UNITED STATES COURT OF APPEALS
For the Fifth Circuit
No. 93-2280
BERNARD M. BARRETT, JR., M.D. and
PLASTIC & RECONSTRUCTIVE SURGEONS, P.A.,
Plaintiffs-Appellants,
VERSUS
UNITED STATES OF AMERICA, ET AL.,
Defendants,
UNITED STATES OF AMERICA,
Defendant-Appellee.
Appeal from the United States District Court
for the Southern District of Texas
(April 20, 1995)
Before KING and BENAVIDES, Circuit Judges, and LEE1, District
Judge.
BENAVIDES, Circuit Judge:
In one form or another, this case has been before this Court
1
District Judge of Southern District of Mississippi, sitting
by designation.
1
on five prior occasions.2 This appeal is taken from the district
court's judgment in favor of the Internal Revenue Service ("IRS")
following a bench trial held pursuant to a prior order of remand
from this Court. The district court found that the IRS did not
violate sections of the tax code which prohibit the unlawful
disclosure of tax return information during a civil or criminal
investigation. Because we conclude that the district court erred,
we reverse the judgment and remand for a determination of Dr.
Barrett's damages.
I. Background and Procedural History
Dr. Barrett is the president of an unincorporated Houston
medical practice specializing in plastic and reconstructive surgery
("PARS"). In 1979, the IRS began an audit of Dr. Barrett's
personal and corporate tax returns for the years 1977 and 1978.
When the initial investigation revealed a $100,000 discrepancy
between Dr. Barrett's books and his bank records, the IRS
transferred the case from its civil division to its criminal
division.
IRS Agent Hanson, to whom the case was transferred, determined
that it would be necessary to find out from Dr. Barrett's patients
the amount each had paid and whether any part was paid in cash.
Two informants who were Dr. Barrett's former employees, Dr. Michael
Kelly and Beverly Redick Kelly, had informed the IRS that Dr.
2
United States v. Barrett, 837 F.2d 1341 (5th Cir. 1988);
United States v. Barrett, 804 F.2d 1376 (5th Cir. 1986); Barrett v.
United States, 795 F.2d 958 (5th Cir. 1986); United States v.
Barrett, 787 F.2d 958 (5th Cir. 1986); United States v. Texas Heart
Institute, 755 F.2d 469 (5th Cir. 1985).
2
Barrett was "skimming" cash payments received from his patients.3
On June 17, 1982, Agent Hanson sent a summons to PARS, calling
for PARS' books and records. Five days later, Dr. Barrett advised
that PARS would not comply with the summons, asserting his
constitutional rights under the Fourth and Fifth Amendments. Agent
Hanson then sent summonses to the hospitals where Dr. Barrett
performed surgery and one to Dr. Barrett individually. All but
four of the sixteen hospitals complied with the summonses. The
responses from the complying hospitals provided Agent Hanson with
386 names and addresses of Dr. Barrett's patients.
Nine months later, Agent Hanson sent a "circular letter" to
each of the 386 patients, informing them that Dr. Barrett was being
investigated by the Criminal Investigation Division of the IRS and
requesting information regarding the nature and amount of the fees
paid to Dr. Barrett. In addition to the years under investigation,
the letters were mailed to patients treated in 1976, 1979, and
1980, years in which no IRS Examination Division work or Criminal
Investigation Division work has been performed. One hundred and
twenty-six letters were returned as undeliverable.
Six months later, on November 29, 1983, Dr. Barrett commenced
this action in district court against the IRS, alleging violations
3
In the 1989 joint pretrial order, the IRS admitted that Dr.
Barrett was no longer the target of any criminal investigation
involving the IRS or Agent Hanson and that no criminal charges or
indictment were ever brought against Dr. Barrett as the result of
the IRS investigation. Agent Hanson also testified that Dr.
Barrett was no longer under any type of criminal investigation and
had never been charged or indicted.
3
of 26 U.S.C. § 6103 and 26 U.S.C. § 7431.4 In short, these
sections authorize a taxpayer to bring suit for unlawful
disclosures of tax return information during a civil or criminal
investigation. Dr. Barrett alleged that the IRS violated these
sections by unnecessarily informing his patients, through the
circular letters, that he "is currently under investigation by the
Criminal Investigation Division of the Internal Revenue Service."
