United States Court of Appeals,
Fifth Circuit.
No. 95-21066.
Bernard M. BARRETT, Jr., M.D.; Plastic & Reconstructive
Surgeons, P.A., Plaintiffs-Appellants,
v.
UNITED STATES of America, et al., Defendants,
UNITED STATES of America, Defendant-Appellee.
Nov. 27, 1996.
Appeal from the United States District Court for the Southern
District of Texas.
Before POLITZ, Chief Judge, and SMITH and DUHÉ, Circuit Judges.
DUHÉ, Circuit Judge:
Plaintiffs-Appellants Bernard M. Barrett, Jr., M.D., and
Plastic and Reconstructive Surgeons, P.A., appeal the district
court's judgment denying them actual and punitive damages for the
unauthorized disclosure by the Internal Revenue Service of certain
return information in violation of 26 U.S.C. §§ 6103(k) and
7431(b). The court held that Appellants had demonstrated neither
that they suffered harm as a result of the unauthorized disclosure
nor that the conduct of the IRS was willful or grossly negligent so
as to justify an award of punitive damages. Alternatively, the
court held that even if Appellants had made the requisite showing
for punitive damages, the plain language and structure of 26 U.S.C.
§ 7431(c) prohibits their award in the absence of actual damages.
Insofar as we affirm the court's decision that Appellants failed to
1
prove actual damages under 26 U.S.C. § 7431(c)(1)(B)(i) and
punitive damages under 26 U.S.C. § 7431(c)(1)(B)(ii), it is
unnecessary to resolve the statutory interpretation issue whether
26 U.S.C. § 7431(c) authorizes an award of punitive damages where
actual damages have not been shown.
I. FACTS1
The saga of Dr. Barrett continues.2 Bernard M. Barrett, Jr.,
M.D. is the president and sole owner of Plastic & Reconstructive
Surgeons, P.A. ("PARS"). In 1979, the Internal Revenue Service
began an audit of Dr. Barrett's personal and corporate tax returns
for the years 1976, 1977, and 1978. When the initial investigation
revealed a discrepancy of $100,000 between Dr. Barrett's books and
his bank records, the IRS transferred the case from its civil
division to its Criminal Investigation Division ("CID") under the
care of Special Agent Michael O. Hanson.
After two informants told the IRS that Dr. Barrett did not
1
These facts are substantially taken from the panel opinion in
Barrett v. United States, 51 F.3d 475 (5th Cir.1995).
2
See e.g., Barrett v. United States, 917 F.Supp. 493
(S.D.Tex.1995) (denying actual and punitive damages, from which
this appeal is taken); Barrett v. United States, 51 F.3d 475 (5th
Cir.1995) (holding that disclosures of return information in
circular letters mailed to plaintiff's patients violated 26 U.S.C.
§ 6301); United States v. Barrett, 837 F.2d 1341 (5th Cir.1988),
cert. denied, Barrett v. United States, 492 U.S. 926, 109 S.Ct.
3264, 106 L.Ed.2d 609 (1989); United States v. Barrett, 804 F.2d
1376 (5th Cir.1986); Barrett v. United States, 795 F.2d 446 (5th
Cir.1986); United States v. Barrett, 787 F.2d 958 (5th Cir.1986);
United States v. Texas Heart Inst., 755 F.2d 469 (5th Cir.1985).
2
accurately report all cash payments received from his patients,3
Agent Hanson sent a summons to PARS seeking its patient ledger
cards and other business records. When Dr. Barrett responded that
PARS would not comply with the summons, Agent Hanson thought it
necessary to inquire of Dr. Barrett's patients the amount each had
paid for Dr. Barrett's services and whether any part had been paid
in cash. He therefore sent summonses to the hospitals where Dr.
Barrett performed surgery and one to Dr. Barrett individually to
obtain Dr. Barrett's patient lists. All but four of the sixteen
hospitals complied, providing Agent Hanson with a list of 386 names
and addresses of Dr. Barrett's patients.
Agent Hanson then sent a "circular letter" to each of those
patients, disclosing Dr. Barrett's name and address, informing them
in the text of his letter that Dr. Barrett was being investigated
by the Criminal Investigation Division of the IRS, requesting
information about the nature and amount of fees paid to Dr.
