Exam team can only obtain third-party tax information possessed by other IRS sources on a "need to know" basis.

In Field Service Advice 200018015 (1/12/00), the IRS Chief Counsel concluded that a taxpayer's examination team may access information provided to the Service by other parties to a transaction involving the taxpayer, as long as the team demonstrates that it has a "need to know" such information to audit the taxpayer.

A corporate subsidiary, S, and several unrelated entities participated in a "lease stripping" transaction. An IRS audit team examining the subsidiary's parent company, P, began considering whether the losses reported by S were allowable. To develop facts necessary to evaluate potential theories for the disallowance of the claimed losses (including the applicability of Sec. 482 and the sham-transaction doctrine), P's exam team sought guidance from Counsel as to the circumstances under which it could obtain and use tax information from other Service sources about the unrelated entities, including audits of those entities. The exam team also sought advice from Counsel as to any restrictions on its use of information obtained by summonsing third parties in P's examination.

* Access to audit information of other parties to transaction: P's exam team sought to obtain from internal IRS sources information about the lease transaction that other parties to the transaction provided to the Service on their own returns or in audits of their own returns. Counsel concluded that, under Sec. 6103(h)(1), P's audit team could access the information as long as the team demonstrated that it had a "need to know" such information to perform its audit of P. Counsel explained that disclosure was authorized, for example, if the information was helpful in identifying parties to the transaction or in analyzing the legal and factual issues.

* Disclosure to taxpayer of third-party tax information: P's exam team sought to disclose the information it obtained to P in its Revenue Agent's Report (RAR). Sec. 6103(h)(4) authorizes disclosure of return information of third-party taxpayers that are not parties to an administrative tax proceeding only if: (1) the treatment of an item reflected on the third party's return is directly related to the resolution of an issue in the proceeding (Sec. 6103(h)(4)(B)); or (2) the third party's 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 the issue in the proceeding (Sec. 6103(h)(4)(C)). Taking the position that an audit is an "administrative tax proceeding" (a position on which Federal courts have disagreed), Counsel concluded that the third parties' information related to the lease-stripping transaction under examination, and therefore could be disclosed to P in an RAR.

* Disclosure to taxpayer of information obtained by summons relating to other parties to transaction under exam: P's exam team obtained information relating to other parties to the lease transaction in which S participated by summonsing third parties. Counsel explained that the relevant inquiry was whether the summonsed information was P's return information. Citing Sec. 6103(e)(1)(D) (which provides for disclosure of a parent's or subsidiary's return to a parent) and Sec. 6103(e)(7) (which provides For disclosure of return information to persons authorized to receive the return if such disclosure would not "seriously impair Federal tax administration"), Counsel concluded that P's exam team could disclose the information to P, because it related to P's liability.

* Access to information concerning other parties to the transaction in which the taxpayer's subsidiary participated: P's exam team sought to obtain from internal IRS sources (such as other exam teams and issue specialists) information on whether other parties to the specific lease transaction in which S participated also participated in other lease-stripping transactions unrelated to P's exam. Counsel concluded that the exam team might obtain such information under Sec. 6103(h)(1) if the team demonstrates that it has a "need to know." Counsel cautioned, however, that, although the transactions may be similar to the transaction at issue, they are unrelated to the transaction under exam, and therefore the information may not be disclosed to P. Counsel explained that, although courts have admitted "pattern evidence" in tax shelter cases when a transaction's substance is questioned (i.e., evidence that parties to the proceeding engaged in similar transactions with other third parties), it did not believe that Sec. 6103 or its legislative history supports disclosure of "pattern evidence" in tax proceedings.

* Disclosure to taxpayer in RAR of information obtained by summons of other parties to a transaction evidencing participation in transactions similar to transaction under audit: Again citing Sec. 6103(e)(1)(D) and (e)(7), Counsel concluded that P's exam team could disclose the information in the RAR, subject to the proviso that such disclosure would not seriously impair tax administration.

FROM KENNETH S. SAVELL, J.D., LL.M., KPMG LLP, WASHINGTON, DC

Editor's note: Mr. Ely is the immediate past chair of the AICPA Tax Division's Relations with the IRS Committee. Ms. Butler and Mr. Oveson are committee members.