Williams Development & Construction, Inc. et al v. United States of America
Filing
71
Memorandum Opinion and ORDER granting in part and denying in part 50 Motion for Summary Judgment; granting 57 Motion to Withdraw Admission. Signed by U.S. District Judge Lawrence L. Piersol on 10/8/2020. (SLW)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION
4:18-CV-4033-LLP
WILLIAMS DEVELOPMENT &
CONSTRUCTION, INC.; CRAIG WILLIAMS;
LEE WILLIAMS; WDC COMMERCIAL
REAL ESTATE, INC.; WILLIAMS WORKING MEMORANDUM OPINION AND ORDER
GRANTING IN PART AND DENYING IN
CAPITAL PARTNERSHIP; WILLIAMS
PART DEFENDANT’S MOTION FOR
MANAGEMENT TRUST; CRAIG & LEE
SUMMARY JUDGMENT
WILLIAMS FAMILY PARTNERSHIP; LEE
AND CRAIG PARTNERSHIP 100 LTD; LEE
AND CRAIG PARTNERSHIP 200 LTD; LEE
AND CRAIG PARTNERSHIP 300 LTD,
Plaintiffs,
vs.
UNITED STATES OF AMERICA,
Defendant.
Pending before the Court is Defendant, United States of America’s (“Defendant”), Motion
for Summary Judgment, Doc. 50, and a Motion to Withdraw Admission filed by WDC
Commercial Real Estate, Inc., Doc. 57. The Court grants the Motion to Withdraw Admission and
grants in part and denies in part Defendant’s Motion for Summary Judgment.
BACKGROUND
I.
Facts
In 2017, the Internal Revenue Service (“IRS”) began a criminal investigation of Craig
Williams to determine whether he committed violation of the Internal Revenue Code. Doc. 53, ¶
3. The focus of the investigation was to determine whether Craig Williams had unreported income
and had overstated business expenses, resulting in the underpayment of personal income taxes.
Doc. 53, ¶ 4; 62 ¶ 7. The special agent in charge of the investigation was Special Agent Cory
L’Heureux. Doc. 55, ¶ 5.
1
Pursuant to this investigation, the IRS served fifteen administrative summonses upon third
parties compelling the production of records in order to corroborate income and expenses reported
on the tax returns. Doc. 53, ¶ 6. The summonses were issued between February 21, 2018, and
March 9, 2018. Doc. 53, ¶¶ 9-23.
The following summons recipients are “third-party recordkeepers” within the meaning of
26 U.S.C. § 7603(b): a) Middleton Raines & Zapata, LLP; (b) Allegiance Bank; (c) Alliance
Bernstein, LP; (d) American Express; (e) Morgan Stanley Smith Barney, LLC; (f) Bank of
America, NA; (g) Citibank NA; (h) Comerica Bank; (i) JP Morgan Chase Bank, NA; Chase Bank
USA NA; JP Morgan Securities LLC; and (j) Wells Fargo Bank NA. Doc. 53, ¶45. The following
summons recipients are not third-party recordkeepers within the meaning of section 7603(b): (a)
Lochinvar Golf Club; (b) The Clubs at Houston Oaks; (c) J. Pacetti Jewelers; and (d) Zadok
Jewelers; and (e) Pure Insurance – Insgroup, Inc.
The first line of the each of the summonses, in what is referred to as the “Statement of
Liability,” states that the summons is issued “In the Matter of Craig A. or Craig Arthur Williams.”.
Doc. 53, ¶ 26-30. Thirteen (13) of the fifteen (15) summonses also identify Craig Williams in the
Statement of Liability by listing his home address. Docs. 55-1-55-15. Each of the summonses
were labeled as issuing from the Criminal Investigation Division of the IRS.
Doc. 53, ¶ 30. In
attachments to the summonses, Agent L’Heureux identified the names and tax identification
numbers of the persons and entities whose records were the subject of the summons. Docs. 55-155-15. The names and tax identification numbers listed on attachments to the summonses were
those belonging to Craig Williams, his wife Lee Williams, and eight of Williams’s businesses—
all named Plaintiffs in this matter. Docs. 55-1-55-15. In 50 instances, summons recipients were
already in possession of tax identification numbers prior to service. Docs. 53, ¶¶ 47-75; 59-1.
II.
Procedural Background
In March 2018, Plaintiffs filed a Complaint in this matter and filed an Amended Complaint
on April 27, 2018. Docs. 1, 15. In their Amended Complaint, Plaintiffs allege that Defendant is
liable for damages under section 7431 of the Internal Revenue Code, 26 U.S.C. § 7431, for serving
summonses upon various third parties in connection with its criminal investigation of Craig
Williams which disclosed, without Plaintiffs’ authorization, Plaintiffs’ tax identification numbers
2
and the fact that Plaintiffs were under a criminal tax investigation—all in violation of 26 U.S.C. §
6103.
On July 23, 2018, Defendant filed a Motion to Dismiss which this Court denied. Docs. 24,
34. On March 23, 2020, Defendant filed a Motion for Summary Judgment which is currently
pending with the Court. Therein, Defendant contends that the disclosures of return information
did not violate section 6103 because they were permitted under 6103(k)(6) of the Internal Revenue
Code in what is known as the “investigatory purposes exception.” In the event that the disclosures
violate section 6103, Defendant argues on summary judgment that it is not liable under the good
faith exception to liability provided under 26 U.S.C. § 7431(b)(1). Also pending before the Court
is a Motion to Withdraw Admission by Plaintiff WDC Commercial Real Estate, Inc. Doc. 57.
On August 10, 2020, this Court heard oral argument from the parties on the Motion for
Summary Judgment. Doc. 67. During oral argument, Defendant stated that it did not oppose the
Motion to Withdraw Admission that had been filed by plaintiff WDC Commercial Real Estate,
Inc. Plaintiffs also affirmed during the hearing that they were seeking to recover statutory damages
of $1,000 per unauthorized disclosure under section 7431(c). At the hearing, the Court ordered
the parties to file supplemental briefs on the good faith exception, 26 U.S.C. § 7431(b)(1).
The Motion for Summary Judgment has been fully briefed and supplemental briefs were
filed by the parties per order of the Court. The Motion for Summary Judgment is now ready to be
ruled on by the Court.
STANDARD OF REVIEW
Summary judgment is appropriate if the movant “shows that there is no genuine dispute as
to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P.
56(a). To meet this burden, the moving party must identify those portions of the record which
demonstrate the absence of a genuine issue of material fact, or must show that the nonmoving party
has failed to present evidence to support an element of the nonmovant’s case on which it bears the
ultimate burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
Once the moving party has met this burden, “[t]he nonmoving party may not ‘rest on mere
allegations or denials, but must demonstrate on the record the existence of specific facts which
3
create a genuine issue for trial.’” Mosley v. City of Northwoods, Mo., 415 F.3d 908, 910 (8th
Cir.2005) (quoting Krenik v. Cty. of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995)). “[T]he mere
existence of some alleged factual dispute between the parties is not sufficient by itself to deny
summary judgment. . . . Instead, the dispute must be outcome determinative under prevailing
law.” Id. at 910-11 (quoting Get Away Club, Inc. v. Coleman, 969 F.2d 664, 666 (8th Cir. 1992)).
In ruling on a motion for summary judgment, the facts, and inferences drawn from those
facts, are “viewed in the light most favorable to the party opposing the motion” for summary
judgment. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587
(1986) (citation omitted). When the evidence cited in support of, or in opposition to, a motion for
summary judgment takes the form of an affidavit or declaration, that affidavit or declaration must
(a) be made based on the personal knowledge of the affiant or declarant, (b) set out facts that would
be admissible in evidence, and (c) demonstrate that the affiant or declarant is competent to testify
regarding those facts. Fed. R. Civ. P. 56(c)(4).
DISCUSSION
Section 7431 of Internal Revenue Code provides that a taxpayer may bring a civil action
for damages against the United States in a district court of the United States “[i]f any officer or
employee of the United States knowingly, or by reason of negligence, inspects or discloses any
return or return information with respect to a taxpayer in violation of any provision of [26 U.S.C.
§ 6103] . . . .” 26 U.S.C. § 7431. Section 6103 of the Internal Revenue Code provides, in part,
that:
(a) General rule.—Returns and return information shall be confidential, and except as
authorized by this title-(1)
no officer or employee of the United States,
...
shall disclose any return or return information obtained by him in any manner in
connection with his service as such an officer or an employee or otherwise or under
the provisions of this section.
