In Re US

United States Court of Appeals
for the Federal Circuit
__________________________

IN RE UNITED STATES,
Petitioner,
__________________________

Miscellaneous Docket No. 992
__________________________

On Petition for Writ of Mandamus to the United
States Court of Federal Claims in case no. 09-CV-793,
Judge Edward Damich.
__________________________

ON PETITION
__________________________

DAMON W. TAAFFE, Trial Attorney, Tax Division, Ap-
pellate Section, United States Department of Justice, of
Washington, DC, for petitioner. With him on the petition
was JONATHAN S. COHEN, Attorney.

DANIEL J. DUNN, Hogan Lovells US LLP, of Denver,
Colorado, for respondent Panasonic Communications
Corporation of America. With him on the response was
ANN K. EDGAR. Of counsel was JESSICA L. ELLSWORTH, of
Washington, DC.
__________________________

Before BRYSON, SCHALL and PROST, Circuit Judges.
PER CURIAM.
2 IN RE UNITED STATES

ORDER

After paying under protest an excise tax for importing
products containing ozone depleting chemicals (ODCs),
the Panasonic Communications Corporation of America
(Panasonic) filed suit seeking a refund based on alleged
flaws in a gas chromatography test performed by the
government during a tax audit to check for ODCs. During
discovery, the United States Court of Federal Claims
compelled the government to turn over the audit tests and
related information of non-party taxpayer entities simi-
larly tested, to help assess the validity and reliability of
the test’s methodology. This court is asked to decide as a
matter of first impression whether that discovery can be
sustained in light of the Internal Revenue Code’s general
prohibition against disclosure of tax “return information.”
I.R.C. § 6103(a), 26 U.S.C. § 6103(a). Because we hold
that it cannot and that the court’s order was a clear abuse
of discretion, we grant the petition.

I.

A.

A brief description of the excise tax on ODCs and the
government’s audit process relating to imports will be
helpful in understanding the issue raised by this petition.

Chlorofluorocarbons (CFCs) and halons are chemical
compounds often used as refrigerants, cleaners, solvents,
sterilants, and propellants in the manufacture of insula-
tion, fast food cartons, and electronic items. Their longev-
ity and stability allow them to persist in the atmosphere
long enough to rise into the stratosphere twelve to thirty
miles above the earth. Once there, the ultraviolet radia-
tion from the sun causes CFCs and halons to become
unstable, break apart, and release chlorine atoms, which
readily react with the earth’s ozone layer.
IN RE UNITED STATES 3
To discourage further depletion of the ozone layer,
I.R.C. § 4681(a)(2) imposes an excise tax on any product
imported for consumption, use, or warehousing, which is
sold or used in the United States and in which any ODCs
were used as material in the manufacturing or production
of the product. The total liability for the excise tax for
imported taxable products is reported on a quarterly basis
on IRS Form 720.

Manufacturers are allowed to self-determine the
excise tax owed based on the weight of each ODC used as
a material in the imported product and to submit as
supporting proof a letter signed by the manufacturer that
adequately identifies the product and states the weight of
each ODC used as a material in the product’s manufac-
ture.

The Internal Revenue Service (IRS), however, found
that many foreign manufacturers were not paying the tax
and were instead submitting letters claiming to have
never used ODCs or to have eliminated their use to avoid
the costs of switching to non-ODC manufacturing proc-
esses. This led the IRS to contract with the Pacific
Northwest National Laboratory (PNNL), a federally
funded research center, to develop a test to determine
whether ODCs were being used in the manufacture of
imported items and to assist the IRS in auditing reporting
companies.

To the extent relevant here, according to the “Ozone
Depleting Chemicals (ODC) Excise Tax Audit Techniques
Guide,” available on the IRS’s website, 1 after placing the

1 http://www.irs.gov/businesses/small/article/0,,id=1
86588,00.html.
4 IN RE UNITED STATES

electronic circuit board of an item being testing in a
sterile environment, PNNL subjects it to various levels of
heat. The gases released from the board at each tempera-
ture level are captured and analyzed in order to detect for
the presence, although not the actual quantity, of ODCs
in the board.

B.

The facts relevant to this petition are not in dispute.

During the calendar quarters ending June 30, 2002
through December 31, 2004, Panasonic manufactured and
imported for sale in the United States consumer tele-
phones assembled in Tijuana, Mexico. Panasonic re-
ported that it owed no excise tax and submitted a certified
letter from its overseas manufacturers and suppliers
stating that no ODCs were used in the manufacture of the
phones.

