July 20, 2010

Government Limits on Disclosing Information from Research Tax Credit Audit

Houston Tax Attorney Blog

Houston Tax Attorney

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In Bayer Corp. & Subs v. United States, Civil Action Nos. 08-693, 09-351 (W.D. PA 2010), the U.S. Tax Court denied the taxpayer’s request to limit the government’s ability to disclose confidential information acquired during the audit of a research tax credit claim.

The facts and procedural history are as follows:

  • Bayer filed a refund suit to recover $50 million in research tax credits.
  • During the course of the litigation, the IRS and U.S. Department of Justice (“DOJ”) sought the production of information that included “confidential and proprietary information, trade secrets, commercial information, strategic planning information, commercial planning information, and commercial pricing relating to the sale, distribution and/or marketing of certain products.”
  • Bayer and the government were not able to reach an agreement on how the information would be handled by the government.

Bayer was concerned that the agreement would allow the IRS and DOJ to pass the information along to other federal agencies. Bayer argued that this information could be subject to disclosure under the Freedom of Information Act pursuant to request submitted by a third party to these other agencies.

The court concluded that the agreement included sufficient safeguards, nothing that “the federal agency or department which receives the Confidential Information from the Defendant becomes a ‘Receiving Party’ as that term is defined in the Order, with all the obligations of the Defendant set out therein, including the obligation to destroy or return all confidential information (with some specified exceptions) within sixty (60) days after the conclusion of the litigation.”

Given that the case was before the court in a refund claim, the court was able to reach this conclusion in the context of a protective order without even having to address Section 6103. Section 6103 is the code section that is normally implicated in disputes with taxpayers and the IRS over confidential information.

It seems this section may have also protected the information at issue in this case. Section 6103 provides that no employee of the United States–not just an IRS or DOJ employee–can disclose confidential tax return information. It goes on to define confidential tax return information as essentially any information provided to the IRS on audit.

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