26 U.S.C. § 6103(a). The term “return information” is defined in the statute to include, among
other things, “a taxpayer’s identity” and “whether the taxpayer’s return was, is being, or will be
examined or subject to other investigation or processing.” 26 U.S.C. § 6103(b)(2)(A). “Taxpayer
4
identity” is defined as “the name of a person with respect to whom a return is filed, his mailing
address, his taxpayer identifying number (as described in section 6109), or a combination thereof.”
26 U.S.C. § 6103(b)(6).
In order to recover under § 7431 for violations of § 6103, a taxpayer must prove that: (1)
the disclosure was unauthorized; (2) the disclosure was made “knowingly or by reason of
negligence”; and (3) the disclosure violated § 6103. 26 U.S.C. § 7431; see Jones v. United States,
97 F.3d 1121, 1124 (8th Cir. 1996). At issue on summary judgment is whether the disclosures of
Plaintiffs’ return information on the face of administrative summonses, and in attachments thereto,
fall within the “investigatory purposes exception” to unauthorized disclosures as codified in 26
US.C. § 6103(k)(6) of the Internal Revenue Code.
The investigatory purposes exception authorizes IRS employees to “disclose return
information” in connection with their official duties relating to a criminal tax investigation “to the
extent that such disclosure is necessary in obtaining information, which is not otherwise reasonably
available.” 26 U.S.C. § 6103(k)(6). Section 6103(k)(6) further provides that “[s]uch disclosures
shall be made only in such situations and under such conditions as the Secretary [of the Treasury]
may prescribe by regulation.” Id.
The Treasury Regulations define a “disclosure of return information to the extent
necessary” as “a disclosure of return information which an [IRS] . . . employee, based on the facts
and circumstances, at the time of the disclosure, reasonably believes is necessary to obtain
information to perform properly [its] official duties.” 26 C.F.R. § 301.6103(k)(6)-1(c)(1). Under
the Treasury Regulations, a “necessary”1 disclosure of return information need not be “essential
or indispensable,” but rather “appropriate and helpful in obtaining the information sought.” Id.
The Treasury Regulations further define “information not otherwise reasonably available” as:
information that an internal revenue . . . employee reasonably believes, under the
facts and circumstances, at the time of a disclosure, cannot be obtained in a
sufficiently accurate or probative form, or in a timely manner, and without
impairing the proper performance of the official duties described by this section
without making the disclosure.
1
The term “necessary” in the context of the revised Treasury Regulations refers to the necessity of the disclosure, not
the “necessity of conducting an investigation or the appropriateness of the means or methods chosen to conduct the
investigation.” 26 C.F.R. § 301.6103(k)(6)-1(c)(1).
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26 C.F.R. § 301.6103(k)(6)-1(c)(3).
I.
Disclosures of Plaintiffs’ identities and criminal investigation
“Return information” that is protected from unauthorized disclosure under section 6103(a)
includes, among other things, the name of a person with respect to whom a return is filed and
“whether the taxpayer’s return was, is being, or will be examined or subject to other investigation
or processing.” 26 U.S.C. § 6103(b)(2)(A).
Plaintiffs argue that disclosing Craig Williams’s
name in the statement of liability (“In the Matter of Craig A. Williams”) on the face of the
summons and detailing therein that the summons was issued out of the Criminal Investigation
Division of the Internal Revenue Service constitutes an unauthorized disclosure of “return
information” because it discloses that Craig Williams is the subject of a criminal investigation.
Doc. 58 at 18. In the attachments to many of the summonses, Agent L’Heureux requested that the
summons recipients produce records of Craig Williams, Lee Williams, and the other named
Plaintiffs in this case. Plaintiffs argue that in doing so, Agent L’Heureux disclosed, in violation
of section 6103, that the Plaintiffs whose records Defendant sought were also subjects of a criminal
investigation.
A. Background
Prior to filing its Motion for Summary Judgment, Defendant had filed a Motion to Dismiss
which this Court denied. In opposition to Defendant’s Motion to Dismiss, Plaintiffs had argued
that under Diamond v. United States, 944 F.2d 431 (8th Cir. 1991), using the identifier “Criminal
Investigation Division” on the summonses immediately below the line stating that the summonses
were issued in the Matter of Craig A. Williams or Craig Arthur Williams violated section 6103
because it disclosed that Mr. Williams was under a criminal investigation. Doc. 26 at 11-12.
In Diamond, an IRS agent was investigating individual tax returns of a physician and his
spouse and decided that it would be necessary to contact Diamond’s patients to determine the
amount of fees he had collected. Id. at 432. The agent contacted 201 patients by means of a
circular letter and questionnaire. Id. The letter informed its recipients that “Special Agent Jay of
the Criminal Investigation Division of the Internal Revenue Service was conducting an
investigation of Diamond’s tax liabilities for the years 1982 through 1985 and requested
6
information on the patients’ financial transactions with [Diamond] during the relevant years.” Id.
at 432-33.
The Eight Circuit concluded on appeal that the agent’s actions violated section 6103, but
held that those actions resulted from a good faith, but erroneous interpretation of the statute. Id.
at 435. In concluding that the agent’s actions violated section 6103, the Court found that the agent
did not need to identify himself as a member of the Criminal Investigation Division to secure the
desired information, noting that in follow-up letters to many of the patients, the agent identified
himself only as a “special agent” and did not mention his affiliation with the Criminal Investigation
Division. Id. The court also found that in the summonses prepared to gather information on the
taxpayer’s financial transactions, the agent did not mention that he was with the Criminal
Investigation Division and that other agents operating in the same state as the agent had issued
circular letters without the Criminal Investigation Division identification. Id.
In its Memorandum Opinion and Order Denying Defendant’s Motion to Dismiss, this Court
noted that the Treasury Regulations implementing section 6103(a) that had been in effect when
the Diamond case was decided were amended on July 10, 2003. Doc. 34 at 7 (citing Disclosure
of Information by Certain Officers and Employee for Investigatory Purposes, 68 Fed. Reg. 4107301 (Jul. 10, 2003) (to be codified at 26 C.F.R. pt. 301)). Temporary regulations were put in place
which became final on July 6, 2006. Disclosure of Information by Certain Officers and Employee
for Investigatory Purposes, 71 Fed. Reg. 38985-01 (Jul. 11, 2006) (to be codified at 26 C.F.R. pt.
301). The revised Treasury Regulations included several new provisions that were intended to
“clarif[y] the standard for determining when disclosures are authorized under section 6103(k)(6).”
71 FR 38985-01. One notable addition was subsection (a)(3) which clarified that IRS employees
have discretion to, in connection with their official duties:
identify themselves, their organizational affiliation (e.g., Internal Revenue Service
(IRS), Criminal Investigation (CI) . . . and the nature of their investigation, when
making an oral, written, or electronic contact with a third party witness. Permitted
disclosures include, but are not limited to, the use and presentation of any
identification media (such as a Federal agency badge, credential, or business card)
or the use of an information document request, summons, or correspondence on
Federal agency letterhead or which bears a return address or signature block that
reveals affiliation with the Federal agency.
26 C.F.R. § 301.6103(k)(1)-1(a)(3).
7
As discussed in the Court’s Memorandum Opinion and Order Denying Defendant’s
Motion to Dismiss, both the Joint Committee on Taxation and the Department of Treasury had
issued reports recommending the adoption of subsection (a)(3). Doc. 34 at 10 (citing Study of
Present-Law Taxpayer Confidentiality and Disclosure Provisions as Required by Section 3802 of
the Internal Revenue Service Restructuring and Reform Act of 1998, Vol. I: Study of General
Disclosure Provisions (JCS-1-00), Joint Committee on Taxation, January 28, 2000 (“Joint
Committee Report”); Report to Congress on Scope & Use of Taxpayer Confidentiality and
Disclosure Provisions, Vol. I: Study of General Provisions, Office of Tax Policy, Department of
Treasury, October 2000) (“Treasury Report”)). The reports stated that the clarification provided
by subsection (a)(3) was necessary to address cases such as Diamond where taxpayers asserted
that criminal investigators, “by various means, wrongfully disclosed the criminal nature of the
investigation of the taxpayers in the course of conducting third party witness interviews or
inquiries.” 68 FR 41073-01 (citing Comyns v. United States, 155 F.Supp.2d 1344 (S.D. Fla. 2001),
aff’d, 287 F.3d 1034 (11th Cir. 2002); Payne v. United States, 91 F.Supp.2d 1014 (S.D. Tex. 1999),
rev’d, 289 F.3d 377 (5th Cir. 2002); Gandy v. United States, Civ. No. 96-730, (E.D. Tex. 1999),
aff’d, 234 F.3d 281 (5th Cir. 2000); Rhodes v. United States, 903 F.Supp. 819 (M.D. Pa. 1995);
Diamond v. United States, 944 F.2d 431 (8th Cir. 1991)); Joint Committee Report at 208-11;
Treasury Report at 52.
