Aloe Vera of America, Inc. v. United States

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

ALOE VERA OF AMERICA , INC., a No. 10-17136
Texas corporation; REX G.
MAUGHAN , husband; RUTH G. D.C. No.
MAUGHAN , wife; MAUGHAN 2:99-cv-01794-
HOLDINGS, INC., an Arizona JAT
corporation; GENE YAMAGATA ;
YAMAGATA HOLDINGS, INC.,
Plaintiffs-Appellants, OPINION

and

BUREAU OF NATIONAL AFFAIRS, INC.
and TAX MANAGEMENT , INC.,
Intervenors,

v.

UNITED STATES OF AMERICA ,
Defendant-Appellee.

Appeal from the United States District Court
for the District of Arizona
James A. Teilborg, District Judge, Presiding

Argued and Submitted
October 24, 2011—San Francisco, California

Filed November 15, 2012
2 ALOE VERA OF AMERICA , INC. V . UNITED STATES

Before: J. Clifford Wallace, Sidney R. Thomas,
and Susan P. Graber, Circuit Judges.

Opinion by Judge Thomas;
Partial Concurrence and Partial Dissent by Judge Wallace

SUMMARY*

The panel affirmed in part and reversed in part the district
court’s summary judgment in favor of the United States in an
action claiming that the United States improperly disclosed
tax information to the Japanese National Tax Administration
(NTA) during the course of a joint investigation.

In a prior appeal of this case, the panel concluded that the
two-year statute of limitations in 26 U.S.C. § 7431(d) is
jurisdictional and applied to Aloe Vera’s claims under
§ 7431(a), and remanded for the district court to make factual
findings and determine whether there is subject matter
jurisdiction. The panel also held that the statute of limitations
under 26 U.S.C. § 7431(d) for a claim of wrongful disclosure
of a tax return is subject to inquiry notice, and begins to run
when the plaintiff knows or reasonably should know of the
government’s allegedly unauthorized disclosures. On
remand, the district court ruled that some of Aloe Vera’s
claims were barred by the statute of limitations and dismissed
them.

*
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 3

In this appeal, the panel held that inquiry notice is not
triggered by a single generalized event, but rather by the
plaintiff’s actual or constructive knowledge of each particular
disclosure. The panel concluded that one of Aloe Vera’s two
claims was barred by the statute of limitations. As to the
remaining claim that was not time-barred, the panel remanded
because genuine issues of material fact (regarding whether
the government knowingly relayed false information to the
NTA) precluded summary judgment. The panel held that
extending immunity to the government under the good-faith
exception of § 7431(b) would eviscerate 26 U.S.C. § 6103’s
basic purpose of protecting against malevolent government
disclosure of tax return information.

Judge Wallace concurred in the majority’s opinion, but
dissented as to the remand because the plaintiffs failed to
carry their burden of establishing that their claims are not
barred by the statute of limitations.

COUNSEL

Tim A. Tarter, Woolston & Tarter, P.C., Phoenix, Arizona;
and Merwin D. Grant, Grant & Vaughn, P.C., Phoenix,
Arizona for plaintiffs-appellants.

Karen G. Gregory, Tax Division, Department of Justice,
Washington, D.C., for defendant-appellee.
4 ALOE VERA OF AMERICA , INC. V . UNITED STATES

OPINION

THOMAS, Circuit Judge:

This appeal presents the question, among others, of what
event triggers the running of the statute of limitations for a
claim for wrongful disclosure of a tax return pursuant to
26 U.S.C. § 7431(d). We conclude that the statute of
limitations begins to run when the plaintiff knows or
reasonably should know of the government’s allegedly
unauthorized disclosures. We also conclude, in the
circumstances presented by this case, that the statute of
limitations did not begin to run when the plaintiffs became
aware of a pending general investigation that would involve
disclosures, but only later when they knew or should have
known of the specific disclosures at issue. Applying these
principles to the facts of this case, we affirm in part and
reverse in part.

I

Tax returns and tax return information must be kept
confidential, unless a statutory exception applies. 26 U.S.C.
§ 6103. Section 6103 “was enacted in response to the use of
tax return information for political purposes revealed during
Watergate.” Rueckert v. IRS, 775 F.2d 208, 210 (7th Cir.
1985). To add teeth to this statutory protection for taxpayers,
Congress created a civil action against the government for an
IRS employee’s knowing or negligent unauthorized
disclosure of a taxpayer’s “return information.” 26 U.S.C.
§ 7431. The action must be brought within two years after
the date the unauthorized disclosure is discovered. § 7431(d).
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 5

“Return information” protected by the statute is very
broadly defined and includes

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
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). “Taxpayer information obtained or
prepared by the IRS . . . is ‘return information’ regardless of
the person with respect to whom it was obtained or prepared.”
Mallas v. United States, 993 F.2d 1111, 1118 (4th Cir. 1993).

