judgment as follows:

In Civil Action No. 3-90-420, judgment shall read as follows:

"It is ordered adjudged and decreed that plaintiff James L Noske shall have and recover nothing on his adion against defendant United States of America and said action is DISMISSED with prejudice."

In Civil Action No. 3-89-100, judgment shall read as follows:

"It is ordered adjudged and decreed that plaintiff Joan Noske shall have and recover nothing on her action against defendant United States of America and said action is DISMISSED with prejudice."

Dated: July 28, 1991

² 689 F. Supp. at 919.

³ The conference report on section 7433 stated in part as follows:

First, the right to sue authorized by this provision is limited to allegations of reckless or intentional disregard by an IRS employee. An action may not be brought under this provision alleging mere negligence or carelessness on the part of an IRS employee. Second, the provision is limited to reckless or intentional disregard in connection with the collection of tax. An adion under this provision may not be based on alleged reckless or intentional disregard in connection with the determination of tax. Third, the provision is limited to reckless or intentional disregard of the Internal Revenue Code or a regulation promulgated thereunder. An action may not be brought under this provision based on an alleged violation of a federal law other than the Internal Revenue Code or a regulation promulgated thereunder.

Conf. Rep. No. 1104, 100th Cong., 2d Sess. 229; 1988-6 U.S. Code Cong. and Admin. News 5289.

⁴ The court notes that in connection with other cases the Noskes have pending before this court, Case Nos. 6-87 Cv. 400 and 6- 87 Cv. 399, the government has indicated that it does not intend to pursue further collection activities with respect to the section 6700 penalties against the Noskes at this time. In fact, this court has stayed those actions on the condition that the government does not attempt to collect on these penalties.