Barrett, and identifying himself in the signature block as a
Special Agent with the Criminal Investigation Division.
One-hundred twenty-six letters were returned as undeliverable,
leaving 260 letters outstanding.
In November, 1983, Dr. Barrett commenced this action against
3
In the 1989 joint pretrial order, the IRS admitted and Agent
Hanson testified that Dr. Barrett was no longer the target of any
criminal investigation involving either the IRS or Agent Hanson and
that Dr. Barrett had never been charged or indicted as a result of
the IRS criminal investigation.
3
the United States, alleging the circular letters unlawfully
disclosed tax return information in violation of 26 U.S.C. §§ 6103
and 7431 of the Internal Revenue Code ("Code").4 A panel of this
Court agreed and remanded the case to the district court for a
determination of damages. Barrett v. United States, 51 F.3d 475,
480 (5th Cir.1995) ("Barrett I "). On remand, the district court
found that Dr. Barrett had failed to prove he suffered actual
damages from the unlawful disclosure. Barrett v. United States,
917 F.Supp. 493, 502 (S.D.Tex.1995) ("Barrett II "). The court
then rejected Dr. Barrett's request under Code § 7431(c)(1)(B)(ii)
for punitive damages, finding that the IRS did not act willfully or
with gross negligence in disclosing that Dr. Barrett was under
criminal investigation. Id. at 504. The court held alternatively
that even if Dr. Barrett had proved willfulness or gross
negligence, Code § 7431(c) barred an award of punitive damages in
the absence of actual damages. Id. Accordingly, the court awarded
Dr. Barrett only statutory damages pursuant to Code § 7431(c)(1)(A)
in the amount of $260,000, plus costs. Id. Dr. Barrett now
appeals. He argues that the district court, by failing to award
either actual or punitive damages under Code § 7431(c)(1)(B),
violated the law of the case, as he interprets it, of Barrett I.
II. STANDARD OF REVIEW
4
It is undisputed that the disclosure of the IRS's criminal
investigation of the tax returns of Dr. Barrett and PARS is return
information. Code § 6103(b).
4
The district court's findings that Dr. Barrett failed to
establish under Code § 7431(c)(1)(B) actual and punitive damages
arising from Agent Hanson's unlawful disclosure are findings of
fact subject to reversal only upon clear error. A finding is
clearly erroneous only 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.
Fed.R.Civ.P. 52(a); see also United States v. United States Gypsum
Co., 333 U.S. 364, 395, 68 S.Ct. 525, 541-42, 92 L.Ed. 746 (1948).
Dr. Barrett would have us review the district court's
holdings de novo, arguing that the court violated the law of the
case doctrine in rejecting his evidence on the actual and punitive
damages claims. We cannot accept this invitation.
Dr. Barrett holds the erroneous belief that our opinion in
Barrett I directs the district court on remand to find for Dr.
Barrett in the very amount of actual and punitive damages he
requests. In support of his reading, he points to our language in
Barrett I remanding the case to the district court, in which we
state:
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 mailing of the circular
letters. Accordingly, we REVERSE the judgment of the district
court and REMAND for a determination of damages.
5
Barrett I, 51 F.3d at 480. Dr. Barrett argues that this language
makes both the causation between the unlawful disclosures and his
loss of business and the amount of damages foregone conclusions.
For the district court to hold otherwise, he complains, violates
the law of the case doctrine.
Dr. Barrett is incorrect. While we recognize the ambiguity of
the above-quoted language, taken in the context of our whole
opinion, it cannot be construed as Dr. Barrett reads it. The
entirety of our opinion focuses exclusively on the liability phase
of the action; nowhere do we discuss the merits of Dr. Barrett's
actual and punitive damages claims. Our statements acknowledging
"that Dr. Barrett presented uncontradicted evidence of his damages
during trial," id., and remanding to the district court for a
"determination of the amount of damages to be awarded," id.
(emphasis added), do not, contrary to Dr. Barrett's assertion,
reflect a decision on our part holding that Dr. Barrett has
factually proven either actual or punitive damages. Our first
statement simply reflects our finding that only Dr. Barrett, and
not the United States, has presented damage evidence; whether this
evidence in turn is sufficiently credible to justify an award of
actual or punitive damages is a determination we appropriately left
to the district court on remand.
