Appeal from the United States District Court for the District of Arizona James A. Teilborg, District Judge, Presiding D.C. No. 2:99-cv-01794-JAT
The opinion of the court was delivered by: Thomas, Circuit Judge
Argued and Submitted October 24, 2011--San Francisco, California
Before: J. Clifford Wallace, Sidney R. Thomas, and Susan P. Graber, Circuit Judges.
Opinion by Judge Thomas; Partial Concurrence and Partial Dissent by Judge Wallace
The panel affirmed in part and reversed in part the district court's summary judgment in favor of the United States in an action claiming that the United States improperly disclosed tax information to the Japanese National Tax Administration (NTA) during the course of a joint investigation.
In a prior appeal of this case, the panel concluded that the two-year statute of limitations in 26 U.S.C. § 7431(d) is jurisdictional and applied to Aloe Vera's claims under § 7431(a), and remanded for the district court to make factual findings and determine whether there is subject matter jurisdiction. The panel also held that the statute of limitations under 26 U.S.C. § 7431(d) for a claim of wrongful disclosure of a tax return is subject to inquiry notice, and begins to run when the plaintiff knows or reasonably should know of the government's allegedly unauthorized disclosures. On remand, the district court ruled that some of Aloe Vera's claims were barred by the statute of limitations and dismissed them.
In this appeal, the panel held that inquiry notice is not triggered by a single generalized event, but rather by the plaintiff's actual or constructive knowledge of each particular disclosure. The panel concluded that one of Aloe Vera's two claims was barred by the statute of limitations. As to the remaining claim that was not time-barred, the panel remanded because genuine issues of material fact (regarding whether the government knowingly relayed false information to the NTA) precluded summary judgment. The panel held that extending immunity to the government under the good-faith exception of § 7431(b) would eviscerate 26 U.S.C. § 6103's basic purpose of protecting against malevolent government disclosure of tax return information.
Judge Wallace concurred in the majority's opinion, but dissented as to the remand because the plaintiffs failed to carry their burden of establishing that their claims are not barred by the statute of limitations.
This appeal presents the question, among others, of what event triggers the running of the statute of limitations for a claim for wrongful disclosure of a tax return pursuant to 26 U.S.C. § 7431(d). We conclude that the statute of limitations begins to run when the plaintiff knows or reasonably should know of the government's allegedly unauthorized disclosures. We also conclude, in the circumstances presented by this case, that the statute of limitations did not begin to run when the plaintiffs became aware of a pending general investigation that would involve disclosures, but only later when they knew or should have known of the specific disclosures at issue. Applying these principles to the facts of this case, we affirm in part and reverse in part.
Tax returns and tax return information must be kept confidential, unless a statutory exception applies. 26 U.S.C. § 6103. Section 6103 "was enacted in response to the use of tax return information for political purposes revealed during Watergate." Rueckert v. IRS, 775 F.2d 208, 210 (7th Cir. 1985). To add teeth to this statutory protection for taxpayers, Congress created a civil action against the government for an IRS employee's knowing or negligent unauthorized disclosure of a taxpayer's "return information." 26 U.S.C. § 7431. The action must be brought within two years after the date the unauthorized disclosure is discovered. § 7431(d).
"Return information" protected by the statute is very broadly defined and includes a taxpayer's identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, overassessments, or tax payments, whether the taxpayer's return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense.
26 U.S.C. § 6103(b)(2). "Taxpayer information obtained or prepared by the IRS . . . is 'return information' regardless of the person with respect to whom it was obtained or prepared." Mallas v. United States, 993 F.2d 1111, 1118 (4th Cir. 1993).
In this case, Aloe Vera of America, Inc., Rex G. Maughan, Ruth G. Maughan, Maughan Holdings, Inc., Gene Yamagata, and Yamagata Holdings, Inc. (collectively, "Aloe Vera" or "Taxpayers") claim that the United States improperly disclosed tax information to the Japanese National Tax Administration ("NTA") during the course of a joint investigation.
Under § 6103(k)(4), return information may be disclosed to a foreign government that has a tax treaty with the United States, "but only to the extent provided in, and subject to the terms and conditions of, such convention or bilateral agreement." The United States has a tax treaty with Japan that provides, in essence, that the IRS may lawfully disclose any return information that is pertinent to preventing tax fraud or fiscal evasion. Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, U.S.-Japan, art. 26, ¶ 1, Mar. 8, 1971, 23 U.S.T. 967 ("Tax Treaty").
