Designated Orders:  7/10/2017 – 7/14/2017

Today we welcome back William Schmidt  the LITC Director for Kansas Legal Services for our “Top of the Order”, designated order post for the week of 7/10 to 7/14.  Steve.

There were 5 designated orders this week and all were on motions for summary judgment.  The majority of the rulings followed a pattern of the IRS filing a motion for summary judgment, the Petitioner had or continued to have a degree of nonresponsiveness, and the Tax Court granted summary judgment for the IRS.  Except for one this week, summary judgment was in favor of the IRS.

Unsuccessful Whistleblowers

Docket # 4569-16W, Thomas H. Carroll, Jr. and David E. Stone v. C.I.R. (Order and Decision Here)

Petitioners submitted to the IRS Whistleblower Office a joint form 211, Application for Award for Original Information, with information about numerous taxpayers who allegedly improperly filed their tax returns.  The claims were referred to the IRS Large Business and International Division and one of the taxpayers was selected, with the matter referred to IRS examiners who had already audited that taxpayer.  The IRS decided to take no action against that taxpayer or any of the others submitted by Petitioners and no proceeds were collected to justify a whistleblower award.

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The Petitioners filed a petition with Tax Court.  In summarizing the petition, this order states that during the IRS review of the whistleblower claims, “the IRS had engaged in negligent conduct, misfeasance, malfeasance, and/or nonfeasance, and discriminative audit policies.  They further alleged that the IRS had permitted flawed tax returns to go unaudited, ignored evidence of systemic prohibited transactions, and wrongfully disallowed petitioners’ claims.  Petitioners requested that the Court conclude that the IRS acted arbitrarily, declare that an implied contract was created between the parties, direct the IRS to enforce Federal income tax laws, and determine that they are entitled to damages equal to the fair market value of their services.”  In their motions for partial summary judgment, the petitioners also accuse the IRS of unreasonable delay, misuse and mismanagement of government resources and administrative delay leading to abuse of discretion.

The Court granted the IRS motion for summary judgment since there was no genuine dispute as to any material fact (the standard for granting summary judgment).  No tax proceeds were collected from a taxpayer to grant a whistleblower award, plus the claims and relief sought by the petitioners were not cognizable by the Court.

My main take on the situation was that being disrespectful to the IRS did not garner the Petitioners any favor with the Tax Court.

Some Quick Takes on Summary Judgments

Docket # 14345-16 L, Russell T. Burkhalter v. C.I.R. (Order Here)

Docket # 12320-16SL, Heath Davis v. C.I.R. (Order and Decision Here)

  • In both the Davis and Burkhalter cases, Judge Armen states that to assist petitioners in preparing a response to the IRS motion for summary judgment, the Court encloses with its Order (for petitioner to file a response to the motion) a copy of Q&A’s the Court prepared on the subject “What is a motion for summary judgment?”
  • In Burkhalter, the petitioner did not dispute the underlying tax liability for 2010, 2011 and 2013 when using Form 12153, Request for a Collection Due Process or Equivalent Hearing.  However, petitioner did dispute the liability for those years when filing a petition with the Tax Court.  The Court granted summary judgment for the IRS, citing a regulation that states:  “Where the taxpayer previously received a CDP Notice under section 6320 with respect to the same tax and tax period and did not request a CDP hearing with respect to that earlier CDP Notice, the taxpayer already had an opportunity to dispute the existence or amount of the underlying tax liability.”
  • In Davis, there is a theme of the petitioner citing hardship but not being responsive to IRS requests.  In response to a notice of intent to levy, Mr. Davis said he was going through hardship and had expenses exceeding income when filing his own Form 12153.  The settlement officer requested Mr. Davis fill out a Form 433-A financial statement and show proof of estimated tax payments.  On Mr. Davis’s 433-A, he showed income of $2,100 with greater expenses while the settlement officer calculated income of $2,994 with expenses of $2,473, leaving $521 to potentially pay the IRS each month.  Mr. Davis was unresponsive to later requests.  Based on a Notice of Determination, Mr. Davis petitioned the Tax Court.  In the petition and amended petition, Mr. Davis requested payment arrangements, potentially of $50 monthly.  The Court granted summary judgment to the IRS based on Mr. Davis’s nonresponsiveness, citing that it is the obligation of the taxpayer and not the reviewing officer to propose collection alternatives.  My take on the situation is that while those conclusions may be procedurally correct, it sounds like Mr. Davis needed some form of assistance and then both parties would have had a better result.

Docket # 26557-15 L, Michael Timothy Bushey v. C.I.R. (Order and Decision Here)

There are two main issues in this case, whether there was abuse of discretion by the settlement officer and the underlying tax liability for the petitioner.

  • Petitioner filed a Form 12153 and the IRS acknowledged receipt by letter dated May 21, 2015.  The settlement officer sent a response on May 28 scheduling a phone conference for July 17, requesting information and stating that the petitioner could contact her to reschedule or set an in-person conference.  The officer was sick on July 17 so sent a letter July 20 rescheduling the phone hearing for August 4, also stating no documents had been received.  On August 4, she received a phone message from Petitioner stating that he would be unavailable for a hearing that day but would be available the first or second week of September.  She sent a letter scheduling the hearing for September 2.  On September 2, she was unable to reach the Petitioner but received a letter the next day acknowledging receipt of the August 5 letter stating he did not request a phone conference and that “by law” he was entitled to a “due process hearing.”  At each point, the petitioner did not send any of the requested supporting documents.  On September 22, Appeals sent Petitioner a Notice of Determination letter.  A lengthy summary was attached to the letter and was also quoted at length in the order currently being discussed.  The Court granted the IRS summary judgment, stating there had been no abuse of discretion in their collection actions.  It also was not an abuse of discretion since there was no in-person meeting between the settlement officer and the Petitioner.  I would state there was quite the opposite of an abuse of discretion since the settlement officer made several attempts to get information from the Petitioner.
  • Regarding the tax liability itself, in the Petitioner’s Form 12153 for 2008, he checked the box for an Offer in Compromise and stated, “I do not owe this money.  It was a tax credit, not a tax owed.  It was a first time home buyers credit and it was based on the first & only house I have ever purchased.”  The settlement officer had requested he submit to her a Form 656, Offer in Compromise, but that did not happen.  In his petition based on the Notice of Determination, Petitioner said, “The amount in dispute was not back taxes or unpaid taxes, but a tax credit (a.k.a. loan).  The amount was discharged under bankruptcy chapter 7 action.”  He said area counsel recommended he file an Offer in Compromise that had been rejected “over and over.”  In court on November 28, 2016, Petitioner stated he already submitted an Offer in Compromise to the IRS with all requested financial information and would be willing to submit another.  The record reflected the parties entered a stipulated decision and following that, the Petitioner submitted and the IRS rejected an Offer in Compromise regarding 2008.  The Court had recommended that Petitioner file an Offer in Compromise with the assistance of Pine Tree Legal Assistance, Inc.  The Court then stated it hoped the IRS will “hold off on proceeding with the proposed collection action to give petitioner an opportunity…to submit an offer in compromise,” perhaps with the above-mentioned low income taxpayer clinic’s assistance.
  • With regard to an Offer in Compromise on a 2008 first-time homebuyer credit (which I agree was basically an interest-free loan, depending on the timing of the credit), it is my understanding that the full amount of the credit owed must be a liability assessed by the IRS before it can be addressed in an Offer in Compromise.  In order to do so, it may be necessary to amend a tax return to state that the taxpayer owes the entirety of the credit as of that tax year.  Once that full credit is a liability owed to the IRS, the credit can then be negotiated through the Offer in Compromise program.  Hopefully Mr. Bushey uses that procedure to address the amount owed through the credit in his Offer in Compromise.

