Aloe Vera of America, Inc. v. United States

FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

ALOE VERA OF AMERICA , INC., a No. 10-17136

Texas corporation; REX G.

MAUGHAN , husband; RUTH G. D.C. No.

MAUGHAN , wife; MAUGHAN 2:99-cv-01794-

HOLDINGS, INC., an Arizona JAT

corporation; GENE YAMAGATA ;

YAMAGATA HOLDINGS, INC.,

Plaintiffs-Appellants, OPINION

and

BUREAU OF NATIONAL AFFAIRS, INC.

and TAX MANAGEMENT , INC.,

Intervenors,

v.

UNITED STATES OF AMERICA ,

Defendant-Appellee.

Appeal from the United States District Court

for the District of Arizona

James A. Teilborg, District Judge, Presiding

Argued and Submitted

October 24, 2011—San Francisco, California

Filed November 15, 2012

2 ALOE VERA OF AMERICA , INC. V . UNITED STATES

Before: J. Clifford Wallace, Sidney R. Thomas,

and Susan P. Graber, Circuit Judges.

Opinion by Judge Thomas;

Partial Concurrence and Partial Dissent by Judge Wallace

SUMMARY*

The panel affirmed in part and reversed in part the district

court’s summary judgment in favor of the United States in an

action claiming that the United States improperly disclosed

tax information to the Japanese National Tax Administration

(NTA) during the course of a joint investigation.

In a prior appeal of this case, the panel concluded that the

two-year statute of limitations in 26 U.S.C. § 7431(d) is

jurisdictional and applied to Aloe Vera’s claims under

§ 7431(a), and remanded for the district court to make factual

findings and determine whether there is subject matter

jurisdiction. The panel also held that the statute of limitations

under 26 U.S.C. § 7431(d) for a claim of wrongful disclosure

of a tax return is subject to inquiry notice, and begins to run

when the plaintiff knows or reasonably should know of the

government’s allegedly unauthorized disclosures. On

remand, the district court ruled that some of Aloe Vera’s

claims were barred by the statute of limitations and dismissed

them.

*

This summary constitutes no part of the opinion of the court. It has

been prepared by court staff for the convenience of the reader.

ALOE VERA OF AMERICA , INC. V . UNITED STATES 3

In this appeal, the panel held that inquiry notice is not

triggered by a single generalized event, but rather by the

plaintiff’s actual or constructive knowledge of each particular

disclosure. The panel concluded that one of Aloe Vera’s two

claims was barred by the statute of limitations. As to the

remaining claim that was not time-barred, the panel remanded

because genuine issues of material fact (regarding whether

the government knowingly relayed false information to the

NTA) precluded summary judgment. The panel held that

extending immunity to the government under the good-faith

exception of § 7431(b) would eviscerate 26 U.S.C. § 6103’s

basic purpose of protecting against malevolent government

disclosure of tax return information.

Judge Wallace concurred in the majority’s opinion, but

dissented as to the remand because the plaintiffs failed to

carry their burden of establishing that their claims are not

barred by the statute of limitations.

COUNSEL

Tim A. Tarter, Woolston & Tarter, P.C., Phoenix, Arizona;

and Merwin D. Grant, Grant & Vaughn, P.C., Phoenix,

Arizona for plaintiffs-appellants.

Karen G. Gregory, Tax Division, Department of Justice,

Washington, D.C., for defendant-appellee.

4 ALOE VERA OF AMERICA , INC. V . UNITED STATES

OPINION

THOMAS, Circuit Judge:

This appeal presents the question, among others, of what

event triggers the running of the statute of limitations for a

claim for wrongful disclosure of a tax return pursuant to

26 U.S.C. § 7431(d). We conclude that the statute of

limitations begins to run when the plaintiff knows or

reasonably should know of the government’s allegedly

unauthorized disclosures. We also conclude, in the

circumstances presented by this case, that the statute of

limitations did not begin to run when the plaintiffs became

aware of a pending general investigation that would involve

disclosures, but only later when they knew or should have

known of the specific disclosures at issue. Applying these

principles to the facts of this case, we affirm in part and

reverse in part.

I

Tax returns and tax return information must be kept

confidential, unless a statutory exception applies. 26 U.S.C.

§ 6103. Section 6103 “was enacted in response to the use of

tax return information for political purposes revealed during

Watergate.” Rueckert v. IRS, 775 F.2d 208, 210 (7th Cir.

1985). To add teeth to this statutory protection for taxpayers,

Congress created a civil action against the government for an

IRS employee’s knowing or negligent unauthorized

disclosure of a taxpayer’s “return information.” 26 U.S.C.

§ 7431. The action must be brought within two years after

the date the unauthorized disclosure is discovered. § 7431(d).

ALOE VERA OF AMERICA , INC. V . UNITED STATES 5

“Return information” protected by the statute is very

broadly defined and 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, 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 liability (or the amount thereof)

of any person under this title for any tax,

penalty, interest, fine, forfeiture, or other

imposition, or offense.