The Joint Committee Report and Treasury Report discussed at length Gandy v. United
States, Civ. No. 96-730, 1999 WL 112527 (E.D. Tex. Jan. 15, 1999), a decision issued by the
District Court for the Eastern District of Texas. See Treasury Report at 52; Joint Committee Report
at 208-11. In Gandy, at the beginning of their interviews of a third party witnesses, IRS special
agents displayed their badges and credentials to witnesses, verbally introduced themselves as
special agents with the Criminal Investigation Division of the Internal Revenue Service, and stated
that they were conducting an investigation of Gandy. 1999 WL 112527 at *1. When the special
agents conducted telephone interviews, or served summonses on third parties, they introduced
themselves in a similar manner. Id. The district court in Gandy held that disclosing that the
plaintiff was under criminal investigation either directly, or through the use of identifying
credentials, was not necessary to secure the desired information and thus violated section 6103.
Id. at *4.
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The Joint Committee Report stated that the court’s ruling in Gandy “precludes special
agents from identifying themselves to persons other than the taxpayer as employees of the CID
and from stating that they are conducting a criminal investigation of the taxpayer.” Joint
Committee Report at 210. The report stated that:
The Joint Committee staff believes a third party witness should know that the IRS
agent interviewing them is an employee of the CID. By not identifying [themself]
as such, the IRS agent could potentially mislead the witness about the nature of the
investigation. In addition, the witness needs to know that he or she is speaking with
a criminal investigator, if only to evaluate how to protect his or her own interests.
Joint Committee Report at 210.2 The Joint Committee report recommended that IRS agents be
required to identify themselves as criminal investigators and state the nature of their investigation
to third parties. Id. at 210-11. However, the report cautioned that special agents “should be
especially mindful that the disclosure of the taxpayer’s identity must be necessary to obtain the
information sought as required by section 6103(k)(6).” Id. at 211.
In response to the Joint Committee Report, the Treasury Report acknowledged that the
“inability of a special agent to identify him/herself and the criminal nature of the investigation can,
in some cases, interfere with the performance of his or her duties and hamper investigations,” but
recommended that these disclosures be discretionary rather than mandatory as was suggested by
the Joint Committee. Treasury Report at 52. The Treasury Department stated that “there may be
circumstances, covert operations in particular, where such identification is undesirable.” Id. The
Treasury Department also clarified that the rule would not only apply to interviews of third-party
witnesses, but also to written contacts, e.g., letters intended to gather information about the target
of an investigation from third parties having a known or probable transactional relationship with
the target. Id. Ultimately, the Treasury Department recommended in its report to Congress that
“IRS CI special agents [ ] be permitted (but not required) to identify themselves, their
2
See also 68 FR 41073-01 (“When CI special agents disclose to third party witnesses that a
taxpayer is under criminal investigation, there is a risk that the disclosure may adversely affect the
taxpayer’s reputation, particularly if the third party witnesses have no prior independent
knowledge of the investigation. The government and third party witnesses have equally important
interests at stake: The CI special agents’ authority to accurately identify themselves so as not to
mislead third party witnesses, and the third party witnesses’ interest in knowing that the inquiry
involves a criminal investigation to fairly assess the situation and protect their own interests.”
9
organizational affiliation, and the criminal nature of their investigation when contacting third
parties in person or in writing.” Id.
In its Memorandum Opinion and Order Denying Defendant’s Motion to Dismiss, the Court
concluded, based on the clarification provided in subsection (a)(3), and the legislative history of
the revised Treasury Regulations, that any information on the summonses disclosing that the
summonses were issued from the criminal investigation division, or pertained to a criminal
investigation, were authorized pursuant to the revised Treasury Regulations implementing the
investigatory purposes exception.
In opposition to the Motion to Dismiss, Plaintiffs had argued that under Snider v. United
States, 468 F.3d 500 (8th Cir. 2006), Defendant had violated section 6103 by identifying that Craig
Williams and the other Plaintiffs were subjects of the criminal investigation. In Snider, an IRS
agent disclosed during interviews with third parties that the taxpayers were being investigated for
criminal tax violations and accused the taxpayers of having committed several crimes. 468 F.3d
at 505. The court in Snider concluded that while the investigatory purposes exception permitted
IRS employees to show their badges and identify themselves as criminal investigators as a
necessary part of their investigation, the statute did not permit an IRS employee to identify the
subject of his or her investigation. Id. at 507. The court found that because the government had
not shown, nor did the record reveal, the necessity of identifying the taxpayer as the subject of his
or her investigation, such disclosure was in violation of section 6103. Id.
Defendant had argued that the Eighth Circuit’s decision in Snider, which Plaintiffs cited in
their Amended Complaint, was inapposite because it did not apply or discuss subsection (a)(3) of
the revised Treasury Regulations since the conduct by the agent at issue in that case began in 2001
before the revised Treasury Regulations took effect in 2003. Doc. 25 at 9. However, this Court
rejected Defendant’s argument and concluded that the Eighth Circuit’s holding in Snider accorded
with subsection (a)(3) of the revised Treasury Regulations. Doc. 34 at 12. The Court stated that,
In Snider, the court stated that it was permissible for IRS agents to show their
badges and identify themselves as criminal investigators as a necessary part of their
investigation. These disclosures are specifically permitted under §301.6103(k)(6)1(a)(3) of the revised Treasury Regulations. What § 6103 does not permit, the court
in Snider held, was the disclosure by the IRS during third party interviews of the
taxpayer’s identity. The [c]ourt stated that “[a]n agent violates the statute, as well
10
as the Internal Revenue Manual, when he or she identifies the subject of his or her
investigation.”
Doc. 34 at 12-13. The Court concluded that “[u]nlike disclosures of an IRS agent’s identity and
nature of an investigation, the revised Treasury Regulations implementing the investigatory
purposes exception . . . do not explicitly authorize IRS employees to disclose a taxpayer’s
identification during the course of a criminal investigation.” Doc. 34 at 13. Such disclosures are
permissible, this Court held, only if made in connection with the employee’s official duties, and if
based on the facts and circumstances at the time of disclosure, they were “necessary in obtaining
information, which is not otherwise reasonably available.” Doc. 34 at 13; 26 U.S.C. § 6103(k)(6).
This Court noted that the Joint Committee Report supported this interpretation. The Court
highlighted language from the report stating that although the Joint Committee recommended that
IRS agents be required to identify themselves and state the nature of their investigation, “[s]pecial
agents should be especially mindful that disclosure of the taxpayer’s identity must be necessary to
obtain the information sought as required by section 6103(k)(6) [and that] [s]pecial agents should
pursue reasonable alternative avenues of questioning to avoid identifying the taxpayer whenever
possible.” Doc. 34 at 13 (citing Joint Committee Report at 211). The Court concluded that while
subsection (a)(3) of the revised Treasury Regulations makes clear that IRS agents have discretion
to identify themselves, their organizational affiliation, and the nature of their investigation,
whether or not the disclosure of the taxpayer’s identity (also considered “return information”) was
necessary under the facts and circumstances to obtain the information sought by Agent L’Heureux,
and whether Agent L’Heureux reasonably believed under the facts and circumstances that the
information sought was not otherwise reasonably available, were questions that would require the
Court to look beyond the pleadings. Doc. 34 at 13.
Although Defendant argued that 26 U.S.C. § 7609(a)(3) mandated that all summonses
issued by the IRS “identify the taxpayer to whom the summons relates or the other persons to
whom the records pertain,” Doc. 25 at 10, the Court noted in its Memorandum Opinion and Order
Denying Defendant’s Motion to Dismiss that section 7609(a)(3) applies only to those summonses
subject to § 7609’s notice requirements, Doc. 34 at 15. Specifically excepted from the notice
requirement are summonses issued by a criminal investigator in connection with an investigation
that are served on any person who is not a third-party recordkeeper as defined in section 7603(b).
26 U.S.C. § 7609(c)(2)(E). The Court concluded that it was unable to determine based on the
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pleadings whether § 7609(a)(3)’s mandate applied to all of the summonses at issue in this case
because Plaintiffs had only alleged that they were entitled to notice of summonses issued to thirdparty recordkeepers Citibank, Middleton Raines & Zapata, LLP, and Wells Fargo Bank. Doc. 34
at 15.
