Solargistic Corporation and Geodesco, Inc., Plaintiffs-appellants, v. United States of America, Defendant-appellee, 921 F.2d 729 (7th Cir. 1991)

This is an appeal from the grant of summary judgment in favor of the defendant, United States. The presence of a federal question provides the basis for subject matter jurisdiction. See 28 U.S.C. § 1331. The question presented is whether the United States improperly disclosed the plaintiffs' "return information" in violation of 26 U.S.C. § 6103. We agree with the District Court's conclusion that any alleged disclosure was authorized by a statutory exception to Sec. 6103 and affirm the decision below.

FACTUAL BACKGROUND

The seeds of this lawsuit lie in an Internal Revenue Service ("IRS") investigation of a tax shelter. The plaintiff Solargistic Corporation ("Solargistic") purchased solar energy equipment which it then sold to customers/investors ("investors"). The investors could then opt to lease the equipment to the plaintiff Geodesco, Inc. ("Geodesco"), which would place the devices with end users. These sale/leaseback transactions were designed to provide the investors with substantial income tax deductions and credits.

For reasons that are unimportant to our decision, the IRS suspected these solar energy investments did not entitle the investors to the claimed income tax deductions and credits. On November 7, 1986, the IRS mailed a letter¹  to the investors that said in part:

Dear Taxpayer(s):

You have been identified as a partner/investor in Solargistics [sic] which is under audit by the IRS. Any adjustments made to that return/promotion will affect your tax return.

We are contacting you because it is necessary for us to secure a copy of the return filed by you for the year(s) 1985. If you have filed a return, please mail us a copy. If you did not file a return, please furnish us with the reasons for not filing.

By stating in this letter that Solargistic was under audit, the IRS disclosed what we will assume for purposes of this appeal is "return information" of Solargistic. See 26 U.S.C. § 6103(b) (2) (A) (including within the definition of "return information" the fact that "the taxpayer's return was, is being, or will be examined"). Solargistic filed suit seeking damages under 26 U.S.C. § 7431(a) (1) for the alleged wrongful disclosure of this return information in violation of 26 U.S.C. § 6103. The District Court granted the government summary judgment, concluding the disclosure at issue was not wrongful because it was excepted from Sec. 6103 prohibition. We affirm. Although the fact of the IRS audit might be the return information of Solargistic it is also the return information of the investors who received the letter.

DISCUSSION

Solargistic's suit arises under 26 U.S.C. § 7431(a) (1), which enables taxpayers to sue for damages caused by violations of 26 U.S.C. § 6103. Section 6103(a) prohibits employees of the government from disclosing any return information unless the disclosure is authorized by an exception. For a taxpayer to prevail, the evidence must establish that return information was disclosed and that no exception applies to exempt the disclosure from the confidentiality protections of Sec. 6103. The District Court granted the United States summary judgment based on the conclusion that the disclosure here was authorized by the exception for disclosure of return information to the taxpayer himself (Sec. 6103(e) (1), (7)).²  We agree.

"Return information" is defined as: [A] taxpayer's identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer's return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary [of the IRS] with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition or offense,....

26 U.S.C. § 6103(b) (2) (A) (emphasis added).

Although the IRS is, in general, admonished to maintain the confidentiality of return information, Sec. 6103(e) (7) provides that a taxpayer's return information is open to inspection by any person authorized to inspect that taxpayer's tax return. Section 6103(e) (1) (A) (i) permits an individual to inspect his own tax return. The interplay between these two provisions enables the IRS to disclose the return information of an individual to that individual. See Mid-South Music Corp. v. United States, 818 F.2d 536, 540 (6th Cir. 1987) (Merritt, J., concurring).

We believe, as did the District Court, that the disclosure here falls within this exception. The IRS disclosed to the investors that Solargistic had been audited. These letters were mailed as the initial step to adjusting the tax liability of the investors for the year in question. The resolution of the audit would directly impact the investors' taxes payable, and the letter says as much--" [a]ny adjustments made to that return/promotion will affect your tax return." The fact of the Solargistic audit is therefore "data ... prepared by ... the Secretary ... with respect to the determination of the ... possible existence" of any tax liability of the investors. 26 U.S.C. § 6103(b) (2) (A). As such, the fact of the audit is the "return information" of each Solargistic investor. See Mid-South, 818 F.2d at 540 (Merritt, J., concurring); Balanced Fin'l Mgmt., Inc. v. Fay, 662 F. Supp. 100, 106 (D. Utah 1987).³ 

Only this construction of Sec. 6103 will enable the IRS to go about its business. In order to adjust the returns of the individuals who have invested in tax shelters found to be suspect, the IRS must be permitted to inform those individuals of the facts underlying the adjustment. Elsewise, these investors would merely be told that an adjustment to their returns might be warranted, but they would not be told why. Section 6103 could not possibly intend such a result and to read the section otherwise would likely handcuff the enforcement arms of the IRS.⁴ 

Because the information disclosed here was the return information of the investors, the disclosure was authorized under Sec. 6103(e) (1), (7). The opinion of the District Court is AFFIRMED.