26 U.S.C. § 6103(b)(2). “Taxpayer information obtained or

prepared by the IRS . . . is ‘return information’ regardless of

the person with respect to whom it was obtained or prepared.”

Mallas v. United States, 993 F.2d 1111, 1118 (4th Cir. 1993).

In this case, Aloe Vera of America, Inc., Rex G.

Maughan, Ruth G. Maughan, Maughan Holdings, Inc., Gene

Yamagata, and Yamagata Holdings, Inc. (collectively, “Aloe

Vera” or “Taxpayers”) claim that the United States

improperly disclosed tax information to the Japanese National

Tax Administration (“NTA”) during the course of a joint

investigation.

6 ALOE VERA OF AMERICA , INC. V . UNITED STATES

Under § 6103(k)(4), return information may be disclosed

to a foreign government that has a tax treaty with the United

States, “but only to the extent provided in, and subject to the

terms and conditions of, such convention or bilateral

agreement.” The United States has a tax treaty with Japan

that provides, in essence, that the IRS may lawfully disclose

any return information that is pertinent to preventing tax

fraud or fiscal evasion. Convention for the Avoidance of

Double Taxation and the Prevention of Fiscal Evasion with

Respect to Taxes on Income, U.S.-Japan, art. 26, ¶ 1, Mar. 8,

1971, 23 U.S.T. 967 (“Tax Treaty”).

Taxpayers claim that the IRS improperly provided false

tax information to the NTA, subjecting the United States to

liability under § 7431. The United States denies the claims.

The district court granted summary judgment to the United

States.

In the prior appeal in this case following the grant of

summary judgment, we focused on the two-year statute of

limitations provided in § 7431(d). We concluded that the

statute of limitations is jurisdictional and that it applied to the

claims Aloe Vera filed under 26 U.S.C. § 7431(a). Aloe Vera

of Am., Inc. v. United States, 580 F.3d 867, 872-73 (9th Cir.

2009). We vacated the judgment, remanded the case, and

directed the district court to make findings of fact and

determine whether there is subject matter jurisdiction. Id. at

873. We retained jurisdiction over the case and reserved

judgment on the merits.

On remand, the district court ruled that some of Aloe

Vera’s claims were barred by the statute of limitations and

dismissed them for lack of subject matter jurisdiction. Aloe

Vera of Am., Inc. v. United States, 730 F. Supp. 2d 1020,

ALOE VERA OF AMERICA , INC. V . UNITED STATES 7

1035 (D. Ariz. 2010) (order). Aloe Vera now appeals from

the district court’s dismissal Order.

II

The facts of this case are recited in our prior opinion. See

Aloe Vera, 580 F.3d at 869-70. For ease of reference, we

restate them here:

Rex Maughan (Maughan) is the owner of

Aloe Vera of America, Inc. (AVA), a United

States corporation that processes and sells

aloe vera products in the United States, Japan,

and other countries. Maughan and Yamagata,

indirectly through their respective holding

companies, are co-owners of Forever Living

Products Japan, Inc. (FLPJ), a Japanese

corporation that purchases products from

AVA.

In 1991 and 1992, AVA paid commissions

and royalty-based income received from FLPJ

to Maughan and Yamagata. The Internal

Revenue Service (IRS) was concerned about

whether this income was properly reported in

the United States. Consequently, on April 26,

1996, the IRS sent a letter to the Japanese

National Taxing Authority (NTA), proposing

that the authorities simultaneously examine

the tax reports of AVA, Maughan, Yamagata,

and FLPJ. The letter estimated that for tax

years 1991 and 1992, Maughan and Yamagata

failed to report commission and royalty

income from AVA product sales to FLPJ,

8 ALOE VERA OF AMERICA , INC. V . UNITED STATES

totaling more than $32 million. In August

1996, the IRS and NTA held a meeting to

discuss the examination. During this time,

Aloe Vera apparently did not know about the

examination and did not know that the NTA

and IRS were disclosing information to each

other.

On August 15, 1996, the IRS notified

Maughan and AVA of the simultaneous

examination. This appears to be the first

notification that Maughan and AVA had of

the investigation. At the end of 1996, the NTA

made an audit proposal to FLPJ, which FLPJ

rejected, and in early 1997, the NTA sent

correction notices to FLPJ regarding its tax

liabilities. In February 1997, the IRS sent

letters to Maughan and AVA to propose tax

adjustments. Shortly thereafter, on March 4,

1997, Maughan and AVA took the offensive

and filed requests pursuant to the Freedom of

Information Act for copies of documents

exchanged by the NTA and the IRS during the

simultaneous examination.

On October 9, 1997, Japanese news sources

reported that Aloe Vera had failed to report

income of 7.7 billion yen (at the time,

approximately $60 million) to tax authorities.

