                            148 T.C. No. 11



                   UNITED STATES TAX COURT



        MESCALERO APACHE TRIBE, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 28120-14.                          Filed April 5, 2017.



   R reclassified P’s workers as employees and determined that P
owed the applicable withholding tax under I.R.C. section 3402(a). P
moved for discovery of the workers’ return information because
under I.R.C. section 3402(d) the workers’ independent payment of
their income tax would absolve P of its liability. R objects under
I.R.C. section 6103 because the information P requests is confidential
taxpayer information.

   Held: The disclosure of third-party taxpayer information to
absolve an employer of his I.R.C. section 3402(a) tax liabilities is not
barred under I.R.C. section 6103(h).

   Held, further, the fact that the burden of proof is on P to show its
workers paid income tax does not make their confidential return
information nondiscoverable.
                                          -2-

      David P. Leeper and John E. Leeper, for petitioner.

      Jason D. Laseter, for respondent.



                                      OPINION


      HOLMES, Judge: This is a worker classification case about hundreds of

workers whom their employer--an Indian tribe--called independent contractors but

whom the Commissioner called employees. The Mescalero Apache Tribe has

moved to compel discovery of the IRS’s records of those workers and argues that

whatever it finds will likely lead to a rapid settlement of the case one way or

another. The Commissioner argues that the information is protected from

disclosure by the Code itself, and even if disclosable is not discoverable. Our

Court has apparently never analyzed this issue.

                                     Background

      The Mescalero Apache Tribe is recognized under the Indian Reorganization

Act of 1934 and has a reservation in south-central New Mexico. 25 U.S.C. sec.

476 (2012).1 The Tribe has about 5,000 members and its own government.

During the 2009-11 tax years the Tribe either employed or contracted with several


      1
          Title 25 U.S.C. section 476 has been transferred to 25 U.S.C. section 5123.
                                         -3-

hundred workers. During each of these years the Tribe timely issued Forms W-2

to its employees, and Forms 1099 to its contractors. This case began when the

Commissioner audited the Tribe on suspicion that some of the workers classified

as contractors were really employees.

      The Tribe still contests the Commissioner’s reclassification of those it

called contractors, but it’s really fighting the major consequence of that

reclassification--a large tax bill.2 Reclassification would make the Tribe liable for

taxes for its workers whom it improperly labeled as contractors. But it sees a way

out: Section 3402 lets an employer in this situation escape tax liability if it can

show the workers whom it labeled independent contractors paid income tax on

their earnings. See also sec. 31.3402(d)-1, Employment Tax Regs. One way to do

this would be for the Tribe to ask each worker to complete Form 4669, Statement

of Payments Received. Internal Revenue Manual pt. 4.23.8.4 (Oct. 26, 2015).

The Tribe tried to do just that, but it was only partly successful because many of

the Tribe’s former workers have moved, and some live in hard-to-reach areas


      2
        Section 7436(a) gives us jurisdiction to determine the correct amounts of
employment taxes in a worker-classification case. See also Menard, Inc. v.
Commissioner, 130 T.C. 54, 60-61 (2008); Orion Contracting Tr. v.
Commissioner, T.C. Memo. 2006-211. (Unless stated otherwise, all section
references are to the Internal Revenue Code in effect for the years at issue. All
Rule references are to the Tax Court Rules of Practice and Procedure.)
                                        -4-

where they lack cell-phone service and even basic utilities. The Tribe was in the

end unable to find 70 of these workers and thus could not secure executed Forms

4669 from them.