Designated Orders: 6/26 – 6/30/2017

Professor Patrick Thomas of Notre Dame Law School writes about  last known address, discovery and whistleblower issues in this week’s edition of Designated Orders. Les

 Last week’s designated orders were quite the mixed bunch: a number of orders in whistleblower cases; a last known address issue; and a discovery order in a major transfer pricing dispute between Coca Cola and the federal government. Other designated orders included Judge Guy’s order granting an IRS motion for summary judgment as to a non-responsive CDP petitioner; Judge Holmes’s order on remand from the Ninth Circuit in a tax shelter TEFRA proceeding; and Judge Holmes’s order in a whistleblower proceeding subject to Rule 345’s privacy protections.

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Last Known Address: Dkt. # 23490-16, Garcia v. C.I.R. (Order Here)

In Garcia, Judge Armen addresses whether the Service sent the Notice of Deficiency to Petitioner’s last known address. As most readers know, deficiency jurisdiction in the Tax Court depends on (1) a valid Notice of Deficiency and (2) a timely filed Petition. Failing either, the Tax Court must dismiss the case for lack of jurisdiction. If the Petition is not timely filed in response to a validly mailed notice of deficiency, the taxpayer is out of luck; the Service’s deficiency determination will stick. The Service can also potentially deprive the Court of jurisdiction through failure to send the Notice of Deficiency to the taxpayer’s last known address by certified or registered mail under section 6212, though the Court will have jurisdiction if the taxpayer receives a Notice of Deficiency that is not properly sent to the last known address and timely petitions. While a petitioner could be personally served with a Notice of Deficiency, this rarely occurs.

Perhaps counterintuitively for new practitioners, the remedy for this latter failure is a motion to dismiss for lack of jurisdiction. Unlike a jurisdictional dismissal for an untimely petition, this motion can substantially benefit the taxpayer. A successful motion will require the Service to re-issue the Notice to the proper address—or else otherwise properly serve it on the taxpayer. If the Service fails to do so within the assessment statute of limitation under section 6501, no additional tax liability may be assessed. This motion is thus a very powerful tool for practitioners in the right circumstances.

Here, the Court dealt with two motions to dismiss for lack of jurisdiction: the Service’s based on an untimely petition, and Petitioner’s based on failure to send the Notice to the last known address. Petitioner had sent multiple documents to the Service, and the Service to the taxpayer, as follows:

 

Date Sender Document Address
February 25, 2015 Petitioner 2014 Tax Return Twin Leaf Drive
April 2015 Petitioner 2011 Amended Return Brownfield Drive
October 30, 2015 Petitioner Power of Attorney Twin Leaf Drive
November 10, 2015 IRS Letter 1912 re: 2014 Exam Brownfield Drive
February 12, 2016 Petitioner 2015 Tax Return Brownfield Drive
March 8, 2016 IRS 2014 Notice of Deficiency Brownfield Drive
October 17, 2016 IRS Collection Notice re: 2014 Brownfield Drive

 

Judge Armen held that the Service did send the Notice to the proper address, despite the ambiguities present here. Petitioner argued that because his attorney had filed a Form 2848 with the Twin Leaf Drive address after he filed his 2011 Amended Return, the Form 2848 changed the last known address to Twin Leaf. The Notice of Deficiency wasn’t sent to that address; ergo, no valid notice.

But Petitioner’s filed his 2015 return using the Brownfield Drive address, prior to issuance of the Notice of Deficiency. Petitioner argued that the regulations governing the last known address issue requires both (1) a filed and (2) properly processed return. Reg. § 301.6212-2(a). In turn, Rev. Proc. 2010-16 defines “properly processed” as 45 days after the receipt of the return. Because the Notice was issued before this “properly processed” date (March 28), the last known address, according to Petitioner, should have been the Twin Leaf Drive address as noted on the most recent document filed with the Service: the October 30, 2015 Form 2848.

Judge Armen chastises petitioner for “using Rev. Proc. 2010-16 as a sword and not recognizing that it represents a shield designed to give respondent reasonable time to process the tens of millions of returns that are received during filing season.” Further, Judge Armen assumes that the Service actually processed the return much quicker (“Here petitioner would penalize respondent for being efficient, i.e., processing petitioner’s 2015 return well before the 45-day processing period….”

I’m not sure that the facts from the order support that conclusion. There is no indication of when Petitioner’s 2015 return was processed by the Service such that they could use it to conclusively determine the last known address. Judge Armen seems to avoid this issue by assuming (perhaps correctly) that the return was processed before the Notice of Deficiency was issued. Unless certain facts are missing from the Order, this seems like an assumption alone.

If the Service did not have the 2015 return on file, or had sent the Notice prior to February 12, 2016, then they would have waded into murkier waters. As Judge Armen alludes to, the Service does not view a power of attorney as conclusively establishing a change of address. Rev. Proc. 2010-16, § 5.01(4). The Tax Court has disagreed with this position previously. See Hunter v. Comm’r, T.C. Memo. 2004-81; Downing v. Comm’r, T.C. Memo. 2007-291.