The Japanese reporters attributed this

information to unidentified “tax sources” and

the IRS. After the news of the simultaneous

examination leaked, Aloe Vera lodged a

complaint with the United States Competent

ALOE VERA OF AMERICA , INC. V . UNITED STATES 9

Authority, accusing the NTA of intentionally

disclosing tax information to the public.

Income tax treaties generally permit taxpayers

to request assistance from a designated

“competent authority” if they believe that any

party to the treaty has taken action that has

resulted or will result in taxation that is

contrary to the provisions of the treaty. Rev.

Proc.2006-54, 2006-2 C.B. 1035. After an

investigation, the Competent Authority found

no proof that the NTA had leaked the

information.

On October 6, 1999, Aloe Vera filed a

complaint against the United States

government in the district court under

26 U.S.C. § 7431(a), containing two counts.

In Count I, Aloe Vera alleged that the IRS had

disclosed false information to the NTA in

violation of 26 U.S.C. § 6103(a). In Count II,

Aloe Vera alleged that the IRS had further

violated section 6103 by disclosing certain tax

information to the NTA even though the IRS

knew or should have known that the NTA

would leak the information.

The government moved to dismiss the

complaint on several grounds, including that

the complaint was barred on jurisdictional

grounds by the two-year statute of limitations

contained in section 7431(d). The district

court held that the statute of limitations in that

section was not jurisdictional, but

nevertheless dismissed the complaint (with

10 ALOE VERA OF AMERICA , INC. V . UNITED STATES

leave to amend) because Aloe Vera had failed

to plead a date of discovery of the allegedly

unauthorized disclosures within the two-year

limitations period. After Aloe Vera filed an

amended complaint, the court refused to

dismiss the action as untimely because the

amended complaint included an allegation

that Aloe Vera did not discover the nature of

the IRS disclosures to the NTA until August

1998, when Aloe Vera received disclosures

under the Freedom of Information Act

pursuant to a court order.

Subsequently, the government moved for

summary judgment on both counts, and Aloe

Vera moved for summary judgment on Count

I. The district court granted the government’s

motion on both counts. As to Count I, the

district court held that the government’s

disclosure of allegedly false information to

the NTA did not violate section 6103(a). As to

Count II, the district court held that Aloe Vera

had not raised a genuine issue of material fact

as to whether the IRS knew or should have

known, prior to October 1997, that the NTA

routinely leaked information received under

the treaty. Aloe Vera timely appealed,

challenging the district court’s summary

judgment on both counts.

Id.

ALOE VERA OF AMERICA , INC. V . UNITED STATES 11

III

We first turn to the question that we remanded, namely

the application of the statute of limitations. The statute of

limitations in 26 U.S.C. § 7431(d) provides that a claim for

wrongful disclosure of tax return information “may be

brought . . . at any time within 2 years after the date of

discovery by the plaintiff of the unauthorized inspection or

disclosure.” In Aloe Vera I, we held that this statute of

limitations is jurisdictional and that it

begins to run on the date on which a plaintiff

discovers that the allegedly unauthorized

inspection or disclosure has taken place,

regardless of whether the plaintiff believed at

that time that the inspection or disclosure was

authorized. W e co ncl ude[ d] that

‘unauthorized’ merely modifies ‘inspection or

disclosure.’ So construed, an action pursuant

to section 7431(d) must be filed within two

years of the date of discovery of the

supposedly improper disclosure, not the date

when the plaintiff realizes that a disclosure

was unauthorized.

580 F.3d at 872.

The question now before us is when the “date of

discovery” occurs and whether the statute of limitations

begins to run on a single date of discovery for all disclosures.

12 ALOE VERA OF AMERICA , INC. V . UNITED STATES

A

The “date of discovery” on which the § 7431(d) statute of

limitations begins to run is the date when a plaintiff knows or

reasonably should know of an allegedly unauthorized

inspection or disclosure. This rule accords with the “general

federal rule”: that a limitations period begins to run when

“‘the plaintiff knows or has reason to know of the injury

which is the basis of the action.’” Mangum v. Action

Collection Serv., Inc., 575 F.3d 935, 940 (9th Cir. 2009)

(quoting Norman-Bloodsaw v. Lawrence Berkeley Lab.,

135 F.3d 1260, 1266 (9th Cir. 1998)). We have long applied

this general rule in many different statutory contexts. See

e.g., Trotter v. Int’l Longshoremen’s & Warehousemen’s

Union Local, 13, 704 F.2d 1141, 1143 (9th Cir. 1983) (per

curiam) (applying constructive discovery to the Labor-

Management Reporting and Disclosure Act of 1959); Norco

Constr., Inc. v. King Cnty., 801 F.2d 1143, 1145 (9th Cir.

1986) (applying constructive discovery to claims under

§ 1983); Bagley v. CMC Real Estate Corp., 923 F.2d 758,

760–61 (9th Cir. 1991) (same); Living Designs, Inc. v. E.I.