In 2005, the IRS audited Panasonic’s imports. PNNL
purchased Panasonic’s phones from retail stores and
tested the phones’ circuit boards. After completing its
audit, the IRS assessed Panasonic a total of $9,885,671.91
in excise taxes, penalties, and interest payments.

Panasonic paid the ODC excise tax assessments for
two alleged taxable transactions for the quarterly tax
period ending September 30, 2002, and for one alleged
taxable transaction in each remaining quarterly tax
period ending June 30, 2002 through December 31, 2004.
It then filed a complaint in the Court of Federal Claims
seeking a refund. Panasonic’s complaint asserts that no
ODCs were ever used in its manufacturing process, and
that PNNL’s testing procedures are scientifically invalid
and unreliable.

In preparation for a mini-trial on the validity and
reliability of PNNL’s testing procedures, Panasonic
IN RE UNITED STATES 5
sought to discover information regarding PNNL’s testing
of commercial products during the IRS’s audit of other
taxpayers.

For instance, Panasonic’s Interrogatory No. 6 reads in
relevant part: “[i]dentify all instances in which the IRS
has used testing for ODCs as a basis to determine or
consider whether excise taxes should be imposed on any
taxpayer other than Panasonic . . .[including] for each
case . . . the testing methodologies used, the results of the
testing (i.e., whether ODCs were detected), the amount of
the taxes assessed, [and] whether the assessment was
appealed or contested[.]”

After the United States refused to turn over the
requested materials on confidentiality grounds, Panasonic
sought and obtained from the Court of Federal Claims an
order compelling discovery.

The court held that, while the information sought was
“return information” as broadly defined under I.R.C.
§ 6103(a), and thus generally prohibited from disclosure
by the IRS, it was nonetheless authorized to be disclosed
in these proceedings under the enumerated exception
provided in I.R.C. § 6103(h)(4)(B). Panasonic Commc’ns
Corp. of Am. v. United States, 09-CV-793 slip op. at 3-6
(Fed. Cl. Apr. 20, 2011). That provision authorizes disclo-
sure of tax information on a tax return in a judicial or
administrative proceeding pertaining to tax administra-
tion “if the treatment of an item reflected on such return
is directly related to the resolution of an issue in the
proceeding[.]” I.R.C. § 6103(h)(4)(B).

The court determined that PNNL’s testing activities
relating to other taxpayers were “derivatively part of the
‘treatment’ of ODC tax liability, which is the ‘item’ identi-
fied by Plaintiff and which is reflected on the taxpayer’s
return, whether as a specific line item or as part of the
6 IN RE UNITED STATES

overall tax liability reported.” Panasonic, slip. op. at 5.
The court therefore concluded that the information was
subject to the § 6103(h)(4)(B) exception. Id. The court
also determined that PNNL’s testing of other taxpayers’
products met the “directly related” requirement of
§ 6103(h)(4)(B) because Panasonic’s discovery was “di-
rected to the purpose of the mini-trial, that is, the validity
of the scientific testing for ODCs employed by PNNL, not
to a direct comparison of its excise tax assessment with
that of other taxpayers” Id.

Before this court, the United States contends that the
Court of Federal Claims improperly interpreted
§ 6103(h)(4)(B) in compelling discovery, so as to require
the IRS to turn over information it is statutorily required
to keep confidential. Thus, the United States urges that
this court issue a writ of mandamus directing the Court of
Federal Claims to vacate its order compelling disclosure.

II.

Pursuant to the All Writs Act, 28 U.S.C. § 1651(a),
this court has authority to issue the requested writ as
“necessary or appropriate in aid of” jurisdiction. The use
of mandamus is limited to correcting a lower court’s
usurpation of judicial power or clear abuse of discretion.
Cheney v. U.S. Dist. Court, 542 U.S. 367, 380 (2004); see
also In re Regents of the Univ. of Cal., 101 F.3d 1386, 1387
(Fed. Cir. 1996).

Notwithstanding the extraordinary nature of such
relief, this court has issued the writ in appropriate cases
to prevent the wrongful exposure of privileged or confi-
dential communications. See Regents, 101 F.3d at 1387;
see also Mohawk Indus., Inc. v. Carpenter, 130 S. Ct. 599,
601-02 (2009) (noting that an appellate court may grant a
writ of mandamus to correct a “particularly injurious or
novel privilege ruling”).
IN RE UNITED STATES 7
Thus, in In re Seagate Technology, LLC, 497 F.3d
1360, 1367 (Fed. Cir. 2007) (en banc), we explained that
“‘mandamus review may be granted of discovery orders
that turn on claims of privilege or confidentiality when (1)
there is raised an important issue of first impression, (2)
the privilege would be lost if review were denied until
final judgment, and (3) immediate resolution would avoid
the development of doctrine that would undermine the
privilege.’” (quoting Regents, 101 F.3d at 1388).