Discovery Dispute Regarding Production of Documents and Response to Interogatories: Dkt. # 31183-15, The Coca-Cola Company and Subsidiaries v. C.I.R. (Order Here)

Judge Lauber denied a portion of the Service’s request to compel the production of documents and responses to interrogatories in the ongoing litigation regarding Coca-Cola’s transfer pricing structure. I’d do our reader’s a disservice by touching transfer pricing with a ten-foot pole. Rather, I’ll focus on the discovery issue at play.

Regarding the motion to compel production of documents, the Service had sought “all documents and electronically stored information that petitioner may use to support any claim or defense regarding respondent’s determination.” The parties had previously agreed to exchange all documents by February 12, 2018. Coca Cola argued that by demanding all such documents presently, the Service was attempting to get around the pretrial order.

Judge Lauber agreed with Coca Cola, especially because certain claims of privilege were unresolved, and expert witness reports and workpapers had not yet been exchanged. In essence, Coca Cola was unable to provide “all documents” upon which they might rely at trial, as they were unable to even identify all of those documents presently due to these unresolved issues. Judge Lauber cautioned Coca Cola, however, to avoid an “inappropriate ‘document dump’” on February 12, by continuing to stipulate to facts and to exchange relevant documents in advance of this date.

The motion to compel response to interrogatories centered on private letter rulings that Coca Cola received under section 367 (which restricts nonrecognition of gain on property transfers to certain foreign corporations). The Service wanted Coca Cola to “explain how the [section 367 rulings] relate to the errors alleged with respect to Respondent’s income allocations” and “identify Supply Point(s) [Coca Cola’s controlled entities] and specify the amount of Respondent’s income allocation that is affected by the transactions subject to the [section 367 rulings]”. While Coca Cola had already identified the entities and transactions relevant to the section 367 rulings, and had provided a “clear and concise statement that places respondent on notice of how the section 367 rulings relate to the adjustments in dispute”, the Service apparently wanted more detail on how precisely the private letter rulings were relevant to Coca Cola’s legal argument.

Coca Cola, and Judge Lauber, viewed this request as premature. Nothing in the Tax Court’s discovery rules require disclosure of legal authorities. Moreover, Judge Lauber cited other non-Tax Court cases holding that such requests in discovery are impermissible. Any disclosure of an expert witness analysis was likewise premature, at least before the expert witness reports are exchanged.

Whistleblower Motions: Dkt. # 30393-15W Kirven v. C.I.R. (Orders Here and Here)

Two orders came out this week in this non-protected whistleblower case. Unlike Judge Holmes’s order mentioned briefly above, we can actually tell what’s going on in this case, as Petitioner has apparently not sought any protection under Rule 345. Chief Judge Marvel issued the first order, which responded to petitioner’s request for the Chief Judge to review a number of orders that Special Trial Judge Carluzzo had previously rendered. Specifically, Petitioner desired Chief Judge Marvel to review the denials of motions to disqualify counsel, to strike an unsworn declaration from the Service, and to compel interrogatories and sanctions.

While the Chief Judge has general supervisory authority over Special Trial Judges under in whistleblower actions under Rule 182(d), Chief Judge Marvel denied the motion, given that these motions were “non-dispositive”.

The second order by Judge Carluzzo did resolve a dispositive motion for summary judgment. Perhaps we shall see a renewal of a similar motion before Chief Judge Marvel in this matter.

The Service had initially denied the whistleblower claim due to speculative and non-credible information. Additionally, however, an award under the whistleblowing statute (section 7623(b)) requires that the Service initiated an administrative or judicial proceeding against the entity subject to a whistleblowing complaint. Further, the Service needs to have collected underpaid tax from that entity for an award, as the award is ordinarily limited to 15% of the amount collected. Neither of those occurred in this matter, and on that basis, Judge Carluzzo granted the motion for summary judgment, upholding the denial of the whistleblowing claim.

This case again reminds pro se petitioners to attend their Tax Court hearings and respond to the Service’s motions for summary judgment. The Petitioner did not attend the summary judgment hearing, because (according to her) the hearing regarded both the Service’s motion for summary judgment as well as her motion to compel discovery. Whatever her reason for not attending the hearing or responding to the motion, all facts provided by the Service were accepted, and the Court assumed there was no genuine dispute as to any material facts: a recipe for disaster for the non-movant in a summary judgment setting.

Determining the Amount in Dispute for Purposes of a Whistleblower Award

In Smith v. Commissioner, 148 T.C. No. 21 (June 7, 2017), the Tax Court looked for the first time at the issue of the amount in dispute for purposes of determining whether the individual providing information to the IRS should receive an award based on a mandatory or discretionary basis.  The information provided directly led to recovery of an amount that did not reach the minimum amount to trigger a mandatory award percentage; however, the information caused the IRS to audit a taxpayer and recover through that audit an amount significantly in excess of the amount needed to trigger the mandatory award percentage.  The question before the Court was the meaning of amount in dispute as it related to the triggering of the mandatory award percentage.  The Tax Court decided that the amount in dispute was the larger amount which will mean a bigger payday for the informant.  The Court did not determine the final amount of the award but sent it back to the IRS to make an award determination consistent with its decision.

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When I worked for Chief Counsel, I had a number of cases generated by whistleblowers.  Their information provided vital pointers to underreporting, non-reporting, or false reporting which, at the time, the IRS rewarded with total discretion.  My observation was that the IRS tended not to be too generous in its determination of the award amount but, nonetheless, individuals still came forward with valuable, and not so valuable, information based on motives not always driven by the potential of a financial reward.

Congress decided that it wanted to incentivize individuals to come forward with information about underreporting of taxes in larger cases because it felt greater incentives and more clarity in the amount of the potential reward would ultimately benefit the government by encouraging more people to come forward.  I am unsure if we have enough data yet to know how successful the law has been but enough high profile cases exist to convince me, as a casual observer and as someone who saw the results during their much less public stage prior to the enactment of the whistleblower provisions, that the incentives do make a difference.

Perhaps Congress felt that for smaller cases, other incentives provided the necessary basis for coming forward and the IRS could continue to have discretion on how much to pay the informant which Congress preserved in IRC 7623(a); however, for “big” cases, Congress stepped up with the concept of mandatory awards in 7623(b).