Dupont de Nemours & Co., 431 F.3d 353, 365 (9th Cir. 2005)

(applying constructive discovery to RICO claims). We see no

reason to deviate from the general federal rule in this case,

and thus we apply it to claims governed by § 7431(d)’s

statute of limitations.

Additionally, the Supreme Court recently held that the

term “discovery,” as used in 28 U.S.C. § 1658(b)(1)’s statute

of limitations, “encompasses not only those facts the plaintiff

actually knew, but also those facts a reasonably diligent

plaintiff would have known.” Merck & Co. v. Reynolds,

130 S. Ct. 1784, 1796 (2010). Although Merck was a

securities fraud case, the Court interpreted the statute against

ALOE VERA OF AMERICA , INC. V . UNITED STATES 13

the background of the so-called “discovery rule” in fraud

cases and “the history and precedent surrounding the use of

the word ‘discovery’ in the limitations context generally.”

Id. at 1795. Here, § 7431(d) also uses the phrase “date of

discovery” to describe the two-year statute of limitations

period. Although this is not a securities fraud case, 26 U.S.C.

§ 7431’s text supports applying the discovery rule in this

context.

Thus, in this case, Aloe Vera’s claims are subject to

inquiry notice. That is, the § 7431(d) statute of limitations

began to run when Aloe Vera knew or reasonably should

have known of the government’s allegedly unauthorized

disclosures.

B

Although the doctrine of inquiry notice applies to

§ 7431(d), inquiry notice is not triggered by a single

generalized event, but rather by the plaintiff’s actual or

constructive knowledge of each particular disclosure. Indeed,

in our remand order, we used plural designations of “dates”

and “disclosures,” because each disclosure has its own

discovery date for jurisdictional purposes:

On remand, the district court shall make

findings of fact regarding the dates on which

Aloe Vera discovered the respective

disclosures underlying each of Aloe Vera’s

claims. With respect to Count I, the district

court shall make findings of fact regarding the

dates on which Aloe Vera discovered each

allegedly false disclosure. The court shall

have jurisdiction over only those claims

14 ALOE VERA OF AMERICA , INC. V . UNITED STATES

related to disclosures, if any, that were

discovered within the two-year statutory

period. With respect to Count II, the district

court shall make findings of fact regarding the

dates on which Aloe Vera discovered that the

IRS had disclosed information to the NTA.

Aloe Vera I, 580 F.3d at 873 (emphasis added).

This conclusion is apparent from an examination of the

statute in context. United Sav. Ass’n of Tex. v. Timbers of

Inwood Forest Assocs., 484 U.S. 365, 371 (1988). Although

§ 7431(d) does not specifically address the question,

§ 7431(c)’s damages provision is instructive. It does not

provide damages for general or collective disclosures.

Instead, it specifies that a defendant held liable under

§ 7431(a) may be subject to damages of “$1,000 for each act

of unauthorized inspection or disclosure.” 26 U.S.C.

§ 7431(c)(1)(A) (emphasis added). It thus would be

incongruous for us to interpret § 7431(d) as being limited to

a single act, encompassing collective disclosures.

General notice of an audit cannot put someone on inquiry

notice of a specific conversation or disclosure that has not yet

occurred. Thus, it does not make sense for the statute of

limitations to begin to run on a single date for all disclosures

if some of the allegedly unauthorized disclosures have not yet

been made. For example, in this case, the government argues

that the statute of limitations should have started running

when the IRS informed Aloe Vera of the IRS/NTA joint

investigation in August 1996. But Aloe Vera alleges that the

government wrongfully disclosed return information at a

meeting in Tokyo that took place in November 1996. Aloe

Vera, 730 F. Supp. 2d at 1032. Of course, the government’s

ALOE VERA OF AMERICA , INC. V . UNITED STATES 15

notice of the joint investigation pre-dates the Tokyo meeting.

Thus, if the statute of limitations began to run on the single

date that the government proposes, Aloe Vera would not have

had the full two-year period to file a claim based on the

alleged disclosures made at the Tokyo meeting.

Moreover, the government’s reading of the statute of

limitations would seriously undermine the statute’s

protections. A multi-jurisdictional audit may take many

years, and the taxpayer may well not learn of unauthorized

disclosures until a lengthy audit is completed. If inquiry

notice were triggered by audit notice alone, the statute would

likely run in most cases before the taxpayer learned of any

unauthorized disclosure. There is no indication that Congress

intended such an anomalous result, particularly because one

of § 6103’s main purposes is protection against malevolent

government disclosure. See Rueckert, 775 F.2d at 210

(“Section 6103 was enacted in response to the use of tax

return information for political purposes revealed during

Watergate.”).

In this case, the government’s August 1996 notice of the

joint IRS/NTA investigation was not sufficient to put Aloe

Vera on inquiry notice of each of the particular items of

information the government disclosed. The August 1996

audit notice was general and did not provide the exact

information that the IRS had or would disclose to the NTA.

