The Tax Court held that the exception in Sec. 6103(h)(4)(A) authorized disclosure of returns and return information that the IRS sought to withhold in a whistleblower case.
Background
An individual (whistleblower) provided information to the IRS regarding three individuals. The IRS pursued actions against all three individuals (including criminal actions with respect to two of the taxpayers) and ultimately collected proceeds from each of them. Nonetheless, the IRS Whistleblower Office (WBO) denied the whistleblower’s claim for an award under Sec. 7623(b).
The WBO acknowledged to the whistleblower that the information he provided was reviewed as part of the IRS’s investigation of the taxpayers, but the information did not result in the assessment of additional tax, penalties, interest, or other amounts with respect to the issues raised by the whistleblower. The IRS also said the information provided was not relevant to the issues for which additional tax, penalties, interest, or additional amounts were assessed against the taxpayers the whistleblower informed on. The whistleblower petitioned the Tax Court for a review of the WBO’s determination.
In general, the Tax Court reviews whistleblower cases based on the administrative record, so the Tax Court ordered the IRS to file redacted and unredacted copies of the administrative record compiled by the WBO in the whistleblower’s case. The IRS filed a redacted copy of the administrative record and requested that the court excuse it from filing an unredacted copy “to protect ... section 6103 information and ... other identifying information.” Under Sec. 6103(a), returns and return information generally must be kept confidential unless disclosure is specifically authorized by the Code. The court then ordered the IRS to submit to the court, for review in camera, any documents that the Service wished to redact to preserve a privilege or protect taxpayer information.
The IRS, in turn, moved that the court modify its order by striking the portion of it that directed the Service to submit the entire unredacted administrative record for review in camera, arguing that there is no exception in Sec. 6103 that would permit the redacted information to be disclosed to the court. The whistleblower filed a response opposing the IRS’s motion.
The Tax Court’s decision
The Tax Court held that in the specific circumstances of this whistleblower’s case, the exception to disclosure in Sec. 6103(h)(4)(A) permitted the IRS to disclose the taxpayers’ returns and return information that the WBO included in the administrative record supporting its determination.
Sec. 6103(h)(4)(A) authorizes the disclosure of tax returns or return information in a federal judicial proceeding pertaining to tax administration 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.” Accordingly, Sec. 6103(h)(4)(A) would apply only if the whistleblower’s case “arose out of, or in connection with” determining the civil or criminal liabilities of the three taxpayers the whistleblower informed on, with respect to any tax imposed under the Code.
Because the phrase “in connection with” sweeps less broadly than “arose out of,” the Tax Court focused on the meaning of “in connection with.” Because the statute did not define this phrase, under the rules of statutory construction, the court looked to the phrase’s ordinary meaning at the time Sec. 6103 was enacted. At that time, based on dictionary definitions, the court found that the phrase was defined broadly (and in relevant part) to mean any link, association, or relationship, and that this definition was consistent with past interpretations of the phrase by the Tax Court itself and various other courts.
However, the Tax Court also noted that the Supreme Court had found, in interpreting another statute involving the disclosure of personal information, that the phrase “in connection with” could be interpreted to be essentially indeterminate and, thus, the scope of the phrase must be contained within reasonable bounds. Thus, the Tax Court found that it must exclude from the scope of Sec. 6103(h)(4)(A) those proceedings that have only a “remote relation to” the determination of a taxpayer’s liability.
Applying these principles in the context of Sec. 6103, the Tax Court had “no difficulty concluding that this case arose ‘in connection with’ … determining the civil or criminal liabilities of” the three taxpayers the whistleblower informed on. The court explained that “[w]hen, as here, a whistleblower provides information to the IRS on a target taxpayer and the IRS proceeds with an action and collects proceeds from that target taxpayer, the decision whether to grant the whistleblower an award — as well as [the Tax Court’s] eventual review of that decision — is inextricably linked with determining the target taxpayer’s civil or criminal liability for at least two reasons.” Thus, the whistleblower’s case was within the scope of Sec. 6103(h)(4)(A), and disclosure of the WBO’s administrative record was authorized.