The Smith case works through the statute to find meaning regarding the definition of a big case.  Congress defined it using the term “amount in dispute” in IRC 7623(b)(5)(B) ; however, the meaning of that term still needed interpretation prior to the Smith case.  The Tax Court noted that it had made some determinations regarding 7623(b)(5)(B) starting with the determination in Lippolis v. Commissioner, 143 T.C. 393, 396 (2014) in which it considered whether the $2 million threshold of 7623(b)(5)(B) was jurisdictional or should be asserted as an affirmative defense.  The Smith opinion works its way through other opinions concerning the provision.

The information provided by Mr. Smith proved very valuable to the IRS for reasons that went beyond the direct information he provided.  The IRS ended up collecting almost $20 million; however, it calculated that the portion of this amount directly related to the information he provided only amounted to $1.7 million.  Since the amount directly related to his information fell below the $2 million threshold for a mandatory award, the IRS determined the amount of his award using its discretion.  The minimum mandatory award would net Mr. Smith 15% of the amount related to his information while the IRS using its discretion awarded him 10% – almost $90,000 less.

“Respondent argues that certain common words or phrases in section 7236(b)(1) require him to follow the same quantitative measure in determining the $2 million threshold of section 7623(b)(5)(B).  In particular, respondent focuses on the words “any” and “action” in the context of section 7623(b)(1)….  Respondent goes on to contend that section 7623(b)(1) therefore defines the scope of the words “any action” for purposes of section 7623(b), and accordingly governs the use of the phrase “any action” in section 7623(b)(5).”

The Tax Court finds the interpretation of the IRS to be misplaced.  It looks at IRC 7623 as a whole as its history and determines that “’action’ for purposes of subsection (b) is the detecting of underpayments of tax or violations of tax law without any qualifier as to quantity or amount.”  Based on this interpretation of the statute, the Court finds that “action” does not establish another technical definition for 7623(b).

Therefore, the Tax Court declines to accept the interpretation by the IRS that action means that only the directly attributable dollars count in determining “amounts in dispute” for purposes of determining if the information meets the $2 million threshold for making a mandatory award.  Petitioner’s information caused the IRS to begin an examination that resulted in the collection of over $20 million.  The phrase in the statute “’amounts in dispute’ is not specifically limited to only those amounts directly or indirectly attributable to the whistleblower information.  Once the monetary thresholds are met and the government recovers ‘collected proceeds’ resulting from the action, the mandatory provisions of subsection (b)(1) or (2) apply.”

Looking at the applicable regulation as well as the statute, the Tax Court determines that the “regulation does not support respondent’s narrow view that the ‘amount in dispute’ is limited to the portion to which award percentages are applied….  The regulation provides instead that the amounts in dispute are the amounts that resulted from the actions with which IRS proceeded based on the whistleblower information.  Accordingly, it does not follow that the limiting standards of section 7623(b)(1) and (2) providing for a percentage to be applied to the portion of ‘collected proceeds’ to which the whistleblower’s information ‘substantially contributed’ would also apply in determining whether the initial $2 million threshold has been met.”

The Tax Court’s interpretation will allow whistleblowers to benefit from collateral items discovered by the IRS in an audit in the application of the percentage applied to their award.  In many, if not most, cases, the IRS would not audit the party targeted by the whistleblower.  Because the IRS would not audit the taxpayer without the intervention of the whistleblower, it makes sense to allow the whistleblower to enjoy the mandatory percentage with respect to that portion of the award clearly attributable to the information provided.  The issue should only arise in cases in which the IRS has benefited in material and fairly substantial ways from the information provided by the whistleblower.  Even though it must pay a higher percentage than it would have paid if it had total discretion, the amount paid remains much less than the amount recovered.

Tax Enforcement Needs Qui Tam Lawsuits

Today’s Op-Ed guest post comes from Eric L. Young and James J. McEldrew, III, who are partners at the Philadelphia law firm McEldrew Young. The firm focuses on various types of complex litigation, including whistleblower suits.  Attorney Young represented the first whistleblower award recipient under Section 7623(b).  Attorney McEldrew has represented many clients in whistleblower claims, and previously served as President of the Philadelphia Trial Lawyers Association.  In this post, Messrs. Young and McEldrew argue that the current tax whistleblower regime is insufficient, and allowing qui tam suits under the FCA or similar statute could decrease fraud and help the nations bottom line.  Stephen

President Trump introduced his tax proposal, which includes a deep reduction in business tax rates with a 15% flat tax for all businesses, in April.  After the announcement, the Wall Street Journal reported that the plan would decrease government revenue by $288 billion in its first year.  The Trump administration can offset this decline and make these tax cuts more palatable with a stronger enforcement scheme built on qui tam lawsuits from tax whistleblowers.

A qui tam lawsuit is an enforcement action initiated by an individual on behalf of the government.  It is a shortened version of a Latin phrase that can be translated as “[he] who sues in this matter for the king as well as for himself.”  Qui tam lawsuits are the primary mechanism for enforcement of the False Claims Act, the nation’s leading tool in the fight against fraud.

However, the Federal False Claims Act specifically excludes tax claims.  It “does not apply to claims, records, or statements made under the Internal Revenue Code of 1986.”  31 U.S.C. 3729(d).  Most states have followed the lead of the United States and barred qui tam lawsuits over tax claims.

In 2006, Congress chose to create the IRS whistleblower program to funnel tips about tax noncompliance to the IRS rather than extend the False Claims Act to tax evasion.  Since the establishment of the IRS Office of the Whistleblower, the IRS has received thousands of tips and whistleblowers have helped the IRS collect more than $3 billion in taxes.  The Dodd-Frank whistleblower programs at the SEC and CFTC were modeled after the IRS program.

However, the IRS program has fallen short of expectations to this point.  Senator Chuck Grassley, the nation’s leading advocate in Congress for whistleblowers and the author of the 2006 provisions that created the section 7623(b) program for tax noncompliance over $2 million, criticized the “trickle” of whistleblower payments in 2015.  Grassley blamed slow processing of tips, insufficient communications with whistleblowers and hyper technical arguments made to justify denying awards.

