                                 No. 95-3537



Terry L. Jones; Patricia K.          *
Jones;                               *
                                     *
       Plaintiffs-Appellants;        *
                                     *
Jones Publishing, Inc.;              *
                                     *
                    Plaintiff;       *
                                     *
Jones Oil Company, Inc.;   *
                                     *
         Plaintiff-Appellant;        *
                                     *
Jones Petroleum Company, a           *
partnership; J. O. Holding,          *
Inc., formerly known as Jones        *
Oil Company, Inc.;                   *
                                     *
                   Plaintiffs;       *
                                     *   Appeal from the United States
        v.                           *   District Court for the
                                     *   District of Nebraska.
United States of America; *
Stephen L. Tinsley; Sandy *
Job-Rivera; Christie Stubbert;       *
Christie Stubbert; Charles           *
Vonderschmitt; John Doe,   *
Unknown Internal Revenue   *
Service, Department of the           *
Treasury and Department of           *
Justice Employees; Jane Roe,         *
Unknown Internal Revenue   *
Service, Department of the           *
Treasury and Department of           *
Justice Employees; Richard           *
Roe, Unknown Internal Revenue        *
Service, Department of the           *
Treasury and Department of           *
Justice Employees;                   *
                                     *
        Defendants-Appellees.        *
                      Submitted:   September 9, 1996

                      Filed:   October 11, 1996


Before FAGG, HEANEY, and BEAM, Circuit Judges.



HEANEY, Circuit Judge.


     Terry L. Jones and Patricia K. Jones appeal the dismissal of their
suit against the United States for the disclosure of return information by
an Internal Revenue Service (IRS) agent to a confidential informant that
resulted in damage to their business.     The district court held that the
disclosure violated 26 U.S.C. § 6103 and did not fall under any statutory
exception to section 6103, but that because the agent made a good faith,
but erroneous interpretation of the statute, the government was not liable
in civil damages.   We affirm in part, reverse in part, and remand for
further consideration consistent with this opinion.


                                    I.



     Terry and Patricia Jones owned and controlled Jones Oil Company, Inc.
(Jones Oil) in Lincoln, Nebraska.        In 1989, two unnamed individuals
contacted the IRS office in Omaha, Nebraska, alleging that Jones Oil had
been violating motor fuel excise tax requirements.     Agent Stennis of the
IRS Criminal Investigation Division, began meeting with the individuals,
who were later granted "confidential informant" status.     Agent Stennis,
originally designated as the agent in charge of communicating with the
informants, assured them that their identities would remain confidential.




                                    2
     Shortly thereafter, IRS agents from Indiana contacted Agent Stennis
regarding alleged violations of motor fuel excise tax laws in the region.
In late 1989 or early 1990, Agent Tinsley, one of the Indiana agents,
arrived in Nebraska and took over the Jones Oil investigation.


     Agent Tinsley and Agent Stennis, who continued to assist with the
investigation, met several times with the informants.       These meetings
produced a significant amount of information about Jones Oil and its
operation, which Agent Tinsley later used to obtain warrants for the search
of Jones Oil.


     Although Agent Stennis was not to participate in the searches, he
knew the details of when and how the warrants were to be served.     The day
before the warrants were to be executed, he called one of the confidential
informants to tell him of the impending search.      The next day several
agents arrived at the premises of Jones Oil to execute the search.   A local
television station covered the search after being tipped off by an
anonymous phone call.


     The IRS never charged Jones Oil with tax violations resulting from
its investigation, but the company suffered significantly from the negative
publicity surrounding the investigation and eventually declared bankruptcy.
Jones Oil filed this suit against the federal government under 26 U.S.C.
§ 7431(a)(1)1 alleging that Agent




     1
      26 U.S.C. § 7431(a)(1) (1988) provides:

     (a) In general

         (1) Disclosure by employee of the United States

        If any officer or employee of the United States
     knowingly, or by reason of negligence, discloses
     any return or return information with respect to a
     taxpayer in violation of any provision of section
     6103, such taxpayer may bring a civil action for
     damages against the United States in a district
     court of the United States.