In response, Aloe Vera diligently tried to learn the exact

information the IRS disclosed to the NTA by filing a

Freedom of Information Act (FOIA) request. See Aloe Vera

I, 580 F.3d at 869. The government initially resisted

providing the requested information, but eventually disclosed

16 ALOE VERA OF AMERICA , INC. V . UNITED STATES

it in August 1998.1 The government conceded that this was

the first time Aloe Vera learned of the specific disclosures at

issue in this litigation.

IV

Applying the foregoing interpretation to the case at hand,

we conclude that the district court erred in dismissing some

of the Taxpayers’ claims for lack of subject matter

jurisdiction.

A

There were two factual claims raised in Count I: (1) the

charge that the IRS falsely informed the NTA that Taxpayers

had significant unreported income and (2) a false statement

made by a United States representative that the commissions

had not varied, although the sales price had. The district

court did not hold that the allegedly false unreported income

statement claim was barred by the statute of limitations. It

did, however, view the “Commission vs. Price Statement” as

being asserted outside the statute of limitations and therefore

outside the jurisdiction of the court.

The district court erred in concluding that it lacked

jurisdiction over the “Commission vs. Price Statement.” See

Aloe Vera, 730 F. Supp. 2d at 1035. The district court

determined that the Yamagata plaintiffs failed to file their

Commission vs. Price False Statement claim on time because

they “offer[ed] no evidence of when they first learned of this

1

AVA and Maughan’s counsel then later shared these records with

Yamagata and Yamagata Holdings, Inc., who did not participate in the

FOIA case.

ALOE VERA OF AMERICA , INC. V . UNITED STATES 17

alleged false statement.” Id. at 1027. However, the AVA and

Maughan plaintiffs presented evidence that they first learned

of this alleged false statement when they received a response

to their FOIA request in August of 1998. Id. at 1025. The

Aloe Vera and Maughan plaintiffs’ counsel then “gave the

notes that revealed the statement to counsel for Gene

Yamagata and Yamagata Holdings, Inc. after August 1998.”

Id. at 1025-26. Nonetheless, the district court held that this

evidence was not sufficient to establish subject matter

jurisdiction over this claim because the Yamagata plaintiffs

“never claim[ed] that receipt of the notes from the other

Plaintffs’ counsel ‘after’ August 1998 [was] the first time

they learned of the alleged false statement.” Id. at 1027.

The Yamagata plaintiffs presented evidence sufficient to

establish subject matter jurisdiction over the Commission vs.

Price False Statement claim. The only place in the record

where the “Commission vs. Price Statement” exists is in IRS

Manager Sturgis’ notes from the August 1996 IRS/NTA

meeting. The Aloe Vera and Maughan plaintiffs did not

discover those notes until they received the FOIA documents

in August 1998. They later shared this information with the

Yamagata plaintiffs’ counsel, who alleged that this was the

first time they learned of the Commission vs. Price False

Statement. There is no evidence that the IRS disclosed this

information to anyone else before turning over the FOIA

documents to the Aloe Vera and Maughan plaintiffs. It

logically follows that the Yamagata plaintiffs first discovered

this evidence only when the Aloe Vera and Maughan

plaintiffs’ counsel shared it with the Yamagata plaintiffs’

counsel. The district court’s hypothetical to the contrary –

that the Yamagata plaintiffs may have somehow discovered

the “Commission vs. Price Statement” before their counsel

learned of it – is not supported by any evidence in the record,

18 ALOE VERA OF AMERICA , INC. V . UNITED STATES

and we must view the factual record in the light most

favorable to the Yamagata plaintiffs. Olsen v. Idaho State

Bd. of Med., 363 F.3d 916, 922 (9th Cir. 2004).

Furthermore, a taxpayer who knows that the IRS has

disclosed his tax return generally has no reason to suspect that

the IRS has also fabricated and disclosed a false statement.

Thus, until the taxpayer knows or should have known about

the disclosure of that specific, false statement, the statute of

limitations does not begin to run on a claim of disclosure of

false information, because the taxpayer has not discovered the

existence of the disclosure. Accordingly, we hold that the

Yamagata plaintiffs’ Count I Commission v. Price Statement

claim is not barred by the statute of limitations because it was

first discovered within the two-year filing period, and we

have subject matter jurisdiction over this claim.

B

The district court did not err in dismissing Aloe Vera’s

Count II claims for lack of jurisdiction. See Aloe Vera,

730 F. Supp. 2d at 1035. Taxpayers’ Count II claims rest on

the premise that any and all disclosures of return information

to the NTA were unauthorized because the IRS should have

known that the NTA would not hold that information in

confidence. Because the statute of limitations is

jurisdictional, Taxpayers bear the burden of establishing

subject matter jurisdiction. Kingman Reef Atoll Invs. L.L.C.

v. United States, 541 F.3d 1189, 1197 (9th Cir. 2008). Thus,

Taxpayers bear the onus of identifying which disclosures

were not known to them until less than two years before they

filed suit.