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If handled properly, whistleblowers could be a boon for the IRS.  Jane Norberg, Chief of the SEC’s Office of the Whistleblower, said recently in a press release, “Whistleblowers with specialized experience or expertise can help us expend fewer resources in our investigations and bring enforcement actions more efficiently.”  The SEC has already paid out $150 million to 43 whistleblowers.

One problem with the IRS whistleblower program is that it relies exclusively on government enforcement and enforcement actions are expensive. Earlier this year, Aitan Goelman, the former head of enforcement at the CFTC, told Reuters that the derivatives regulator had to triage cases because of a lack of resources.  In the interview, he cited two cases that would have used up half of the 2017 operating budget for CFTC enforcement if they were taken to trial.

Like the CFTC, the IRS has had to make due with limited budget resources recently.  Since 2010, Congress has cut the IRS budget by approximately $2.4 billion.  Adjusted for inflation, that is a 17 percent decrease from its 2010 budget.  The decrease in funding has translated into 13,000 fewer employees enforcing the tax laws and providing taxpayer services.

Tax noncompliance is a serious problem and limited resources only make it worse.  Between 2008 and 2010, the estimated average annual tax gap – the difference between total taxes owed and collected – was $406 billion. The number has likely increased since then. In 2016, the total number of tax audits of individuals fell for the fifth year in a row.  The IRS’ Large Business & International (LB&I) Division is also undergoing a significant makeover.  Driven by resource constraints and personnel reductions, it is moving to issue-based examinations.

Ten years after the creation of the IRS whistleblower program, the time is ripe for improvements. In March, Senators Grassley and Ron Wyden proposed the IRS Whistleblower Improvements Act of 2017 to (1) enhance communications between the IRS and whistleblowers; and (2) provide anti-retaliation protections for tax whistleblowers.  These changes could be bolstered by allowing qui tam lawsuits.

For the past few years, New York State has led the charge against tax evasion through whistleblower usage of its qui tam statute.  New York has one of the only False Claims Act laws to allow the recovery of taxes through a qui tam lawsuit after it amended its statute in 2010 to allow them.  New York targeted large scale corporate tax schemes, requiring the defendant to have more than $1 million in income and have deprived the state of more than $350,000 in revenue.

On April 19, 2017, New York announced the largest settlement ever of a tax claim initiated by a whistleblower under its False Claims Act.  The $40 million settlement covered unpaid taxes, penalties, and interest on hundreds of millions in income which hedge fund Harbinger Capital Partners did not report to New York State between 2004 and 2009.  New York paid the tax whistleblower $8.8 million for bringing the matter to the attention of the State.

The IRS could operate more efficiently with its limited resources if it adopted the New York approach and utilized qui tam lawsuits for tax noncompliance.  The IRS is already outsourcing more services than it ever did before.  In a controversial move, the IRS hired law firm Quinn Emanuel in May 2014 to serve as a litigation consultant in an audit of Microsoft.  More recently, it is about to outsource debt collection to four private companies to recover money owed by hundreds of thousands of people.

Qui tams are already used to fight billions of dollars in Medicare and Medicaid fraud annually.  The system perfected in the fight against fraudulent claims for payment could be adapted and used to recover unpaid taxes as well.  When the United States concludes that it does not have the time or resources to expend in pursuit of tax evasion, the whistleblower and their counsel could pursue collection of the tax on behalf of the United States.

If the IRS had unlimited resources, there would be no need for qui tam lawsuits.  However, it does not.  Budgetary shortfalls demand nimble and thoughtful approaches to regulatory enforcement.  In 1986, Congress recognized that government spending was fraught with problems and strengthened the public-private partnership between the government and whistleblowers.  It must do so again now with tax evasion and whistleblowers.

The False Claims Act is America’s most important tool to fight fraud against taxpayers. Congress and more state legislatures should put its terms to use in the fight against fraud by taxpayers.

 

 

Whistleblower Who Prompted Voluntary Compliance Not Entitled to Reward

One of the more interesting Tax Court opinions of the last month is Whistleblower 16158-14W v Commissioner. The opinion concludes that a whistleblower who provides information that exposes taxpayer misconduct and brings about a voluntary change in a taxpayer’s behavior in future years is not entitled to receive a reward.

The case involves an employee/whistleblower who told the Service about his employer, a corporation (perhaps a financial institution) that failed to withhold on payments of interest and dividends to foreign persons. (As background, US persons paying US source payments to foreign persons are generally required to withhold at a 30% rate unless the foreign person establishes that it is subject to an exemption or lesser rate).

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The noncomplying corporation was already under audit for the 2006-08 years for unrelated issues. After the Whistleblower Office received the information about the corporation’s withholding noncompliance, it provided the information to LB&I and Criminal Investigation, and LB&I expanded the audit to include the withholding issues.

At the conclusion of the 2006-08 examination, the Service issued a no-change letter to the corporate taxpayer. After the exam, an employee of the Whistleblower Office and an employee of LB&I completed an evaluation of the whistleblower claim on Form 11369. The opinion discusses that evaluation:

The explanation attached to the Form 11369 stated that the whistleblower was correct that the taxpayer had made errors but the cause of the errors was an “honest mistake” made while updating its reporting systems. The explanation went on to say that “[i]t appears the * * * [taxpayer] has been convinced by its close call to become fully compliant with its withholding tax responsibilities and further examination is not warranted.”

Eventually, the Service issued a denial of the request for an award because the information that the whistleblower provided did not turn into “collected proceeds” under the whistleblower statute.

Section 7623(b)(1) provides that a whistleblower will “receive as an award at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts)”.

Section 7623(b)(1) also predicates the award on the Secretary’s proceeding with “any administrative or judicial action described in subsection (a)” There was no dispute that there was an administrative action in 2006-08, the original years under audit. Yet the taxpayer received a no change letter for those years.

What about future years, when the whistleblower alleged (and the Service did not dispute) that the taxpayer became voluntarily compliant, resulting in the Service collecting substantially more revenue than it otherwise would have absent the whistleblower coming forward?

This tees up the legal issue that the opinion addressed: can a whistleblower’s information that prompts a taxpayer’s voluntary compliance in future years serve as the basis of an award? In particular, does the additional revenue that the Service collects due to a taxpayer’s voluntary compliance amount to “collected proceeds” under Section 7623(b)(1)?

