Exempt organizations’ applications do not contain protected return information

Organizations claiming the IRS targeted them for their political beliefs won a victory in the Sixth Circuit when the court denied the IRS’s petition to avoid having to disclose information about other organizations that were on the IRS’s controversial “Be on the lookout” list of organizations (NorCal Tea Party Patriots, No. 15-3793 (6th Cir. 3/22/16)).

The plaintiffs in the case, applicants for recognition under Sec. 501(c)(4) that claimed they were targeted because of their political beliefs as “Tea Party organizations,” alleged that the IRS used political criteria to single out applications filed by these groups; that the IRS often took four times as long to process their applications as they did with others; and that the IRS made “crushing demands” for what the Treasury Inspector General for Tax Administration (TIGTA) called “unnecessary information.” TIGTA and the IRS Taxpayer Advocate’s Office concluded that the IRS had indeed engaged in this behavior when reviewing Sec. 501(c)(4) applications. 

The lead plaintiff, NorCal, submitted its application in April 2010. In July 2010, the IRS requested additional information, which consisted of 120 more pages of material. The IRS did nothing for 18 months and then asked for a large amount of additional information and gave the organization three weeks to comply, which it did, supplying 3,000 pages of material in response.

The plaintiffs sued the IRS and IRS officials, making claims under the Privacy Act (5 U.S.C. §552a) and the First and Fifth amendments to the Constitution. They also claimed that the IRS’s collection and internal exchange of information about their donors, along with other sensitive information not usually required in an application for tax-exempt status, violated the Sec. 6103 prohibition on unauthorized inspection of confidential return information.

The plaintiffs sought, among other things, class certification of a group of plaintiffs that had been targeted by the IRS and asked for the names of those organizations and the names of the IRS employees who had reviewed the applications. In response, the IRS asserted that the applications were return information (and even, at first, that the employee names were return information), which it was prohibited from disclosing under Sec. 6103. The court characterized the IRS’s position as “one of continuous resistance” (slip op. at 7).

After a district court ordered the IRS to produce the requested documents, the IRS filed a petition for a writ of mandamus with the Sixth Circuit, asking it to halt the district court’s order. The appeals court noted that a writ of mandamus is granted only in “exceptional circumstances” involving a “judicial usurpation of power” or a “clear abuse of discretion” (slip op. at 9). The IRS claimed that the district court’s discovery order threatened taxpayer privacy and that the relief it asked for was therefore appropriate.  

To determine whether, as the IRS argued, information in applications for tax-exemption was return information subject to Sec. 6103, the appeals court looked first at applications for exemption that had already been granted. In those cases, Sec. 6104 contains a contrary provision to Sec. 6103, requiring that those organizations that have their applications approved are subject to public disclosure of their applications. Therefore, the court found that the IRS’s argument that the names of taxpayers in this group were barred form disclosure was meritless.

The court next looked at those organizations that either had withdrawn their applications or whose applications had been denied or were still pending. The court rejected the IRS’s contention that the applications themselves were return information that could not be disclosed. First, the court looked at whether return information includes a taxpayer’s identity under Sec. 6103(b)(6). It determined it did not because under that subsection a taxpayer’s identity is further defined as the name of someone for whom a return is filed, and applications for tax-exempt are not returns.

The IRS’s next argument was that the applications fell under the definition of “other data” prohibited from disclosure by Sec. 6103(b)(2)(A). The court found that the IRS’s interpretation would render other subsections superfluous and, thus, as a matter of elementary statutory interpretation, this argument again was meritless.

Finally, the court examined Sec. 6104(c)(2)(A)(iii) and (c)(2)(B), which provide for disclosure to state tax authorities of the names organizations that have applied for tax exemption and for “additional disclosures” of return information. The court concluded that Sec. 6104(c)(2)(A)(iii) would not be necessary if the organizations’ names were return information, thus supporting the conclusion that the organization’s names were not return information.          

In denying the IRS’s petition, the court concluded with the admonition that Sec. 6103 was enacted to protect taxpayers from the IRS, not to protect the IRS from taxpayers. It ordered the IRS to comply with the discovery orders without redactions or further delay.

—Sally P. Schreiber (sschreiber@aicpa.org) is a JofA senior editor.