Panel Says Suit Over Tax Disclosures Was Timely

Friday, November 16, 2012

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Panel Says Suit Over Tax Disclosures Was Timely

By a MetNews Staff Writer

The two-year statute of limitations for wrongful disclosure of tax return information under 26 U.S.C.§ 7431 begins to run when the plaintiff knew or reasonably should have known of the government’s allegedly unauthorized disclosures, the Ninth U.S. Circuit Court of Appeals ruled yesterday.

The panel, in a 2-1 decision, said such knowledge is triggered not by a single generalized event, such as notice of an audit, but rather by the plaintiff’s actual or constructive knowledge of each particular disclosure.

In 1999, a group of taxpayers filed a complaint in federal district court alleging that the IRS had disclosed false information to the Japanese National Tax Administration in violation of 26 U.S.C. § 6103(a), which gives taxpayers the right to bring a civil action against the government for an IRS employee’s knowing or negligent unauthorized disclosure of a taxpayer’s return information. The plaintiffs also alleged that the IRS had wrongfully disclosed such information even though it knew or should have known that the Japanese NTA would leak it.

The government maintained that the court had no subject matter jurisdiction because the plaintiffs’ claims were barred under § 7431(d) of the statute, which provides that a claim for wrongful disclosure of tax return information “may be brought . . . at any time within 2 years after the date of discovery by the plaintiff of the unauthorized inspection or disclosure.” It argued that the statute of limitations should have started running in August 1996, when the IRS informed the plaintiffs of the IRS/NTA joint investigation.

But the plaintiffs countered that the government didn’t wrongfully disclose the information until a meeting in Tokyo in November 1996.

In siding with the taxpayers, the court stated that the government’s reading of the statute of limitations would seriously undermine the statute’s protections.

Judge Sidney R. Thomas, writing for the majority, said:

“General notice of an audit cannot put someone on inquiry notice of a specific conversation or disclosure that has not yet occurred. Thus, it does not make sense for the statute of limitations to begin to run on a single date for all disclosures if some of the allegedly unauthorized disclosures have not yet been made… The statute does not start running until the plaintiff’s actual or constructive knowledge of each particular disclosure.”

Explaining its reasoning, the judge noted that a “multi-jurisdictional audit may take many years, and the taxpayer may well not learn of unauthorized disclosures until a lengthy audit is completed. If inquiry notice were triggered by audit notice alone, the statute would likely run in most cases before the taxpayer learned of any unauthorized disclosure.”

The government also argued that even if it knowingly made false disclosures, it was immune from liability because it had made a good-faith misinterpretation of the relevant tax treaty. The panel held that the defense of good faith does not apply when the government knowingly discloses false information to a tax treaty partner.

Senior Judge J. Clifford Wallace dissented, arguing that the plaintiffs failed to meet their burden of proving that they first learned of the disclosures within the limitations period.

The case is Aloe Vera of America, Inc. v. the United States of America, 10-17136.