IRS AGENTS NOT LIABLE FOR 'GOOD FAITH' VERBAL DISCLOSURES.

                 IN THE UNITED STATES DISTRICT COURT

[2] The parties have stipulated to the following facts. Special Agent Laura Sanders was assigned to assist in the investigation of Plaintiff. Sanders was assigned to make "follow up" contacts with businesses who received the September 19, 1990 letter in order to obtain responses and information sought in the letter. Special Agent Ronnie L. McPherson also made similar follow up contacts during the two months after the letters were mailed. Sanders testified that she conducted the follow up contacts as follows:

     I am Laura Sanders, a special agent with IRS Criminal

     My name is _________ and I am a Special Agent with the Criminal

[3] Attorney J.W. Tyner represented Plaintiff in connection with the criminal charges brought against Plaintiff and was physically present when McPherson interviewed John Shinn and Betty Sexton in 1989 and 1990 respectively, at which times McPherson believes he introduced himself in the manner stipulated above. On June 18, 1992 McPherson served a grand jury subpoena upon Stanley Bass.

[4] Upon trial of the case to the Court, the Court makes the following findings of fact and conclusions of law. To the extent, if any, that the findings of fact as stated may be deemed conclusions of law, they shall also be considered conclusions of law. In the same manner, to the extent, if any, that the matters later expressed as conclusions of law may be deemed findings of fact, they shall also be considered findings of fact.

FINDINGS OF FACT

[5] McPherson interviewed forty-seven people regarding Plaintiff's tax liabilities. He also served summonses on four financial institutions in an effort to obtain records which would assist in the investigation of Plaintiff. Finally, McPherson made telephone calls to four businesses which did a large volume of business with Plaintiff. The Court will address these three categories of verbal disclosures separately.

I In-person interviews

[6] It is undisputed that, regardless of the manner in which the agents introduced themselves, they disclosed the fact that the IRS was conducting a criminal investigation of Plaintiff. McPherson testified that at the beginning of a meeting or interview with a third party witness, it is an agent's general practice to introduce himself by displaying his badge and credentials to witnesses. The badges and credentials identify him as a "Special Agent" with the "Criminal Investigation Division" of the "Internal Revenue Service." McPherson stated he felt it was necessary to introduce himself to advise the witnesses that he was seeking information about Plaintiff, otherwise the witnesses would not have known what information to provide to him.

[7] The Department of Justice caused to be issued and served a grand jury subpoena on Stanley Bass in connection with the case against Plaintiff. McPherson served the subpoena and interviewed Bass on June 18, 1992. McPherson told Bass the IRS was conducting a criminal investigation of plaintiff and Bass responded that he was already aware of that fact.

[8] Any disclosures of Plaintiff's tax return information made during McPherson's interviews of John Shinn or Betty Sexton were made in the presence of Plaintiff's attorney J.W. Tyner. As such, any disclosures conducted in Mr. Tyner's presence were made more than two years before Plaintiff filed this lawsuit.

II Summonses

[9] Plaintiff voluntarily signed waivers so that McPherson could obtain documents from certain financial institutions. McPherson served the summonses in person by presenting a copy to the summoned person. When McPherson served the administrative summonses, he either displayed his badge and credentials, or advised the recipient that Plaintiff was under criminal investigation, or both. McPherson testified that he was trained and instructed to display his badge and credentials when serving an administrative summons.

III Telephone contacts

[10] Before mailing letters to Sears, K-Mart, AAFES, and Wal- Mart, McPherson first contacted those businesses by phone. McPherson testified that he would have introduced himself to the person from whom he wished to receive information in the manner described in the stipulation above. In order to conduct the telephone interviews, McPherson stated that it was necessary for the agents to introduce themselves and to advise the witnesses that they were seeking information about Plaintiff so the witnesses would know what information to provide.

