## Facts

- Jerry S. Payne, a tax professional, became the subject of an IRS inquiry that began as a civil audit and later shifted to a criminal tax investigation.
- During the investigation, IRS agents contacted third parties including Payne’s clients, relatives, and other attorneys with whom he had business relationships.
- In making these contacts, agents identified Payne and indicated he was under criminal investigation for potential Internal Revenue Code violations, seeking financial and corroborative information.
- Payne alleged these statements unnecessarily disclosed confidential “return information,” including that he was under criminal investigation.
- Agents later acknowledged that much of the information sought could have been obtained directly from Payne without compromising the investigation.
- Payne was not convicted of the criminal tax violations that were the subject of the investigation.
- Payne sued the United States for civil damages under I.R.C. § 7431, alleging unauthorized disclosures in violation of I.R.C. § 6103.
- After a bench trial, the district court found liability and awarded damages, and the United States appealed.

## Issues

1. Whether telling third parties that Payne was under criminal tax investigation constituted disclosure of “return information” protected by I.R.C. § 6103.
2. Whether, and to what extent, I.R.C. § 6103 permits IRS personnel to disclose return information to third parties as necessary to obtain or verify information for tax administration.
3. How a court must analyze, under I.R.C. § 7431, whether each alleged disclosure was authorized, unauthorized but protected by the statutory good-faith defense, or unauthorized and not in good faith (with resulting liability and damages).

## Decision

- The Fifth Circuit held that identifying a taxpayer and revealing that the taxpayer is under investigation can constitute disclosure of “return information” within § 6103’s broad definition.
- The court held that § 6103 also contains exceptions allowing limited third-party disclosures to the extent necessary to obtain or verify information for tax administration; third-party contacts are not automatically unlawful.
- The court concluded that the district court’s analysis was insufficiently specific to determine, contact by contact, whether disclosures were authorized, unauthorized but made in good faith, or unauthorized and not in good faith.
- The Fifth Circuit vacated in part and remanded for additional factual findings and application of the clarified legal framework, including reconsideration of damages.

## Legal Principles

- “Return information” under I.R.C. § 6103 is broadly defined and includes whether a taxpayer is, has been, or will be examined or otherwise investigated.
- A disclosure that a named taxpayer is under criminal tax investigation may fall within § 6103’s protected return information.
- Section 6103 permits limited disclosures to third parties for tax-administration purposes when the disclosure is reasonably necessary to obtain information not otherwise reasonably available or to verify information relevant to civil or criminal tax liability.
- Determining whether a disclosure was “necessary” requires a transaction-specific inquiry into what was said, to whom, and why, and whether the disclosure was broader than needed for the investigative purpose.
- Under I.R.C. § 7431, the United States may avoid liability if a disclosure resulted from a good-faith, though erroneous, interpretation of § 6103; courts must separate (a) authorized disclosures from (b) unauthorized but good-faith disclosures and (c) unauthorized, non-good-faith disclosures that support damages.

## Conclusion

The Fifth Circuit required a granular, contact-by-contact application of § 6103’s necessity-based exceptions and § 7431’s good-faith defense, vacating in part and remanding because the existing findings did not adequately classify each alleged disclosure or support the damages award under the correct framework.


Payne v. United States, 289 F.3d 377 (5th Cir. 2002)