B. Summary Judgment Motion
i. Necessity of Disclosure
The Court now has before it in the summary judgment record copies of the summonses that
are at issue in this case and more fully understands the exact nature of the disclosures of return
information therein. On the first line of the summonses, in what is referred to as the “Statement
of Liability,” the summonses state that they are issued “In the Matter of Craig A. Williams or Craig
Arthur Williams,” and 13 of the 15 summonses also identify Craig Williams in the Statement of
Liability by listing his home address. Docs. 55-1-55-15.
As the Court has already discussed at length, subsection (a)(3) of the revised Treasury
Regulations make clear that an IRS employee has discretion to identify himself, his division, and
the nature of the investigation orally or in writing, including in summonses, when soliciting
information from third parties in the course of a criminal investigation. The Court finds that the
fact that Agent L’Heureux used the designation “Criminal Investigation” rather than the acronym
“CI” on the summonses to identify his division is of little significance in light of the fact that
subsection (a)(3) was enacted to clarify that the investigatory purposes exception permits
employees to identify not only their organizational affiliation, but also the criminal nature of their
investigation when making oral, written, or electronic contacts with third parties.
It is undisputed by the parties on summary judgment that the following summons recipients
are “third-party recordkeepers” within the meaning of section 7603(b): Middleton Raines &
Zapata, LLP; Allegiance Bank; Alliance Bernstein, LP; American Express; Morgan Stanley Smith
Barney, LLC; Bank of America, NA; Citibank NA; Comerica Bank; JP Morgan Chase Bank, NA;
Chase Bank USA NA; JP Morgan Securities, LLC, and Wells Fargo Bank NA. Docs. 53, ¶ 45;
59, ¶ 45. The Court concludes that the disclosure of the identity of Craig A. Williams, the taxpayer
to whom the summonses pertain, and the disclosures of the identities of the other Plaintiffs in
attachments to the summonses, are necessary to obtain the information sought because they are
specifically mandated by section 7609(a)(3). See 26 U.S.C. § 7609(a)(3) (“Any summons to which
12
this subsection applies . . . shall identify the taxpayer to whom the summons relates or the other
person to whom the records pertain and shall provide such other information as will enable the
person summoned to locate the records required under the summons.”).
As explained further below, the Court concludes that the disclosures of Craig Williams’
name in the Statement of Liability and of the other Plaintiffs’ names on the summons attachments
issued to Lochinvar Golf Club, The Clubs at Houston Oaks, J. Pacetti, Zadok Jewelers, and
Insgroup, Inc.—third parties who are not third-party recordkeepers within the meaning of §
7603(b)—were also necessary to obtain the information Agent L’Heureux sought. Defendant
argues on summary judgment, and this Court is in agreement, that the disclosures of these taxpayer
names were necessary in order to ensure that the summonses were legally enforceable and to
identify the parties in the attachments whose records were the subject of the summons. Doc. 54 at
8.
Pursuant to section 7602, the IRS is authorized to examine any books, papers, records, or
other data “[f]or the purpose of ascertaining the correctness of any return, making a return where
none has been made, determining the liability of any person for any internal revenue tax . . . or
collecting any such liability.” 26 U.S.C. § 7602. Certain judicial standards must be met in order
to enforce any administrative summons. These standards were set forth by the Supreme Court in
United States v. Powell, 379 U.S. 48 (1964). In contrast to the requirement for issuing a search
warrant, the Powell Court held that the government need not meet any standard of probable cause
in order to obtain enforcement of a section 7602 summons. Id. at 251. Instead, in order to obtain
judicial enforcement of a summons, the IRS must make a prima facie showing “that the
investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant
to the purpose, that the information sought is not already within the [IRS] Commissioner’s
possession, and that the administrative steps required by the Code have been followed.” Id. at 5758.
In determining whether an investigation has been conducted pursuant to a legitimate
purpose, courts have noted that section 7602 was not meant to permit the IRS to conduct a “fishing
expedition” into a person’s private affairs. See Bisceglia v. United States, 420 U.S. 141, 150-51
(1975). The Supreme Court has said that “by definition, the IRS is not engaged in a ‘fishing
expedition’ when it seeks information relevant to a legitimate investigation of a particular
13
taxpayer.” Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 321 (1985). However, the
Supreme Court held in United States v. Bisceglia, that IRS employees are authorized to issue John
Doe administrative summonses for the purpose of obtaining information from third parties
regarding taxpayers whose identities were unknown. 420 U.S. at 150. Subsequently, Congress
enacted section 7609(f) of the Internal Revenue Code to provide some safeguards so that “the IRS
could not use its summons powers to engage in ‘fishing expeditions’ that might unnecessarily
trample upon taxpayer privacy.” Tiffany Fine Arts, 469 U.S. at 320 (citing S.Rep. No. 94-938, at
373 (1976); H.R.Rep. No. 94-658, at 311 (1975)). Under section 7609(f), the IRS may serve a
John Doe summons (a summons that does not identify the taxpayer with respect to whose liability
the summons is issued) upon a third party, but only if it demonstrates in an ex parte court
proceeding that:
(1) The summons relates to the investigation of a particular person or ascertainable
group or class of persons, (2) there is a reasonable basis for believing that such
person or group or class of persons may fail or may have failed to comply with
any provision of any internal revenue law; and (3) the information sought to be
obtained from the examination of the records or testimony (and the identity of
the person or persons with respect to whose liability the summons is issued) is
not readily available from other sources.
26 U.S.C. § 7609(f). “In other words, when the government seeks information about an unnamed
person from a third party, it must show the district court that it has some reason to believe that this
unnamed person violated or may violate the law.” Byers v. I.R.S., 963 F.3d 548, 553 (6th Cir.
2020). “What section 7609(f) does is to provide some guarantee that the information that the IRS
seeks through a summons is relevant to a legitimate investigation, albeit that of an unknown
taxpayer.” Tiffany Fine Arts, 469 U.S. at 321.
In this case, Agent L’Heureux knew the identity of the taxpayer under investigation. The
Court concludes that based on the foregoing, Agent L’Heureux reasonably believed it was
necessary to disclose the identity of Craig Williams in the Statement of Liability in order to prove
to a court, in the case of enforcement, that the summons was relevant to a legitimate investigation.
In addition, the Court concludes that it was necessary to disclose the identities of the other
Plaintiffs in the attachments to summonses. Agent L’Heureux would be unable to conduct his
investigation if he was unable to identify the persons or entities whose records he summoned.
ii. Information not otherwise available
14
In order for the disclosure of return information to fall within the investigatory purposes
exception, the disclosure must not only be necessary to obtain the information sought, but the
information sought must also not otherwise be reasonably available. See 26 U.S.C. § 6103(k)(6)
(stating that IRS employees “may, in connection with his official duties . . . disclose return
information to the extent that such disclosure is necessary in obtaining information, which is not
otherwise reasonably available. . .”). The Treasury Regulations further define “information not
otherwise reasonably available” as:
information that an internal revenue [] employee reasonably believes, under the
facts and circumstances, at the time of a disclosure, cannot be obtained in a
sufficiently accurate or probative form, or in a timely manner, and without
impairing the proper performance of the official duties described by this section
without making the disclosure.
26 C.F.R. § 301.6103(k)(6)-1(c)(3).
In his declaration, Agent L’Heureux stated that the focus of his investigation into whether
Craig Williams committed violations of the Internal Revenue Code was on whether Craig Williams
had overstated his business expenses, resulting in the underpayment of personal income taxes.
Doc. 55, ¶¶ 5, 6. Agent L’Heureux stated in his declarations that he determined that the “specific
item” method of proof was best suited to his investigation and that this method of proof would
require him to “identif[y] the sources and amounts of reported income and expenses shown on the
tax return by reconciling them to the [Craig Williams’s] records.” Doc. 62, ¶ 7. Agent L’Heureux
stated that he needed to “determine[] the correct amounts of income, expenses, and credits using
[Craig Williams’s] records, bank records, investment account records, and/or contacts with third
parties and compare[] the correct amounts to those reported on the tax return,” which process
would reveal any items of unreported income. Doc. 62, ¶ 7.
The revised Treasury Regulations make clear that IRS employees are “not require[d] . . .