      This case was first on the Court’s 2015 trial calendar for El Paso, Texas, but

we continued it because the parties agreed that it was going to require a greater-

than-average amount of pretrial work. That brings us to the discovery issue: The

Tribe wants the IRS to search the records of those 70 workers to determine

whether they reported their Form 1099 income and paid their tax liabilities and

then to adjust the Tribe’s liability accordingly.3 The Tribe was eager to get this

information. It made its first motion to compel discovery before even trying

informal discovery. We denied the motion without prejudice as premature. See

Branerton Corp. v. Commissioner, 61 T.C. 691 (1974). When, as was probably

inevitable, informal discovery didn’t cause the Commissioner to give up the

information, the Tribe again moved to compel discovery of the Commissioner’s

      3
        The Commissioner normally accepts Form 4669, Statement of Payments
Received, as prima facie evidence that a worker filed an individual income-tax
return and paid the income tax due. This relieves the employer of its withholding-
tax liability under section 3402(d). IRM pt. 4.23.8.4.3(1) (Oct. 26, 2015); id. pt.
8.7.16.5(3) (Oct. 1, 2015). What an employer may use to substantiate its claim
under section 3402(d) in the absence of Forms 4669 is not entirely clear, and the
Tribe in this motion asks specifically that the Commissioner produce the
information that would appear on a Form 4669 for each worker identified in the
notice of determination.
                                         -5-

records, but it was not in compliance with Rule 71(c) because it failed to attach the

required documentation.4 The Tribe’s current motion to compel discovery--this

time in compliance with our Rules--asks that we decide an issue that it turns out

we have not yet analyzed in any opinion: Can an employer take discovery of its

workers’ IRS records to reduce its own tax liability under section 3402?

      The Commissioner objects, claiming that this is barred under section 6103

and that it amounts to a prohibited shift of the burden of proof from the Tribe to

the Commissioner.

                                      Discussion

      Section 3402(a) requires every employer to deduct and withhold a tax on the

wages it pays. Sec. 31.3402(a)-1(b), Employment Tax Regs. The employer itself

is liable for this withholding tax. Sec. 3403. But the tax is really in aid of the tax

owed by the employee on the income he earns. The employee gets a credit on his

income-tax bill for the money withheld by his employer from his paycheck. See,

e.g., Slodov v. United States, 436 U.S. 238, 243 (1978). An employer can get hit

with a big tax bill if it misclassifies its employees as independent contractors

because it would not have collected and paid over this withholding tax. But what

      4
        Rule 71(c) requires a moving party to “annex the interrogatories to the
motion, with proof of service on the other party, together with the answers and
objections, if any.”
                                           -6-

if the employee actually paid the tax on his income even though it wasn’t

withheld? The answer is that the employer is off the hook--section 3402(d)

provides:

       If the employer, in violation of the provisions of this chapter, fails to
       deduct and withhold the tax under this chapter, and thereafter the tax
       against which such tax may be credited is paid, the tax so required to
       be deducted and withheld shall not be collected from the employer
       * * *.

       The Tribe wants to take advantage of section 3402(d) in this case. But

how? It tried to find its old workers and get them to fill out the form the IRS

wants employers in this situation to use, but the Tribe argues that the information

is just sitting there in the IRS’s records.

       Isn’t that what discovery is for?

I.     Section 6103

       The Commissioner first argues that he is barred by section 6103 from

disclosing information to the Tribe. Section 6103(a) does provide a general rule

that returns and the information on returns should be kept confidential. A “return”

is “any tax or information return, declaration of estimated tax, or claim for

refund,” and “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,
                                            -7-

overassessments, or tax payments.” Sec. 6103(b)(1) and (2)(A) (emphasis added).

So no one can doubt that what the Tribe seeks is “return information” protected by

6103. But general rules usually have exceptions in trail, and section 6103 is no

different.