It is undisputed that this particular disclosure to Dr. Barrett's
patients constitutes the disclosure of "tax return information."
In an initial attempt to dispose of Dr. Barrett's suit against
the IRS, the district court granted the IRS a summary judgment.
The district court concluded that the IRS was authorized to
disclose this information because of its strong interest in
choosing the source of information it sought and because Dr.
Barrett's bank records were, as a matter of law, not a source of
information "otherwise reasonably available" pursuant to the
4
26 U.S.C. § 6103(k)(6) provides: An internal revenue
officer or employee may, in connection with his official duties
relating to any audit, collection activity, or civil or criminal
tax investigation or any other offense under the internal revenue
laws, disclose return information to the extent that such
disclosure is necessary in obtaining information, which is not
otherwise reasonably available, with respect to the correct
determination of tax, liability for tax, or the amount to be
collected or with respect to the enforcement of any other provision
of this title. Such disclosures shall be made only in such
situations and under such conditions as the Secretary may prescribe
by regulation.
26 U.S.C. § 7431(a)(1) provides: If any officer or employee
of the United States knowingly, or by reason of negligence,
discloses any return or return information with respect to a
taxpayer in violation of any provision of section 6103, such
taxpayer may bring a civil action for damages against the United
States in a district court of the United States.
4
exception to the rule of nondisclosure contained in 26 U.S.C. §
6103(k).
On appeal, this Court reversed the district court's summary
judgment, holding that there was a fact issue concerning whether
the disclosures in the circular letters to Dr. Barrett's patients
were necessary and whether the information sought was otherwise
reasonably available. See Barrett v. United States, 795 F.2d 446
(5th Cir. 1986).
[A] genuine issue of material fact has been raised as to
whether disclosure of the return information that the
taxpayer was under investigation, particularly criminal
investigation, was "necessary." We recognize that this
may be a mixed question of law and fact; that is, the
district court must interpret section 6103(k)(6) and the
relevant IRS regulations in the light of the facts
developed.
Id. at 451.
Consequently, the case was remanded for trial to determine
whether it was necessary for Agent Hanson to disclose that Dr.
Barrett was currently under criminal investigation to each, or any,
of Dr. Barrett's patients and, if so, whether the disclosure might
have been avoided by reviewing and analyzing the bank records. The
panel emphasized that the question was not whether the information
sought was necessary; rather, the question was whether the
disclosure was necessary to obtain the information and, if it was,
whether the information sought was "otherwise reasonably
available." On this appeal, we consider Dr. Barrett's appeal from
the bench trial, occasioned by our previous remand, in which the
district court found that the disclosure in Agent Hanson's circular
letters did not violate 26 U.S.C. § 6103 and 26 U.S.C. § 7431.
5
II. Necessity of Disclosure
With respect to the district court's underlying fact-findings
and inferences deduced therefrom, we are bound by the clearly
erroneous standard of review. Robicheaux v. Radcliff Material,
Inc., 697 F.2d 662, 666 (5th Cir. 1983). However, with regard to
the legal conclusions reached by the district court based upon
factual data, we review these conclusions de novo, as an issue of
law. Id.
In regard to the question of whether it was necessary to
disclose in the circular letters the fact that Dr. Barrett was
currently under investigation by the Criminal Investigation
Division of the Internal Revenue Service, the district court
concluded:
It was "necessary" for Mr. Hanson to identify himself,
his title and his division, the name of the taxpayer
about whom he was requesting information, the nature of
his inquiry, and sufficient facts about the information
he was seeking to permit the recipients of the letters to
comply with his request, in order to obtain the
information he sought by sending the letters, which was
"information not otherwise reasonably available."
(R. Vol. 1; 3213) (emphasis added). While the district court
concluded that it was necessary to provide sufficient information
to permit the recipients to comply, the district court did not
specifically address the question of whether it was necessary to
disclose that Dr. Barrett was under criminal investigation.