[to] seek information from a taxpayer or authorized representative prior to contacting a third party
witness in an investigation . . . [and that an] employee may make a disclosure to a third party
witness to corroborate information provided by a taxpayer.” 26 C.F.R. § 301.6103(k)(6)-1(c)(3).
The Court finds that there is no dispute that under the facts and circumstances of this case, the
information Agent L’Heureux sought—the verification of sources and amounts of income and
15
expenses reported on a tax return—was information that was not otherwise reasonably available
without contacting third parties.
The Court may not second-guess “the appropriateness of the means or methods chosen to
conduct the investigation.” See 26 C.F.R. § 301.6103(k)(6)-1. In this particular case, Agent
L’Heureux elected to verify the sources and amounts of reported personal and business-related
income and expenses and summoned the records of third parties to aid him in doing so. As the
Court has already concluded, disclosures of taxpayer names on the summonses, and the fact that
the summonses were issued by the Criminal Investigation Division of the IRS, were “necessary”
under the facts and circumstances to ensure to that the summonses were legally enforceable and to
obtain information that was not otherwise reasonably available (verification of income and
expenses).
II.
Disclosures of taxpayer address
Of the 15 administrative summonses at issue in this case, 13 of them had the mailing
address of Craig A. Williams on the face of the administrative summons: “In the Matter of Craig
A. Williams, mailing address.” Docs. 55-1-55-15. Plaintiffs argue that the disclosures of Craig
Williams’s home address violated section 6103.
As stated above, in order to obtain judicial enforcement of a summons, the IRS must make
a prima facie showing “that the investigation will be conducted pursuant to a legitimate purpose,
that the inquiry may be relevant to the purpose, that the information sought is not already within
the [IRS] Commissioner’s possession, and that the administrative steps required by the Code have
been followed.” Powell, 379 U.S. at 57-58. The Court concludes that identifying not only the
name, but also the address, of the taxpayer with respect to whose liability the summons relates is
necessary under the facts of this case in order to demonstrate to the court in an enforcement
proceeding that the information sought is relevant to a “legitimate investigation of a particular
taxpayer.” Tiffany Fine Arts, 469 U.S. at 321. The name “Craig Williams” is not unique and a
cursory search of the Internet shows that there are numerous other Craig Williamses residing in
the Houston area. By detailing the name and address of Craig A. Williams in the Statement of
Liability on the summonses in this case, the IRS is able to demonstrate that the information
requested relates to an ongoing investigation of an identifiable person.
16
III.
Disclosures of tax identification numbers
A. Tax identification numbers already in possession of summons recipients
As the Court concluded in its Memorandum Opinion and Order Denying Plaintiffs’ Motion
to Dismiss, in order to prove that a “disclosure” of a tax identification number was made to a
summons recipient, Plaintiffs must prove that the third party recipients of the Summonses did not
already have knowledge of Plaintiffs’ tax identification numbers. Doc. 34 at 18. The Court
concluded that this interpretation most closely aligned with the definition of “disclosure” provided
in the Internal Revenue Code which is “the making known to any person in any manner whatever
a return or return information.” Doc. 34 at 17; 26 U.S.C. § 6103(b)(8).
Having granted WDC Commercial Real Estate, Inc.’s Motion to Withdraw Admission, it
is undisputed by the parties that in 50 instances, the summons recipients were already aware of
Plaintiffs’ tax identification numbers prior to service of the summonses. Because the listing of
these 50 taxpayer identification numbers do not constitute “disclosures” within the meaning of the
Code, the Court concludes that they do not violate section 6103.
B. Disclosures of tax identification numbers to financial institutions
Agent L’Heureux disclosed Plaintiffs’ tax identification numbers in attachments to
summonses served upon each of the following financial institutions: Middleton Raines & Zapata,
LLP; Allegiance Bank; American Express; Morgan Stanley Smith Barney, LLC; Bank of America,
NA; Citibank NA; Comerica Bank; JP Morgan Chase Bank, NA, and Wells Fargo Bank NA. Doc.
59-1. In the attachment to the summons served upon Alliance Bernstein, Agent L’Heureux
disclosed the taxpayer identification numbers of all Plaintiffs but for Williams Development &
Construction, Inc. Doc. 59-1. It is undisputed that all of the financial institutions mentioned above
are third-party recordkeepers within the meaning of 26 U.S.C. § 7603(b). Doc. 53, ¶ 45; 59, ¶ 45.
Plaintiffs argue that disclosures of taxpayer identification numbers on attachments to
summonses served upon these third-party record keepers did not fall within the investigatory
purposes exception because the disclosures were unnecessary to obtain the financial records Agent
L’Heureux sought. Doc. 58 at 15. Plaintiffs argue that because they had already provided Agent
L’Heureux their account numbers with many of the summons recipients, Agent L’Heureux could
17
have used the account numbers rather than tax identification numbers to identify the information
sought from those third parties. Doc. 58 at 16.
Defendant argues that disclosure of taxpayer identification numbers on attachments to the
summonses was “reasonably necessary to ensure collection of complete and accurate records.”3
Doc. 61 at 9. In his declaration, Agent L’Heureux stated that at the outset of the investigation, it
was unknown which of Craig Williams’ business entities were involved in potential violations of
the United States Code and how many accounts each plaintiff may have had at the various financial
institutions. Doc. 62, ¶¶ 12, 14. Agent L’Heureux stated that although Plaintiffs had provided
him with some account numbers, it was necessary to verify that the information that he had
received from Plaintiffs was complete, and that there were no other accounts and related financial
records that Plaintiffs had not disclosed. See Doc. 62, ¶¶ 8, 14.
The revised Treasury Regulations make clear that an IRS employee may contact third
parties to corroborate information provided by a taxpayer. See 26 C.F.R. § 301.6103(k)(6)-1(c)(3)
(“[A]n internal revenue . . . employee may make a disclosure to a third party witness to corroborate
information provided by a taxpayer.”). An example in the revised Treasury Regulations provides
that a revenue agent may contact a taxpayer’s suppliers in order to corroborate invoices provided
by a taxpayer. The example states that such disclosures are considered necessary to obtain
information not otherwise reasonably available (corroboration of invoices) because suppliers
would be the only source available for corroboration of this information.
26 C.F.R. §
301.6103(k)(6)-1(d). Based on the revised Treasury Regulations, the Court concludes that it was
necessary under the facts and circumstances of the case for Agent L’Heureux to seek financial
records from these third-party recordkeepers in order to ensure the collection of complete and
accurate records.
3
In his declaration, Agent L’Heureux stated that the focus of his investigation was on whether the overstatement of
Mr. Williams’s business expenses resulted in the underpayment of personal income taxes. Doc. 55, ¶ 6. Agent
L’Heureux stated in his declarations that he determined that the “specific item” method of proof was best suited to
this particular investigation which would require him to “identif[y] the sources and amounts of reported income and
expenses shown on the tax return by reconciling them to the [Craig Williams’s] records.” Doc. 62, ¶ 7 (citing Internal
Revenue Manual 9.5.9.4.3.1(1). Agent L’Heureux would also need to “determine[] the correct amounts of income,
expenses, and credits using [Craig Williams’s] records, bank records, investment account records, and/or contacts
with third parties and compare[] the correct amounts to those reported on the tax return” which would reveal any items
of unreported income. Doc. 62, ¶ 7 (citing Internal Revenue Manual 9.5.9.4.3.1(1)).
18
However, that is not the end of the Court’s inquiry. Although it is undisputed that
corroboration of information provided by Plaintiffs was necessary under the facts and
circumstances of the case, the Government is entitled to summary judgment on this issue only if
the Court determines that the disclosures of tax identification numbers were “necessary” to obtain
this information. See 26 U.S.C. § 6103(k)(6) (stating that IRS employees are authorized to disclose
return information in connection with official duties relating to a criminal tax investigation “to the
extent that such disclosure is necessary in obtaining information, which is not otherwise
reasonably available.”) (emphasis added). In order to conclude as a matter of law that the
disclosure of tax identification numbers to the financial institutions in this case were necessary to
obtain the records sought by Agent L’Heureux, the Court must find that no question of fact exists
as to whether Agent L’Heureux reasonably believed, “based on the facts and circumstances, at the
time of the disclosure” that the disclosures were necessary to obtain the financial records he sought
from these third parties. A “necessary” disclosure is defined in the Treasury Regulations as being
not essential or indispensable, but rather as being “appropriate and helpful in obtaining the
information sought.” 26 C.F.R. § 301.6103(k)(6)-1(c)(1).
Plaintiffs contend that summary judgment on this issue is improper because the Agent
L’Heureux’s opinion as to the necessity of these disclosures to financial institutions is conclusory.