In this case, Aloe Vera of America, Inc., Rex G.
Maughan, Ruth G. Maughan, Maughan Holdings, Inc., Gene
Yamagata, and Yamagata Holdings, Inc. (collectively, “Aloe
Vera” or “Taxpayers”) claim that the United States
improperly disclosed tax information to the Japanese National
Tax Administration (“NTA”) during the course of a joint
investigation.
6 ALOE VERA OF AMERICA , INC. V . UNITED STATES

Under § 6103(k)(4), return information may be disclosed
to a foreign government that has a tax treaty with the United
States, “but only to the extent provided in, and subject to the
terms and conditions of, such convention or bilateral
agreement.” The United States has a tax treaty with Japan
that provides, in essence, that the IRS may lawfully disclose
any return information that is pertinent to preventing tax
fraud or fiscal evasion. Convention for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income, U.S.-Japan, art. 26, ¶ 1, Mar. 8,
1971, 23 U.S.T. 967 (“Tax Treaty”).

Taxpayers claim that the IRS improperly provided false
tax information to the NTA, subjecting the United States to
liability under § 7431. The United States denies the claims.
The district court granted summary judgment to the United
States.

In the prior appeal in this case following the grant of
summary judgment, we focused on the two-year statute of
limitations provided in § 7431(d). We concluded that the
statute of limitations is jurisdictional and that it applied to the
claims Aloe Vera filed under 26 U.S.C. § 7431(a). Aloe Vera
of Am., Inc. v. United States, 580 F.3d 867, 872-73 (9th Cir.
2009). We vacated the judgment, remanded the case, and
directed the district court to make findings of fact and
determine whether there is subject matter jurisdiction. Id. at
873. We retained jurisdiction over the case and reserved
judgment on the merits.

On remand, the district court ruled that some of Aloe
Vera’s claims were barred by the statute of limitations and
dismissed them for lack of subject matter jurisdiction. Aloe
Vera of Am., Inc. v. United States, 730 F. Supp. 2d 1020,
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 7

1035 (D. Ariz. 2010) (order). Aloe Vera now appeals from
the district court’s dismissal Order.

II

The facts of this case are recited in our prior opinion. See
Aloe Vera, 580 F.3d at 869-70. For ease of reference, we
restate them here:

Rex Maughan (Maughan) is the owner of
Aloe Vera of America, Inc. (AVA), a United
States corporation that processes and sells
aloe vera products in the United States, Japan,
and other countries. Maughan and Yamagata,
indirectly through their respective holding
companies, are co-owners of Forever Living
Products Japan, Inc. (FLPJ), a Japanese
corporation that purchases products from
AVA.

In 1991 and 1992, AVA paid commissions
and royalty-based income received from FLPJ
to Maughan and Yamagata. The Internal
Revenue Service (IRS) was concerned about
whether this income was properly reported in
the United States. Consequently, on April 26,
1996, the IRS sent a letter to the Japanese
National Taxing Authority (NTA), proposing
that the authorities simultaneously examine
the tax reports of AVA, Maughan, Yamagata,
and FLPJ. The letter estimated that for tax
years 1991 and 1992, Maughan and Yamagata
failed to report commission and royalty
income from AVA product sales to FLPJ,
8 ALOE VERA OF AMERICA , INC. V . UNITED STATES

totaling more than $32 million. In August
1996, the IRS and NTA held a meeting to
discuss the examination. During this time,
Aloe Vera apparently did not know about the
examination and did not know that the NTA
and IRS were disclosing information to each
other.

On August 15, 1996, the IRS notified
Maughan and AVA of the simultaneous
examination. This appears to be the first
notification that Maughan and AVA had of
the investigation. At the end of 1996, the NTA
made an audit proposal to FLPJ, which FLPJ
rejected, and in early 1997, the NTA sent
correction notices to FLPJ regarding its tax
liabilities. In February 1997, the IRS sent
letters to Maughan and AVA to propose tax
adjustments. Shortly thereafter, on March 4,
1997, Maughan and AVA took the offensive
and filed requests pursuant to the Freedom of
Information Act for copies of documents
exchanged by the NTA and the IRS during the
simultaneous examination.