These criteria are met here. The tax law requires
millions of individuals and business entities to furnish the
IRS with highly confidential information. This informa-
tion, as well as the documents that are created by the IRS
in connection with it, is indispensible to the administra-
tion of the revenue laws. Recognizing that the effective
operation of our tax system hinges on the willingness of
taxpayers to provide such information, Congress has
taken steps to guarantee that confidentiality. Section
6103(a) of the Code prohibits the IRS from disclosing tax
“returns” and tax “return information” except in specifi-
cally enumerated circumstances, a prohibition which is
enforced by civil and criminal penalties.

Not only is the issue of the scope of the § 6103(h)(4)(B)
exception vital to matters of taxpayer confidentiality and
proper tax administration but it also is a matter of first
impression for this or any court of appeals, and one that
has created a split within the United States Court of
Federal Claims. Compare Panasonic, 09-CV-793, slip op.
at 5-6 (holding the disclosure requirements satisfied if the
item is directly related to the purpose of discovery), and
Shell Petroleum, Inc. v. United States, 47 Fed. Cl. 812,
817-19 (2000) (using the Federal Rules of Evidence “as a
helpful guide” to broadly construe § 6103(h)(4)(B) to allow
discovery of tax treatment of similarly situated third
parties), with Vons Cos., Inc. v. United States, 51 Fed. Cl.
1 (2001) (relying exclusively on legislative history to
8 IN RE UNITED STATES

narrowly construe § 6103(h)(4)(B) to deny discovery for
similarly situated third parties). Hearing the issue will
thus bring needed uniformity to this area of the law.
Further, absent our immediate review, the protection
afforded against disclosure by § 6103(a) will be lost in this
case. We therefore proceed to the merits.

III.

The government contends that the Court of Federal
Claims was without authority to compel disclosure of
confidential taxpayer information in the form of PNNL’s
testing results and related information because of the
general prohibition of § 6103(a). The government also
contends that the exception in § 6103(h)(4)(B) is inappli-
cable. Our analysis of the language, structure, and legis-
lative history of these provisions leads us to agree with
the government that the decision of the Court of Federal
Claims requiring disclosure of this private taxpayer
information was a clear abuse of discretion.

Insofar as relevant here, the Internal Revenue Code
obligates the government to keep confidential and not
disclose “returns and return information.” 2 Section

2 Section 6103(b)(1) defines “return” to mean “any
tax or information return, declaration of estimated tax, or
claim for refund required by, or provided for or permitted
under, the provisions of this title which is filed with the
Secretary by, on behalf of, or with respect to any person,
and any amendment or supplement thereto, including
supporting schedules, attachments, or lists which are
supplemental to, or part of, the return so filed.” Section
6103(b)(2) broadly defines “return information” to include
“data, received by, recorded by, prepared by, furnished to,
or collected by the Secretary with respect to a return or
with respect to the determination of the existence, or
possible existence, of liability (or the amount thereof) of
IN RE UNITED STATES 9
6103(h)(4)(B), however, provides an exception to non-
disclosure:

A return or return information may be disclosed
in a Federal or State judicial or administrative
proceeding pertaining to tax administration, but
only . . . —(B) if the treatment of an item re-
flected on such return is directly related to the
resolution of an issue in the proceeding.

I.R.C. § 6103(h)(4).

As detailed in its motions papers below and reiterated
here, Panasonic rests its claim for disclosure on the
argument that the “‘item’ reflected on a return is the ODC
excise tax liability and the ‘treatment’ of that item with
respect to third party taxpayers—that is, the testing of
those taxpayers’ products.” Panasonic also argues that
this “item” is “directly related to” the issue of PNNL’s
testing methodology at issue in the mini-trial. Pana-
sonic’s argument suffers from at least three fatal flaws.