This Court disagrees. Agent L’Heureux stated in his declaration that third-party recordkeepers
typically maintain identifying information about their customers, including tax identification
numbers, and that disclosure of Plaintiffs’ tax identification numbers “was necessary to assist the
third-party record keepers in correctly identifying the individuals or entities to whom the
summoned records related.” Doc. 55, ¶¶ 17, 20. The Court finds that Agent L’Heureux’s
declaration contains sufficient factual allegations establishing that the disclosures of Plaintiffs’ tax
identification numbers were appropriate and helpful, and therefore “necessary” for the financial
institutions to identify any accounts and associated records that may be held by the named
Plaintiffs. See Flannery v. Trans World Airlines, Inc., 160 F.3d 425, 428 (8th Cir. 1998) (finding
the plaintiff’s affidavit in support of her retaliation claim to be conclusory because it was “devoid
of any specific factual allegations that, if credited by a trial jury, could support a finding of causal
connection.”); see also Stewart v. United States, Civ. No. 94-241, 1995 WL 367938, at *4 (S.D.
Ohio Mar. 27, 1995) (concluding that because financial institutions use social security numbers to
19
identify accounts, it was necessary to disclose the plaintiff’s social security number to the thirdparty recordkeepers in order to identify with certainty the plaintiff’s accounts).
Plaintiffs also contend that summary judgment on this issue is improper because the
Agent’s opinion is contradicted by evidence in the record, specifically section 25.5.2.2.1.1.(2) of
the Internal Revenue Manual which provides that:
When a third-party recordkeeper receives a summons, they often request the
taxpayer’s TIN to assist them in correctly identifying the taxpayer to whom the
summoned records relate. In these situations, the Service may, when necessary,
identify the taxpayer’s [taxpayer identification number] when the summoned third
party needs that information to identify the correct summoned records. The Service
could provide the taxpayer's TIN to the third party in a letter or in a telephone call
as indicated in IRM 25.5.2.4(5) Description of Information Requested; this would
avoid disclosing information to anyone entitled to notice under IRC 7609(a).
Internal Revenue Manual, 25.5.2.2.1.1(2) (Dec. 9, 2011) (emphasis in original). Doc. 58 at 8, 1011. Contrary to the argument put forth by the Plaintiffs, the Court does not find that section
25.5.2.2.1.1(2) of the Internal Revenue Manual contradicts or discredits Agent L’Heureux’s
statements in any way, thus rendering them inadmissible. The Court looks to Scott v. Harris, 550
U.S. 372 (2007) to provide further context on this issue. In Scott v. Harris, a county deputy was
sued in his individual capacity for injuries that resulted from a vehicle crash when the deputy
applied his push bumper to the rear of the plaintiff’s vehicle during a high-speed chase. Id. at 375.
The deputy filed a motion for summary judgment based on an assertion of qualified immunity
which the district court denied on the basis that there were material facts at issue which required
submission to a jury. Id. at 376. On interlocutory appeal, the Eleventh Circuit affirmed the district
court’s decision to allow the excessive force claim to proceed to trial. Id.
On appeal, the Supreme Court in Scott v. Harris acknowledged that in qualified immunity
cases, a court on summary judgment usually must adopt, as the Court of Appeals did in that case,
the plaintiff’s version of the facts. Id. at 378 (stating that are on summary judgment, courts are
generally required to view the facts and draw reasonable inferences “in the light most favorable to
the nonmoving party”). However, the Court held that the Court of Appeals had erred in doing so
because a videotape capturing the events in question, which was uncontested by the parties, clearly
contradicted the version of the story told by the plaintiff and adopted by the Court of Appeals. Id.
at 378. The Court stated that “when opposing parties tell two different stories, one of which is
20
blatantly contradicted by the record, so that no reasonable jury could believe it, a court should not
adopt that version of the facts for purposes of ruling on a motion for summary judgment.” Id. The
Supreme Court found that the plaintiff’s version of events was “so utterly discredited by the record
that no reasonably jury could have believed him.” Id.
The Court finds that there is nothing in 25.5.2.2.1.1(2) of the Internal Revenue Manual that
discredits Agent L’Heureux’s statements of fact supporting his belief that disclosures of taxpayer
identification numbers to the third-party recordkeepers in this case were reasonably necessary to
obtain the information sought. Furthermore, the Court does not find that section 25.5.2.2.1.1(2)
of the Internal Revenue Manual creates a factual dispute as to whether Agent L’Heureux
reasonably believed the disclosures were “necessary” to obtain the information. Plaintiffs urge the
Court to find that the disclosures of taxpayer identification numbers to third-party recordkeepers
were unnecessary because these summons recipients did not first request the numbers to correctly
identify the summoned records. Adopting the position advocated by Plaintiffs—that the disclosure
of tax identification numbers to third-party recordkeepers may only be made if the institution needs
and requests such information to correctly identify the summoned records—runs contrary to the
Treasury Regulations’ definition of “necessary” disclosures simply as being helpful and
appropriate in obtaining the information sought.
Accordingly, the Court concludes that the disclosures of taxpayer identification numbers
to third-party recordkeepers in this case does not violate section 6103 because those disclosures in
this case fall within the investigatory purposes exception.
C. Disclosures of tax identification numbers to jewelers
a. Overview
Agent L’Heureux served summonses upon two different jewelers in this case—Zadok
Jewelers and J. Pacetti. In an attachment to the summons served upon Zadok Jewelers, Agent
L’Heureux included the tax identification numbers of all Plaintiffs. Doc. 55-7. In an attachment
to the summons served upon J. Pacetti, Agent L’Heureux listed the tax identification numbers for
Craig and Lee Williams only. Doc. 55-14.
Plaintiffs argue that the disclosures of Plaintiffs’ tax identification numbers in the
summonses to the jewelers do not fall within the investigatory purposes exception. Specifically,
21
Plaintiffs argue that such disclosures were unnecessary to obtain Plaintiffs’ records from the
jewelers because customers generally do not share their social security numbers with their
jewelers. Doc. 58 at 14-15.
b. Analysis
The Treasury Regulations define a “disclosure of return information to the extent
necessary” as “a disclosure of return information which an [IRS] . . . employee, based on the facts
and circumstances, at the time of the disclosure, reasonably believes is necessary to obtain
information to perform properly [its] official duties.” 26 C.F.R. § 301.6103(k)(6)-1(c)(1). The
Treasury Regulations define a “necessary” disclosure not as “essential or indispensable,” but rather
as “appropriate and helpful in obtaining in the information sought.” 26 C.F.R. § 301.6103(k)(6)1(c)(1).
The Government contends that there is no evidence in the record disputing Agent
L’Heureux’s assertion that the disclosure of tax identification numbers to the jewelers was
appropriate and helpful (and therefore “necessary”) in obtaining the records summoned. Doc. 61
at 1-2. In his supplemental declaration, Agent L’Heureux stated that based upon his experience,
jewelry stores frequently offer financing for in-store customers and that any such credit account is
“likely” to be associated with the customer’s taxpayer identification number. Doc. 62, ¶ 15. Agent
L’Heureux stated that he accordingly concluded that the jewelers could use Plaintiffs’ taxpayer
identification numbers to “identify, review, and produce complete and accurate responsive
records.” Doc. 62, ¶ 15.
The investigatory purposes exception should not “be broadly interpreted to evade the
overarching confidentiality provisions of section 6103(k)(6).” Jones v. United States, 954 F.Supp.
191, 193 (D. Neb. 1997), aff’d, 207 F.3d 508 (8th Cir. 2000). In analyzing whether the disclosure
of taxpayer identification numbers to the jewelers in this case were necessary, the Court finds
illustrative the following examples from the Treasury Regulations. These examples illustrate the
facts and circumstances in which the disclosure of return information by an IRS employee is
considered necessary to obtain information relating to the investigation or examination. In the first
example,
A revenue agent contacts a taxpayer's customer regarding the customer's purchases
made from the taxpayer during the year under investigation. The revenue agent is
22
able to obtain the purchase information only by disclosing the taxpayer's identity
and the fact of the investigation. Depending on the facts and circumstances known
to the revenue agent at the time of the disclosure, such as the way the customer
maintains his records, it also may be necessary for the revenue agent to inform the
customer of the date of the purchases and the types of merchandise involved for the
customer to find the purchase information.