On October 9, 1997, Japanese news sources
reported that Aloe Vera had failed to report
income of 7.7 billion yen (at the time,
approximately $60 million) to tax authorities.
The Japanese reporters attributed this
information to unidentified “tax sources” and
the IRS. After the news of the simultaneous
examination leaked, Aloe Vera lodged a
complaint with the United States Competent
ALOE VERA OF AMERICA , INC. V . UNITED STATES 9

Authority, accusing the NTA of intentionally
disclosing tax information to the public.
Income tax treaties generally permit taxpayers
to request assistance from a designated
“competent authority” if they believe that any
party to the treaty has taken action that has
resulted or will result in taxation that is
contrary to the provisions of the treaty. Rev.
Proc.2006-54, 2006-2 C.B. 1035. After an
investigation, the Competent Authority found
no proof that the NTA had leaked the
information.

On October 6, 1999, Aloe Vera filed a
complaint against the United States
government in the district court under
26 U.S.C. § 7431(a), containing two counts.
In Count I, Aloe Vera alleged that the IRS had
disclosed false information to the NTA in
violation of 26 U.S.C. § 6103(a). In Count II,
Aloe Vera alleged that the IRS had further
violated section 6103 by disclosing certain tax
information to the NTA even though the IRS
knew or should have known that the NTA
would leak the information.

The government moved to dismiss the
complaint on several grounds, including that
the complaint was barred on jurisdictional
grounds by the two-year statute of limitations
contained in section 7431(d). The district
court held that the statute of limitations in that
section was not jurisdictional, but
nevertheless dismissed the complaint (with
10 ALOE VERA OF AMERICA , INC. V . UNITED STATES

leave to amend) because Aloe Vera had failed
to plead a date of discovery of the allegedly
unauthorized disclosures within the two-year
limitations period. After Aloe Vera filed an
amended complaint, the court refused to
dismiss the action as untimely because the
amended complaint included an allegation
that Aloe Vera did not discover the nature of
the IRS disclosures to the NTA until August
1998, when Aloe Vera received disclosures
under the Freedom of Information Act
pursuant to a court order.

Subsequently, the government moved for
summary judgment on both counts, and Aloe
Vera moved for summary judgment on Count
I. The district court granted the government’s
motion on both counts. As to Count I, the
district court held that the government’s
disclosure of allegedly false information to
the NTA did not violate section 6103(a). As to
Count II, the district court held that Aloe Vera
had not raised a genuine issue of material fact
as to whether the IRS knew or should have
known, prior to October 1997, that the NTA
routinely leaked information received under
the treaty. Aloe Vera timely appealed,
challenging the district court’s summary
judgment on both counts.

Id.
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 11

III

We first turn to the question that we remanded, namely
the application of the statute of limitations. The statute of
limitations in 26 U.S.C. § 7431(d) 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.” In Aloe Vera I, we held that this statute of
limitations is jurisdictional and that it

begins to run on the date on which a plaintiff
discovers that the allegedly unauthorized
inspection or disclosure has taken place,
regardless of whether the plaintiff believed at
that time that the inspection or disclosure was
authorized. W e co ncl ude[ d] that
‘unauthorized’ merely modifies ‘inspection or
disclosure.’ So construed, an action pursuant
to section 7431(d) must be filed within two
years of the date of discovery of the
supposedly improper disclosure, not the date
when the plaintiff realizes that a disclosure
was unauthorized.

580 F.3d at 872.

The question now before us is when the “date of
discovery” occurs and whether the statute of limitations
begins to run on a single date of discovery for all disclosures.
12 ALOE VERA OF AMERICA , INC. V . UNITED STATES

A

The “date of discovery” on which the § 7431(d) statute of
limitations begins to run is the date when a plaintiff knows or
reasonably should know of an allegedly unauthorized
inspection or disclosure. This rule accords with the “general
federal rule”: that a limitations period begins to run when
“‘the plaintiff knows or has reason to know of the injury
which is the basis of the action.’” Mangum v. Action
Collection Serv., Inc., 575 F.3d 935, 940 (9th Cir. 2009)
(quoting Norman-Bloodsaw v. Lawrence Berkeley Lab.,
135 F.3d 1260, 1266 (9th Cir. 1998)). We have long applied
this general rule in many different statutory contexts. See
e.g., Trotter v. Int’l Longshoremen’s & Warehousemen’s
Union Local, 13, 704 F.2d 1141, 1143 (9th Cir. 1983) (per
curiam) (applying constructive discovery to the Labor-
Management Reporting and Disclosure Act of 1959); Norco
Constr., Inc. v. King Cnty., 801 F.2d 1143, 1145 (9th Cir.
1986) (applying constructive discovery to claims under
§ 1983); Bagley v. CMC Real Estate Corp., 923 F.2d 758,
760–61 (9th Cir. 1991) (same); Living Designs, Inc. v. E.I.
Dupont de Nemours & Co., 431 F.3d 353, 365 (9th Cir. 2005)
(applying constructive discovery to RICO claims). We see no
reason to deviate from the general federal rule in this case,
and thus we apply it to claims governed by § 7431(d)’s
statute of limitations.