Taxpayers claim that the IRS improperly provided false tax information to the NTA, subjecting the United States to liability under § 7431. The United States denies the claims. The district court granted summary judgment to the United States.
In the prior appeal in this case following the grant of summary judgment, we focused on the two-year statute of limitations provided in § 7431(d). We concluded that the statute of limitations is jurisdictional and that it applied to the claims Aloe Vera filed under 26 U.S.C. § 7431(a). Aloe Vera of Am., Inc. v. United States, 580 F.3d 867, 872-73 (9th Cir. 2009). We vacated the judgment, remanded the case, and directed the district court to make findings of fact and determine whether there is subject matter jurisdiction. Id. at 873. We retained jurisdiction over the case and reserved judgment on the merits.
On remand, the district court ruled that some of Aloe Vera's claims were barred by the statute of limitations and dismissed them for lack of subject matter jurisdiction. Aloe Vera of Am., Inc. v. United States, 730 F. Supp. 2d 1020, 1035 (D. Ariz. 2010) (order). Aloe Vera now appeals from the district court's dismissal Order.
The facts of this case are recited in our prior opinion. See Aloe Vera, 580 F.3d at 869-70. For ease of reference, we restate them here:
Rex Maughan (Maughan) is the owner of Aloe Vera of America, Inc. (AVA), a United States corporation that processes and sells aloe vera products in the United States, Japan, and other countries. Maughan and Yamagata, indirectly through their respective holding companies, are co-owners of Forever Living Products Japan, Inc. (FLPJ), a Japanese corporation that purchases products from AVA.
In 1991 and 1992, AVA paid commissions and royalty-based income received from FLPJ to Maughan and Yamagata. The Internal Revenue Service (IRS) was concerned about whether this income was properly reported in the United States. Consequently, on April 26, 1996, the IRS sent a letter to the Japanese National Taxing Authority (NTA), proposing that the authorities simultaneously examine the tax reports of AVA, Maughan, Yamagata, and FLPJ. The letter estimated that for tax years 1991 and 1992, Maughan and Yamagata failed to report commission and royalty income from AVA product sales to FLPJ, totaling more than $32 million. In August 1996, the IRS and NTA held a meeting to discuss the examination. During this time, Aloe Vera apparently did not know about the examination and did not know that the NTA and IRS were disclosing information to each other.
On August 15, 1996, the IRS notified Maughan and AVA of the simultaneous examination. This appears to be the first notification that Maughan and AVA had of the investigation. At the end of 1996, the NTA made an audit proposal to FLPJ, which FLPJ rejected, and in early 1997, the NTA sent correction notices to FLPJ regarding its tax liabilities. In February 1997, the IRS sent letters to Maughan and AVA to propose tax adjustments. Shortly thereafter, on March 4, 1997, Maughan and AVA took the offensive and filed requests pursuant to the Freedom of Information Act for copies of documents exchanged by the NTA and the IRS during the simultaneous examination.
On October 9, 1997, Japanese news sources reported that Aloe Vera had failed to report income of 7.7 billion yen (at the time, approximately $60 million) to tax authorities. The Japanese reporters attributed this information to unidentified "tax sources" and the IRS. After the news of the simultaneous examination leaked, Aloe Vera lodged a complaint with the United States Competent Authority, accusing the NTA of intentionally disclosing taX information to the public. Income tax treaties generally permit taxpayers to request assistance from a designated "competent authority" if they believe that any party to the treaty has taken action that has resulted or will result in taxation that is contrary to the provisions of the treaty. Rev. Proc.2006-54, 2006-2 C.B. 1035. After an investigation, the Competent Authority found no proof that the NTA had leaked the information.
On October 6, 1999, Aloe Vera filed a complaint against the United States government in the district court under 26 U.S.C. § 7431(a), containing two counts. In Count I, Aloe Vera alleged that the IRS had disclosed false information to the NTA in violation of 26 U.S.C. § 6103(a). In Count II, Aloe Vera alleged that the IRS had further violated section 6103 by disclosing certain tax ...