The IRS argues that disclosing the fact of a criminal
investigation is necessary to obtain meaningful responses from
third parties. Without referring to any evidence adduced at trial,
the IRS argues that disclosing the criminal nature of the
6
investigation is necessary because it apprises the third parties of
the potential severity of the consequences of the investigation,
which may encourage them to exercise appropriate care in responding
to the inquiry. To the contrary, the IRS's own expert witness, Mr.
Eugene "Pete" Twardowicz, testified on cross-examination that it
was not necessary to include the first paragraph in the letter
which disclosed "[t]he above-named individual is currently under
investigation by the Criminal Investigation Division of the
Internal Revenue Service." Specifically, Twardowicz testified:
Q: Now isn't it true, Mr. Twardowicz, that the absence
of the first paragraph in that letter would not have
detracted from the effectiveness of the letter?
A: Well, I again, I think it would have detracted, and,
you know, instead of beating around the bush here, does
it need Criminal Investigation Division there, no, it
doesn't need that, but I think it needs in there that he
is under investigation. Now the question is does the
addition of Criminal Investigation Division hurt it, and
I think that's up to your Honor to decide that. In my
judgment, it doesn't.
The IRS offered no evidence that disclosing the fact that a
taxpayer is under criminal investigation is necessary to obtain the
information sought by sending the letters. Cf. Diamond v. United
States, 944 F.2d 431, 435 (8th Cir. 1991) (as a matter of law, IRS
agent did not need to identify himself in circular letters as a
member of the Criminal Investigation Division to secure the desired
information).
The IRS previously took a conflicting position on what is
relevant to the proposition that disclosing the fact of a criminal
investigation promotes third-party compliance. At trial, the IRS
successfully objected on relevancy grounds to the admission of
7
evidence showing how many patients actually replied or sent back
information in response to the circular letters. As further
evidence that the disclosure was unnecessary, the formal IRS
summonses for information sent out by Agent Hanson before the
circular letters did not disclose that Dr. Barrett was under
criminal investigation.
Aside from the uncontradicted evidence presented through Mr.
Twardowicz at trial, we note that there are several statutes that
make it unlawful for third parties to give knowingly false
information to an agent of the Internal Revenue Service, whether
the investigation is civil or criminal. See, e.g., 18 U.S.C. §
1001; 26 U.S.C. § 7206(1); 26 U.S.C. § 7207; 26 U.S.C. § 7212.
Certainly, the existence of these criminal penalties sufficiently
encourages third parties to exercise appropriate care in responding
to inquiries from an employee of the Internal Revenue Service.
Ordinarily, a district court's finding is clearly erroneous
when, although there is evidence to support it, the reviewing court
on the entire evidence is left with the definite and firm
conviction that a mistake has been committed. See United States v.
United States Gypsum Co., 333 U.S. 364, 395 (1948); Lewis v. Timco,
Inc., 736 F.2d 163, 166 n.2 (5th Cir. 1984). Here, there is no
evidence to support a finding that it was necessary to state in the
body of the letter that Dr. Barrett was currently under
investigation by the Criminal Investigation Division of the
Internal Revenue Service. In the context of our standard of
review, there are not two permissible views of the evidence. See
8
Anderson v. City of Besemer City, N.C., 470 U.S. 564, 573 (1985).
Consequently, we hold that the district court's conclusion that
such disclosure was necessary is clearly erroneous and must be
reversed.
III. Existence of Good Faith
Despite our conclusion that the disclosure was not necessary,
no liability attaches to any disclosure which results from a good
faith, but erroneous, interpretation of 26 U.S.C. § 6103. See 26
U.S.C. § 7431(b).5 Thus, we must determine if Agent Hanson was
acting in good faith when he wrongfully sent out the circular
letters. We determine the existence of good faith under this
section by applying an objective standard. Huckaby v. United
States Department of Treasury, Internal Revenue Service, 794 F.2d
1041, 1048 (5th Cir. 1986). Parenthetically, the district court's
failure to reach the good-faith defense issue under section 7431(b)
does not prevent this Court from resolving the issue by applying an
objective standard, as we did in Huckaby.