Additionally, the Supreme Court recently held that the
term “discovery,” as used in 28 U.S.C. § 1658(b)(1)’s statute
of limitations, “encompasses not only those facts the plaintiff
actually knew, but also those facts a reasonably diligent
plaintiff would have known.” Merck & Co. v. Reynolds,
130 S. Ct. 1784, 1796 (2010). Although Merck was a
securities fraud case, the Court interpreted the statute against
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 13

the background of the so-called “discovery rule” in fraud
cases and “the history and precedent surrounding the use of
the word ‘discovery’ in the limitations context generally.”
Id. at 1795. Here, § 7431(d) also uses the phrase “date of
discovery” to describe the two-year statute of limitations
period. Although this is not a securities fraud case, 26 U.S.C.
§ 7431’s text supports applying the discovery rule in this
context.

Thus, in this case, Aloe Vera’s claims are subject to
inquiry notice. That is, the § 7431(d) statute of limitations
began to run when Aloe Vera knew or reasonably should
have known of the government’s allegedly unauthorized
disclosures.

B

Although the doctrine of inquiry notice applies to
§ 7431(d), inquiry notice is not triggered by a single
generalized event, but rather by the plaintiff’s actual or
constructive knowledge of each particular disclosure. Indeed,
in our remand order, we used plural designations of “dates”
and “disclosures,” because each disclosure has its own
discovery date for jurisdictional purposes:

On remand, the district court shall make
findings of fact regarding the dates on which
Aloe Vera discovered the respective
disclosures underlying each of Aloe Vera’s
claims. With respect to Count I, the district
court shall make findings of fact regarding the
dates on which Aloe Vera discovered each
allegedly false disclosure. The court shall
have jurisdiction over only those claims
14 ALOE VERA OF AMERICA , INC. V . UNITED STATES

related to disclosures, if any, that were
discovered within the two-year statutory
period. With respect to Count II, the district
court shall make findings of fact regarding the
dates on which Aloe Vera discovered that the
IRS had disclosed information to the NTA.

Aloe Vera I, 580 F.3d at 873 (emphasis added).

This conclusion is apparent from an examination of the
statute in context. United Sav. Ass’n of Tex. v. Timbers of
Inwood Forest Assocs., 484 U.S. 365, 371 (1988). Although
§ 7431(d) does not specifically address the question,
§ 7431(c)’s damages provision is instructive. It does not
provide damages for general or collective disclosures.
Instead, it specifies that a defendant held liable under
§ 7431(a) may be subject to damages of “$1,000 for each act
of unauthorized inspection or disclosure.” 26 U.S.C.
§ 7431(c)(1)(A) (emphasis added). It thus would be
incongruous for us to interpret § 7431(d) as being limited to
a single act, encompassing collective disclosures.

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. For example, in this case, the government argues
that the statute of limitations should have started running
when the IRS informed Aloe Vera of the IRS/NTA joint
investigation in August 1996. But Aloe Vera alleges that the
government wrongfully disclosed return information at a
meeting in Tokyo that took place in November 1996. Aloe
Vera, 730 F. Supp. 2d at 1032. Of course, the government’s
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 15

notice of the joint investigation pre-dates the Tokyo meeting.
Thus, if the statute of limitations began to run on the single
date that the government proposes, Aloe Vera would not have
had the full two-year period to file a claim based on the
alleged disclosures made at the Tokyo meeting.

Moreover, the government’s reading of the statute of
limitations would seriously undermine the statute’s
protections. 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. There is no indication that Congress
intended such an anomalous result, particularly because one
of § 6103’s main purposes is protection against malevolent
government disclosure. See Rueckert, 775 F.2d at 210
(“Section 6103 was enacted in response to the use of tax
return information for political purposes revealed during
Watergate.”).

In this case, the government’s August 1996 notice of the
joint IRS/NTA investigation was not sufficient to put Aloe
Vera on inquiry notice of each of the particular items of
information the government disclosed. The August 1996
audit notice was general and did not provide the exact
information that the IRS had or would disclose to the NTA.
In response, Aloe Vera diligently tried to learn the exact
information the IRS disclosed to the NTA by filing a
Freedom of Information Act (FOIA) request. See Aloe Vera
I, 580 F.3d at 869. The government initially resisted
providing the requested information, but eventually disclosed
16 ALOE VERA OF AMERICA , INC. V . UNITED STATES

it in August 1998.1 The government conceded that this was
the first time Aloe Vera learned of the specific disclosures at
issue in this litigation.