ALOE VERA OF AMERICA , INC. V . UNITED STATES 19

Taxpayers failed to carry that burden. Their complaint

does not identify which disclosures were unknown to them as

of October 6, 1997. The record indicates that, by that date,

Taxpayers should have known that the IRS had disclosed to

Japan all, or at least most, of the information contained in

their 1991–1995 tax returns. The simultaneous examination

notice did not trigger the statute of limitations, because a

notice that the government intends to disclose documents in

the future does not constitute discovery of any actual

disclosure. But Taxpayers should have known of the

disclosure of most of their return information once the

investigations had concluded, their tax amounts for those

years had been adjusted, and they received a letter noting that

“a voluminous amount of information” had been exchanged.

We decline to vacate to allow an amendment of the

complaint or an evidentiary hearing. Our review of the

record shows that Taxpayers never asked to amend their

complaint and that only the government even hinted that an

evidentiary hearing might be held. The district court gave the

parties the briefing on remand that they requested. Aloe Vera,

730 F. Supp. 2d at 1035. Furthermore, Taxpayers could not

have been taken by surprise by the district court’s holding

that constructive notice applies, as this is the general federal

rule. It was also mentioned as a possibility in our prior oral

argument. While the parties may not have used the term

“constructive notice” in their briefs to the district court,

Taxpayers were aware that the government argued “that there

exists but one critical limitation date which began to run here

when Taxpayers first learned that the IRS was making

disclosures of any sort to the NTA,” a theory that parallels

constructive notice. Thus, the district judge did not abuse his

discretion by declining to order an additional evidentiary

hearing. Aloe Vera, 730 F. Supp. 2d at 1035.

20 ALOE VERA OF AMERICA , INC. V . UNITED STATES

V

Having determined that the district court had jurisdiction

over the allegations contained in Count I, we turn to the

question whether the district court properly granted summary

judgment on those claims. We conclude that genuine issues

of material fact preclude summary judgment on the claims.

A

The district court properly concluded that Taxpayers had

stated a claim for relief under § 7431 for improper

unauthorized disclosure of tax return information. Disclosure

of false tax return information can constitute tax return

information within the meaning of the statute. See Mallas,

993 F.2d at 1118. Taxpayers allege that the United States

disclosed false tax return information to NTA.

As we have also discussed, under § 6103(k)(4), return

information may be disclosed to a foreign government that

has a tax treaty with the United States, “but only to the extent

provided in, and subject to the terms and conditions of, such

convention or bilateral agreement.” The Tax Treaty provides,

in relevant part, that “[t]he competent authorities of the

Contracting States shall exchange such information as is

pertinent to carrying out the provisions of this Convention or

preventing fraud or fiscal evasion in relation to the taxes

which are the subject of this Convention.” Tax Treaty, art.

26, ¶ 1 (emphasis added). Thus, under the Tax Treaty, the

IRS may lawfully disclose any return information “pertinent”

to “preventing [tax] fraud or fiscal evasion.” The IRS argues

that even false information may be “pertinent” and therefore

protected under the exception.

ALOE VERA OF AMERICA , INC. V . UNITED STATES 21

As a general matter, treaties of the United States are

interpreted liberally to give effect to their purposes. See

United States v. Stuart, 489 U.S. 353, 368 (1989). Thus,

under the Tax Treaty, any information that may reasonably be

considered pertinent should be covered under § 6103(k)(4)’s

disclosure exemptions.

In this case, the simultaneous tax examination by both

countries was pertinent to the Tax Treaty’s purpose of

avoiding tax evasion, and the investigation of potentially

fraudulent commissions was equally pertinent. The question

is whether a knowing provision of false information can be

“pertinent” to “preventing fraud or fiscal evasion.”

“Pertinent” is defined as “[p]ertaining to the issue at hand;

relevant.” Black’s Law Dictionary 1261 (9th ed. 2009).

“Relevant” is defined as “[l]ogically connected and tending

to prove or disprove a matter in issue; having appreciable

probative value—that is, rationally tending to persuade

people of the probability or possibility of some alleged fact.”

Id. at 1404. Thus, to be pertinent to fighting tax fraud,

information must tend to prove or persuade that tax fraud or

evasion has actually occurred.

Knowingly false information cannot tend to prove tax

fraud. Such information does not lead to useful evidence, and

it is certainly not competent evidence in its own right. Thus,

information known to be false cannot be subject to protection

as “pertinent” information under the Tax Treaty. One of

§ 6103’s main purposes is protection against malevolent

government disclosure. Rueckert, 775 F.2d at 210. Congress

intended § 6103 to limit disclosure of tax information to

narrowly defined circumstances. Tierney v. Schweiker,

718 F.2d 449, 455 (D.C. Cir. 1983). A definition of

22 ALOE VERA OF AMERICA , INC. V . UNITED STATES

“pertinent” that allows the IRS to knowingly disclose false

taxpayer information would eviscerate the statute’s purpose.