First, we reject Panasonic’s argument that the “di-
rectly related” requirement is met here. As with any
statutory construction, the starting point of our analysis
is the language of the statute itself; here, “directly re-
lated.” Bailey v. United States, 516 U.S. 137, 144 (1995).
We find that “directly related,” as used in the statute, is
ambiguous on its face; we therefore resort to legislative
history to clarify its meaning. See Church of Scientology
of Cal. v. I.R.S., 484 U.S. 9, 16-17 (1987) (relying on
legislative history to construe section 6103(a)); Vons Cos.,
Inc., 51 Fed. Cl. at 16 (relying on legislative history to
determine the meaning of “directly related”); Shell Petro-
leum, Inc., 47 Fed. Cl. at 817 (same); see also Koons Buick

any person under this title for tax, penalty, interest, fine,
forfeiture, or other imposition, or offense.”
10 IN RE UNITED STATES

Pontiac GMC, Inc. v. Nigh, 543 U.S. 50, 62 (2004) (resort-
ing to legislative history to resolve an ambiguity in stat-
ute).

The legislative history describes § 6103(h)(4)(B)’s
“directly related” requirement by contrasting it to
§ 6103(h)(2)(B), which allows disclosure to the Depart-
ment of Justice if “the treatment of an item reflected on
such return is or may be related to the resolution of an
issue in the proceeding or investigation.” (emphasis
added). The legislative history pertaining to
§ 6103(h)(2)(B) articulates an “item test” for determining
whether a third party’s treatment of an item meets the “is
or maybe related” requirement. The “item test” allows
disclosure where “the treatment of an item reflected on
[the third party’s] return is or may be relevant to the
resolution of an issue of the taxpayer’s liability under the
Code.” S. Rep. No. 94-938, at 325 (1976); H.R. Rep. No.
94-1515, at 477 (1976) (Conf. Rep.).

According to the Senate Report, the “item test” is
satisfied in instances where, for example, the treatment of
an item on the return of a pass-through entity, such as a
subchapter S corporation, partnership, or trust, is rele-
vant to the resolution of the taxpayer’s liability because of
the relationship between the taxpayer (as shareholder,
partner, or beneficiary) and the third party. S. Rep. No.
94-938, at 325.

Both the Senate report and House Conference report
build on this test to describe the scope of § 6103(h)(4)(B)’s
“directly related” language, explaining that “[t]he disclo-
sure of a third party return in a tax proceeding will be
subject to the same item . . . test described above, except
that such items . . . must have a direct relationship to the
resolution of an issue of the taxpayer’s liability.” S. Rep.
No. 94-938, at 326; H.R. Rep. No. 94-1515, at 478 (empha-
sis added). By using “directly” to modify the “related to”
IN RE UNITED STATES 11
language in § 6103(h)(4)(B), Congress intended an even
narrower exception to apply for disclosure to members of
the public in judicial proceedings, such as in this case.

Therefore, scenarios that do not satisfy the item test
under § 6103(h)(2)(B) would never satisfy the narrower
standard required by the “directly related” language of
§ 6103(h)(4)(B). The Senate report provides the following
example of a situation that does not meet the item test:

The return reflecting the compensation paid to
an individual by an employer other than the
taxpayer whose liability is at issue would not
meet . . . the item . . . test[] described above in a
reasonable compensation case. Thus, for exam-
ple, the reflection on a corporate return of the
compensation paid its president would not rep-
resent an item the treatment of which was rele-
vant to the liability of an unrelated corporation
with respect to the deduction it claims for the
salary it paid its president.

S. Rep. No. 94-938, at 325. This example, as well as
others in the legislative history, 3 makes clear that the
treatment of an item on a third party’s return is not
related, never mind directly related, to the resolution of a
taxpayer’s issue when the only link between the third

3 The Senate report also explains that “[i]n section
482 cases (involving the reallocation of profits and losses
among related companies), where it is sometimes neces-
sary to determine the prices paid for certain services and
products at arms-length between unrelated companies,
the return or return information of a company which was
unrelated to the taxpayer company would not be disclos-
able under either the item or transaction tests described
above.” S. Rep. No. 94-938, at 325-26.
12 IN RE UNITED STATES

party and taxpayer is the same tax treatment for a simi-
lar item of liability, income, deduction, or credit. 4 See
Vons Cos., Inc., 51 Fed. Cl. at 17. This is the exact “treat-
ment” identified by Panasonic here; the only link between
the third parties that Panasonic seeks return information
from and itself is the treatment of ODC tax liability, and
therefore the information is not directly related. 5 What is
more, as Vons Cos., Inc. pointed out, “[t]o release return
information in such circumstances would fly in the face
not only of the specific legislative purpose underlying
section 6103(h)(4)(B), but also the broader legislative
history of section 6103(a), which repeatedly emphasizes
the vital importance to tax administration of maintaining
the privacy of tax returns and return information.” Id. at
18.

