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May 5, 2014
Did Ways and Means' EO Data Dump Break the Law?
by David van den Berg

Full Text Published by Tax Analysts®

Karl Rove and Miss America have something in common: Organizations affiliated with each of them had their confidential tax information made public last month by the House Ways and Means Committee.
What's more, there's probably nothing those groups -- or more than a dozen others in the same boat -- can do about it.

Ways and Means staff maintain that the committee acted within its rights when it posted the organizations' names and details online. But several practitioners and scholars who spoke with Tax Analysts were skeptical of those assertions. Some said the committee may have broken the law.

The mass disclosure happened April 9, when Ways and Means voted along party lines to refer former IRS official Lois Lerner to the Justice Department for criminal investigation. The committee accused Lerner, former exempt organizations director in the IRS Tax-Exempt and Government Entities Division and the central figure in the Service's EO scandal that began last May, of depriving conservative groups of their constitutional rights, impeding official investigations, and putting confidential taxpayer information at risk.

Ways and Means Chair Dave Camp, R-Mich., chose to submit that referral to Attorney General Eric Holder by letter, which the committee posted online. The letter included more than 80 pages of exhibits -- mostly e-mails between Lerner and her IRS colleagues discussing how to deal with rising numbers of political nonprofits, particularly conservative ones.

But among those messages were three tables listing organizations that had applied for tax exemption, the status of their applications, and problems the IRS screeners identified in their submissions.

Some of those groups -- like Crossroads Grassroots Policy Strategies (Crossroads GPS), a politically active group connected to Rove that is seeking section 501(c)(4) status -- were at the heart of the Tea Party targeting controversy. But many more, such as the Miss America Foundation and the World Wildlife Fund, have no apparent connection to Lerner, political campaigns, or the Ways and Means investigation. Instead, they simply appear to have been on the wrong list at the wrong time.

The episode raises several questions: What are the rules governing the taxwriting committees' powers of disclosure? Are there any limits to what they can release? And how can taxpayers whose information is released seek redress?

Deep-Sixing 6103?

Congress enacted section 6103 taxpayer confidentiality protections in the Tax Reform Act of 1976 to address public concern over government agencies' use of taxpayer information, according to an October 2000 report by the Treasury Office of Tax Policy. In general, the statute requires that tax returns and return information remain confidential except in cases when the Internal Revenue Code expressly says otherwise. The policy principle guiding section 6103 is that the need for a particular piece of tax information must be balanced against a taxpayer's reasonable expectation of privacy as well as the impact on continued compliance with the country's voluntary tax system, according to the Treasury report.

One exception is within section 6103(f), which stipulates that the Senate Finance and House Ways and Means committees may access confidential taxpayer information in closed executive session and may publicly share that information only after obtaining taxpayer consent.

During the April 9 Ways and Means executive session to mark up the letter to the Justice Department, Camp said the letter would become public record upon its being voted to the House, a move he said was made under the authority of section 6103(f)(4)(A) and after consulting with the House parliamentarian and counsel and with the Joint Committee on Taxation.

Ways and Means ranking minority member Sander M. Levin, D-Mich., disputed Camp's reasoning, saying in his opening statement, "The provision under which you claim authority to release this information -- Section 6103(f) -- was enacted in response to the inappropriate use of taxpayer information by the Nixon Administration. The very disclosure that you put to a vote today violates the very taxpayer protections this Committee meant to create."

Levin continued: "You certainly don't need to erode the prestige of this committee by having us use -- for political purposes -- this sacred obligation we have to safeguard taxpayer information." He said the Justice Department already had access to the information it needed.

Serious Consequences Possible

The consequences of the committee's disclosure could be serious for the affected organizations and for the congressional process, according to some attorneys and academics.

The release of the information could be significantly damaging for the affected organizations, said Lloyd Hitoshi Mayer, a professor at the University of Notre Dame Law School. "If you're a donor and you know a group's application is getting extra review or you know a group has an exemption issue, you may get skittish," he said. "Opponents of the groups listed may latch onto the fact the IRS had a concern -- even if the IRS doesn't ultimately pursue it -- and use that to criticize the group."