      What is unusual is the extensive disagreement among courts about the

extent and even existence of these exceptions. The possible exceptions that the

parties identified are in section 6103(h)(4), which provides:

            (4) Disclosure in judicial and administrative tax
      proceedings.--A return or return information may be disclosed in a
      Federal or State judicial or administrative proceeding pertaining to
      tax administration, but only--

         *            *          *         *          *         *          *

                    (B) if the treatment of an item reflected on such return is
             directly related to the resolution of an issue in the proceeding; [or]

                    (C) if such return or return information directly relates to a
             transactional relationship between a person who is a party to the
             proceeding and the taxpayer which directly affects the resolution
             of an issue in the proceeding;

      The first problem is that the circuits are split on the question of whom

section 6103 information can be disclosed to under subsection (h)(4). The Fifth

Circuit was the first to look at the issue, and it focused on the title of the

subsection, “Disclosure to Certain Federal Officers and Employees For Purposes
                                         -8-

of Tax Administration, Etc.” In Chamberlain v. Kurtz, 589 F.2d 827, 837-38 (5th

Cir. 1979), that court read section 6103(h) to allow release of third-party return

information only to officials of the Department of the Treasury or the Department

of Justice. The Tenth Circuit, however, specifically rejected that argument in First

W. Gov’t Sec., Inc. v. United States, 796 F.2d 356, 360 (10th Cir. 1986). It

reasoned that, while section 6103(h)(1), (2), and (3) speaks of disclosure to

officials, section 6103(h)(4) speaks specifically of disclosure in a judicial or

administrative tax proceeding with no indication that disclosure should be limited

to officials. The court found disclosure proper in judicial and administrative tax

proceedings in general. Id.

      Most courts have followed the Tenth Circuit in ruling on discovery requests.

See Shell Petroleum, Inc. v. United States, 46 Fed. Cl. 719, 722 (2000) (disclosure

of return information authorized in connection with suit by taxpayer seeking tax

credit); United States v. N. Tr. Co., 210 F. Supp. 2d 955, 956-58 (N.D. Ill. 2001)

(granting motion to compel discovery of partial third-party returns); Lebaron v.

United States, 794 F. Supp. 947, 951-52 (C.D. Cal. 1992) (disclosure of return

information authorized in summons-enforcement proceeding). Because it seems
                                         -9-

highly likely that the Tribe’s case is appealable to the Tenth Circuit5 we will

follow the precedent set in First Western and hold that third-party tax-return

information may be disclosed in judicial and administrative tax proceedings to

persons other than government officials under section 6103(h)(4), so long as the

other requirements of subsection (h) are met.

      Let us turn to that section. It allows disclosure of some information, but

what kind exactly? The Tribe is looking for information about its workers’ tax

payments, which is “return information.” And section 6103(h)(4) begins: “A

return or return information may be disclosed in a Federal or State judicial or

administrative proceeding pertaining to tax administration”. (Emphasis added.)

So far, this works for the Tribe.

      But then the sentence continues, in subsection (h)(4)(B), “but only if * * *

the treatment of an item reflected on such return is directly related to the

resolution of an issue in the proceeding”. (Emphasis added.) Is there a difference

      5
        Appellate venue of our decisions is defined by section 7482. For an
individual we ask where he resided when he filed his petition, sec. 7482(b)(1)(A);
for a corporation we ask where its principal place of business was, sec.
7482(b)(1)(B). Indian tribes are neither individuals nor corporations--they are
recognized by the federal government as sovereign governments. 25 U.S.C. sec.
476 (2012). Because the Mescalero Apache Tribe is located in New Mexico, we
will assume that appellate venue in this case would ordinarily be the Tenth Circuit
and will follow its law. Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff’d,
445 F.2d 985 (10th Cir. 1971).
                                        - 10 -

here between disclosure of a return and disclosure of return information?

Disclosure of “return information” is not mentioned in subparagraph (B). Both the

Federal and Sixth Circuits have weighed in on the question of whether this

provision authorizes the disclosure of “return information,” and both have decided

that it does not. United States v. NorCal Tea Party Patriots (In re United States),

817 F.3d 953, 962 (6th Cir. 2016); In re United States, 669 F.3d 1333, 1339-40

(Fed. Cir. 2012). The Tenth Circuit might have ruled differently--in Tavery v.

