IRS Not Liable for Opening FBAR Investigation Based on Return Information Subject to Section 6103 (10/3/13)

In Hom v. United States, 2013 U.S. Dist. LEXIS 142818 (ND CA 9/30/13), the taxpayer brought suit for damages for alleged IRS violations of Section 6103.  The amount of damages sought was "$40,874,000 in damages and "at least" $500,000 in punitive damages."  The claim was that the IRS was conducting an IRS examination and, based on information discovered in the IRS investigation, improperly opened an FBAR investigation without authority or making the determination required to do so.  I quote the court's entire analysis:

1. Unauthorized Disclosure Under Section 6103. 

Plaintiffs are authorized to file this suit under 26 U.S.C. 7431. Plaintiffs argue that, under 26 U.S.C. 6103, the use of information discovered in the tax return investigation cannot be used for an FBAR investigation. Section 6103(a) states: 

[r]eturns 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 services as such an employee or otherwise or under the provisions of this section . . . .

Defendant's motion to dismiss argues that Section 6103(h)(1) provides an exception that allows such a disclosure:

[r]eturns and return information shall, without written request, be open to inspection by or disclosure to officers and employees of the Department of the Treasury whose official duties require such inspection or disclosure for tax administration purposes.

Tax administration is defined as "the administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws or related statutes . . . and includes assessment, collection, enforcement, litigation, publication, and statistical gathering functions under such laws, statutes, or conventions." 26 U.S.C. 6103(b)(4). 

Thus, the issue here is whether Section 5314 is either an internal revenue law or related statute (either designation would make the disclosure permissible). The United States argues that Section 5314 is a "related statute" under Section 6103 (Dkt. No. 13 at 6). This is correct. Congress intended for Section 5314 to fall under "tax administration." See Staff of Joint Comm. on Taxation, 108th Cong., General Explanation of the Tax Legislation Enacted in the 108th Congress, 378 (Comm. Print 2005) ("The Congress . . . believed that improving compliance with this reporting requirement is vitally important to sound tax administration . . ."). Section 5314 is therefore a related statute under Section 6103 and the disclosures at issue in this action were lawful. 

Plaintiffs' opposition argues that the IRS did not follow the proper procedure pursuant to the Internal Revenue Manual ("IRM") Sections 4.26.17.2 and 4.26.14.2.2. The IRM states: "[w]ithout a related statute determination, Title 26 information cannot be used in the Title 31 FBAR examination. Any such use could subject the persons making the disclosure to penalties for violating the disclosure provisions protecting Title 26 return information." IRM 4.26.17.2(1)(G). Plaintiffs argue that defendant IRS failed to properly obtain a related statute determination because they did not follow the stated procedure for doing so. 

Plaintiffs' argument fails because the IRM holds no legal significance. Our court of appeals has held that "[t]he Internal Revenue Manual does not have the force of law and does not confer rights on taxpayers." Fargo v. Comm'r of Internal Revenue, 447 F.3d 706, 713 (9th Cir. 2006). Even assuming that the IRS did not follow its own procedures, plaintiffs have no claim for relief. 

Plaintiffs also argue that the IRS reports contained false statements and that these false statements are "actionable" under Section 6103 of Title 26. In support of this argument, plaintiffs cite Aloe Vera v. United States, 699 F.3d 1153 (9th Cir. 2012). Aloe Vera is not dispositive here because that decision analyzed the disclosure under Section 6103(k)(4), which exempts information that is authorized by treaty. Id. at 1163. The treaty in Aloe Vera authorized the disclosure of "pertinent" information. The court in Aloe Vera held that "knowingly false information" could not be pertinent under the treaty. Id. at 1163-64. Aloe Vera is irrelevant here because neither Section 6103(k)(4) nor the treaty are at issue.

Plaintiffs finally argue that the type of information the IRS was soliciting from them suggested that defendant's purpose was "penalty assessment not tax administration" (Dkt. No. 1 at 20). This distinction is meaningless for the purposes of Section 6103. Under Section 6103, the term "Tax administration . . . includes assessment, collection, enforcement . . . ." 

Even if by "penalty" plaintiffs mean that defendant IRS was acting maliciously and without merit, this argument fails as well. Plaintiffs have not alleged sufficient facts to support such an argument. 

Defendant's disclosures were lawful under Section 6103(h)(1) and the motion by the United States is therefore Granted.

JAT Notes:

1.  The analysis is cryptic but probably a proper resolution of the case.  I do note in this regard that Mr. Hom represented himself in the litigaiton.  Hence, there is some probability that the issues were not properly refined and well-briefed.

2.  For those wishing to read the authorities citedin the opinion:

26 USC (IRC 1986)

• Section 6103, here.

31 USC 

• Section 5314, here.

IRM

• 4.26.14.2.2, here, which with related provisions provides (emphasis supplied by JAT):

4.26.14.2.1  (07-24-2012)
Related Statute Exception 

IRC 6103(h)(1) provides that returns and return information shall, without written request, be open to inspection by or disclosure to officers and employees of the Department of the Treasury whose official duties require such inspection or disclosure for tax administration purposes. IRC 6103(b)(4) provides that the term "tax administration" means the administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws or related statutes (or equivalent laws and statutes of a state) and tax conventions to which the United States is a party. 

The BSA (codified, in part, in Title 31) is not "per se" (automatically) related to the Internal Revenue Code. This is because BSA reports are required not only for tax compliance purposes but for other governmental purposes that are consistent with the purpose of the BSA, such as for law enforcement and counterterrorism purposes. A related statute determination is based on an analysis of the facts and circumstances of the particular case. 