If an IRS employee disclosed confidential taxpayer information, the statute would speak for itself, said Alan J. Wilensky, a Minneapolis tax attorney and former acting Treasury assistant secretary for tax policy. But the committee's authority on whether it acted properly in disclosing the material it did is "grayer and more questionable," he said. "I don't know that they violated the letter of the law, but it seems to me they have violated the spirit of the law," Wilensky said.

If the legal authority for the committee to disclose information isn't rock solid, it shouldn't do it, said Ofer Lion of Hunton & Williams LLP. He said he believes the IRS can share information identifying particular taxpayers only with committees in closed executive sessions. "Taken to its natural end . . . that power would let the committee request and then disclose any and all taxpayer information as it sees fit, upending the laws protecting taxpayer confidentiality," Lion said.

The procedure Camp followed sets a precedent for the release of other protected taxpayer information in which there is great public interest and which an authorized committee could request, said Marcus S. Owens of Caplin & Drysdale, who formerly led the IRS exempt organizations function. That could include the returns of the various Koch brothers entities and the brothers' personal returns, the lists of donors to politically active section 501(c)(4) groups, and former Republican presidential candidate Mitt Romney's tax returns, he said.

Ways and Means did exactly what section 6103 was designed to prevent: publicly disclosing information on taxpayers facing an audit or having pending tax issues before the IRS, Owens said. Calling the move "an apparent violation on its face," Owens said prior written consent of the affected taxpayers is the only thing that could have saved it.

Section 6103 permits disclosure to various congressional committees and to the full House or Senate, but it doesn't allow public disclosure except when the taxpayer involved has provided a waiver, Owens said. That's in stark contrast to the specific language of section 6104, which he said does explicitly provide for public inspection. Allowing the public release of otherwise protected taxpayer information by sending it to the full House or Senate contradicts the strong privacy statement in section 6103(a), he said.

"I would hope that someone writing a letter like that would have recited in the letter to the Department of Justice that they had received an appropriate authorization to disclose the protected information," Owens said. "It strikes me that in order to restore some sense of integrity to the congressional process, there has to be some statement about whether or not the rules were violated here, and there has to be an explanation about why they were not violated if that indeed is the view."

Opposing View

When reached for comment, a Ways and Means spokesperson reiterated Camp's authority under section 6013(f)(4)(A) to relay the taxpayer information to the House after consultation with the JCT. When a committee submits material to the full House, it automatically becomes a public document, the spokesperson said.

Despite the vulnerability it caused for the affected organizations, the committee was probably correct that sending the referral letter to the House means the information can then be publicly distributed, Mayer said.

Section 6103(f)(4)(A) isn't entirely clear on whether information sent to the full House or Senate is public, but section 6103(f)(4)(B) says information that nontax committees send can only be considered in executive session, Mayer said. That strongly indicates that information sent by the taxwriting committees does not have to be considered only in executive session, which means it can be publicly available, he said. "I don't think that distinction is accidental," Mayer added, pointing to legislative histories he said make clear what it is that tax and nontax committees can do.

George K. Yin of the University of Virginia School of Law and a former JCT chief of staff said section 6103(f)(4)(B) authorizes nontax committees to furnish information to the full House or Senate, but only in executive session. The Ways and Means Committee apparently isn't subject to that rule, he said. Anyone can draw any desired inference from that, Yin said, adding that he hasn't studied the legalities yet.

During the executive session, Camp said submitting the letter to the House would reveal the actions of IRS officials at the heart of the targeting scandal and would hold the Justice Department accountable on whether it acts on those facts.

The committee indicated that its purpose in releasing the information was to facilitate greater transparency and further the public's right to know, Yin noted. "I'm sympathetic to that goal, but there's obviously a right way and a wrong way to achieve a policy objective."

What the Future Holds

Even assuming the affected organizations' rights were violated, observers agreed there might be little recourse for those organizations.