United States, 32 F.3d 1423 (10th Cir. 1994), it allowed disclosure of a taxpayer’s

“return information” under section 6103(h)(4)(B) after it analyzed whether the

information “directly related to the resolution of an issue in the proceeding.” It

seems to have done so without considering absence of the phrase “return

information” in subparagraph (B). But then, in a published but nonprecedential

order issued a year after Tavery, the Tenth Circuit relied on Tavery to uphold the

disclosure of a return, but specifically reasoned that because the introductory

wording of section 6103(h)(4) allows disclosure of a “return or return

information,” the government may disclose either returns or return information

under subsection (h)(4)(B). See Conklin v. United States, 61 F.3d 915 (10th Cir.

1995).
                                         - 11 -

      We will conscientiously avoid this conflict. In just the next subsection,

Congress expressly allowed for disclosure of both “returns” and “return

information.” Sec. 6103(h)(4)(C). The Tribe in the case before us needs to know

whether its workers paid their tax liabilities--that’s “return information” and not

something readily apparent on the face of a return. Sec. 6103(b)(1) and (2); see In

re United States, 669 F.3d at 1339-40. But that may still not be enough. Section

6103(h)(4)(C) permits disclosure of returns or return information only if such

“return or return information directly relates to a transactional relationship

between a person who is a party to the proceeding and the taxpayer which directly

affects the resolution of an issue in the proceeding.”

      Subparagraph (C) raises a few more questions. First, what is a

“transactional relationship” under section 6103, and is the employer/worker

relationship included within it? Next, does the return information that the Tribe

wants “directly relate” to this relationship? And, finally, does the information

related to the transactional relationship directly affect the resolution of the issue in

this case?

      Look first at what relationships count. Courts have found that many

different types of relationships satisfy section 6103(h)(4)(C). See, e.g., First

Western, 796 F.2d (RIA) at 358 (investors and promoters in the same tax-shelter
                                       - 12 -

scheme); Noske v. United States, 71A A.F.T.R.2d (RIA) 93-3243 (D. Minn. 1992)

(participants in a fraudulent-conveyance scheme), aff’d without published opinion,

998 F.2d 1018 (8th Cir. 1993); Davidson v. Brady, 559 F. Supp. 456 (W.D. Mich.

1983) (participants in general business dealings), aff’d, 732 F.2d 552 (6th Cir.

1984); Guarantee Mut. Life Co. v. United States, 42 A.F.T.R.2d (RIA) 78-5915

(D. Neb. 1978) (insurance agents and insurance company). To “transact” means

simply “to carry on business.” Webster’s Third New International Dictionary

2425 (2002). And the wide variety of business relationships that other courts have

held are included in the general phrase lead us now to hold that the relationship

between an employer and his worker is one that pertains to the carrying on of

business.

      Our next question is whether the return information that the Tribe is asking

for “directly relates” to this relationship. Here we have some help from a district

court in Nebraska. In Guarantee Mut. Life, 42 A.F.T.R.2d (RIA) 78-5915, a

company sued for a tax refund by establishing that its workers were independent

contractors and not employees. The district court there found that the workers’ tax

records would contain evidence of how the workers viewed their status--a

significant factor in a worker-classification case--and allowed disclosure under

section 6103(h)(4)(C). Id. We agree that whether the Tribe’s workers paid their
                                         - 13 -

tax liabilities in full tends to show whether they considered themselves

independent contractors or employees and thus directly relates to their relationship

with the Tribe.

      Whether return information directly affects the resolution of an issue in a

case is one where there is more law. For example, in Texture Source, Inc. v.

United States, 851 F. Supp. 2d 1260, 1267 (D. Nev. 2012), the court found that

discovery of relevant return information relating to tax treatment of drywall

workers was directly related to the tax treatment of those workers as contractors.

In Davidson, 559 F. Supp. at 461, the court found that financial statements

between a debtor and a creditor directly related to whether the creditor made a

material misstatement to a probation officer. This information directly related to

the sentencing court’s ability to resolve an issue crucial in arriving at a just

sentence for the creditor. Id. at 461-62. And in First Western, 796 F.2d at 359-60,

the court found that audit information relating to a transactional relationship

between investors and their broker directly affected the investors’ tax liabilities.

