Individuals Receive Limited Damages for IRS Disclosure

In this action brought pursuant to 26 U.S.C. § 7431, plaintiffs Gary Minda and Nancy Findlay Frost seek damages from the United States for disclosing certain information related to their tax returns to an unrelated third party. The government admits liability for disclosure of plaintiffs' return information and moves for summary judgment as to the amount of damages.

According to a report by the U.S. Treasury Inspector General for Tax Administration, the Examination Report contained documents that were generated a week apart by different units located in different departments and printed on different printers. The report notes that the individual responsible for the disclosure could not be identified. No other facts relating to the disclosure of plaintiff's return information appear in the record.

Plaintiffs admit that they have suffered no actual damages.

"Return information" is defined under 26 U.S.C. § 6103(a)(2). The statute lists a number of items including identity, nature, source or amount of income. Id. The definition clarifies that "return information" does not include "data in a form which cannot be associated with, or otherwise identify, directly or indirectly, a particular taxpayer." Id.

Upon a finding of liability on the part of the defendant, the statute provides for damages in an amount that is equal to the sum of:

Based upon the statutory language and the persuasive reasoning of courts that have addressed this issue, I hold that "each act" in the context of Section 7431 refers to the mailing of the Examination Report and award each plaintiff $1,000 in statutory damages.

In Marre v. United States, 1992 WL 240527 (S.D. Tex. 1992), aff'd in part and vacated on other grounds, 38 F.3d 823 (5^th Cir. 1994), IRS agents disclosed return information to investors in plaintiff's tax shelter. On the question of damages, the court was faced with the task of counting the acts of disclosure. The court declined to "carve up each communication into separate, actionable disclosures" even though the court noted the disclosures did not deal with "reiterated facts," but with distinct items of return information. Id at *2. In Smith v. United States, 730 F. Supp. 948, rev'd on other grounds, 964 F.2d 630 (7^th Cir. 1992), an IRS agent provided an officer of the Illinois Department of Revenue with a memorandum containing plaintiff's return information. The court counted the release of the memorandum as one act of disclosure. Id. And, in Rorex v. Traynor, 771 F.2d 383 (8^th Cir. 1985), an IRS agent disclosed return information for a husband and wife for two separate years to plaintiff's bank. The disclosure came in the form of a notice to the bank and included confidential information such as the amount of unpaid taxes. Id. The appellate court found that only one act of disclosure took place. Id.

Similarly, in Miller v. United States, 66 F.3d 220 (9th Cir. 1995), the Ninth Circuit declined to multiply the acts of disclosure when an IRS agent disclosed return information to a reporter who went on to publish the information. Instead, the court found that disclosure to a reporter should not be counted multiple times for damages but should be taken into account when deciding the degree of negligence. Id. And, in Siddiqui v. United States, 217 F.Supp.2d 985 (D. Ariz. 2002), an IRS agent disclosed plaintiff's return information during a speech at a retirement party with 100 people in the room. The court noted that plaintiff had not suffered any actual damages and that multiplying the statutory damages would grant plaintiff an "unjustified windfall." Id at 989. The court explained that it is the act of disclosure, not the scope of disclosure, that triggers liability. Id. The court found that the extent of disclosure was relevant only in determining the degree of negligence. Id.

The court in Snider v. United States 468 F.3d 500 (8^th Cir. 2006), took a somewhat different view. There, an IRS officer was conducting a criminal investigation into plaintiffs' business. Id. at 504. During the course of the investigation, the IRS officer disclosed to a number of third-parties that there was a criminal investigation against plaintiffs and accused the plaintiffs of several crimes. Id. The district court found that in total, 79 disclosures had been made. Id. at 505. In affirming, the Court of Appeals for the Eighth Circuit explained that, during the course of one interview, the IRS officer disclosed six pieces of return information and that the district court counted that as six disclosures. Id. at 506, 509. The Eighth Circuit found that the disclosures involved distinct "affirmative statements" made over the course of several interviews. Id. at 505. In contrast, here, a single Examination Report containing return information was disclosed. In any event, to the extent that Snider can be read to support plaintiffs' position, I decline to follow it, finding the cases cited above more persuasive.

Plaintiffs rely heavily on Mallets v. United States, 993 F.2d 1111 (4th Cir. 1993), to argue that the government should not benefit from the fortuity of multiple disclosures being contained in a single envelope. But, in Mallas, the court held that because an envelope, which contained plaintiff's return information, was addressed to two individuals, two separate acts of disclosure had occurred. Id. No such issue arises here.

SO ORDERED.

NINA GERSHON