                                    3
Stennis revealed return information to the informant in violation of 26
U.S.C. § 6103.2


     At trial, Agent Stennis testified that he did not consult IRS manuals
or anyone in the IRS, including Agent Tinsley, before notifying the
informant of the impending search; nor could he cite the specific statute
governing disclosure.   He stated that he had been educated about the
provision and that he believed an agent had a right to disclose return
information to an informant if the agent believed it necessary for the
informant's safety, a condition he felt had been satisfied.


     The district court held that the disclosure by Agent Stennis violated
section 6103, but that Jones Oil was not entitled to damages from the
government because Agent Stennis acted on the basis of a good faith, but
erroneous, interpretation of the statute.3   Jones Oil appeals.


     2
      26 U.S.C. § 6103(k)(6) (1988) provides:

     (6) Disclosure by internal revenue officers and
     employees for investigative purposes.

        An internal revenue officer or employee may, in
     connection with his official duties relating to any
     audit, collection activity, or civil or criminal
     tax investigation or any other offense under the
     internal revenue laws, disclose return information
     to the extent that such disclosure is necessary in
     obtaining information, which is not otherwise
     reasonably available, with respect to the correct
     determination of tax, liability for tax, or the
     amount to be collected or with respect to the
     enforcement of any other provision of this title.
     Such disclosures shall be made only in such
     situations and under such conditions as the
     Secretary may prescribe by regulation.
      3
      The district court relied upon 26 U.S.C. § 7431(b) to hold
that no governmental liability arose from the disclosure. Section
7431(b) provides:

     (b) No liability for good faith but erroneous
                 interpretation


                                    4
                                       II.


A.    Violation of Section 6103


       We agree with the district court that Agent Stennis's disclosure to
the   informant   violated   section   6103.   The   district   court   properly
determined that the disclosure was not authorized by the taxpayer, was made
knowingly or by reason of negligence, and revealed "return information" as
defined in section 6103.4    See Jones v. United States, 898 F. Supp. 1360,
1376 (D. Neb. 1995).   We also agree that the disclosure did not fall into
any of the exceptions to the general rule against disclosure contained in
26 U.S.C. § 6103(c)-(o).     Id. at 1377.


B.    Good Faith Exception


       We part company with the district court, however, in its analysis of
whether Jones Oil can recover damages from the government due to the
improper disclosure.   The district court held that the language of section
7431(b) -- "[n]o liability shall arise . . . from a good faith, but
erroneous interpretation of section




         No liability shall arise under this section with
       respect to any disclosure which results from a good
       faith, but erroneous, interpretation of section
       6103.
       4
        Return information 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, [or] whether the taxpayer's return was,
       is being, or will be examined or subject to other
       investigation or processing . . . .

26 U.S.C. § 6103(b)(2) (emphasis added).

                                        5
6103" -- requires the plaintiff to prove "bad faith" on the part of the
disclosing party to succeed under section 7431.5


       The district court relied on Davidson v. Brady, 732 F.2d 552 (6th
Cir.   1984)   for   the   proposition    that,       through   the   language    of   the
                                          6
predecessor statute to section 7431, Congress intended to make "bad faith"
an element the plaintiff must prove.              Id. at 553.   In Davidson, the court
stated that "the policies . . . of avoiding excess disruption of government
and permitting the early resolution of insubstantial claims . . . militate
interpreting [the predecessor statute to section 7431] as requiring a
plaintiff to plead facts specific to establish bad faith."              732 F.2d at 553
(citations omitted).       We disagree.


       The burden of pleading and proving good faith under section 7431
rests with the government, not the complaining party.              In Rorex v. Traynor,
771 F.2d 383, 387 (8th Cir. 1985), we held that the good faith defense to
a section 6103 violation is analogous to the immunity defense provided to
government officials performing discretionary functions.                    See Harlow v.
Fitzgerald, 457 U.S. 800, 818 (1982) (establishing protection from civil
damages for government officials who perform their duties without violating
"clearly   established     statutory     or       constitutional   rights    of   which   a
reasonable person would have known").                The Supreme Court has held that
"[q]ualified or `good faith' immunity is an affirmative




       5
      The district court added a fourth element that "may need to
[be] prove[d]" to the three statutory elements for an unlawful
disclosure of return information claim. Jones, 898 F. Supp. at
1374.    The court held that, where circumstances warrant, the
plaintiff must prove that the government employee acted in "bad
faith," stating that "the burden of proof is imposed on the
plaintiff because the `good-faith' exemption from liability is not
phrased as a defense in the statute, but rather as an element of
the cause of action . . . ." Id.
       6
        26 U.S.C. § 7217 (1978).