Known falsehoods are not pertinent to tax investigations, and

knowing disclosures of such false information, even to a

treaty partner, is actionable under § 6103 and § 7431, as the

district court properly concluded. The knowing provision of

false information can never further the purposes of a tax

treaty.

B

Although the district court concluded that Taxpayers had

stated a claim for relief, it granted summary judgment on

Count I. Aloe Vera does not argue that mere negligent

disclosure of false information to a tax treaty partner can

support liability under § 6103(k)(4). Thus, Aloe Vera may

overcome summary judgment only if it can show a dispute of

material fact as to whether the government knowingly relayed

false information to the NTA.

1

The IRS’s Simultaneous Examination Proposal suggested

that Taxpayers had not reported an estimated $32 million of

income. The government does not contend that this figure

was, in any respect, accurate. Rather, the government

suggests that this number was a mere estimate, and therefore

could not be true or false. Thus, the IRS could not have

“knowingly” turned over false information. The district court

agreed and rested its summary judgment decision primarily

on this argument.

But even an estimate can be objectively false if, for

example, the communicator knows it cannot be true. See

ALOE VERA OF AMERICA , INC. V . UNITED STATES 23

United States ex rel. Siewick v. Jamieson Sci. & Eng’g, Inc.,

214 F.3d 1372, 1378 (D.C. Cir. 2000) (“[A] faulty estimate or

opinion can qualify as a false statement where the speaker

knows facts ‘which would preclude such an opinion’ . . . .”

(quoting Harrison v. Westinghouse Savannah River Co.,

176 F.3d 776, 792 (4th Cir. 1999)). “[A]n opinion or estimate

carries with it ‘an implied assertion, not only that the speaker

knows no facts which would preclude such an opinion, but

that he does know facts which justify it.’” Harrison, 176 F.3d

at 792 (quoting W. Page Keeton, et al., Prosser & Keeton on

the Law of Torts § 109, at 760 (5th ed. 1984)). More

importantly, the question in this case is not the amount of the

estimate, but whether Taxpayers had accurately reported the

information.

Here, the government has provided no basis whatsoever

for its accusations that Taxpayers had a $32 million liability.

There is support in the record for Taxpayers’ assertion that

the IRS knew that Taxpayers had correctly reported the

supposedly unreported $32 million in commissions and

royalties. Thus, there is a genuine issue of material fact as to

whether the government knowingly disclosed false

information, and summary judgment was not appropriate on

this issue.

2

The second instance of false disclosure in Count I is that,

in a presentation to the NTA, an IRS official stated that

commission payments on sales of aloe vera products

remained unchanged between 1985 and 1989, while prices

fluctuated. This alleged statement implied that Taxpayers

had unreported income. In support of this claim, Taxpayers

offer notes taken during the presentation and an IRS audit

24 ALOE VERA OF AMERICA , INC. V . UNITED STATES

from this period showing that the commissions did, in fact,

change. The notes resemble formal minutes. In the relevant

portion, which is preceded and followed by heavily redacted

information, the notes state:

Rick Smith commented that the U.S. team

feels that they are doing other things in other

countries because their sales are going up and

net income is going down. Rick also stated

that through the years the sales price of the

product changed quite a bit. The commission

always stayed the same.

The district court determined that the notes, the audit, and

deposition testimony were insufficient, concluding that “the

Court is not willing to hold the United States liable for

intentional falsehoods based on notes taken by two different

attendees of a meeting–attendees who admitted to the

weakness of their notes.”

Unfortunately, this conclusion was made at summary

judgment, not after trial. In deciding whether to grant

summary judgment, “the judge’s function is not himself to

weigh the evidence and determine the truth of the matter but

to determine whether there is a genuine issue for trial.”

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249 (1986).

“Credibility determinations, the weighing of the evidence,

and the drawing of legitimate inferences from the facts are

jury functions, not those of a judge . . . .” Id. at 255. Further,

at the summary judgment stage, we must draw all reasonable

inferences in favor of the non-moving party and, where

disputed issues of material fact exist, assume the version of

the material facts asserted by the non-moving party to be

correct. Mattos v. Agarano, 661 F.3d 433, 439 (9th Cir.

ALOE VERA OF AMERICA , INC. V . UNITED STATES 25

2011) (en banc), cert. denied, 132 S. Ct. 2681 (2012), 132 S.

Ct. 2682 (2012), 132 S. Ct. 2682 (2012), 132 S. Ct. 2684

(2012). Here, reasonable inferences may be drawn that IRS

representatives falsely communicated to Japanese authorities

that commissions had not fluctuated with price. Although

these assertions have yet to be tested in the crucible of trial,

the evidence is sufficient to withstand a motion for summary

judgment.

