Welcome to TaxBlawg, a resource from Chamberlain Hrdlicka for news and analysis of current legal issues facing tax practitioners. Although blawg.com identifies nearly 1,400 active “blawgs,” including 20+ blawgs related to taxation and estate planning, the needs of tax professionals have received surprisingly little attention.
The Wall Street Journal's Tax Blog gives “tips and advice for filers,” and Paul Caron’s legendary TaxProf Blog is an excellent clearinghouse for academic and policy-oriented news. Yet, tax practitioners still lack a dedicated resource to call their own. For those intrepid souls, we offer TaxBlawg, a forum of tax talk for tax pros.
Chamberlain Hrdlicka Blawgs
President Obama's health-care legislation is becoming more of a tax issue on a daily basis. In addition to the codification of economic substance (discussed here; see also yesterday's TNT story featuring our own Phil Karter) contained in the reconciliation bill, the consequences of the legislation seem to be increasingly a matter of tax, rather than health-care, policy.
Of particular relevance here is the brewing confrontation between Reps. Waxman and Stupak and the companies who have announced substantial hits to their financial statements as a result of provisions in the health-care legislation. In response to these announcements, Reps. Waxman and Stupak have requested that companies provide documentation verifying their assessment of the impact of the legislation and have indicated an intention to hold a hearing to examine the impact of the new law on these companies. (Presumably, the documentation provided by the companies will be a central basis for whatever questions are directed at the executives who appear at these hearings.)
Without taking a position about the politics of the matter, the dynamics of the request (and any responses to it) may implicate sensitive areas of tax policy and procedure. At this point, Reps. Waxman and Stupak have merely requested that the corporate taxpayers provide information about the impact of the health-care legislation. Suppose, though, that one or more companies decline to produce the requested information. The perceived costs and benefits of the health-care legislation are likely to be key issues in the upcoming Congressional races this fall. If the request is declined, and Congressional Democrats fear that their signature achievement is being negatively perceived, would subpoenas to the taxpayers, demanding that they produce the information, come next?
Assuming that scenario, would taxpayers then be obligated to provide the information being sought? Perhaps more importantly, would Congress be authorized to use that information in a public hearing?
The starting point for this discussion is Code section 6103, which provides, in relevant part:
Returns and return information shall be confidential, and except as authorized by this title... 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 service as such an officer or an employee or otherwise or under the provisions of this section.
The section defines "return information" as, including, among other items:
a taxpayer’s identity, the nature, source, or amount of his... deductions... or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return...
The request from Reps. Waxman and Stupak is, in theory, directed at the companies' financial accounting records and methods. However, the breadth of their request (which would presumably be repeated in any subpoena) suggests that they may be seeking documents directly related to the companies' calculations of their tax deductions and liabilities. That is, they request the disclosure of "(1) any analyses related to the projected impact of health care reform on [insert company name]; and (2) any documents, including e-mail messages, sent to or prepared or reviewed by senior company officials related to the projected impact of health care reform on [insert company name]."
Certainly, any analysis of the projected impact of the health care legislation cannot help but identify "the nature, source, or amount of... deductions" that will eventually be furnished to the Treasury Department in connection with the companies' tax returns. Thus, there may be an argument that those analyses should be considered "return information." (As discussed below, if such analyses are excluded from the definition of "return information" because the information has not yet been provided to the IRS, then a significant loophole will have been opened in section 6103.)
Let's suppose that at least some of the requested information (e.g., any specific discussion of deductions for health benefits provided to retirees) would be considered "return information." Can Congress rightfully obtain that information from taxpayers?
At a superficial level, there are probably few limitations on the ability of Congress to "request" information from taxpayers. The decision of whether to comply with such a request is, in theory, entirely within the taxpayer's control. In this case, if the companies identified by Reps. Waxman and Stupak decide to comply with their request; then, as a practical matter, Congress' ability to obtain the information will have been rendered a non-issue.
But suppose the taxpayers were to decide not to comply with the request, and Reps. Waxman and Stupak were to issue a subpoena demanding the information. Then, it would seem, there would be a tension between Congress' subpoena power, which is generally quite broad, and the limitation on the disclosure of return information to Congress, as reflected in section 6103.
At the risk of avoiding the issue, it is beyond the scope of this blog post to resolve a question of that breadth. While courts generally will not interfere with Congress' subpoena power, Eastland v. United States Servicemen's Fund, 421 U.S. 491, 501-02 (1975), can it really be the case that individual members of Congress can unilaterally ignore a statute that is founded upon concerns about potential abuses between two branches of government? For purposes of this blog post, I will put aside any potential Constitutional issues and instead focus only on two questions: (1) whether section 6103 would prevent Congress from obtaining return information directly from taxpayers, and (2) whether the ability of Congress to disclose such information in a public hearing depends upon whether the taxpayer "voluntarily" answered a request request, rather than "involuntarily" complied with a subpoena.
