PANASONIC COMMUNICATIONS CORPORATION OF AMERICA v. USA
Filing
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ORDER granting 33 Plaintiff's Motion to Compel Discovery Responses. Signed by Judge Edward J. Damich. (jsb) Copy to parties.
In the United States Court of Federal Claims
No. 09-793 T
(Filed: April 20, 2011)
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PANASONIC COMMUNICATIONS
CORPORATION OF AMERICA,
Plaintiff,
v.
THE UNITED STATES,
Defendant.
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ORDER
This case is a tax refund action wherein Panasonic complains that the Internal Revenue
Service (“IRS”) improperly imposed an excise tax against it due to the presence of ozonedepleting chemicals (ODCs) allegedly used in the manufacture and productions of its imported
telephone products. In September 2010, the Court set out a schedule for fact and expert
discovery in preparation for a mini-trial on the issue of the validity of the ODC testing.
Plaintiff has filed a motion to compel discovery responses from Defendant with respect to
interrogatories and requests for production of documents and from Pacific Northwest National
Laboratory (“PNNL”)1 with respect to a parallel subpoena for documents. The United States and
PNNL have withheld the responsive information on the grounds that Plaintiff‟s requests seek
taxpayer return information that is confidential under 26 U.S.C. § 6103.
The discovery requests at issue are Plaintiff‟s Document Requests 1, 23, 24, and 25
(made to both Defendant and PNNL) and Interrogatories 3 and 6 (made to Defendant). In
addition, Defendant has asserted a blanket objection to all of Plaintiff‟s document requests on the
basis of § 6103.
Section 6103 establishes a general prohibition on the disclosure of “return or return
information.” 26 U.S.C. § 6103(a)(1). “Return information” is defined broadly and means:
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PNNL is a federally-funded research center that has conducted testing at the request of the IRS for the presence of
ODCs in products of Plaintiff as well as of other taxpayers. Def.‟s Resp. at 2. It is managed by Battelle, a charitable
trust organized as a non-profit under Ohio law.
a taxpayer‟s identify, 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 payment, 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).
Audit information has been held encompassed within the confidentiality protection of this
section. See Flamingo Fishing Corp. v. United States, 31 Fed. Cl. 655, 658 (1994).
At the heart of this discovery dispute is Plaintiff‟s desire for information regarding
PNNL‟s ODC-testing of commercial products of other taxpayers.
“[T]he responsive documents and interrogatory responses related
to testing on other taxpayers are critical to demonstrating any
changes, inconsistencies, and variations in PNNL‟s testing
methodologies that have occurred over time and that touch upon
the issue of whether the testing employed on Panasonic‟s products
was valid.
Pl.‟s Mot. at 3.
For example, Panasonic‟s document Request No. 1 reads, in relevant part:
Produce all documents related to the procedures (including
standard operating procedures), methods, standards, and controls
followed or used in any and all testing for ODC‟s in commercial
products by PNNL, Battelle, the IRS, or any other entity retained
by or working for the IRS or DOE on testing for ODCs . . . .
Please note that this request is not limited to documents related to
the testing of Panasonic products for ODCs, and therefore includes
all testing for ODCs in commercial products.
Interrogatory No. 6 reads, in relevant part:
Identify 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. Please respond as
completely as possible without violating taxpayer confidentiality
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obligations while fulfilling your obligation to answer this
interrogatory, identifying in your response the number of instances
in which the IRS has used testing for ODCs to determine or
consider whether excise taxes should be imposed and, for each
case, whether excise taxes were assessed, the date of the test(s), the
person(s) who conducted each test, the testing methodologies used,
the results of the testing (i.e., whether ODCs were detected), the
amount of the taxes assessed, whether the assessment was appealed
or contested in any way, and the result of any appeal or dispute
with the taxpayer regarding the correctness of the assessment. . . .
Both PNNL and the government, however, assert that the information relating to the
testing of other entities‟ products is confidential taxpayer return information protected from
disclosure by § 6103.
