Some IRS Determination Letters of Tax-Exempt Status Are Subject to Disclosure

By Roy Whitehead, Pam Spikes,and Donna Smith

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Recently the United States Court of Appeals for the District of Columbia decided Tax Analysts v. Internal Revenue Service [No. 02-5278 (December 2, 2003)], an important case of first impression on whether the IRS must make available, for public inspection, determination letters denying or revoking tax-exempt status. Tax Analysts, a publisher of news and commentary on tax issues, asked the IRS to disclose determination letters denying or revoking the tax-exempt status of several organizations. The IRS refused to disclose the written determinations on the grounds that the Tax Reform Act of 1976 and the applicable regulations, which generally require public disclosure of IRS determinations, did not apply to the denial or revocation of tax-exempt status. Tax Analysts then asked the United States District Court for the District of Columbia to compel disclosure. The District Court found the IRS’ refusal lawful. On appeal, the United States Court of Appeals for the District of Columbia concluded that the IRS regulations violated the IRC, and compelled disclosure of denial and revocation determinations.

Discussion of the Law

Congress passed the Tax Reform Act of 1976 because of concerns about the possible misuse of tax information by the government. At the time, there were concerns about disclosure of tax information to government entities for political purposes [Senate Report No. 94-938 at 317 (1976)]. The IRC protects the confidentially of tax returns and information such as the taxpayer’s source of income, net worth, and tax liability. Less well known, however, is that the IRC requires the IRS to disclose some information about tax-related issues such as tax-exempt status. Two IRC sections are relevant to the disclosure of determination letters concerning tax-exempt organizations, sections 6104 and 6110. IRC section 6110 applies to IRS written responses to taxpayer inquiries about how tax laws apply to a particular fact situation. A written determination is defined as a “ruling, determination letter, technical advice memorandum, or Chief Counsel advice” [section 6110(b)(1)(A)]. The “text of any written determination and any background document” relating to the written determination must be available for public inspection under section 6110(a). To balance the competing interests of public disclosure and taxpayer privacy, IRC section 6110 requires the deletion of “names, addresses, and other identifying details of the person to whom the written determination pertains” [6110(c)(1)].

Although IRC section 6110 governs most written determinations, it does not apply to all of them. Section 6110(l)(1) provides that section 6110’s disclosure rule “shall not apply to … any matter which section 6104 applies.” IRC section 6104(a)(1)(A) requires the IRS to disclose documents relating to exempt organizations, including applications for exempt status, supporting materials, and IRS determinations granting those exemptions. Interestingly, unlike section 6110, section 6104 has no provision for deleting taxpayer identifying information. Consequently, the IRS must fully disclose determinations granting tax-exempt status. Finally, section 6104 is silent on whether the IRS must disclose determinations denying or revoking tax-exempt status. The IRS claims this silence is evidence that Congress did not intend to require the disclosure of denial or revocation determinations.

Treasury Regulations of the IRS’ Nondisclosure Policy

Unlike the IRC’s mandate, requiring disclosure of written determinations in redacted form, and its more specific requirement that the IRS disclose determinations granting tax-exempt status in unredacted form, the regulations say the IRS will not disclose determinations denying or revoking tax-exempt status in any form. Specifically, Treas. Reg. section 301.6104(a)-1(i) provides the IRS will not disclose tax-exempt denials and revocations at all. The regulation reads:

Some determination letters and other documents relating to tax-exempt organizations that are not open to public inspection under 6104(a)(1)(A) and this section are nevertheless within the ambit of section 6104 for the purposes of 6110. These determination letters and other documents are therefore not available for public inspection under either section 6104 or 6110. They include but are not limited to—

(1) Unfavorable rulings or determination letters … issued in response to applications for tax exemption.
(2) Rulings or determination letters revoking or modifying a favorable determination letter.
(3) Technical advice memoranda … relating to a disapproved application for tax exemption or the revocation or modification of a favorable determination letter.

The IRS defends its position by arguing that because IRC section 6104(a)(1)(A) requires disclosure of determinations granting tax-exempt status but says nothing with respect to denials and revocations, one can reasonably conclude that Congress did not intend to require disclosure of denials or revocations. The district court agreed with the IRS, but Tax Analysts appealed.

The Appellate Ruling

The United States Court of Appeals for the District of Columbia disagreed with the ruling. The appeals court based its holding on IRC section 6104(a)(1)(B), which is silent on denials and revocations. Section 6104(a)(1)(B) requires the IRS to make available for public inspection “any application” filed for tax-exempt status, “any papers” submitted in support of the application, and “any document” issued by the IRS in support of the application. The court reasoned that, unlike section 6104(a)(1)(A), which covers only determinations regarding tax-exempt organizations, section 6104 (a)(1)(B) requires the IRS to disclose all tax exemption determinations, whether they grant, deny, or revoke the exemption. The court essentially reasoned that it made no sense to conclude that Congress wanted to require disclosure of all tax-exemption determinations, whether it grants, denies, or revokes the exemption, in subsection 6104(a)(1)(B), nor to conclude that Congress wanted to deny access to tax-exempt denial and revocation determinations through its silence on the issue in section 6104(a)(1)(A).

The court ruled that the Treasury Regulations that prevent the disclosure of denial and revocation determinations were in violation of the plain language of IRC section 6110: “[T]he text of any written determination and any background file document relating to such written determination shall be open to public inspection at such place the Secretary may by regulations prescribe.”

The court’s holding is important because disclosure of denial and revocation determinations opens up an area of tax law that should have been available to the general public for years. Knowledge of the IRS’ interpretation of the law and regulations will surely provide much needed guidance to taxpayers and their advisors. The holding also clearly advances the purposes of protecting taxpayer privacy, while requiring the IRS to disclose written determinations. It is puzzling why the IRS seeks to keep tax-exempt denial and revocation determinations secret. Disclosure would seem to lead to more efficient administration of the tax laws. Tax advisors would be aware of mistakes made by prior tax-exempt organizations. Perhaps this is why the solicitor general has announced that the case will not be appealed to the Supreme Court.


Roy Whitehead, JD, LLM, is an assistant professor of business law, and Pam Spikes, PhD, CPA, is a professor of accounting, and Donna Smith, CPA, CMA, is an assistant professor of accounting, all at the University of Central Arkansas, Conway, Ark.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



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