A reasonable IRS agent can be expected to know statutory
provisions governing disclosure, as interpreted and reflected in
IRS regulations and manuals. Id. at 1048. An agent's contrary
interpretation is not in good faith. Id. at 1049.
Agent Hanson admitted at trial that he did not review section
6103 or the applicable IRS manual provisions prior to mailing the
circular letters. Of paramount importance, however, the Chief of
5
26 U.S.C. § 7431(b) provides: No liability shall arise
under this section with respect to any disclosure which results
from a good faith, but erroneous, interpretation of section 6103.
9
the Criminal Investigation Division had not approved the content of
the circular letters as required by Chapter 347.2 of the IRS
"Handbook for Special Agents." The relevant version of Chapter
347.2 required:
To ensure proper use of this technique, mail
circularization will not be undertaken in any case
without the prior approval of the Chief, Criminal
Investigation Division, including approval of the letters
to be sent out. Care must be exercised in approving mail
circularization to ensure that mail inquiries are sent
only to those third parties who, in the view of the
Chief, Criminal Investigation Division, are a likely
source of information; the information sought is
important to the investigation; and obtaining the
information by other means, if at all possible, would not
be practical because of either delays in investigation,
costs involved, or similar reasons. Caution must be
exercised not be [sic] damage the reputation of the
taxpayer by making the letter either offensive or
suggestive of any wrongdoing by the taxpayer.
Appropriate wording could be "The Internal Revenue
Service is conducting an investigation of . . .". [sic]
When mailing circularizations, all such letters will be
signed by the special agent with prior approval of the
Chief, Criminal Investigation Division, indicated on the
file copy. The title "Special Agent" and Criminal
Investigation Division will be included in the signature
block.
Agent Hanson testified that he was aware of this Chapter at the
time that he mailed the letters. Curiously, however, Agent Hanson
further testified that he did not recall any specifics of Chapter
347.2 when he prepared and mailed out the letters. As of the date
of trial, Agent Hanson had worked as a special agent in the
Criminal Investigation Division of the IRS for 19 years. Yet, he
provided no explanation for his complete failure to follow the
mandates of Chapter 347.2. See Diamond, 944 F.2d at 438 n.3 (IRS
agent stated that a circular letter indicating in the body of the
letter that the investigation was criminal would not be approved by
10
a supervisor under Chapter 347.2). Finally, we note that the
investigation that was being conducted by Agent Hanson was for the
tax years 1977 and 1978. Nonetheless, Agent Hanson sent letters to
patients who were treated by Dr. Barrett in 1976, 1979, and 1980.
No work or investigation whatsoever had been performed for these
years.6
Applying an objective good-faith test to the uncontroverted
facts, can lead us to only one conclusion: that a reasonable IRS
agent would not have violated the express provisions contained in
Chapter 347.2 of the IRS manual. Agent Hanson did not act in good
faith. We reverse the judgment of the district court; the IRS is
liable to Dr. Barrett under 26 U.S.C. § 6103.
IV. Conclusion
Because the district court erred in concluding that the IRS
was not liable, it made no findings on the issue of Dr. Barrett's
damages. We acknowledge that Dr. Barrett presented uncontradicted
evidence of his damages during trial, and he urges this Court to
assess damages. We believe, however, that the trial level is the
appropriate site for the factual determination of the amount of
damages to be awarded to Dr. Barrett as a result of Agent Hanson's
6
Interestingly, Agent Hanson also testified that he knew
that the relationship between Dr. Barrett and his patients was
personal and confidential. Directly contradicting his prior sworn
testimony during a related proceeding, Agent Hanson stated that he
did not think that Dr. Barrett's patients who had undergone plastic
or reconstructive surgery would be embarrassed, humiliated, or
otherwise distressed by receiving the letters which would harm Dr.
Barrett's relationship with his patients. While this evidence does
not directly impact the question of objective, as opposed to
subjective, good faith, it is indicative of Agent Hanson's
willfulness or gross negligence.
11
mailing of the circular letters. Accordingly, we REVERSE the
judgment of the district court and REMAND for a determination of
damages.
12