In every instance, the testing conducted by PNNL on commercial
products imported by these companies was done at the request of
the IRS for the use of the IRS in each of the excise tax audits of
those particular companies in order to correctly determine their
respective liabilities for ozone-depleting chemical taxes.
Def.‟s Resp. at 3.
Exception to Confidentiality
Despite the general prohibition on disclosure, § 6103(h) allows disclosure for purposes of
tax administration in certain circumstances. Pertinent to this dispute is § 6103(h)(4), which
provides, “Disclosure in judicial and administrative tax proceedings.--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 reflected on such return
is directly related to the resolution of an issue in the proceeding[.]”
Because the information requested by Panasonic qualifies as return information – ODC
testing documentation from PNNL‟s testing of other taxpayers generated as a result of IRS
excise tax audits, emails associated with that testing, and three additional documents that discuss
the audit or potential audit of other taxpayers – the Court cannot compel its disclosure except as
provided by § 6103(h)(4)(B).
In opposing disclosure, the Government argues that Panasonic has failed to identify the
“item” reflected on the taxpayer‟s return, the treatment of which relates to the resolution of an
issue in this case, and that Panasonic has also not identified the “return” on which the item is
reflected. Def.‟s Response at 19-20. Finally, the Government argues that Panasonic has failed to
establish how the information it seeks is “directly related to the resolution of an issue” before the
Court. Id. at 21-24.
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In its Reply, Panasonic identifies “ODC tax liability” as the item reflected on the returns
of the other taxpayers and argues that it is impossible for it to have identified the actual returns
on which the item is reflected because of the confidentiality of returns and return information.
Pl.‟s Reply at 12-13. Regarding the direct relationship between the information sought and the
resolution of this case, Panasonic in its opening brief first quotes from the Court‟s September 8,
2010, Order for a mini-trial on the sole issue of the “validity of the testing employed for the
presence of ozone-depleting chemicals . . . in the products and components in question.” Pl.‟s
Mot. at 2. Furthermore, Panasonic explains that its discovery requests “are aimed at the totality
of PNNL‟s testing to evince common testing issues, varying parameters, precision issues,
instrument faults, methodology deviations, performance issues, statistical anomalies, and
contamination sources.” Reply at 18. Thus, it argues, the information “is not merely related or
relevant, but „directly related in nature,‟ and goes to the heart of the validity of the IRS‟s testing
methodology as employed on Panasonic.” Id. at 19.
“Item”
Although the Government is correct that Panasonic, in its opening brief, did not expressly
identify an item on a return, the Court agrees with Panasonic that ODC tax liability was, by clear
implication, the item to which Panasonic alluded in its § 6103(h)(4)(B) argument. Moreover, it
expressly identified ODC tax liability in its Reply.
In addition, at the oral argument conducted by the Court on March 14, 2011, the Court
specifically asked the parties whether there were IRS forms containing any item dealing with
ODC tax liability. The parties referred variously to IRS Forms 720, 6627, and 8849. Form 720,
attached to Plaintiff‟s Reply as Exhibit 15, is titled “Quarterly Federal Excise Tax Return,” and
provides in Part I, “Environmental Taxes,” for the entry of a tax amount in item No. 19 described
as “ODC tax on imported products.” The section of Part I providing for “Environmental Taxes”
instructs the taxpayer to attach Form 6627. Part III of Form 6627, “Environmental Taxes,” to
which the Government referred in oral argument and of which the Court takes judicial notice, is
titled “ODC Tax on Imported Products, IRS No. 19.” According to Plaintiff, if a taxpayer
determined it had no excise tax liability and did not file a Form 720, but was assessed an ODC
tax by the IRS and subsequently were to seek a refund, it might file a Form 8849. Although
Form 8849, titled “Claim for Refund of Excise Taxes” and attached as Exhibit 17 to Plaintiff‟s
Reply, contains no direct reference to ODC taxes, Schedule 6 to Form 8849, “Other Claims,”
would qualify therefore as an item relating to ODC tax liability. Even the overall excise tax
liability in Form 720, whether including any component of ODC excise taxes or not, can be seen
as constituting or incorporating an “ODC tax liability” item for purposes of the exception to
confidentiality at issue here. The conclusion is inescapable, then, that Panasonic has identified
an “item” on a return as required by § 6103(h)(4)(B).2
Defendant further argues, however, that the item test is not satisfied because the validity
of PNNL‟s scientific testing of the other taxpayers‟ products would not have been reflected on
any of the above-mentioned returns. The testing of those other products “wouldn‟t satisfy the
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At oral argument, the Government essentially conceded this point, acknowledging that “the overall tax liability . . .