4 Accepting a broader reading of § 6103(h)(4)(B) that
would allow such scenarios to warrant disclosure would
essentially rewrite the statute so that, contrary to Con-
gress’s intent, the release of third party taxpayer informa-
tion would be the norm rather than the exception. See
Vons Cos., Inc., 51 Fed. Cl. at 17 (reasoning that broadly
construing this section “would be tantamount to rewriting
the statute, deleting, at the very least, the word ‘directly’
and, perhaps the word ‘related,’ as well”).

5That the evidence Panasonic seeks is not “directly
related” under § 6103(h)(4)(B), does not imply that it is
not relevant under the Federal Rules of Evidence. The
legislative history makes clear that the two are not coex-
tensive; the “directly related” requirement is far narrower
and different than evaluating whether evidence is rele-
vant. Thus, to the extent that Shell Petroleum suggests
that “the Federal Rules of Evidence serves as a helpful
guide in understanding the meaning of the phrase, ‘di-
rectly related,’” 47 Fed. Cl. at 819, it is incorrect.
IN RE UNITED STATES 13
Second, Panasonic arrives at its erroneous under-
standing of § 6103(h)(4)(B) by failing to give effect to
every clause and word in the statute. We read the words
“in tax statutes . . . in their ordinary and natural sense.”
Helvering v. San Joaquin Fruit & Inv. Co., 297 U.S. 496,
499 (1936). In its ordinary and natural usage, “reflected”
means “manifest” or “apparent,” Webster’s New World
Dictionary 989 (9th ed. 1984). PNNL’s testing results and
related information, however, did not exist until after the
third party taxpayers filed their tax forms, and thus could
not be “reflected” on such filings within the ordinary
usage of that term.

Panasonic is thus left to focus on the IRS’s “treat-
ment” of an item during the audit process. It would have
made no sense, however, for Congress to condition disclo-
sure based on the IRS’s “treatment” of an “item” as “re-
flected” on a “return,” for the IRS does not submit a
return from which the treatment of an item is reflected.
If, on the other hand, “treatment” covers the taxpayer’s
handling of an item on a return, the phrase “reflected on
such return” is properly understood as referring to what is
shown on the face of the return submitted by the taxpayer
whose “return or return information” is being sought,
thereby giving each part of the statute a role. See United
States v. Menasche, 348 U.S. 528, 538-539 (1955) (“It is
our duty ‘to give effect, if possible, to every clause and
word of a statute.’” (quoting Montclair v. Ramsdell, 107
U.S. 147, 152 (1883))).

Third, nothing in the language of the statute indi-
cates, or even suggests, that Congress intended for the
courts to focus on the relevance of the “return informa-
tion” sought to the issue in the proceeding (as opposed to
the relevance of the treatment of the item on the return
being sought to the issue in the proceeding). Nonetheless,
Panasonic’s argument is premised on this flawed assump-
tion.
14 IN RE UNITED STATES

When Congress intended to permit disclosure of
information based on relevance of the information sought
to an event or issue, it said so clearly and unequivocally.
The very next subsection of the statute, for example,
provides for disclosure “if such return or return informa-
tion directly relates to a transactional relationship be-
tween a person who is a party to the proceeding and the
taxpayer which directly affects the resolution of an issue
in the proceeding.” I.R.C. § 6103(h)(4)(C). The lack of
similar language in § 6103(h)(4)(B), which Congress
presumably would have included had it intended for
disclosure based on the relevance of the information
sought, is strong evidence that the exception the trial
court relied upon for disclosure does not authorize such
action. See Bates v. United States, 522 U.S. 23, 29-30
(1997) (“‘[W]here Congress includes particular language
in one section of a statute but omits it in another section
of the same Act, it is generally presumed that Congress
acts intentionally and purposely in the disparate inclu-
sion or exclusion.’” (quoting Russello v. United States, 464
U.S. 16, 23 (1983))).

In view of the lack of anything in the language or
history of these provisions that even suggests, let alone
establishes, that Congress intended to authorize disclo-
sure of information such as the information sought in this
case, we hold that the Court of Federal Claims clearly
erred as a matter of law in compelling discovery. We
therefore grant the petition and direct the court to vacate
its order.

Accordingly,

IT IS ORDERED THAT:

(1) The petition is granted. The Court of Federal
Claims is directed to vacate its April 20, 2011 order
IN RE UNITED STATES 15
compelling the United States to turn over “return infor-
mation.”

(2) Panasonic’s motion to vacate the stay is denied as
moot.
16 IN RE UNITED STATES

FOR THE COURT

January 20, 2012 /s/ Jan Horbaly
Date Jan Horbaly
Clerk