The IRS appeared to acknowledge that the plain text of Sec. 6103(h)(4) (A) supported the Tax Court’s conclusion, conceding in its brief that its own interpretation is “narrower in scope than the plain language implies.” The IRS contended that the legislative history of the provision and its statutory purpose supported its narrower interpretation.
The IRS argued that examples from the legislative history of a parallel provision in Sec. 6103(h) show that Congress had a more limited understanding of Sec. 6103(h)(4)(A). The Tax Court, however, found that this legislative history, being from a parallel provision, had no probative value in determining the meaning of Sec. 6103(h)(4)(A). Even if it did, the court found that the legislative history the IRS cited simply comprised some illustrative examples of circumstances that would fall under the parallel provision and there was no indication that the legislative history was intended to be an all-inclusive expression of what the parallel provision or Sec. 6103(h)(4)(A) meant.
Regarding the statutory purpose of Sec. 6103, the IRS argued that the Tax Court’s interpretation of Sec. 6103(h)(4)(A) would allow “unfettered disclosure” of return information to “any whistleblower who might file a Tax Court appeal,” resulting in “wholesale, unregulated access to return information of any taxpayer that a whistleblower might choose to target.” This would be contrary to the overarching purpose of Sec. 6103, which the IRS claimed is to “restrict access to return information within well-defined limits.” The Tax Court gave four reasons why it did not believe this was the case.
First, the Tax Court explained that the general rule of Sec. 6103 and its “numerous” exceptions already reflected Congress’s balancing of the competing interests of taxpayers in maintaining the confidentiality of their returns and return information and the interests of others whose rights might be affected by that information. Second, the Tax Court noted that Congress had used a broad phrase in the provision and, if it intended to adopt a narrower standard, it could have easily used narrower language. Third, the flush text in Sec. 6103(h)(4) gives the IRS authority to prevent disclosure if it “determines that such disclosure would identify a confidential informant or seriously impair a civil or criminal tax investigation.” Thus, in the court’s view, Congress did not leave the IRS powerless with respect to disclosures in judicial proceedings.
Finally, the Tax Court stated that it did not share the IRS’s broad view of what it was holding. According to the court, a number of rules in addition to Sec. 6103 limit the information available to whistleblowers in Tax Court. Contrary to the IRS’s contention, therefore, it was not holding that every whistleblower should receive unfettered access to the return information of every target the whistleblower names. Instead, the court stated it was holding that in the specific circumstances present in the whistleblower’s case, Sec. 6103 does not prohibit disclosure of the taxpayers’ returns and return information that the WBO included in the administrative record supporting its determination.
The court then addressed the IRS’s contention that the current regulations were consistent with its position. To the extent the regulations allow limited return information disclosure to whistleblowers, in the IRS’s eyes, these disclosures are authorized by Sec. 6103(h)(4)(B) or (C) and not Sec. 6103(h)(4)(A).
The Tax Court saw things differently, observing that Regs. Secs. 301.6103(h) (4)-1(b) and 301.7623-3(c)(4)(i)(B) authorize the WBO to disclose returns and return information to a whistleblower during the whistleblower administrative proceeding and that these regulations were based on Sec. 6103(h)(4)(A). Because the court saw no reason that Sec. 6103(h)(4)(A) would authorize broader disclosure in administrative proceedings than in judicial proceedings, it concluded that the regulations reinforced its conclusion that Sec. 6103(h)(4)(A) authorizes the disclosure of the administrative record.
Reflections
As the Tax Court pointed out in the conclusion to its opinion, its holding did not leave taxpayer information in a WBO administrative record without protection, citing for example its own rules that allow the Tax Court to require further redactions from the record or to issue a protective order. It further noted that under another of its rules, on a party’s motion and for good cause shown, “the [Tax Court] may make any order that justice requires to protect a party or other person from annoyance, embarrassment, oppression, or undue burden or expense.” While the IRS can pursue redaction under these rules, it cannot claim that it is prohibited by Sec. 6103 from complying with Tax Court orders.
Whistleblower 972-17W, 159 T.C. No. 1 (2022)
Contributor
James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.