C

The government argues that, even if it knowingly made

false disclosures, it is immune from liability because it had a

good-faith misinterpretation of § 6103(k)(4). We disagree.

Section 7431(b) carves out a good-faith exception to the

liability imposed by § 7431(a). It provides that “[n]o liability

shall arise . . . with respect to any inspection or disclosure . . .

which results from a good faith, but erroneous, interpretation

of section 6103.” 26 U.S.C. § 7431(b)(1). Whether the

government’s erroneous interpretation of § 6103 was in good

faith turns on whether the government violated “clearly

established statutory or constitutional rights of which a

reasonable person would have known.” McDonald v. United

States, 102 F.3d 1009, 1011 (9th Cir. 1996) (internal

quotation marks omitted). The burden is on the government

to plead and prove good faith as an affirmative defense. Id.

at 1010.

As we have already explained, Congress intended § 6103

to protect against malevolent government disclosure of

taxpayers’ tax return information. Rueckert, 775 F.2d at 210.

For § 7431(b) to shield the government from liability at this

stage in the litigation, the government must argue that, even

26 ALOE VERA OF AMERICA , INC. V . UNITED STATES

if there is a genuine dispute as to whether it knowingly

disclosed false tax return information to the NTA, it is

nevertheless entitled to summary judgment because it made

an erroneous interpretation of § 6103(k)(4) by which it

believed it was permitted to make such a false disclosure.

This interpretation of § 6103(k)(4) would clearly eviscerate

the basic purpose of § 6103. A knowingly false disclosure

could not be made in good faith because it would be contrary

to established statutory rights of which a reasonable person

would have known. See McDonald, 102 F.3d at 1011.

Accordingly, the government is not entitled to summary

judgment on the basis of the good-faith defense of § 7431(b).

VI

In sum, we have jurisdiction over Taxpayers’ Count I

claims, but we do not have jurisdiction over Taxpayers’

Count II claims. We therefore reverse the district court’s

dismissal of the Yamagata plaintiffs’ Count I claims for lack

of jurisdiction and affirm the district court’s dismissal of

Taxpayers’ Count II claims. Because genuine issues of

material fact exist as to the claims asserted in Count I, we

reverse the grant of summary judgment on those claims.

The parties shall bear their own costs on appeal.

AFFIRMED IN PART; REVERSED IN PART;

REMANDED.

ALOE VERA OF AMERICA , INC. V . UNITED STATES 27

WALLACE, Senior Circuit Judge, concurring in part and

dissenting in part.

I concur in the majority’s opinion with one exception. It

is clear to me that the Yamagata plaintiffs have failed to carry

their burden of establishing that their claims are not barred by

the statute of limitations.

“When subject matter jurisdiction is challenged under

Federal Rule of Procedure 12(b)(1), the plaintiff has the

burden of proving jurisdiction in order to survive the motion.”

Kingman Reef Atoll Invs., L.L.C. v. United States, 541 F.3d

1189, 1197 (9th Cir. 2008) (internal quotation marks

omitted). When we remanded this case to the trial court to

resolve the statute of limitations question, all plaintiffs

alleged that they first learned about the critical statements in

August 1998, when the Maughan/AVA plaintiffs’ counsel

received notes from an IRS meeting. The Maughan/AVA

plaintiffs’ allegation is supported by an affidavit from their

general counsel indicating that they first learned of the

statements in question when the notes were received. The

only support for the Yamagata plaintiffs’ allegation, on the

other hand, is the Maughan/AVA plaintiffs’ counsel’s

statement that he gave the notes to the Yamagata plaintiffs’

counsel sometime after he received them. Obviously, that

allegation does not prove any date on which the Yamagata

plaintiffs first learned of the statements in question.

The majority nonetheless concludes that the Yamagata

plaintiffs met their burden because (1) there is no evidence in

the record that suggests the Yamagata plaintiffs learned about

the statements before their attorneys and (2) the evidence

should be viewed in the light most favorable to the Yamagata

plaintiffs as the nonmoving party.

28 ALOE VERA OF AMERICA , INC. V . UNITED STATES

While both these general premises are correct, they lead

nowhere to solve the critical issue before us. A permissible

inference cannot replace required supporting information. On

the relevant question, the Yamagata plaintiffs have not given

us what we need most: an affidavit that supports their

individualized awareness date. The majority’s avoidance of

the required proof cannot constitute a satisfaction of the

Yamagata plaintiffs’ burden of proving jurisdiction.

Federal jurisdiction is always a critical issue. Without its

establishment in a case, we do not have power to act. The

Yamagata plaintiffs could easily prove jurisdiction by an

affidavit stating the date they gained knowledge. Their failure

to do so speaks volumes about whether they could prove

jurisdiction. The fact is that they did not and the majority’s

attempt to make an end run around this critical issue is

unfortunate.

As to the Yamagata plaintiffs, they had the burden to

prove jurisdiction. Perhaps they could have but did not. They

should be dismissed for failure to prove jurisdiction.