ODC tax liability and audit information cannot be disclosed.

• Author: Beavers, James A.
• Position: Ozone-depleting chemicals

The Federal Circuit held that audit tests and related information of third-party taxpayers pertaining to the assessment of the ozone-depleting chemicals excise tax was return information not subject to disclosure under Sec. 6103(a).

Background of ODC Excise Tax

To discourage the use of chlorofluorocarbons and halons (ozone-depleting chemicals or ODCs), Sec. 4681 imposes an excise tax on any product imported for consumption, use, or warehousing that is sold or used in the United States and in which any ODCs were used as material in the manufacturing or production of the product. Manufacturers are allowed to self-determine the excise tax owed based on the weight of each ODC used as a material in the imported product and to submit as supporting proof a letter signed by the manufacturer that adequately identifies the product and states the weight of each ODC used as a material in the product's manufacture. (For more on the tax, see Karet and Hoffman, "Are You Properly Paying the Ozone-Depleting Chemicals Excise Tax?" 41 The Tax Adviser 377 (June 2010).)

The IRS, however, found that many foreign manufacturers were not paying the tax and were instead submitting letters claiming to have never used ODCs or to have eliminated their use to avoid the costs of switching to non-ODC manufacturing processes. This led the IRS to contract with the Pacific Northwest National Laboratory (PNNL), a federally funded research center, to develop a test to determine whether ODCs were being used in the manufacture of imported items and to assist the IRS in auditing reporting companies.

According to the IRS's Ozone Depleting Chemicals (ODC) Excise Tax Audit Techniques Guide, after placing the electronic circuit board of an item being tested in a sterile environment, PNNL subjects it to various levels of heat. The gases released from the board at each temperature level are captured and analyzed to test for the presence (although not the actual quantity) of ODCs in the board.

Background of This Case

Panasonic manufactured and imported for sale in the United States consumer telephones assembled in Tijuana, Mexico. Panasonic reported that it owed no excise tax and submitted a certified letter from its overseas manufacturers and suppliers stating that they used no ODCs in the manufacture of the phones.

In 2005, the IRS audited Panasonic's imports. As part of the audit, PNNL purchased Panasonic's phones from retail stores and tested the phones' circuit boards. After...