26 C.F.R. § 301.6103(k)(6)(c)(1). What the Court finds notable from the example above is that it
does not provide that an agent may disclose any and all information that may possibly be helpful
to the customer to locate the purchase information, but that the disclosure must be appropriate
under “the facts and circumstances known to the revenue agent at the time, such as the way the
customer maintains his records.” See id. Another example detailed in the Treasury Regulations
provides as follows:
A revenue agent is conducting an examination of a taxpayer. The taxpayer has been
very cooperative and has supplied copies of invoices as requested. Some of the
taxpayer’s invoices show purchases that seem excessive in comparison to the size
of the taxpayer’s business. The revenue agent contacts the taxpayer’s suppliers for
the purpose of corroborating the invoices the taxpayer provided. In contacting the
suppliers, the revenue agent discloses the taxpayer’s name, the dates of purchase
and the type of merchandise at issue. These disclosures are permissible under
section 6103(k)(6) because, under the facts and circumstances known to the
revenue agent at the time of the disclosures, the disclosures were necessary to
obtain information (corroboration of invoices) not otherwise reasonably available
because suppliers would be the only source available for corroboration of this
information.
This second example makes clear that the disclosures of name, dates of purchase, and type of
merchandise at issue were permissible under § 6103(k)(6) based on the facts and circumstances
known to the agent at the time. As with the first example, there is no suggestion in this second
example that it is permissible for an agent to disclose any return information that may possibly be
helpful in identifying or locating the records sought.
It is clear from Agent L’Heureux’s declaration that he did not know which Plaintiffs had
made purchases since he disclosed the tax identification numbers of all Plaintiffs in the summons
to Zadok Jewelers, or whether any of the Plaintiffs had lines of credit at either of the jewelers at
the time of disclosures. Agent L’Heureux did not specify any due diligence he had conducted on
23
whether either of the jewelers advertised offering lines of credit to their customers,4 and if they
did, what identifying information the jewelers would need to identify and locate such records.
Agent L’Heureux stated only that if a customer happens to have a credit account with a jeweler, it
is “likely” to be associated with the customer’s tax identification number.
The Court finds that the facts and circumstances surrounding the disclosures of taxpayer
identification numbers to J. Pacetti and Zadok Jewelers to differ from those surrounding the
disclosures of such information to the financial institutions in this case. In his declaration, Agent
L’Heureux established that financial institutions maintain the taxpayer identification numbers of
their account holders and that these financial institutions are able to use this information to identify
any accounts and associated records that may have been held by any of the named Plaintiffs. By
contrast, Agent L’Heureux’s declaration establishes that jewelers typically do not maintain the
taxpayer identification numbers of their customers unless such customer happens to have a credit
account. Even then, Agent L’Heureux’s declaration fails to establish that jewelers generally, or
that J. Pacetti and Zadok Jewelers, in particular, use tax identification numbers to identify and
locate records relating to their customers. If an agent need only assert that the disclosure of tax
identification numbers could possibly be helpful in identifying records relating to any store lines
of credit or other records that might possibly exist, the agent would essentially have carte blanche
to disclose taxpayer identification numbers to any retailer, even if the agent has no reason to
believe that (a) the retailer offers store lines of credit to its customers or has offered a store line of
credit to the taxpayer whose records are summoned, or (b) is able to use this identifying
information to locate such records. Adopting such a broad interpretation of the investigatory
purposes exception would result in the exception swallowing the general rule prohibiting
unauthorized disclosures of return information.
Based on the foregoing, the Court concludes that Defendant has not established as a matter
of law that he reasonably believed based on the facts and circumstances at the time of the disclosure
that the disclosures of Plaintiffs’ tax identification numbers to Zadok Jewelers and J. Pacetti were
necessary to obtain the records summoned.
4
An email printout dated August 18, 2020, from the website of Zadok Jewelers that was attached as an exhibit to the
supplemental briefing ordered by the Court on August 10, 2020, regarding the good faith exception, Doc. 70-1, does
not demonstrate that Agent L’Heureux’s belief as to the necessity of the disclosures at the time was reasonable and
there is no evidence in the record that J. Pacetti offers lines of credit to its customers.
24
D. Disclosures of tax identification numbers to Lochinvar Golf Club and The
Clubs at Houston Oaks
Agent L’Heureux issued summonses to Lochinvar Golf Club and The Clubs at Houston
Oaks. In an attachment to the summons served upon The Clubs at Houston Oaks, Agent
L’Heureux listed the tax identification numbers of all the Plaintiffs. Doc. 55-12. In an attachment
to the summons issued to Lochinvar Golf Club, Agent L’Heureux included the tax identification
numbers for Craig Williams and Lee Williams only. Doc. 55-6.
Prior to the disclosures at issue in this case, Lochinvar Golf Club already possessed the tax
identification number of Craig Williams and The Clubs at Houston Oaks already possessed the tax
identification numbers of both Craig and Lee Williams. Doc. 69-1. Accordingly, as discussed
above, the listing of these tax identification numbers does not constitute a “disclosure” within the
meaning of section 6103.
The Court must now evaluate whether the disclosures of tax
identification numbers of Lee Williams to Lochinvar Golf Club and of the Plaintiffs other than
Craig and Lee Williams to The Clubs at Houston Oaks—information not already in the possession
of the summons recipients—violates section 6103.
In his supplemental declaration submitted in support of Defendant’s Motion for Summary
Judgment, Agent L’Heureux stated that based on his training and experience, he understood that
golf or country club memberships sometimes have a cash value option that can be passed on to
children in the event of death. Doc. 62, ¶ 16. In such situations, Agent L’Heureux stated that “the
club membership is likely to be associated with a unique identifier such as a tax identification
number – in addition to the . . . membership holders first and last name.” Doc. 62, ¶ 16. Agent
L’Heureux stated that he concluded that the Plaintiffs’ taxpayer identification numbers could be
used to “identify, review, and produce complete and accurate responsive records.” Doc. 62, ¶ 16.
As with the disclosures of tax identification numbers to the jewelers in this case, the Court
finds that Defendant has not established that as a matter of law that Agent L’Heureux reasonably
believed, based on the facts and circumstances at the time of the disclosure, that the disclosure of
the tax identification numbers of Lee Williams to Lochinvar Golf Club and of Plaintiffs (other than
Craig and Lee Williams) to The Clubs at Houston Oaks were necessary to obtain the records
sought. While the record demonstrates that financial institutions may use the tax identification
numbers to identify their accountholders, Agent L’Heureux’s declaration in no way suggests that
25
golf or country clubs typically use taxpayer identification numbers to identify their members. In
his supplemental declaration, Agent L’Heureux stated that “in some instances,” golf or country
club memberships have a cash value option that can be passed on to children in the event of death
and that in such situations, the club membership is likely to be associated with the member’s
taxpayer identification number. Since Agent L’Heureux disclosed the tax identification number
of Lee Williams to Lochinvar Golf Club and the tax identification numbers of all of the Plaintiffs
to The Clubs at Houston Oaks, it is clear that Agent L’Heureux did not know what persons or
entities held a membership, let alone whether such memberships may have a cash value option.
The Court does not find that such circumstances demonstrate that the disclosures were appropriate
and helpful in obtaining the records Agent L’Heureux sought, only that such disclosure may
possibly be helpful in obtaining the records summoned. If the Court was to interpret the
investigatory purposes exception to permit disclosures of tax identification numbers to golf and
country clubs in the event that the named taxpayer holds a membership, and in the event that such
membership has a cash value option,5 an Agent would have carte blanche to disclose taxpayer
identification numbers to such clubs in every instance. Such an interpretation seems particularly
unnecessary in light of the fact that Agent L’Heureux stated that memberships, and cash value
options associated with those memberships, are associated with a club member’s first and last
name. Doc. 62, ¶ 16.
Based on the foregoing, the Court concludes that Defendant has not established as a matter
of law that he reasonably believed, based on the facts and circumstances at the time of the
disclosure, that the disclosures of Plaintiffs’ tax identification numbers to Lochinvar Golf Club
and The Clubs at Houston Oaks were necessary to obtain the records summoned.
IV.
Good Faith Exception
As noted above, the Court concludes that Defendant has not established as a matter of law
that the disclosures of tax identification numbers to J. Pacetti, Zadok Jewelers, Lochinvar Golf
Club and The Clubs at Houston Oaks were permissible under the investigatory purposes exception.
5
Agent L’Heureux stated in this declaration that in some instances, insurance policies and golf or country club
membership have a cash value option that, in the event of death, can be passed on to children. The Court notes that
Agent L’Heureux’s declaration fails to explain why a corporate membership such as that which may have been held
by Williams Development Construction, Inc. or WDC Commercial Real Estate, Inc.—entities whose tax identification
numbers were disclosed to The Clubs as Houston Oaks—would have such a cash value option associated with it.