may be considered an item on the return” and that “the information that‟s requested by these returns . . . would be
considered an item.” Transcript, p. 37, lines 6-9; p. 39, lines 4-7, March 14, 2011.
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item test . . . unless information regarding that testing was actually reported and reflected on the
return.” Tr. 45, 5-7. Defendant concurred with the Court‟s characterization of its argument, i.e.,
that “the testing that the Plaintiff wants to discover is a result of an audit, which is a step
removed from an item on the return.” Id. at 11-13. Defendant explained that “if there was a
return filed, it most likely would have been filed prior to any audit and therefore could not have
considered any testing by PNNL.” Id. at 16-19.
The Court is not persuaded by Defendant‟s crabbed interpretation of § 6103(h)(4)(B).
Defendant does not take into account the words “treatment” and “reflected” in the phrase,
“treatment of an item reflected on such return.” The Court reads “reflected on such return” to
mean that the item need not necessarily have been a specific line item on a return, but also
encompasses aspects of the item as to which the return has a bearing. Congress could have used
the more specific terminology “treatment of an item on a return,” that is, without the word,
“reflected,” if it intended the narrower interpretation favored by the Government. The Court
further reads “treatment” as modifying the remainder of the phrase as a whole. Thus, the
“treatment” of the item need not be manifest on the return itself, but rather includes the manner
in which the item is handled subsequently. These other taxpayers were audited by the IRS in
order to assess their ODC tax liability; the audit encompassed the scientific testing performed by
PNNL. PNNL‟s activities were therefore derivatively part of the “treatment” of ODC tax
liability, which is the “item” identified by Plaintiff and which is reflected on the taxpayer‟s
return, whether as a specific line item or as part of the overall tax liability reported.
“Directly Related”
Defendant also argues that Plaintiff‟s discovery requests for the ODC testing
documentation do not meet the requirement under § 6103(h)(4)(B) that the “treatment of an item
reflected on such return” be “directly related” to the resolution of an issue in this litigation.
“Panasonic fails to persuasively explain how PNNL‟s testing conducted on the products of other
taxpayers has any relevance whatsoever to the validity of the specific testing employed on
Panasonic‟s products.” Def.‟s Resp. at 22. At oral argument, Defendant explained that “whether
the ODC tax reported by another company is zero or 500 or 700 has no relevance to Panasonic‟s
liability.” Tr. 39, 9-11. Defendant‟s observation, however, misses the mark. Plaintiff‟s
discovery is directed 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. It seeks not the returns of the other taxpayers but rather documentation
regarding the testing of their products for the presence of ODCs.
Because this is a discovery dispute, not a motion to admit evidence at trial, the Court
finds Plaintiff‟s statement of need and potential relevance sufficient on its face to demonstrate
that the testing documentation is directly related to the issue in this proceeding.
Conclusion
Based on the foregoing discussion, the Court hereby GRANTS Plaintiff‟s Motion to
Compel Discovery Responses. Defendant shall provide the discovery responses otherwise
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withheld, but shall redact taxpayer-identifying information, such as the taxpayer‟s name or the
product name.
s/ Edward J. Damich
EDWARD J. DAMICH
Judge
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