If the committee violated section 6103 in disclosing the information, groups could sue for civil damages, Mayer said, but he added that Camp is likely immune from that kind of suit because he was acting while performing his official duties as a member of Congress.

Even if the advice Camp got from counsel and from the JCT was wrong, the fact that Camp sought and used it negates the ability of organizations to sue for monetary damages under section 7431, said A. Lavar Taylor, a tax controversy attorney in Southern California. Citing a line of cases under Bivens v. Six Unknown Named Agents of Fed. Bureau of Narcotics, 403 U.S. 388 (1971), Taylor said that people have sued for damages in collection actions but that courts have uniformly held that Congress "preempted the area" by passing section 7433, which prevents those lawsuits from being brought.

Section 7431(b) frees potential violators of section 6103 from liability if they acted in a "good faith, but erroneous" interpretation of section 6103.

In this case, Taylor said, "I suspect that the government would argue that section 7431 preempts the area and [that] therefore any other type of suit that somebody might bring against the federal government for disclosing tax return information has been preempted by 7431." But he added, "Now, how that would play out, I'm not sure."

Potential section 6103 violations aside, not all of the organizations identified in the Ways and Means letter and exhibits have received approval of their exemption applications and may still be waiting for an IRS determination of their status.

For any organization in the posted Lerner materials still waiting on an IRS determination, the disclosure of its information shouldn't have any impact on the IRS reaching a conclusion, said David H. Laufman, an attorney in Washington and a former assistant U.S. attorney. "The IRS must still make a legal determination regarding the eligibility for exempt status, regardless of the political theater accompanying this matter," Laufman said. "As a practical matter, it is possible that exempt organizations may feel greater urgency to resolve any such applications that have not yet been decided."

The Lerner letter and attached documents suggest the IRS plans to deny Crossroads GPS's exemption application. Owens said the disclosure shouldn't stop the agency from making a determination. "The only thing the IRS can do, I think at this point, is to make a decision based on the law about whether Crossroads meets the standards for tax exemption under section 501(c)(4)," Owens said.

The materials Ways and Means disclosed include one page of a multipage IRS document labeled political advocacy cases that names organizations, lists their employer identification numbers, discusses issues regarding them, and mentions possible next steps for the agency. USA Today published in 2013 a multipage "political advocacy cases" list that includes the page included in the Lerner exhibits, a disclosure that earned a strong rebuke from the IRS and the Ways and Means Committee. (Prior coverage: Tax Notes, Sept. 23, 2013, p. 1379.)

Two similar documents in the exhibits, labeled "significant case reports" and from 2010 and 2011, list the Miss America Foundation, an organization that provided non-forfeitable scholarships to Miss America participants under section 501(c)(3) as an affiliate of the National Miss America Pageant. The IRS issued a proposed denial and was waiting for a taxpayer protest, the report says. However, the group now appears in the IRS's Web directory of organizations eligible to receive charitable contributions.

The United Order of Texas, an organization seeking exemption as an apostolic or religious order and that is affiliated with a polygamist ranch, shows up on both reports in the Lerner materials but is not listed as an organization eligible to get charitable contributions. The 2011 report says a proposed denial was in the hands of a group reviewer.

More troubling than the pending decisions might be the situation's effect on the relationship between Congress and the IRS, a concern raised by both Owens and Wilensky. If the disclosures were unauthorized, the Treasury Inspector General for Tax Administration would investigate what happened, Owens said.

"The IRS would be legally justified in withholding further 6103 information until there were procedures in place and the individuals involved had been properly trained and briefed on the rules," Owens said. "The IRS, I would think, would be required to withhold section 6103 information on any topic, not just applications for exemption under (c)(4)."

Wilensky took the opportunity to offer recently appointed IRS Commissioner John Koskinen some advice. "The action taken by the committee suggests that the committee, like many Americans, has a basic distrust of the Internal Revenue Service," he said. "It is incumbent upon the new commissioner to build as many bridges to Congress as he can as quickly as possible."

As for Lerner, the House is scheduled to vote this week on a resolution to hold her in contempt of Congress.

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