For a related statute determination, IRM 11.3.22.22.1 provides that the test is whether, under the particular facts and circumstances of the case, the BSA provisions are considered related to the administration of the internal revenue laws. 

If the related statute test is not met, returns and return information may not be accessed or disclosed for examination of non-tax matters. 

4.26.14.2.2  (07-24-2012)
Related Statute Procedures

 If information is uncovered in a Title 26 examination that indicates that there has been a Title 31 violation, there must be a related statute determination before the Title 26 return or return information can be used in the Title 31 examination or in written referrals to Criminal Investigation or FinCEN.

If, in an ongoing Title 31 examination, Title 26 return information is needed, a related statute determination must be made before using return information in the Title 31 examination.
A determination must be made in writing with regard to the related statute test prior to the access or disclosure of returns or return information. The examiner documents the reasons supporting the related statute determination in a written memorandum, known as the related statute memorandum. The determination is made by a Territory Manager, not the examiner.
A special related statute memorandum has been developed for Report of Foreign Bank and Financial Accounts (FBAR) cases. It is Form 15535, Foreign Bank and Financial Accounts Report Related Statute Memorandum, Catalog # 38150X. See IRM 4.26.16. However, other types of related BSA cases do not require a specific format for the required related statute memorandum. 

A good faith judgment that the BSA violation was in furtherance of the Title 26 violation should be demonstrated by tangible objective factors and supported by adequate documentation. The reasons supporting the determination are noted on the related statute memorandum. 

Once the related statute memorandum has been signed by the Territory Manager, the Title 26 information may be accessed and used in the BSA examination. The original memorandum and determination should be included in the Title 31 file and a copy should be included in the Title 26 file. 

4.26.14.2.3  (07-24-2012)
Related Statute Determination Factors 

IRC sections 6103(b)(4) and (h)(1) together permit disclosure of Title 26 information to IRS employees for examination purposes when there is a good faith determination that a Title 31 violation was committed in furtherance of a Title 26 violation or was part of a pattern to violate the provisions of Title 26. Once a related statute call has been made, IRC sections 6103(b)(4) and (h)(1) allow IRS employees, whose official duties require access to tax returns and tax return information, to use it in an examination under Title 31. 

[Money laundering discussion omitted]

Taxpayers who have a financial account in a foreign country may be required, under the BSA, to file a Report of Foreign Bank and Financial Accounts (FBAR) disclosing the existence of the foreign account. When a taxpayer fails to comply with the Title 31 FBAR filing requirement and also fails to report interest income from the foreign financial account in violation of Title 26, the failure to comply with the FBAR requirement, may indicate the non-compliance was done in furtherance of a tax violation under Title 26, making the Title 26 information available for use in the Title 31 case under the related statute test. 

To make a related statute determination, the Territory Manager must make a good faith determination that the Title 31 violation was in furtherance of a Title 26 violation. If it is subsequently determined that there was no Title 26 violation, this does not prevent the Title 31 examination from going forward. 

4.26.14.2.4  (07-24-2012)
Effect of Related Statute Determination 

The related statute determination allows IRS personnel to use returns or return information derived from a tax case for examination of activities in a Title 31 case for which the IRS has responsibility. 

The determination that the statutes are related makes the Title 31 case a matter of tax administration for purposes of IRC 6103. The information gathered in the Title 31 investigation from this point forward is subject to the disclosure rules under IRC 6103. 

The information can be disclosed within Treasury for purposes of tax administration. The Title 31 case can be disclosed to FinCEN, a Treasury bureau, for penalty assessment and/or collection purposes. IRC 6103(h)(1). It can also be disclosed to the Department of Justice for enforcement purposes under the rules of IRC 6103(h)(2).

• 4.26.17.2, here, which provides:

4.26.17.2  (01-01-2007)
FBAR Procedures Starting the Case - Related Statute Memorandum 

Information relevant to a Title 26 (Internal Revenue Code) case that is also relevant to an FBAR case may be obtained during a tax examination or a Form 8300 examination. 

For example, bank account information is a necessary part of an income probe, and may reveal the existence of a foreign account requiring the filing of an FBAR. 

The examiner should not ask interview questions or request documents that are only relevant to the FBAR examination without first obtaining a related statute memorandum signed by the examiner’s Territory Manager. 

Neither interviews nor Information Document Requests (IDRs) in a Title 26 case should request documents only needed for the FBAR examination, such as the FBAR itself, prior to a related statute determination signed by the examiner’s Territory Manager.\ 

If the source of the FBAR information is a Title 26 examination, including a Form 8300 examination, the information acquired is return information protected by IRC Section 6103. The examiner must obtain a related statute determination, signed by a Territory Manager before using the return information in an FBAR case. 

A related statute determination is a good faith determination with respect to the present case, that the apparent FBAR violation was in furtherance of an apparent Title 26 violation.
A related statute determination is necessary to allow the examiner to use the information obtained from a Title 26 examination in the FBAR examination. 

Without a related statute determination, Title 26 information cannot be used in the Title 31 FBAR examination. Any such use could subject the persons making the disclosure to penalties for violating the disclosure provisions protecting Title 26 return information.
The Related Statute Memorandum (RSM) also serves as an input document for the FBAR database maintained at the Detroit Computing Center. 

For an in depth discussion of the related statute determination, its basis in IRC Section 6103, the factors in making the determination, and its effect, see IRM 4.26.14, Disclosure.

3. The key case for the proposition that the IRM confers no rights on taxpayers is United States v. Caceres, 440 U.S. 741 (1979), here.