Our second statement, although an acknowledgment of the
propriety of some damages, is not ipso facto a comment on the
6
propriety of actual and punitive damages themselves. We read, and
believe the panel in Barrett I intended, the phrase "amount of
damages" to authorize the district court to award either statutory
damages pursuant to Code § 7431(c)(1)(A) or actual or punitive
damages pursuant to Code § 7431(c)(1)(B), whichever the court on
remand, after a thorough review of the damage evidence, found
appropriate. In other words, we concluded in Barrett I that Dr.
Barrett is entitled to some damages; whether they be statutory,
actual, or punitive damages is a factual determination that only
the district court is competent to make.
The law of the case, therefore, established in Barrett I holds
only that the United States is liable to Dr. Barrett and PARS for
some damages for the unlawful disclosures of return information;
significantly, it does not also specify the type of damages to
which Dr. Barrett is entitled. Rather than expressing an opinion
on that issue, we specifically left that factual determination to
the district court. Any other reading, as the district court
points out, is nonsensical; we would not have directed the
district court to make a "factual determination of the amount of
damages" had we meant it "merely to perform the ministerial duty of
writing down the damage amount Barrett requested at trial."
Barrett II, 917 F.Supp. at 496 n. 5. On appeal, therefore, are the
court's factual determinations of damages. Our review is thus
appropriately circumscribed by the "clearly erroneous" standard.
7
III. ANALYSIS
Code § 6103(a) provides that tax "[r]eturns and return
information shall be confidential" and may not be disclosed "except
as authorized by [the Code]." Return information includes the fact
that a taxpayer is under investigation. Code § 6103(b)(2)(A).
Code § 6103(k)(6) excepts from this general rule return information
disclosed to third parties to obtain information relating to any
civil or criminal tax investigation "to the extent that such
disclosure is necessary in obtaining information, which is not
otherwise reasonably available." Liability for unauthorized
disclosures does not attach, however, if the disclosure "results
from a good faith, but erroneous interpretation of section 6103."
Code § 7431(b).
Once liability attaches, a court must make a determination of
damages consonant with Code § 7431(c), which states:
[U]pon a finding of liability on the part of the defendant,
the defendant shall be liable to the plaintiff in an amount
equal to the sum of—
(1) the greater of—
(A) $1,000 for each act of unauthorized disclosure
of a return or return information with respect to which
such defendant is found liable, or
(B) the sum of--
(i) the actual damages sustained by the plaintiff as
a result of such unauthorized disclosure, plus
(ii) in the case of a willful disclosure or a
disclosure which is the result of gross negligence,
punitive damages, plus
8
(2) the costs of the action.
This appeal concerns only the damage phase of the action.
A. Actual Damages
Dr. Barrett seeks at least $8,629,208.00 in compensatory
damages, arguing that but for the circular letters, he would not
have suffered as great a loss as he did in his surgery practice.
Emphasizing our previous statement that his evidence on damages was
"uncontradicted" at trial, Barrett I, 51 F.3d at 480, Dr. Barrett
disputes the district court's subsequent failure to award actual
damages on remand as clearly erroneous. The United States
maintains that Dr. Barrett did not suffer any economic loss as a
result of the disclosure, pointing out that Dr. Barrett's damage
evidence at trial was not "uncontradicted" insofar as the United
States thoroughly discredited it during cross examination.5
Before discussing the merits, we must once again address Dr.
Barrett's contention that the district court's opinion emasculates
the rule of law established in Barrett I. He rejects the court's
premise for denying actual and punitive damages as based upon a
fallacious reading of our opinion in Barrett I. Dr. Barrett's
accusation lacks justification. The district court correctly
discerned that opinion to hold that the IRS had violated Code §§
5
The United States accepts the court's finding awarding Dr.
Barrett $260,000 in statutory damages pursuant to Code §
7431(c)(1)(A), which provides $1,000.00 for each act of disclosure.
9
6103 and 7431 not by mailing the circular letters but by
unnecessarily and in bad faith disclosing in the body of those
letters the criminal investigation. This distinction is
significant, as the court in Barrett II emphasized, because a
violation occasioned by the mailing of the letters obliges Dr.