IV

Applying the foregoing interpretation to the case at hand,
we conclude that the district court erred in dismissing some
of the Taxpayers’ claims for lack of subject matter
jurisdiction.

A

There were two factual claims raised in Count I: (1) the
charge that the IRS falsely informed the NTA that Taxpayers
had significant unreported income and (2) a false statement
made by a United States representative that the commissions
had not varied, although the sales price had. The district
court did not hold that the allegedly false unreported income
statement claim was barred by the statute of limitations. It
did, however, view the “Commission vs. Price Statement” as
being asserted outside the statute of limitations and therefore
outside the jurisdiction of the court.

The district court erred in concluding that it lacked
jurisdiction over the “Commission vs. Price Statement.” See
Aloe Vera, 730 F. Supp. 2d at 1035. The district court
determined that the Yamagata plaintiffs failed to file their
Commission vs. Price False Statement claim on time because
they “offer[ed] no evidence of when they first learned of this

1
AVA and Maughan’s counsel then later shared these records with
Yamagata and Yamagata Holdings, Inc., who did not participate in the
FOIA case.
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 17

alleged false statement.” Id. at 1027. However, the AVA and
Maughan plaintiffs presented evidence that they first learned
of this alleged false statement when they received a response
to their FOIA request in August of 1998. Id. at 1025. The
Aloe Vera and Maughan plaintiffs’ counsel then “gave the
notes that revealed the statement to counsel for Gene
Yamagata and Yamagata Holdings, Inc. after August 1998.”
Id. at 1025-26. Nonetheless, the district court held that this
evidence was not sufficient to establish subject matter
jurisdiction over this claim because the Yamagata plaintiffs
“never claim[ed] that receipt of the notes from the other
Plaintffs’ counsel ‘after’ August 1998 [was] the first time
they learned of the alleged false statement.” Id. at 1027.

The Yamagata plaintiffs presented evidence sufficient to
establish subject matter jurisdiction over the Commission vs.
Price False Statement claim. The only place in the record
where the “Commission vs. Price Statement” exists is in IRS
Manager Sturgis’ notes from the August 1996 IRS/NTA
meeting. The Aloe Vera and Maughan plaintiffs did not
discover those notes until they received the FOIA documents
in August 1998. They later shared this information with the
Yamagata plaintiffs’ counsel, who alleged that this was the
first time they learned of the Commission vs. Price False
Statement. There is no evidence that the IRS disclosed this
information to anyone else before turning over the FOIA
documents to the Aloe Vera and Maughan plaintiffs. It
logically follows that the Yamagata plaintiffs first discovered
this evidence only when the Aloe Vera and Maughan
plaintiffs’ counsel shared it with the Yamagata plaintiffs’
counsel. The district court’s hypothetical to the contrary –
that the Yamagata plaintiffs may have somehow discovered
the “Commission vs. Price Statement” before their counsel
learned of it – is not supported by any evidence in the record,
18 ALOE VERA OF AMERICA , INC. V . UNITED STATES

and we must view the factual record in the light most
favorable to the Yamagata plaintiffs. Olsen v. Idaho State
Bd. of Med., 363 F.3d 916, 922 (9th Cir. 2004).

Furthermore, a taxpayer who knows that the IRS has
disclosed his tax return generally has no reason to suspect that
the IRS has also fabricated and disclosed a false statement.
Thus, until the taxpayer knows or should have known about
the disclosure of that specific, false statement, the statute of
limitations does not begin to run on a claim of disclosure of
false information, because the taxpayer has not discovered the
existence of the disclosure. Accordingly, we hold that the
Yamagata plaintiffs’ Count I Commission v. Price Statement
claim is not barred by the statute of limitations because it was
first discovered within the two-year filing period, and we
have subject matter jurisdiction over this claim.

B

The district court did not err in dismissing Aloe Vera’s
Count II claims for lack of jurisdiction. See Aloe Vera,
730 F. Supp. 2d at 1035. Taxpayers’ Count II claims rest on
the premise that any and all disclosures of return information
to the NTA were unauthorized because the IRS should have
known that the NTA would not hold that information in
confidence. Because the statute of limitations is
jurisdictional, Taxpayers bear the burden of establishing
subject matter jurisdiction. Kingman Reef Atoll Invs. L.L.C.
v. United States, 541 F.3d 1189, 1197 (9th Cir. 2008). Thus,
Taxpayers bear the onus of identifying which disclosures
were not known to them until less than two years before they
filed suit.
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 19

Taxpayers failed to carry that burden. Their complaint
does not identify which disclosures were unknown to them as
of October 6, 1997. The record indicates that, by that date,
Taxpayers should have known that the IRS had disclosed to
Japan all, or at least most, of the information contained in
their 1991–1995 tax returns. The simultaneous examination
notice did not trigger the statute of limitations, because a
notice that the government intends to disclose documents in
the future does not constitute discovery of any actual
disclosure. But Taxpayers should have known of the
disclosure of most of their return information once the
investigations had concluded, their tax amounts for those
years had been adjusted, and they received a letter noting that
“a voluminous amount of information” had been exchanged.