26
The next question the Court must examine is whether the disclosures fall within the “good faith”
exception to liability. Under section 7431(b), “[n]o liability shall arise under this section with
respect to any . . . disclosure which results from a good faith, but erroneous, interpretation of
section 6103.” 26 U.S.C. § 7431(b)(1). The good faith defense to a section 6103 violation “is
analogous to the immunity defense provided to government officials performing discretionary
functions.” Jones v. United States, 97 F.3d 1121, 1124 (8th Cir. 1996) (citing Harlow v.
Fitzgerald, 457 U.S. 800, 818 (1982)). “Under the good-faith defense, a government official may
avoid liability for violating a constitutional or statutory right where that right is not clearly
established such that a reasonable person would have known that his or her conduct violated the
right.” Snider v. United States, 468 F.3d 500, 507 (8th Cir. 2006). Thus, the disclosures of tax
identification numbers to Lochinvar Golf Club, The Clubs at Houston Oaks, J. Pacetti, and Zadok
Jewelers will fall within the “good faith” exception to liability if a reasonable Criminal
Investigation agent “would not know that the challenged conduct was illegal.” See Johnson-El v.
Schoemehl, 878 F.2d 1043, 1047 (8th Cir. 1989). The burden of pleading and proving good faith
under section 7431 rests with the government, not the complaining party. Jones, 97 F.3d at 1124.
Although, in this Court’s view, it seems incongruous with the qualified immunity defense
afforded government officials performing discretionary functions, the Eighth Circuit Court of
Appeals held in Diamond that “[b]ecause section 7431 authorizes causes of action against the
government for a violation of section 6103, the good faith exception in section 7431(b) applies to
the IRS’ interpretation of section 6103.” 944 F.2d at 435. The court noted that this was particularly
true because in that case, the agent’s conduct accorded with specific directions contained in the
Internal Revenue Manual instructing agents mailing circular letters to include the title “Special
Agent, Criminal Investigation Division” in the signature block. Id. at 435-36. Although the court
in Diamond found that the IRS had failed to demonstrate that such disclosures were necessary, the
court concluded that the IRS’s instructions were made in good faith because elsewhere in the
manual, the IRS had warned its agents against committing unnecessary disclosures and
emphasized unwarranted embarrassment to the taxpayer and other damaging collateral
consequences that may result from the nonjudicious use of circular letters. Id. at 436-37.
Unlike the agent’s disclosures in Diamond, there is no IRS policy that explicitly authorizes
Agent L’Heureux’s disclosures in this case. While the Internal Revenue Manual provides that
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agents may disclose tax identification numbers to third-party recordkeepers when the third party
requests it and it is necessary for them to correctly identify the summoned records, the Manual is
silent as to disclosures of tax identification numbers to non-third-party recordkeepers such as the
golf and country clubs, and the jewelers in this case. The Internal Revenue Manual simply instructs
agents that under the investigatory purposes exception, IRS employees may disclose return
information if the employee reasonably believes, based on the facts and circumstances at the time
of the disclosure, the disclosure is necessary to obtain information to properly perform the
employee’s official duties. Internal Revenue Manual 11.3.21.1.4. The Manual further provides
that “[d]isclosures of return information in investigative situations may be made only if the
information cannot otherwise be reasonably obtained in accurate and sufficiently probative form,
or in a timely manner, without impairing the proper performance of official duties.” Internal
Revenue Manual 11.3.21.1.4.
In Diamond, the court said that although the good faith exception in section 7431(b)
typically applies to the IRS’ interpretation of section 6103, the court stated that there may be
situations where the good faith defense will apply to the individual agent’s, and not the IRS’s
interpretation of section 6103. Diamond, 944 F.2d at 435 n.7. “Such a situation might arise where
the IRS guidelines comply with section 6103 and the Secretary of Treasury’s regulations, but the
agent acting pursuant to these laws misunderstands or misinterprets not only the IRS internal
guidelines but the general statutory and regulatory law as well.” Id.
Unlike in Diamond, the IRS has not given any specific guidance to IRS agents regarding
the specific disclosures made by Agent L’Heureux in this case. The Internal Revenue Manual
does not specifically discuss disclosures of taxpayer identification numbers to non-third party
recordkeepers beyond reiterating the general statutory and regulatory law governing the good faith
exception.
Accordingly, it is Agent L’Heureux’s, rather than, as in Diamond, the IRS’s
interpretation of section 6103(k)(6) that will be the subject of this Court’s good faith analysis. See
also Jones v. United States, 207 F.3d 508, 511 (8th Cir. 2000) (“With respect to liability, the proper
focus is arguably on what an objectively reasonable agent could have thought about the legality of
his acts had he in fact known clearly established law, whether or not he acted to discover what it
was.”); Snider v. United States, 468 F.3d 500, 507 (8th Cir. 2006) (“Under the good faith defense,
a government official may avoid liability for violating a constitutional or statutory right where that
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right is not clearly established such that a reasonable person would have known that his or her
conduct violated the right.”).
In order to determine whether Agent L’Heureux’s actions, although unlawful, were made
based upon a good faith interpretation of section 6103, the Court must look to whether “that right
is [ ] clearly established such that a reasonable person would have known that his or her conduct
violated the right.” Snider, 468 F.3d at 507. A right is considered to be “clearly established” if,
The contours of the right . . . [are] sufficiently clear that a reasonable official would
understand that what he is doing violates that right. This is not to say that an official
action is protected by qualified immunity unless the very action in question has
previously been held unlawful; but it is to say that in light of pre-existing law the
lawfulness must be apparent.
Anderson v. Creighton, 483 U.S. 635, 640 (1987).
Section 6103(k)(6) permits disclosures of return information when an IRS employee
reasonably believes, based on facts and circumstances existing at the time of disclosure, that such
disclosure “is” appropriate and helpful (and therefore “necessary”) to obtain the information
sought. Here, Agent L’Heureux did not point to existing facts and circumstances that necessitated
the disclosures of tax identification numbers to non-third-party recordkeepers. Instead, Agent
L’Heureux cited to hypothetical facts and circumstances that might necessitate the disclosure of
tax identification numbers to these third parties. For example, Agent L’Heureux stated that if a
Plaintiff was a customer of one of the jewelers in this case, and if such customer had a credit
account, the customer’s tax identification number may be associated with the credit
account. Agent L’Heureux stated that under such hypothetical circumstances, the disclosure of
the customer’s tax identification number may be helpful in obtaining information relating to the
customer’s credit account. However, Agent L’Heureux did not provide any facts as to how
jewelers or other retailers typically maintain their records, or how J. Pacetti or Zadok Jewelers did
so in this case, and thus failed to demonstrate, even under these hypothetical circumstances, that
the disclosure would be helpful in obtaining the records sought. The Court does not know what
the agent actually considered, as opposed to the hypotheticals, before making the
disclosures. There is no suggestion in the Treasury Regulations, caselaw, or elsewhere that it is
permissible for an agent to disclose, as the record shows that Agent L’Heureux did here, return
information that might possibly be helpful in locating information under hypothetical
circumstances such as these. This being the summary judgment stage, and on the basis of the
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record before the Court, the Court cannot say as a matter of law that a reasonable criminal
investigation agent “would not know that the disclosures in this case were [unlawful],” and
accordingly denies Defendant’s Motion for Summary Judgment on the good faith exception.
Accordingly, it is hereby ORDERED that:
1. WDC Commercial Real Estate, Inc.’s Motion to Withdraw Admission, Doc. 57, is
GRANTED; and
2. Defendant’s Motion for Summary Judgment, Doc. 50 is GRANTED IN PART AND
DENIED IN PART as follows:
a. GRANTED as to Defendant’s disclosures of Plaintiffs’ identities and criminal
nature of investigation; and
b. GRANTED as to Defendant’s disclosures of Craig Williams’s home address;
c. GRANTED as to Defendant’s disclosures of tax identification numbers to thirdparty recordkeepers; and
d. DENIED as to Defendant’s disclosures of tax identification numbers to
Lochinvar Golf Club, The Clubs at Houston Oaks, J. Pacetti Jewelers, and
Zadok Jewelers.
Dated this 8th day of October, 2020.
BY THE COURT:
ATTEST:
MATTHEW W. THELEN, CLERK
________________________________
Lawrence L. Piersol
United States District Judge
______________________________
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