Barrett to prove his lost business arose from his patients'
concerns about breach of privacy issues whereas a violation
occasioned by the disclosure of the criminal investigation obliges
him to prove he lost business because his patients thought him a
"tax cheat." Insofar as this Court in Barrett I did not dispute
the wisdom of Agent Hanson's decision to use the circular letters
to obtain the payment data, the district court in Barrett II
correctly recognized that the privacy interests of Dr. Barrett's
patients would have been implicated whether or not the disclosures
had been made.6 The court therefore properly concluded that, "any
6
Dr. Barrett is of the remarkable opinion that this Court in
Barrett I expressly held that liability attaches to the United
States for the very use of the circular letters themselves. He
directs us to various statements in our discussion, where we
address the facts that "Agent Hanson sent a "circular letter,' "
Barrett I, 51 F.3d at 477 (emphasis added); that he testified
about his failure to follow established procedures "when he
prepared and mailed out the letters," id. at 480 (emphasis added);
and that we remanded for a factual determination of damages to be
awarded "as a result of Agent Hanson's mailing of the circular
letters." Id. (emphasis added).
Dr. Barrett reads these statements in a vacuum, thus
ignoring the full import of our decision. Our opinion in
Barrett I resolved only that the United States was liable
because it had acted in bad faith in making disclosures that
10
actual damages must have arisen from the disclosure to the patients
of the criminal investigation itself and not from the concern of
the patients that their privacy had been breached." Barrett II,
917 F.Supp. at 496. Even were we to concede, though in no way
should our opinion be understood to do so, Dr. Barrett's point that
actual damages need arise only out of breach of privacy concerns,
we still cannot hold the district court's conclusion rejecting
actual damages as clearly erroneous.
Code § 7431(c)(1)(B)(i) limits actual damages to those
"sustained ... as a result of [an] unauthorized disclosure."
Although Dr. Barrett put forth evidence to support his contention
that he suffered a dramatic loss in business, the district court
found that there is little but speculation connecting this loss to
the unlawful disclosures. Dr. Barrett himself admits that he has
never identified one patient who has ceased, either as a result of
the disclosures or out of privacy concerns, to see him or refer to
him putative patients. He further concedes that he cannot offer
were not necessary pursuant to Code § 6103(k); nowhere did we
question the district court's previous finding that the
information sought by the IRS was not "otherwise reasonably
available." In other words, we did not question the IRS's
decision to use the circular letters as an initial matter; we
denounced only its decision to include in those letters the
disclosure of the criminal investigation. Our statements
cited above are therefore not expressions of our opinion on
the scope of damages but merely references to the illegal
contents of otherwise lawful letters. To avoid any further
confusion, unless otherwise indicated, references to "circular
letters" or the mailing of such letters do not criticize the
letters themselves or their use, but rather the unlawful
disclosures contained within them.
11
the testimony of even one doctor who has stopped referring patients
to him and admits that he has never been denied surgical privileges
or suspended on account of the disclosures. Dr. Barrett's other
witnesses notably fail to offer a scintilla of evidence connecting
his loss of business with the unlawful disclosures. Even Dr.
Barrett's strongest witness, Mr. Karl M. Johnson, proved
unreliable. Mr. Johnson, a certified public accountant and tax
partner at Peat Marwick, created a loss income model to illustrate
the amount of loss that Dr. Barrett allegedly sustained from the
circular letters; this model, however, takes causation as a given
and fails to distinguish among different possible causes for the
loss that Dr. Barrett suffered.7
The paucity of evidence establishing a causal link between Dr.
Barrett's loss and the circular letters left the district court
with little choice but to find for the United States. We do not
hold this finding to constitute clear error.
B. Punitive Damages
Dr. Barrett next argues that the district court erred in
rejecting his claim for punitive damages. The court rested its
7
These additional theories, offered by the United States,
include the possibility that (1) a sharp decline in oil prices had
a profound economic impact on the Houston economy and Texans
seeking plastic surgery; (2) Dr. Barrett's marital troubles had
caused him to see fewer patients; (3) the devaluation of the
Mexican peso rendered plastic surgery too expensive for Dr.
Barrett's Mexican patients and putative patients; and (4) putative
patients learned of Dr. Barrett's tax battles not from Agent
Hanson's circular letters but from newspaper accounts.