As this case was resolved on summary judgment, the opinion assumed that the whistleblower’s factual allegations were correct, i.e, that in fact his spilling the beans on the withholding noncompliance did in fact contribute to the corporation becoming compliant in future years.

The opinion concludes essentially that without the Service taking administration action in future years the information that the whistleblower provides cannot justify the payment of an award. The opinion gets there first by noting how prior opinions have addressed the scope of the term “collected proceeds”:

Section 7623(b)(1) provides that a whistleblower will “receive as an award at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts)”. Therefore, an award is predicated on the collection of proceeds. “Collected proceeds” is not defined in the statute. In Whistleblower 21276-13W v. Commissioner, we relied on the canons of statutory construction to define collected proceeds. We defined it as “all proceeds collected by the Government from the taxpayer”. We explained that “collected proceeds” is an “expansive and general term” a “sweeping term”, and “not limited to amounts assessed and collected under title 26”… (citations omitted).

Despite the expansive language in Whistleblower 21276-13W  v. Commissioner, it held against the taxpayer, primarily based on a policy concern about the difficulty of establishing a connection between the information that the whistleblower has provided to the Service and a taxpayer’s future conduct:

Collected proceeds do not include self-reported amounts collected when a taxpayer changes its reporting for years that are not part of the action. The Commissioner argues, and we agree, that because of the significant costs and heavy administrative burden, collected proceeds cannot include amounts collected for years after examination years on account of a taxpayer’s changing its reporting. (emphasis added)

In language that I found a bit harsh, the opinion states that the whistleblower’s argument takes the Whistleblower 21276-13W discussion of collected proceeds to an “irrational extreme to argue that self-assessed amounts collected for future years are proceeds collected by the Government. Indeed, many, if not all, of the Commissioner’s examinations will have some influence on a taxpayer’s reporting. However, any determination of an award based on additional amounts collected for years following examination years would be based on speculation.”

There is more to the opinion, including a discussion of how the regulations under Section 7623 in limited and different circumstances tether collected proceeds to future years’ positions if “adjustments to tax attributes made in the year of the action have direct carryover consequences for other years”; its discussion of how if the Tax Court accepted the taxpayer’s position it would effectively require the Court to impermissibly order the Service to conduct an examination of the taxpayer’s future years; and how the Service discussion in Form 11369 of the taxpayer’s future compliance at the end of the 2006-08 audit did not amount to an “implied settlement” for those future years.

This is a very tough outcome for the whistleblower. There are strong policy reasons to want to reward a person whose conduct causes future tax compliance. Given the limited statutory definition of the term “collected proceeds”, and the competing policy concerns that the opinion did not fully address (such as the benefit of information prompting voluntary compliance). I suspect that this is not the last word on some of these issues.

What Does Mnuchin Think of the Whistleblower Program

And, “collected proceeds” Tax Court case is finally final…now will there be an appeal?

In early August 2016, I wrote a second post on Whistleblower 21276-13W v. CIR, where the Petitioner was successful arguing that criminal fines and civil forfeitures were included in “collected proceeds” for whistleblower awards.  The decision can be found here, and my lyrical yet learned post can be found here.  The issue, as I wrote it up back then was:

Under Section 7623(b), certain whistleblowers are entitled to mandatory awards if certain requirements are met.  That amount can be between 15% and 30% of the “collected proceeds” under (b)(1), which has a parenthetical indicating that is “(including penalties, interest, additions to tax, and additional amounts),” and the sentence further states these amounts can be “resulting from the action (including any related actions) or from any settlement in response to such action.”

…[T]he Service took the position collected proceeds did not include criminal penalties and civil forfeitures.  The Service based this on the claim that Section 7623 should only apply to proceeds assessed and collected under the federal tax laws found in Title 26 of the United States Code.  As the fines and forfeitures here were imposed under Chapter 18, they could then not be “collected proceeds” subject to the statute; unlike the restitution, which as per 2010 law can be assessed and collected in the same manner as tax.

The Court concluded the statute was clear on its face, and the penalties and forfeitures were included.  I would highly recommend reading the post if you are interested in this area.  Although I heaped self-praise on myself, the post is really strong because of the input from Jack Townsend on the case and Les Book.  It also links back to our initial post on this case, which Dean Zerbe wrote, and which is also an important but different holding.  Dean, who was lead counsel on the case, also provided some comments on the second holding, which we included in a separate post, found here.

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The Service had sought a motion for reconsideration, but it was denied on January 28th in apparently a one sentence order (I could not track that down).  It will be interesting to see if anything happens in the next 90 days.

This case has, somewhat directly, come up in the recent testimony of Treasury Secretary nominee Steve Mnuchin.  Much of the remainder of this post will be borrowed from a press release by Kohn, Kohn, and Colapinto, co-counsel on the above case, which can be found here, and from Senator Grassley’s webpage.

Dean provided a recent quote on the case, arguing against the failed “kitchen sink” approach taken by Counsel, and highlighting that the Tax Court wasn’t picking up what the Service was putting down, stating:

The IRS Chief Counsel’s office emptied the in basket in making arguments for the Motion for Reconsideration – including the availability of funds for award payments.  To no avail.  While I appreciate that Counsel wanted to defend its corner, at the end of the day the Tax Court wasn’t buying what IRS Counsel was selling.  This decision gives Treasury Secretary nominee Mnuchin and the new administration an opportunity to embrace the Tax Court’s final ruling and show that it supports the IRS whistleblower program and is serious about going after big time tax cheats.

Senator Grassley, who has been instrumental in the implementation of the whistleblower program and often a harsh critic of how it has been rolled out by the Service, questioned Mr. Mnuchin on the program, and specifically how the Service would handle this issue.  The response was somewhat positive as to the Whistleblower program, although not exactly a guarantee on the collected proceeds issue.  The Senator asked:

The IRS has chosen to interpret the whistleblower law narrowly to the detriment of whistleblowers and several instances, the IRS has interpreted the terms ‘collected proceeds’ which is the base for determining the amount of award to exclude criminal penalties and certain other proceeds suggest penalties assessed for undisclosed foreign bank accounts.  Two questions, and I will say that both – should you be confirmed, can I count on you to be support of the whistleblower program and work to ensure its success and would you be willing to review the IRS’s administration program including its very narrow interpretation of the words ‘collected proceeds?