We decline to vacate to allow an amendment of the
complaint or an evidentiary hearing. Our review of the
record shows that Taxpayers never asked to amend their
complaint and that only the government even hinted that an
evidentiary hearing might be held. The district court gave the
parties the briefing on remand that they requested. Aloe Vera,
730 F. Supp. 2d at 1035. Furthermore, Taxpayers could not
have been taken by surprise by the district court’s holding
that constructive notice applies, as this is the general federal
rule. It was also mentioned as a possibility in our prior oral
argument. While the parties may not have used the term
“constructive notice” in their briefs to the district court,
Taxpayers were aware that the government argued “that there
exists but one critical limitation date which began to run here
when Taxpayers first learned that the IRS was making
disclosures of any sort to the NTA,” a theory that parallels
constructive notice. Thus, the district judge did not abuse his
discretion by declining to order an additional evidentiary
hearing. Aloe Vera, 730 F. Supp. 2d at 1035.
20 ALOE VERA OF AMERICA , INC. V . UNITED STATES

V

Having determined that the district court had jurisdiction
over the allegations contained in Count I, we turn to the
question whether the district court properly granted summary
judgment on those claims. We conclude that genuine issues
of material fact preclude summary judgment on the claims.

A

The district court properly concluded that Taxpayers had
stated a claim for relief under § 7431 for improper
unauthorized disclosure of tax return information. Disclosure
of false tax return information can constitute tax return
information within the meaning of the statute. See Mallas,
993 F.2d at 1118. Taxpayers allege that the United States
disclosed false tax return information to NTA.

As we have also discussed, under § 6103(k)(4), return
information may be disclosed to a foreign government that
has a tax treaty with the United States, “but only to the extent
provided in, and subject to the terms and conditions of, such
convention or bilateral agreement.” The Tax Treaty provides,
in relevant part, that “[t]he competent authorities of the
Contracting States shall exchange such information as is
pertinent to carrying out the provisions of this Convention or
preventing fraud or fiscal evasion in relation to the taxes
which are the subject of this Convention.” Tax Treaty, art.
26, ¶ 1 (emphasis added). Thus, under the Tax Treaty, the
IRS may lawfully disclose any return information “pertinent”
to “preventing [tax] fraud or fiscal evasion.” The IRS argues
that even false information may be “pertinent” and therefore
protected under the exception.
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 21

As a general matter, treaties of the United States are
interpreted liberally to give effect to their purposes. See
United States v. Stuart, 489 U.S. 353, 368 (1989). Thus,
under the Tax Treaty, any information that may reasonably be
considered pertinent should be covered under § 6103(k)(4)’s
disclosure exemptions.

In this case, the simultaneous tax examination by both
countries was pertinent to the Tax Treaty’s purpose of
avoiding tax evasion, and the investigation of potentially
fraudulent commissions was equally pertinent. The question
is whether a knowing provision of false information can be
“pertinent” to “preventing fraud or fiscal evasion.”

“Pertinent” is defined as “[p]ertaining to the issue at hand;
relevant.” Black’s Law Dictionary 1261 (9th ed. 2009).
“Relevant” is defined as “[l]ogically connected and tending
to prove or disprove a matter in issue; having appreciable
probative value—that is, rationally tending to persuade
people of the probability or possibility of some alleged fact.”
Id. at 1404. Thus, to be pertinent to fighting tax fraud,
information must tend to prove or persuade that tax fraud or
evasion has actually occurred.

Knowingly false information cannot tend to prove tax
fraud. Such information does not lead to useful evidence, and
it is certainly not competent evidence in its own right. Thus,
information known to be false cannot be subject to protection
as “pertinent” information under the Tax Treaty. One of
§ 6103’s main purposes is protection against malevolent
government disclosure. Rueckert, 775 F.2d at 210. Congress
intended § 6103 to limit disclosure of tax information to
narrowly defined circumstances. Tierney v. Schweiker,
718 F.2d 449, 455 (D.C. Cir. 1983). A definition of
22 ALOE VERA OF AMERICA , INC. V . UNITED STATES

“pertinent” that allows the IRS to knowingly disclose false
taxpayer information would eviscerate the statute’s purpose.
Known falsehoods are not pertinent to tax investigations, and
knowing disclosures of such false information, even to a
treaty partner, is actionable under § 6103 and § 7431, as the
district court properly concluded. The knowing provision of
false information can never further the purposes of a tax
treaty.