Statutes, Rules, and Regulations

     26 U.S.C. section 6103(k)(6) provides, in pertinent part

[11] McPherson attended a Continuing Professional Education course (CPE) given by the IRS shortly before the Gandy investigation began. Among the topics covered were issues relating to disclosures. The course materials addressing exceptions for investigative disclosures under section 6103 state that an agent cannot fulfill his investigative responsibility unless he makes certain disclosures. Contained in the materials is the following example

     You contact a taxpayer's customer regarding the purchases the

CONCLUSIONS OF LAW

[12] Unlike the written disclosures contained in the circular letters, there is no analogous express prohibition in any IRS rules or procedure against making verbal statement to a third party that a taxpayer is under investigation by the Criminal Investigation Division, or that the taxpayer is under criminal investigation. Accordingly, this Court must determine if the disclosures made by Special Agents McPherson and Sanders were authorized under the various rules and regulations. If it appears the disclosures were not authorized, the Court must then decide whether, under 26 U.S.C. section 7431(b), the statements were made with a good faith, but erroneous belief, that they were authorized.

[13] While section 6103 does forbid the disclosure of return information, including the taxpayer's identity, the fact that the taxpayer is under investigation or subject to further investigation, and data that the IRS has collected about the return, the statute also sets out various exceptions allowing disclosure. Specifically, section 6103(k)(6) authorizes an agent, in connection with his official duties relating to a criminal tax investigation, to disclose return information to the extent that such disclosure is necessary. McPherson testified that he believed it was necessary to disclose to third party witnesses the fact that Plaintiff was under criminal investigation in order to obtain the information he desired. The Court finds, however, that the disclosure that Plaintiff was under criminal investigation was not necessary to secure the desired information. One of the purposes of the Tax Reform Act of 1976 was to "strengthen the rights of taxpayers." H.R.Rep. No. 658, 94th Cong., 1st Sess. 7 (1975). The Special Agent Handbook section 347.2 specifically recognizes the IRS's obligation to respect the confidentiality taxpayers, warning that "caution must be exercised not [to] damage the reputation of the taxpayer." ²

[14] Despite the Court's belief that McPherson might not have needed to disclose that Plaintiff was under criminal investigation, the Court finds McPherson's and Sanders' actions resulted from a good faith, but erroneous interpretation of section 6103. 26 U.S.C. section 7431(b) states, in pertinent part,

     [N]o liability attaches to any disclosure that results from a

[15] In view of section 6103(k)(6), the Handbook, the CPE materials, and Treas.Reg. section 301.6103(k)(6)-1, McPherson and Sanders could be said to have made the disclosures with a good faith, but erroneous belief, that they were authorized, under section 6103(k)(6), to inform the third parties they interviewed that the agents were with the Criminal Investigation Division of the IRS and that they were conducting a criminal investigation of Plaintiff. The CPE course material indicates that, at a minimum, disclosing the taxpayer's name and the fact of the investigation is always necessary. It is difficult to imagine a situation in which a special agent could obtain information from a third party witness without at least identifying himself to the witness, as well as identifying the taxpayer about whom the agent seeks information. McPherson's actions accorded with the specific example contained in the CPE materials. Further, the Handbook expressly advises special agents that they may necessarily disclose the name of the taxpayer under investigation. Finally, the Treasury Regulation specifically states that an agent may disclose "the fact that the inquiry pertains to the performance of official duties, and the nature of the official duties" in order to obtain information pursuant to an investigation.

[16] Plaintiff has been unable to show any IRS interpretation of the statutes or regulations that indicates that a reasonable agent in McPherson's or Sander's position would not be authorized to disclose the fact Plaintiff was under criminal investigation. For a special agent to identify himself to a third party witness by displaying his credentials, and by asking for information pertaining to the identified taxpayer under investigation whether or not the special agent mentions that the investigation is a "criminal" investigation is a disclosure that the taxpayer is under criminal investigation. McPherson was trained that this was in fact a disclosure that the taxpayer is under criminal investigation, and that such a disclosure was authorized by section 6103(k)(6).

[17] Accordingly, the Court concludes that any verbal disclosures made by McPherson and Sanders resulted from a good faith, but erroneous interpretation of section 6103. As such, no liability attaches to any of the disclosures.

[18] IT IS SO ORDERED.

                                   JOHN HANNAH, JR.

² While this is in the context of a circular letter, the same principle applies to all types of disclosures.