ABELEIN v. U.S., (W.D.Wash. 2001)

MARSHA J. PECHMAN, United States District Judge

By prior Order, the Court granted partial summary judgment for defendant and stayed the remainder of this litigation pending certain rulings by the United States Tax Court. Dkt. No. 171. Both plaintiffs and defendant subsequently moved for reconsideration of the Court's Order. Dkt. Nos. 172, 176. Having considered the motions brought by each party the Court amends its prior ruling and ORDERS as follows: The Court continues to concluded that the audits at issue in this case were administrative proceedings within the meaning of; U.S.C. § 6103(h)(4)(A) and/or (C). Having reached that conclusion, the Court determines that defendant is entitled to judgment as a matter of law on all issues. The stay in this matter is therefore LIFTED, and summary judgment is GRANTED for defendant. The basis for the Court's modification of its prior Order is set forth more fully below.

This litigation is brought by a group of former investors in partnerships formed by Walter J. Hoyt and Sons ("Hoyt partnerships"). These partnerships purchased cattle and sheep from the Hoyt family, and then claimed certain tax benefits, Adams v. Ballard, 2000 WL 1753329, *1 (D. Or. 2000). Subsequent investigations by the Internal Revenue Service ("IRS") and the United States Attorney ("U.S. Attorney") have revealed that the Hoyt partnerships bought interests in livestock that did not exist. The partnerships therefore claimed tax relief to which they were not entitled. Id. at *2.

The IRS began to audit the Hoyt partnerships in early 1980. First Amended Complaint, ¶ 6. As part of its investigation, the IRS prepared and distributed multiple documents, each titled Notice of Final Partnership Administrative Adjustment ("FPAA"). I Plaintiffs' litigation before this Court rests on two claims. First, they argue that the FPAA forms included confidential tax information about the partners which by law should not have been disclosed. Id. at ¶¶ 17-32. Second, plaintiffs argue that the FPAA forms were sent to people whom the IRS should have known had ceased to be partners in any Hoyt partnership. Id. at ¶¶ 33-45.

This litigation is brought pursuant to 26 U.S.C. § 6103, which provides that "returns and return information shall be confidential." Plaintiffs have brought suit pursuant to 26 U.S.C. § 7431, which creates a private right of action against the United States if "any officer or employee knowingly, or by reason of negligence, discloses any return or return infomation . . . in violation of section 6103." A prevailing plaintiff is entitled to $1000.00 for each violation of§ 6103. 28 U.S.C. § 7431(c).

§ 7431 provides an exception from liability "with respect to any inspection or disclosure which results from a good faith, but erroneous, interpretation of section 6103." U.S.C. § 7431(b)(1). By prior Order adopting an agreement between the parties, the Court has divided this litigation into three phases. Dkt. No. 100. During phase one, currently in progress, the parties are to address the question of whether the contested disclosures of Hoy partnership tax information were authorized by § 6103. Id. During phase two, the parties a to address the "good faith" defense under § 7431(b). Id. And finally, the parties are to address damages during phase three. Id.

In its prior Order granting partial summary judgment to defendant, the Court concluded that an audit is an administrative proceeding within the meaning of 26 U.S.C. § 6103(h)(4)(A) and (C). These subsections read as follows:

A return or return information may be disclosed in a Federal or State judicial or administrative proceeding pertaining to tax administration, but only

(A) if the taxpayer is a party to the proceeding, or the proceeding arose out of or in connection with, determining the taxpayer's civil or criminal liability, or the collection of such civil liability, in respect of any tax imposed under this title; (or)

(C) if such return or return information directly relates to a transactional relationship between a person who is a party to the proceeding and the taxpayer which directly affects the resolution of an issue in the proceeding.

After noting a lack of definitive authority in this Circuit, the Court concluded an existing precedent in this circuit and elsewhere strongly suggests that an audit is an administrative hearing within the meaning of 26 U.S.C. § 6103(h)(4)(A) and (C). Having reached this conclusion, the Court declined to address whether the individual taxpayer's "at risk" and "basis" amounts were properly included in the FPAA forms. The Court also declined to address whether the FPAA forms were unlawfully sent to persons who were not Hoyt partners. in declining to reach these issues, the Court noted that identification of the individual Hoyt partners was a necessary prerequisite to answering the questions posed by plaintiffs. It is this conclusion that the Court now reconsiders and modifies. The Court is convinced that it is neither necessary nor appropriate to await a determination from the Tax Court before ruling.

Defendant argues that "[t]he issue is not whether the information on the FPAAs is ultimately `correct,' the issue is whether the IRS made a proper disclosure given the substantive tax determinations which the IRS made." Defendant's Memo. in Support of Memo for Reconsideration, p. 3. Defendant notes, correctly, that a procedural defect in an otherwise lawful tax disclosure does not violate the anti-disclosure requirements of § 6103. See, e.g., Huff v. United States, 10 F.3d 1440 (9th Cir. 1993); Mann v. United States, 204 F.3d 1012 (10th Cir. 2000). While neither Huff nor Mann ad dress an identical factual situation, both clearly stand for the proposition that disclosures made pursuant to an otherwise lawful tax collection procedure are not rendered invalid by the commission of a procedural error by the IRS.

In this case, plaintiffs have not convincingly established that defendant indeed erred including at-risk or basis amounts, nor in sending out the FPAA forms to all former Hoyt partners. However, even if defendant had committed error, the Court's inquiry must cease with the determination that the audits were administrative proceedings and therefore were exempt from the anti-disclosure requirements of § 6103.

This ruling makes sense in light of the purpose underlying a partnership audit procedure. The Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") mandates the "the tax treatment of any partnership item shall be determined at the partnership level." 26 U.S.C. § 6221. TEFRA creates joint rights of participation in partnership tax liability proceedings, and also allows for partners to be bound by one another's settlement negotiations. See 26 U.S.C. § 6221-6233. As a result, TEFRA has specific notice requirements, mandating that partners receive information about pending administrative proceedings which implicate the partnership. 26 U.S.C. § 6223. Any person who might be subject to tax liability as a result of defendant's determination that he or she was a Hoyt partner was entitled to that information. The results of withholding such information from plaintiffs would have been absurd; in order to protect the privacy of persons who might not have had any tax liability, those persons would be shielded from information which could reasonably have had significant financial consequences.

The disclosure of at-risk and basis information was similarly reasonable in this administrative proceeding. Persons who potentially faced tax consequences as a result of the partnership audits were entitled to know all of the operative facts which defendant relied upon in its calculations. The IRS determined that at-risk and basis amounts were among the partnership information to which partners were entitled. This information was then distributed as part of a valid administrative proceeding. The Court cannot, and will not, second-guess the IRS's findings in this matter.

Finally, defendant has brought a motion to strike materials filed by plaintiffs in support of their reply memorandum. Dkt. No. 182. This motion is MOOT and is STRICKEN.

For the reasons set forth more fully above, the stay previously entered in this matter LIFTED and summary judgment is GRANTED in full for defendant. The clerk of the Court is directed to distribute a copy of this Order to all counsel of record.