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NORMAN E. DUQUETTE, INC. v. COMMISSIONER OF I.R.S.

August 25, 2000

NORMAN E. DUQUETTE, INC., AND NORMAN E. DUQUETTE, PLAINTIFFS,
V.
COMMISSIONER OF INTERNAL REVENUE SERVICE, DEFENDANT.



The opinion of the court was delivered by: Paul L. Friedman, District Judge.

OPINION

This case was brought by plaintiffs Norman E. Duquette and Norman E. Duquette, Inc. ("NEDI") under 26 U.S.C. § 6103 and 7431 of the Internal Revenue Code. Section 6103 prohibits the disclosure of tax returns and tax return information except as otherwise authorized by the Internal Revenue Code. Section 7431 creates a cause of action for damages for a taxpayer whose tax return or return information is disclosed in violation of Section 6103.

Plaintiffs Norman Duquette and NEDI assert that the Internal Revenue Service disclosed tax return information about NEDI to Mr. Duquette's former wife, Aline Duquette, in violation of Section 6103. The IRS maintains that the disclosures were authorized under Section 6103; that even if they were not authorized, they were the result of a good faith but erroneous interpretation of Section 6103; and that Mr. Duquette (but not NEDI) lacks standing to prosecute this action. Plaintiffs seek compensatory damages, punitive damages, attorneys' fees and costs.

The matter is now before the Court on the motion of the IRS for summary judgment. The Court heard oral argument on August 16, 2000. Upon consideration of the motions papers, declarations and exhibits filed by the parties and the arguments of counsel, the Court concludes that there are no genuine issues of material fact and that the IRS is entitled to judgment as a matter of law. Defendant's motion for summary judgment will be granted.

I. BACKGROUND

On November 6, 1995, IRS Revenue Agent Pat Grimes was assigned to audit the joint federal tax returns of Norman and Aline Duquette for tax years 1992 and 1993, as well as the corporate tax returns of NEDI for the same years. Declaration of Pat Grimes ("Grimes Decl.") ¶ 1. On May 15, 1996, Agent Grimes notified NEDI that its 1992 and 1993 corporate tax returns had been selected for examination. Id. ¶ 3. The audits for both the personal and corporate returns were assigned to the same agent because "the individual and corporate tax liability were interrelated for the 1992 and 1993 tax years." Id. ¶ 5. Mr. and Mrs. Duquette were 50 percent shareholders, officers and members of the board of directors of NEDI for the relevant tax years. Id. ¶ 6. The purpose of the individual and corporate audits was to determine whether NEDI had been used by the Duquettes to pay for personal expenses (including costs for furniture, clothes, condo association fees, prescriptions, books, magazine subscriptions, a vacuum, dry cleaning, cable TV fees, the cost of maintaining two cars, certain travel expenses, etc.) and whether those expenses should be treated as income to the Duquettes in the form of constructive dividends from NEDI. Id. ¶¶ 7-8.

In July 1996, the Duquettes divorced. Under the terms of the divorce, Mr. Duquette became the sole owner of NEDI and Mrs. Duquette surrendered all professional and financial ties to the corporation. According to plaintiffs, Mrs. Duquette and Agent Grimes had a telephone conversation on March 26, 1997, in which Agent Grimes provided Mrs. Duquette with tax liability information, requested information about NEDI's business practices, and informed Mrs. Duquette that NEDI probably (or definitely) had a tax deficiency for tax years 1992 and 1993. Declaration of Norman E. Duquette ("Duquette Decl.") ¶¶ 1-5 and Exhibits 4, 5, 7. Information gained by Mrs. Duquette through the telephone call was subsequently used in the Duquettes' divorce property settlement proceedings, allegedly to Mr. Duquette's disadvantage. Id. ¶¶ 7-8, 41.*fn1

Agent Grimes ultimately concluded that the deductions taken by NEDI were in fact personal expenses, that they should be treated as constructive dividends to Mr. and Mrs. Duquette, that NEDI's deductions for the personal expenses should be denied and its tax liability readjusted, and that the Duquettes' total joint tax liability should be increased accordingly. Grimes Decl. ¶ 9.

II. SUMMARY JUDGMENT STANDARD

Under Rule 56 of the Federal Rules of Civil Procedure, summary judgment should be granted if the pleadings, depositions, answers to interrogatories, admissions on file and affidavits show that there is no genuine issue of material fact in dispute and that the moving party is entitled to judgment as a matter of law. Rule 56(c), Fed.R.Civ.P. Material facts are those "that might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In considering a motion for summary judgment, the "evidence of the non-movant is to be believed, and all justifiable inferences are to be drawn in his favor." Id. at 255, 106 S.Ct. 2505; see also Washington Post Co. v. US. Dept of Health and Human Services, 865 F.2d 320, 325 (D.C.Cir. 1989).

The non-moving party's opposition, however, must consist of more than mere unsupported allegations or denials and must be supported by affidavits or other competent evidence setting forth specific facts showing that there is a genuine issue for trial. Rule 56(e), Fed.R.Civ.P.; Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The non-moving party is "required to provide evidence that would permit a reasonable jury to find" in its favor. Laningham v. US. Navy, 813 F.2d 1236, 1242 (D.C.Cir. 1987). If the evidence is "merely colorable" or "not significantly probative," summary judgment may be granted. Anderson v. Liberty Lobby, Inc., 477 U.S. at 249-50.

III. THE DISCLOSURE WAS PERMISSIBLE UNDER 26 U.S.C. SECTION 6103

Section 6103(a) of the Internal Revenue Code renders all returns and return information confidential with certain specified exceptions. The term "return information" is broadly defined to include:

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 ...

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