B

Although the district court concluded that Taxpayers had
stated a claim for relief, it granted summary judgment on
Count I. Aloe Vera does not argue that mere negligent
disclosure of false information to a tax treaty partner can
support liability under § 6103(k)(4). Thus, Aloe Vera may
overcome summary judgment only if it can show a dispute of
material fact as to whether the government knowingly relayed
false information to the NTA.

1

The IRS’s Simultaneous Examination Proposal suggested
that Taxpayers had not reported an estimated $32 million of
income. The government does not contend that this figure
was, in any respect, accurate. Rather, the government
suggests that this number was a mere estimate, and therefore
could not be true or false. Thus, the IRS could not have
“knowingly” turned over false information. The district court
agreed and rested its summary judgment decision primarily
on this argument.

But even an estimate can be objectively false if, for
example, the communicator knows it cannot be true. See
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 23

United States ex rel. Siewick v. Jamieson Sci. & Eng’g, Inc.,
214 F.3d 1372, 1378 (D.C. Cir. 2000) (“[A] faulty estimate or
opinion can qualify as a false statement where the speaker
knows facts ‘which would preclude such an opinion’ . . . .”
(quoting Harrison v. Westinghouse Savannah River Co.,
176 F.3d 776, 792 (4th Cir. 1999)). “[A]n opinion or estimate
carries with it ‘an implied assertion, not only that the speaker
knows no facts which would preclude such an opinion, but
that he does know facts which justify it.’” Harrison, 176 F.3d
at 792 (quoting W. Page Keeton, et al., Prosser & Keeton on
the Law of Torts § 109, at 760 (5th ed. 1984)). More
importantly, the question in this case is not the amount of the
estimate, but whether Taxpayers had accurately reported the
information.

Here, the government has provided no basis whatsoever
for its accusations that Taxpayers had a $32 million liability.
There is support in the record for Taxpayers’ assertion that
the IRS knew that Taxpayers had correctly reported the
supposedly unreported $32 million in commissions and
royalties. Thus, there is a genuine issue of material fact as to
whether the government knowingly disclosed false
information, and summary judgment was not appropriate on
this issue.

2

The second instance of false disclosure in Count I is that,
in a presentation to the NTA, an IRS official stated that
commission payments on sales of aloe vera products
remained unchanged between 1985 and 1989, while prices
fluctuated. This alleged statement implied that Taxpayers
had unreported income. In support of this claim, Taxpayers
offer notes taken during the presentation and an IRS audit
24 ALOE VERA OF AMERICA , INC. V . UNITED STATES

from this period showing that the commissions did, in fact,
change. The notes resemble formal minutes. In the relevant
portion, which is preceded and followed by heavily redacted
information, the notes state:

Rick Smith commented that the U.S. team
feels that they are doing other things in other
countries because their sales are going up and
net income is going down. Rick also stated
that through the years the sales price of the
product changed quite a bit. The commission
always stayed the same.

The district court determined that the notes, the audit, and
deposition testimony were insufficient, concluding that “the
Court is not willing to hold the United States liable for
intentional falsehoods based on notes taken by two different
attendees of a meeting–attendees who admitted to the
weakness of their notes.”

Unfortunately, this conclusion was made at summary
judgment, not after trial. In deciding whether to grant
summary judgment, “the judge’s function is not himself to
weigh the evidence and determine the truth of the matter but
to determine whether there is a genuine issue for trial.”
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).
“Credibility determinations, the weighing of the evidence,
and the drawing of legitimate inferences from the facts are
jury functions, not those of a judge . . . .” Id. at 255. Further,
at the summary judgment stage, we must draw all reasonable
inferences in favor of the non-moving party and, where
disputed issues of material fact exist, assume the version of
the material facts asserted by the non-moving party to be
correct. Mattos v. Agarano, 661 F.3d 433, 439 (9th Cir.
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 25

2011) (en banc), cert. denied, 132 S. Ct. 2681 (2012), 132 S.
Ct. 2682 (2012), 132 S. Ct. 2682 (2012), 132 S. Ct. 2684
(2012). Here, reasonable inferences may be drawn that IRS
representatives falsely communicated to Japanese authorities
that commissions had not fluctuated with price. Although
these assertions have yet to be tested in the crucible of trial,
the evidence is sufficient to withstand a motion for summary
judgment.

C

The government argues that, even if it knowingly made
false disclosures, it is immune from liability because it had a
good-faith misinterpretation of § 6103(k)(4). We disagree.