      How the Tribe’s workers viewed themselves--as employees or independent

contractors--is a factor in worker-classification cases. See Weber v.

Commissioner, 103 T.C. 378, 387 (1994) (whether a worker is a common-law

employee or an independent contractor depends in part on the relationship the
                                        - 14 -

parties believed they were creating), aff’d, 60 F.3d 1104 (4th Cir. 1995); see also

Ewens & Miller, Inc. v. Commissioner, 117 T.C. 263, 270 (2001). And whether

the Tribe’s workers paid their income-tax liabilities as independent contractors

would tend to prove or disprove the Tribe’s case, which would directly relate to

the resolution of one of the issues here. We also shouldn’t overlook the big issue

here: If the Tribe’s workers did indeed pay their tax liabilities, then the Tribe’s

section 3402(d) defense would be proved and would be entirely resolved.

      We hold that the Tribe’s workers’ return information is disclosable under

section 6103(h)(4)(C).

II.   Burden of Proof

      The Commissioner still objects that, even if the information is disclosable, it

is still not discoverable. It is true that section 3402(d) seems to place the burden

on the taxpayer to show that the income tax is paid. And each party in civil

litigation must bear “the ordinary burden of financing his own suit.” Eisen v.

Carlisle & Jacquelin, 417 U.S. 156, 179 (1974). But that doesn’t mean discovery

cannot be had of his opponent. Our Rule 70(b) says that information is

discoverable or not “regardless of the burden of proof involved.” We’ve read our

Rule to mean what it says. Piscatelli v. Commissioner, 64 T.C. 424, 426 (1975).

“Who bears the burden of proof on an issue has no effect on the obligation to
                                       - 15 -

comply with appropriate discovery requests.” Guillo v. Commissioner, T.C.

Memo. 1998-40, 1998 WL 42189 at *4, aff’d, 165 F.3d 915 (9th Cir. 1998).

      Under Rule 70(b), “discovery may concern any matter not privileged and

which is relevant to the subject matter involved in the pending case.” Bernardo v.

Commissioner, 104 T.C. 677, 682 (1995). It’s up to the party opposing the

production to show that the information is not discoverable. Rutter v.

Commissioner, 81 T.C. 937, 948 (1983) (citing Branerton Corp. v. Commissioner,

64 T.C. 191, 193 (1975)). The Commissioner argues here that the statute places

the burden on the Tribe,6 and that for him to comply with the request places a

“tremendous”, if almost unelaborated, burden on him.7




      6
         Section 3402(d) also says that if “thereafter the tax against which such tax
may be credited is paid, the tax so required to be deducted and withheld shall not
be collected from the employer.” This at least implies that the Commissioner
should have some responsibility for reviewing his own records for the proof that
the Tribe may not be liable for withholding taxes. The Fifth Circuit has gone so
far as to grant a taxpayer attorney’s fees where proof that the taxpayer did not owe
FICA and withholding taxes was in the IRS’s own records. Jones v. United States,
613 F.2d 1311 (5th Cir. 1980). We don’t need to go that far here.
      7
        The Commissioner doesn’t invoke it in his opposition, but Rule 70(c)
limits discovery where it is unreasonably cumulative or unduly burdensome or if
the information is more easily obtained from another source. The Tribe has
already exhausted its own ability to find its workers, and a request for return
information about only 70 payees is not particularly voluminous.
                                       - 16 -

      Because the Tribe seeks information that is both disclosable and

discoverable, we hold for the Tribe.


                                                An appropriate order will be issued.

      Reviewed by the Court.

    MARVEL, FOLEY, VASQUEZ, GALE, THORNTON, GOEKE,
GUSTAFSON, PARIS, MORRISON, KERRIGAN, BUCH, LAUBER, NEGA,
PUGH, and ASHFORD, JJ., agree with this opinion of the Court.
