In Goldstein v. IRS the District Court for the District of Columbia found that the IRS misconstrued the relationship between the Freedom of Information Act (FOIA) and Section 6103. It remanded large parts of the case to the IRS for further action because the Court finds that the IRS did not properly follow its own regulations and did not properly interpret the relationship between FOIA and Section 6103. Because this decision comes from the District of Columbia, it carries significant weight. The case involves an heir seeking information about his father’s estate and income taxes. The case provides a guide to obtaining information as an heir as well as a glimpse at the IRS processing of such requests. It shows that the privacy wall around tax information which protects taxpayers from having their tax information seen by others may not rise as high in the context of an heir. The case offers hope to those who need information about an estate to protest their interest but who do not control the estate or a trust. The case also views the return of information provided by a whistleblower differently than the IRS. We do not post in this area often. Les ventured into disclosure last year in a post involving another case that deserves attention if you did not receive an adequate explanation from the IRS for denying your request for information.
As a Chief Counsel attorney I always felt that demonstrating knowledge of disclosure law operated as a close second to demonstrating knowledge of TEFRA. Such knowledge created a path to case assignments in which I had no interest. Yet, I always had a fascination with knowledge of the disclosure laws because these laws provided a path to important information. Representing clinic clients, I do not use FOIA as much as I should. Perhaps, my failure stems from my old fears of demonstrating knowledge of matters regarding disclosure but more likely it stems from a failure to know how to use the disclosure laws to the best advantage of my clients. The Goldstein case shows FOIA opening the door to information that will assist the plaintiff in evaluating his interest in the assets of a complicated estate and whether the actions of the executor have best preserved his interest. A guest post on FOIA may provide a guide if you seek to use FOIA to gain information.
The plaintiff made a FOIA request for 10 discreet items from the IRS. In the context of a summary judgment motion, the Court goes through each of the ten items, grouping a few together, and discusses how the IRS treatment of the request did, or did not, comply with the law. Prior to the litigation, the IRS had determined that either FOIA or 6103 allowed plaintiff to receive the documents; however, it denied the release of many other documents on the grounds that the IRS did not have authority to release them. The Court started its legal discussion pointing out the flaw in the IRS treatment of information requests that created a distinction between FOIA and 6103. Citing to a 1986 D.C. Circuit court case of Church of Scientology of California v. IRS the Court quoted “FOIA is a structural statute, designed to apply across-the-board to many substantive programs; it explicitly accommodates other laws [under FOIA Exemption 3] by excluding from its disclosure requirement documents ‘specifically exempted from disclosure’ by other statutes.”
Section 6103 is one of the “other statutes” referred to in FOIA similar to other provisions elsewhere in the United States Code that prohibit the disclosure of certain information. So, 6103 and FOIA work in harmony rather than as separate stovepipes as the IRS treated them. Because a request for information, even one that implicates 6103 still comes under the FOIA umbrella, plaintiff here appropriately made the request for the information under FOIA and the IRS must follow FOIA (and 6103) in making its determination whether to provide the information requested. The separate non-FOIA process that the IRS developed for information covered by 6103 does not work as a process to prevent a plaintiff from moving forward for resolution under a FOIA action. Section 6103 still plays a role in whether the information will be turned over but the IRS cannot hold up 6103 as a shield to prevent a party from seeking information by bringing a FOIA suit. Having decided that the FOIA litigation itself provided the appropriate vehicle for examining the requests for information, the Court then went through each separate request.
Item 1 of Plaintiff’s request sought the entire examination file with respect to the audit of the estate of Plaintiff’s father. The relevant statute governing this request, IRC 6103(e)(1)(E) has two requirements. A relationship requirement and a material interest requirement. Plaintiff met the relationship requirement as an heir of the estate. The IRS found that he did not meet the material interest requirement which requires that the person “will be affected by the information contained therein.” The IRS found Plaintiff had a material interest in only part of the examination records. Plaintiff sent two more letters seeking to show the material interest but the IRS remained unconvinced and it sought summary judgment that its determination regarding material interest correctly followed the statutory standard. The Court, however, determined that the IRS failed to follow another part of the same regulations it sought to use to deny the request because the IRS did not advise the Plaintiff in writing “in what respect” his request failed 26 C.F.R. 601.702(c)(1)(i) and (c)(4)(i). So, it remanded the case to allow the IRS to provide the Plaintiff with specific guidance and to evaluate his response.
Item 2 of the FOIA request sought the estate tax return and return information. The IRS provided some of the estate tax return but Plaintiff complained that the response failed to provide “the full and complete return [including all schedules] nor the amendments to the return, as agreed upon, in an estate tax audit.” The Court remanded again saying the that IRS failed to appreciate the breadth of the request and that it failed to advise the Plaintiff in writing of the specific reason for its denial so that he could respond to the stated concern.
Items 3 and 4 sought fiduciary income tax returns of the estate and of a living trust. Because the IRS treated the request for income tax returns as falling within its 6103 procedures and outside of the FOIA procedures, the affidavits it provided to the Court concerning its response to this request failed to address the information the Court needed in order to properly evaluate the FOIA request and it remanded this aspect of the case for further information gathering on the basis for the IRS denial of the request pointing again to the IRS failure to follow its own regulations by providing Plaintiff a detailed statement regarding the deficiencies in the information request.
Items 5 and 7 concerned information about a partnership in which the decedent had invested. The IRS refused to provide this information because Plaintiff was not a “general partner, limited partner or special limited partner.” The court found clear error in the IRS determination that Plaintiff was not a beneficiary of the living trust established by the decedent and remanded this part of the case to the IRS to “re-evaluate its determination.” The court went further on the legal issue applicable here to direct the IRS to consider whether the definition of partner advanced by Plaintiff was correct essentially ordering the IRS to reconsider who may receive partnership information.
Item 8 seeks information submitted to the IRS by attorney David Capes who submitted the information to the IRS at the request of Plaintiff. The information submitted by Mr. Capes alleged civil and criminal fraud by the estate. The IRS denied the request and argued in the proceeding that this information, if it exists, was return information of a third party protected under 6103 for which Plaintiff did not have a release. The Court looked at the IRM which states that “information furnished to the IRS by third parties (e.g. informants) may be returned to the third party upon request in most instances provided the material has remained in its original state.” The Court said that the IRS appeared not to have considered the rules that should apply when a whistleblower requests the return of documents.
The case offers many possible bases for challenging IRS denials for request of information. The primary focus of the opinion concerns those whose interest arises through a will but the last item discussed also challenges IRS assumptions regarding return of information provided by informants. The tone of the opinion challenges another vestige of tax exceptionalism. The IRS bifurcated 6103 responses from FOIA responses but the Court found the two bound together in a statutory scheme that recognizes the importance of the disclosure provisions under 6103 but does not place them outside the scope of the broader FOIA framework for requesting information from the government.