                                              6
defense that must be pleaded by a defendant official."7         Harlow, 457 U.S.
at 815 (citing Gomez v. Toledo, 446 U.S. 635 (1980)).
     Further, Congress intended to protect the privacy of taxpayers in
enacting section 6103,8 creating narrow exceptions to its prohibition
against revealing taxpayer return information. See 26 U.S.C. § 6103(c)-(o)
(1996).       The most effective means of preventing a disruption in government
operations resulting from claims against the government is for agents
handling tax return information to abide by the regulations Congress set
forth to protect taxpayer privacy.           A taxpayer who is able to prove the
elements required by section 7431(a)(1) to show an improper disclosure of
return information can hardly be said to bring an "insubstantial claim."




          7
        Although section 7431 requires that a claim be brought
against the government rather than against the individual agent,
the application of the government's "good faith" defense applies to
the agent's actions in the same fashion as in Harlow.
     8
      Congress has stated that the purpose of the law giving rise
to section 6103 is to "strengthen the rights of taxpayers."
Diamond v. United States, 944 F.2d 431, 434 (8th Cir. 1991)
(quoting H.R.Rep. No. 658, 94th Cong., 1st Sess. 7 (1975) reprinted
in 1976 U.S. Code Cong. & Admin. News 2897, 2902). Moreover, the
Supreme Court determined that "[s]ection 6103 of the Internal
Revenue Code sets out the general rule that `returns' and `return
information' as defined therein shall be confidential." Church of
Scientology v. IRS, 484 U.S. 9, 10, 98 L. Ed.2d 228, 232 (1987)
(citations omitted).

                                         7
     Other circuits have likewise rejected Davidson.9       In Barrett v.
United States, 51 F.3d 475 (5th Cir. 1995), cert. denied, 492 U.S. 926
(1989), the Fifth Circuit adopted a rule that an IRS agent "can be expected
to know statutory provisions governing disclosure, as interpreted and
reflected in IRS regulations and manuals."   Id. at 479 (citing Huckaby v.
United States Dep't of Treasury, IRS, 794 F.2d 1041, 1048 (5th Cir. 1986)).
The court continued that "[a]n agent's contrary interpretation is not in
good faith."   Id.     Although we do not adopt the Barrett de facto "bad
faith" rule, we hold that a failure to act in accordance with statutory
provisions governing disclosure places the burden on the government to show
a "good faith, but erroneous interpretation" of the statute by the IRS10 or
an individual agent.   An agent's failure to consult the statutory language
as interpreted and reflected in IRS regulations and manuals prior to an
improper disclosure of return information is strong evidence that the
interpretation of the statute was not in good faith.




      9
      See Hrubec v. National R.R. Passenger Corp., 981 F.2d 962,
964 (7th Cir. 1992) (declining to follow the Sixth Circuit holding
in Davidson); Huckaby, 794 F.2d at 1048 (holding a good faith
defense not available where a reasonable agent is expected to know
statutory provisions governing disclosure and finding the holding
in Davidson unclear); Flippo v. United States, 670 F. Supp. 638,
643 (W.D.N.C. 1987), (stating that "good faith" is available as a
defense to taxpayer's action for improper disclosure of return
information if the unauthorized disclosure resulted from an
erroneous interpretation of the disclosure statute), aff'd, 849
F.2d 604 (4th Cir. 1988). But see Fostvedt v. United States, 824
F. Supp. 978, 984-85 (D. Colo. 1993) (applying the Davidson
standard that requires a showing of bad faith on the part of the
person or persons disclosing return information to succeed on a
claim under predecessor statute to section 7431), aff'd, 16 F.3d
416 (10th Cir. 1994).
      10
       In Diamond v. United States, 944 F.2d 431 (8th Cir. 1991),
we held that an agent's reliance on a good faith, but erroneous
interpretation of section 6103 in an IRS manual was sufficient to
shield the government from liability under section 7431.

                                     8
                                   III.


     Accordingly, because the district court placed the burden to prove
"bad faith" on Jones Oil, we remand this case to the district court for a
determination of whether the government has met its burden and demonstrated
that Agent Stennis's actions met the objective standard of "good faith."


     A true copy.


         Attest:


              CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.




                                    9