Mr. Mnuchin’s response was favorable to the program overall, but not terribly specific as to the “collected proceeds” issue, stating:

We are aware there is tax fraud.  There is tax fraud as you said, and we need to be diligent and I believe that the whistleblower laws are very important part of that.  I will work very hard with you on that.

He also gave assurances he would look into the collected proceeds matter.  Giving assurances to look into something seems a little like government (and lawyer) speak for one of three things: “nope”; “I have no idea”; or, “we’ll actually consider it…someday”.    It would have been nice to get more specifics out of this aspect of the Q&A, as Mr. Mnuchin knew this was going to be a topic.  Here is a quote about Senator Grassely and Mr. Mnuchin meeting prior to the hearings to discuss Senator Grassely’s concerns.  From the Senator:

It was our first time meeting, so Mr. Mnuchin and I spent a few minutes getting acquainted.  We then discussed a series of issues.  We covered the importance of comprehensive tax reform on both the corporate and individual levels and how tax fairness is critical to economic growth and job creation.  I’ve often said that a major undertaking like tax reform requires the President’s use of his bully pulpit to rally support behind a plan from Congress and the American people.  There’s an opportunity to do that with a new administration.  I emphasized the importance of listening to whistleblowers within the Treasury Department and those who come to the IRS with allegations of major tax fraud.  The provisions improving the IRS whistleblower office that I drafted are working, but it’s required a lot of oversight to maintain the momentum, and I’d like to see a Treasury secretary who will build on the progress.  Enforcing tax fraud is a matter of fairness for the majority of the taxpayers who pay what they owe.  Mr. Mnuchin and I discussed the burden of the estate tax on family farms and businesses.   I emphasized the need to treat alternative energy tax incentives fairly, including keeping the current phase-out for the wind energy production tax incentive as is.  Alternative energy drives job creation in Iowa and nationwide.  We discussed currency manipulation as well as the need to broaden the scope of the Committee on Foreign Investment in the United States to cover food security.  Mr. Mnuchin seemed to appreciate the need for the review process to become broader than it is now to help protect U.S. interests.  I look forward to covering these issues and more in Mr. Mnuchin’s nomination hearing.

You can find the full exchange during the hearings here on YouTube.  The Senator endorsed Mnuchin following the hearing, stating the following on the whistleblower program:

Having a Treasury secretary who understands the whistleblower role in enforcing tax fraud is important.  Whistleblowers have helped the IRS recover $3.4 billion that otherwise would have been lost to fraud.  Cracking down on big dollar tax fraud is a matter of fairness to the vast majority of taxpayers who pay what they owe.  The IRS has made progress in working with whistleblowers, but there’s more work to be done.  Mr. Mnuchin gave his assurance that he’ll work with me if confirmed to support tax fraud whistleblowers.

I also asked Mr. Mnuchin about the importance of supporting the congressionally established phase-out of the wind energy production tax credit.  A smooth transition and the certainty of the phase-out are necessary for a fast-growing industry that supports numerous jobs in Iowa and elsewhere around the country.  The industry needs to be able to maintain its successful growth even as its tax credit phases out.  Mr. Mnuchin said he supported the smooth phase-out.  And I asked Mr. Mnuchin about the role of private contractors in collecting tax debt that the IRS hasn’t tried to collect.  He agreed that it makes sense to use outside help in closing the tax gap.

I’ve expressed my personal views on the whistleblower program in the past.  I am fully in favor of having a whistleblower program, but my perception of the IRS handling of the program has not been favorable.  I recognize the financial and other constraints, but it does seem like other aspects of the agency may not be favorably inclined towards it, that the roll out had significant issues, and that internally there have been some efforts to thwart what seem like straightforward requirements of payment.  I hope the program continues to grow under Mr. Mnuchin or anyone else who may take over as Secretary of Treasury.

For more on this case, the testimony, and the recent report on whistleblower awards, check out Dean’s post on Forbes here.

When to File a Tax Court Petition after Denial of a Whistleblower Claim

Continuing in what seems to be a series of cases on when the Tax Court gets jurisdiction, the appropriately titled case of Whistleblower 26876-15W v. Commissioner provides guidance on how to gain entry into the Tax Court in this relatively new type of case.  The Court finds that it has jurisdiction even though the petitioner argues that it did not.  The petitioner argued that the decision of the IRS to deny an award was “null and void” and seeks to have the Tax Court make that determination as it determines it has no jurisdiction.  The recent post on what the Tax Court can do after it determines it lacks jurisdiction might have come into play here, except that, despite the protestations of the petitioner, the Court determines it has jurisdiction.  This funny role reversal of the petitioner arguing the Tax Court lacks jurisdiction while the IRS argues for jurisdiction also shows that last known address cases arise in the whistleblower arena as well as other types of Tax Court cases.

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Petitioner here filed the IRS Form 211 seeking an award with respect to information provided to the IRS.  The IRS decided that the information did not merit an award and sent the letter denying the claim for award to somewhere other than petitioner’s last known address.  Petitioner did not receive the letter.  Because petitioner did not receive the letter stating that the IRS would not pay an award, the petitioner waited in limbo for quite some time.

Eventually, petitioner contacted the Whistleblower Office seeking information about the claim.  For those of you accustomed to waiting to hear from the IRS about one thing or another, it is easy to step into petitioner’s shoes here as the wait for information gnaws at you.  As an aside, I note that the IRS has recently introduced a feature that allows you to track your amended return.  Here is a link to the place you go to do the tracking.  What a great idea!  I hope it does not take long before a similar tracking system exists for many other types of matters for which taxpayers, and their representatives, wait for the IRS.  Somehow, waiting seems to go more smoothly, up to a point when you can track the matter and not wonder if it is lost somewhere in the IRS system.

The whistleblower in this case gave information that the examination division of the IRS thought had value and it audited at least one of the taxpayers implicated by the information provided.  The audit resulted in adjustments which the taxpayer took to Appeals.  At Appeals, the taxpayer convinced the Appeals Officer that the adjustments lacked merit.  In November 2013, Appeals conceded the case and determined that the case should be “no-changed.” The report written by the Appeals Officer about the case made its way back to the Whistleblower Office at the IRS where, in January 2014, an employee completed Form 11369, Confidential Evaluation Report on Claim for Award, and recommended the denial of the claim.  On May 30, 2014, the IRS sent petitioner a final determination letter with respect to the award denying the claim for award in full.