Section 7431(b) carves out a good-faith exception to the
liability imposed by § 7431(a). It provides that “[n]o liability
shall arise . . . with respect to any inspection or disclosure . . .
which results from a good faith, but erroneous, interpretation
of section 6103.” 26 U.S.C. § 7431(b)(1). Whether the
government’s erroneous interpretation of § 6103 was in good
faith turns on whether the government violated “clearly
established statutory or constitutional rights of which a
reasonable person would have known.” McDonald v. United
States, 102 F.3d 1009, 1011 (9th Cir. 1996) (internal
quotation marks omitted). The burden is on the government
to plead and prove good faith as an affirmative defense. Id.
at 1010.

As we have already explained, Congress intended § 6103
to protect against malevolent government disclosure of
taxpayers’ tax return information. Rueckert, 775 F.2d at 210.
For § 7431(b) to shield the government from liability at this
stage in the litigation, the government must argue that, even
26 ALOE VERA OF AMERICA , INC. V . UNITED STATES

if there is a genuine dispute as to whether it knowingly
disclosed false tax return information to the NTA, it is
nevertheless entitled to summary judgment because it made
an erroneous interpretation of § 6103(k)(4) by which it
believed it was permitted to make such a false disclosure.
This interpretation of § 6103(k)(4) would clearly eviscerate
the basic purpose of § 6103. A knowingly false disclosure
could not be made in good faith because it would be contrary
to established statutory rights of which a reasonable person
would have known. See McDonald, 102 F.3d at 1011.
Accordingly, the government is not entitled to summary
judgment on the basis of the good-faith defense of § 7431(b).

VI

In sum, we have jurisdiction over Taxpayers’ Count I
claims, but we do not have jurisdiction over Taxpayers’
Count II claims. We therefore reverse the district court’s
dismissal of the Yamagata plaintiffs’ Count I claims for lack
of jurisdiction and affirm the district court’s dismissal of
Taxpayers’ Count II claims. Because genuine issues of
material fact exist as to the claims asserted in Count I, we
reverse the grant of summary judgment on those claims.

The parties shall bear their own costs on appeal.

AFFIRMED IN PART; REVERSED IN PART;
REMANDED.
 ALOE VERA OF AMERICA , INC. V . UNITED STATES 27

WALLACE, Senior Circuit Judge, concurring in part and
dissenting in part.

I concur in the majority’s opinion with one exception. It
is clear to me that the Yamagata plaintiffs have failed to carry
their burden of establishing that their claims are not barred by
the statute of limitations.

“When subject matter jurisdiction is challenged under
Federal Rule of Procedure 12(b)(1), the plaintiff has the
burden of proving jurisdiction in order to survive the motion.”
Kingman Reef Atoll Invs., L.L.C. v. United States, 541 F.3d
1189, 1197 (9th Cir. 2008) (internal quotation marks
omitted). When we remanded this case to the trial court to
resolve the statute of limitations question, all plaintiffs
alleged that they first learned about the critical statements in
August 1998, when the Maughan/AVA plaintiffs’ counsel
received notes from an IRS meeting. The Maughan/AVA
plaintiffs’ allegation is supported by an affidavit from their
general counsel indicating that they first learned of the
statements in question when the notes were received. The
only support for the Yamagata plaintiffs’ allegation, on the
other hand, is the Maughan/AVA plaintiffs’ counsel’s
statement that he gave the notes to the Yamagata plaintiffs’
counsel sometime after he received them. Obviously, that
allegation does not prove any date on which the Yamagata
plaintiffs first learned of the statements in question.

The majority nonetheless concludes that the Yamagata
plaintiffs met their burden because (1) there is no evidence in
the record that suggests the Yamagata plaintiffs learned about
the statements before their attorneys and (2) the evidence
should be viewed in the light most favorable to the Yamagata
plaintiffs as the nonmoving party.
28 ALOE VERA OF AMERICA , INC. V . UNITED STATES

While both these general premises are correct, they lead
nowhere to solve the critical issue before us. A permissible
inference cannot replace required supporting information. On
the relevant question, the Yamagata plaintiffs have not given
us what we need most: an affidavit that supports their
individualized awareness date. The majority’s avoidance of
the required proof cannot constitute a satisfaction of the
Yamagata plaintiffs’ burden of proving jurisdiction.

Federal jurisdiction is always a critical issue. Without its
establishment in a case, we do not have power to act. The
Yamagata plaintiffs could easily prove jurisdiction by an
affidavit stating the date they gained knowledge. Their failure
to do so speaks volumes about whether they could prove
jurisdiction. The fact is that they did not and the majority’s
attempt to make an end run around this critical issue is
unfortunate.

As to the Yamagata plaintiffs, they had the burden to
prove jurisdiction. Perhaps they could have but did not. They
should be dismissed for failure to prove jurisdiction.