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Mary Charles McDonald Denver McDonald Richard Maynard Bill McDonald Maynard & McDonald v. United States
Citations: 102 F.3d 1009; 96 Cal. Daily Op. Serv. 9213; 96 Daily Journal DAR 15199; 78 A.F.T.R.2d (RIA) 7631; 1996 U.S. App. LEXIS 33123; 1996 WL 727009Docket: 95-16222
Court: Court of Appeals for the Ninth Circuit; December 19, 1996; Federal Appellate Court
Plaintiffs Mary Charles McDonald and others appealed a summary judgment favoring the United States regarding claims that the IRS violated 26 U.S.C. § 6103 by improperly disclosing their tax return information. The district court ruled that the IRS agent's good faith disclosure negated liability, and thus did not address whether the disclosures were statutorily authorized under § 7431(b). The Ninth Circuit affirmed the lower court's decision, clarifying the burden of proof in tax disclosure cases. It determined that the plaintiffs must plead sufficient facts to establish that the IRS agent knowingly or negligently disclosed information. The court rejected the Sixth Circuit’s precedent which placed the burden on plaintiffs to prove the agent's bad faith, instead ruling that good faith is an affirmative defense for the government to establish. The Ninth Circuit aligned with the Eighth Circuit in holding that the government must assert good faith under § 7431(b) as part of its defense in cases alleging violations of § 6103. The district court incorrectly shifted the burden to the plaintiffs to prove the agent's bad faith, yet the summary judgment for the government is upheld. The evidence shows that Agent Pease acted in good faith under 26 U.S.C. 6103(h)(4)(C) when sending audit reports that incidentally revealed taxpayer information. This statute permits disclosure in judicial or administrative proceedings related to tax matters, if the information pertains to a transactional relationship affecting the resolution of an issue. The plaintiffs contended that the IRS acted in bad faith, arguing that an audit is not an administrative proceeding. To hold an agent liable for unauthorized disclosure, there must be a violation of clearly established rights that a reasonable person would recognize. At the time of four audits in 1992, the Tenth Circuit had classified audits as administrative proceedings, while the Fourth Circuit later determined they were not. This circuit split created legal uncertainty, and it had not been clearly established that audits were not administrative for the purposes of the statute. Additionally, the disclosures by Agent Pease occurred during the IRS's internal appeals process, which IRS regulations categorize as "proceedings." Therefore, Agent Pease's interpretation of the statute was deemed to be made in good faith. The ruling is affirmed.