Does 6103 prevent Congress from obtaining information directly from taxpayers via a subpoena? On the one hand, section 6103 seems intended to prevent only the IRS from disclosing taxpayer information. See Stokwitz v. United States, 831 F.2d 893 (9th Cir. 1987) ("[S]ection 6103 is clearly designed to protect the information flow between taxpayers and the IRS by controlling the disclosure by the IRS of information received from taxpayers.") Moreover, "the statute does not broadly prohibit disclosure of tax information voluntarily given to nongovernmental entities by taxpayers." Jade Trading, LLC v. United States, 65 Fed. Cl. 188 (2005).
On the other hand, Congress is not a "nongovernmental entit[y]," and section 6103 is designed to prevent Congress from getting such return information from the IRS, except under narrowly prescribed circumstances. See, e.g., Code section 6103(c), (f). If Congress could circumvent section 6103's requirement that return information be "received by" the IRS by requesting such information from the taxpayer before the taxpayer files its return, Congress could obviate a significant portion of section 6103 by either pre-emptively requesting such information before the taxpayer's return is filed or requesting all relevant records maintained by the taxpayer but not submitted to the IRS (which would likely contain the same information).
Notwithstanding the reasoning of the Stokwitz decision cited above, the ability of Congress to obtain such information would seem to run counter to the very concerns that motivated the passage of section 6103 -- namely, the ability for politicians to obtain taxpayer-specific information for political ends. Indeed, as the Internal Revenue Manual states: "Members of Congress in their individual capacity [and not as a taxpayer's designee] are entitled to no greater access to returns or return information than any other person inquiring about the tax affairs of a third party." See IRM 188.8.131.52. Thus, it is not clear that Congress should have the authority to obtain information from taxpayers that would otherwise be unavailable to them.
Of course, as noted above, taxpayers can choose to comply with a Congressional request, in which case the above-discussion would be rendered largely academic.
The real implication of the distinction between requesting information and demanding it via subpoena seems to be the implications for whether the information may be used for questioning and discussion at a public hearing.
As an illustrative point, it makes sense to begin with section 6103(f), which authorizes the disclosure of taxpayer information to certain Congressional committees, but generally requires that:
any return or return information which can be associated with, or otherwise identify, directly or indirectly, a particular taxpayer shall be furnished to such committee only when sitting in closed executive session unless such taxpayer otherwise consents in writing to such disclosure.
In other words, even when Congress is generally allowed to obtain return information from the IRS, to the extent that an individual taxpayer can be identified, the information may be provided only in closed sessions, not in a hearing that would divulge the taxpayer's information to the general public. Should the concerns embodied in that provision not apply when the taxpayer provides the information itself in cooperation with a Congressional investigation?
If a taxpayer were to comply with a Congressional "request" for information, one might argue that the taxpayer had disclosed the information voluntarily, and has consented to public disclosure, in a manner similar to that contemplated in section 6103(f). Such an implied consent would potentially obviate any claim that the information not be divulged more broadly. See Stokwitz, supra. However, note the breadth of the language of section 6103, which provides in relevant part that:
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 service as such an officer or an employee or otherwise or under the provisions of this section.
This language, "obtained... in any manner in connection with his service" suggests that, even if the information were given voluntarily to a member of Congress in response to such a request, that person should not be permitted to disclose the information to the public, for example, through a hearing based upon the disclosed information. Of course, the argument should be even stronger in the event that a taxpayer were forced to disclose such information in response to a subpoena.
In one important respect, the idea that Congress could disclose taxpayer information in public hearings is far less defensible than the idea that the IRS could disclose such information to other government agencies. When the IRS collects taxpayer information, it is in furtherance of the Service's tax administration function. Thus, the IRS can accomplish its objectives without running afoul of section 6103. (Indeed, the restrictions of section 6103 could be interpreted as being intended generally to prevent the IRS from using taxpayer information for purposes other than tax administration.) In contrast, Reps. Waxman and Stupak's request for such information appears to be motivated by a desire to use that information to conduct public hearings, rather than for some independent, tax-related purpose. Isn't this the sort of political use of taxpayer information that is intended to be avoided by section 6103?
In sum, although the issue is not free from doubt, it seems that, even if Reps. Waxman and Stupak are able to obtain the requested information, either by request or by subpoena, there is an argument that, by holding a public hearing on the topic, the legislators could risk running afoul of section 6103. At a minimum, no matter one's political affiliations, Reps. Waxman and Stupak may be setting an unfortunate precedent in requesting (and perhaps eventually demanding) taxpayer information, ostensibly in furtherance of their political ends. (For those who see no problem in the request, would the propriety of the request cause greater concern if Congress were seeking information from individual, rather than corporate, taxpayers?)
As a final note, the request at issue is not for bare factual information but for analyses of the projected impact of the health-care legislation. Thus, perhaps even more troublingly, the representatives are asking taxpayers to disclose documents that will likely contain legal analyses of their tax liabilities, ostensibly for public consumption. In light of the ongoing tug-of-war between corporate taxpayers and the IRS over "tax accrual workpapers" generally, the idea of Congress getting into the game of demanding disclosure of taxpayer's legal analyses certainly seems to be an unhealthy development.
Many thanks to Jennifer Weidler for her assistance in putting this post together and to Phil Karter for his helpful comments.