12
holding on two grounds. First, the court found that the
disclosures were neither willful nor grossly negligent. Second, it
held that even if punitive damages were recoverable, the plain
language and structure of Code § 7431(c) precluded their award in
the absence of actual damages. We do not today resolve this
statutory interpretation question because we are persuaded that the
factual evidence is insufficient to support an award of punitive
damages, even if the statute would so allow.
Code § 7431(c)(1)(B)(ii) authorizes a punitive damage award
only if the disclosures are willful or grossly negligent. Willful
conduct is "that which was done without ground for believing that
it was lawful or conduct marked by a careless disregard of whether
one has a right to act in such a manner." Smith v. United States,
730 F.Supp. 948, 955 (C.D.Ill.1990), rev'd on other grounds, Smith
v. United States, 964 F.2d 630 (7th Cir.1992). Conduct that is
grossly negligent is that which is either willful or marked by
"wanton or reckless disregard of the rights of another." Id.; see
also Marré v. United States, 38 F.3d 823, 826 (5th Cir.1994).
Reviewing the district court's holding denying punitive damages for
clear error, we do not find conduct by Agent Hanson so egregious as
to warrant an award of punitive damages.
Dr. Barrett contends that Agent Hanson's statement in the body
of the circular letters disclosing that the IRS was conducting a
criminal investigation of Dr. Barrett constitutes willful or
13
grossly negligent conduct. In support of this contention, he first
points to the fact that Agent Hanson mailed the letters despite his
belief that their receipt may cause Dr. Barrett's patients
"embarrassment, humiliation, or emotional distress." This
acknowledgment alone does not prove willfulness or gross
negligence. Section 347.1 of the Internal Revenue Manual, Handbook
for Special Agents prohibits an agent from causing only unwarranted
embarrassment. This prohibition therefore implicitly recognizes
that some embarrassment is likely to result during any third-party
contact made in the course of a criminal investigation. That Agent
Hanson appreciated some embarrassment may fall upon patients in
receipt of the letters does not alone evince a willful or grossly
negligent disregard of section 347.1.8
Dr. Barrett then points to Agent Hanson's inability to explain
his complete failure to follow the mandates of section 347.2 of the
8
Dr. Barrett appears confused by our footnote in Barrett I in
which we mentioned that Agent Hanson's acknowledgment of the
embarrassment, humiliation, or emotional distress that Dr.
Barrett's patients would experience upon receiving the letters is
evidence "indicative of Agent Hanson's willfulness or gross
negligence." Barrett I, 51 F.3d 475, 480 n. 6. Dr. Barrett reads
this dicta to be a holding in which we direct the district court on
remand to find that Agent Hanson's conduct constitutes willfulness
or gross negligence pursuant to Code § 7431(c)(1)(B)(ii). Nothing
could be farther from the truth. This language is considerably
less than a holding and, even if a holding, merely expresses our
opinion that the evidence cited is indicative of Agent Hanson's
willfulness or gross negligence, leaving to the district court the
duty of resolving whether such evidence in fact demonstrates
willfulness or gross negligence. On remand, the district court did
not so find and we cannot now hold that this finding is clear
error.
14
Handbook for Special Agents, which requires written approval from
the Chief of the CID of the content as well as the use of the
circular letters and directs that Special Agents not injure the
reputation of the taxpayer under investigation, as evidence
establishing willfulness or gross negligence. Dr. Barrett used
this same evidence to convince us in Barrett I that Agent Hanson
had acted in bad faith in contravention of Code § 7431(b). As the
district court stated, although this evidence of Agent Hanson's
dilatory conduct may be sufficient to support a finding of bad
faith, it "cannot alone support a second finding of willfulness or
gross negligence. There must be something more." Barrett II, 917
F.Supp. at 503. In other words, had Congress meant for the proof
burdens to be the same for both a finding of liability under Code
§ 7431(b) and punitive damages under Code § 7431(c)(1)(B)(ii), it
would have so articulated. Instead, Congress directed that
liability be found only upon a showing of bad faith and punitive
damages only upon a showing of willfulness or gross negligence.
The district court's conclusion that Dr. Barrett failed to make the
requisite showing for punitive damages is therefore not clearly
erroneous. We thus decline to reverse on this ground.
IV. CONCLUSION
For the foregoing reasons, we AFFIRM.
15