Petitioner moved in 2013 and properly notified the Whistleblower office of the new address.  My guess is that of the 1% of people who move and who actually notify the IRS of the move, those making whistleblower requests fall into the 1%.  Despite notifying the IRS, when it sent to petitioner the final determination letter, the IRS sent the notice to the prior address.  The patient petitioner, who would have no basis for knowing when the IRS might make a determination regarding the award, waited for almost a year and a half after the IRS sent the notice of final determination before requesting an update on the status of the award request.  In September of 2015, petitioner reached out to the Whistleblower Office seeking an update and on October 15, 2015, the IRS sent a letter informing petitioner that it had denied his claim.  Petitioner alleged that the October 15 letter was the first he learned of the denial and petitioner used that letter as the basis for filing a petition in Tax Court, which was filed on October 26, 2015.

In whistleblower cases, the Tax Court has jurisdiction under IRC 7623(b)(4) if the IRS makes a “determination regarding an award” and “a petition invoking our jurisdiction over that matter is timely filed.”  Petitioner filed the petition hoping for a result similar to the result petitioners receive in Tax Court cases based on a notice of deficiency cases where the IRS sends the notice to someplace other than the taxpayer’s last known address and the Tax Court finds that it lacks jurisdiction for the reason that the notice of deficiency is invalid.  The Court did not go where the petitioner hoped it would go.

Petitioner’s first argument regarding the lack of validity of the notice denying the award did not attack the mailing address but rather the authority of the person signing the notice.  Delegation Order 25-7 delegated the authority to approve or disapprove awards to the Director of the Whistleblower Office.  The notice here was signed by an analyst in the office rather than by the director of the office.  The Court takes little time dispensing with this argument holding that the delegation order gave to the director the authority to approve or disapprove awards but did not require the director to personally sign the letter notifying the taxpayer of the approval or disapproval.  The Court found that the director had signed the Form 11369 determining that the claim was disallowed, and the director’s signature there met the requirements of the delegation order.

Next, the Court turned to the issue of its jurisdiction based on the timing of the filing of the petition.  It noted that generally the 30-day period within which to timely file a whistleblower petition begins on the date the determination is mailed to a claimant’s last known address or is personally delivered to the claimant.  The Tax Court had not previously addressed this question in the whistleblower context.  It noted that the statute at play here closely resembled section 6330(d) controlling jurisdiction in a Collection Due Process (CDP) case, which says that a taxpayer dissatisfied with the CDP determination made by the IRS “may, within 30 days of a determination under this section, appeal such determination to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter.)”  The Court found that neither the CDP nor the whistleblower statutes require the IRS to send the notice of determination by certified mail to the taxpayer’s last known address or to deliver it in any particular way.  Interestingly, the Court went on to find that neither statute requires that the IRS notify the taxpayer (or the claimant) at all.  The statutes only require that the IRS make a determination.

Judge Lauber cites to the case of Bongam v. Commissioner, 146 T.C. 52 (2016) in which the IRS mailed the notice of determination to an address other than the taxpayer’s last known address.  “Several months later … the IRS remailed the notice to the taxpayer’s last known address by regular mail” and the taxpayer received the remailed notice and filed a petition within 18 days of that receipt.  In Bongam, the Tax Court held that the first notice was invalid because it was not sent to taxpayer’s last known address and was not actually received by the taxpayer; however, the remailed notice gave the Court a basis for jurisdiction because the taxpayer petitioned within 30 days of receipt.

The reasoning in Bongam applies to this whistleblower case.  The Court found that the remailed notice of determination which the claimant used as a basis for petitioning validly serves as the notice of determination.  So, the petitioner in this case now has the opportunity to show the determination incorrectly denied the claim even though the claimant did not seek that result.

Dean Zerbe Adds Insights to Whistleblower “Collected Proceeds” Tax Court Case

On August 4th, I wrote about the Tax Court’s second holding in Whistleblower 21276-13W v. Commissioner, and how the Court held that “collected proceeds” included criminal fines and civil forfeitures.   That post can be found here.  In the post, we noted that Dean Zerbe was the attorney on the prior case who successfully obtained the whistleblower award, and we assumed he was the lead attorney on this case, but the attorney of record was sealed.

Dean was one of the primary architects of the whistleblower statute, and one of the leading practitioners in this area, so it is not surprising to see him attached to these important cases.  Dean reached out to me last week and confirmed he was the lead attorney on this case also.  He also provided some feedback on the post and some of the issues we highlighted.  I’ve recreated some of Dean’s insightful comments below.  It probably goes without saying, any errors and coarse language are assuredly mine .

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I will not recreate my prior post, but will add a few excerpts to provide context to Dean’s comments.  The key issue was:

Under Section 7623(b), certain whistleblowers are entitled to mandatory awards if certain requirements are met.  That amount can be between 15% and 30% of the “collected proceeds” under (b)(1), which has a parenthetical indicating that is “(including penalties, interest, additions to tax, and additional amounts),” and the sentence further states these amounts can be “resulting from the action (including any related actions) or from any settlement in response to such action.”

As stated above, the Service took the position collected proceeds did not include criminal penalties and civil forfeitures.  The Service based this on the claim that Section 7623 should only apply to proceeds assessed and collected under the federal tax laws found in Title 26 of the United States Code.  As the fines and forfeitures here were imposed under Chapter 18, they could then not be “collected proceeds” subject to the statute; unlike the restitution, which as per 2010 law can be assessed and collected in the same manner as tax.

The Court held “internal revenue laws” were not simply those under Title 26, and included the fines and forfeitures.  This implicates FBAR penalties also, although not explicitly stated in the holding.  Dean’s thoughts on the holding generally were as follows:

I read  the case as the Court seeking to get rid of any shadows or dark corners about what is included in “collected proceeds” and not wanting to see this litigated again and again (there are a lot of these cases in the pipeline).  [My impression] is the Tax Court will not engage in hair splitting.  See page 26, “In sum, we herein hold that the phrase “collected proceeds” is sweeping in scope and is not limited to amounts assessed and collected under Title 26.”    And again on page 29, “We have already explained that ‘collected proceeds’ is a broadly defined term:  It encompasses ‘the total amount brought in’ by the Government.”   And then again, of course, the language in first paragraph of page 32.  There is nowhere to hide with those statements.

I think one of the more interesting points in this opinion (which deserves a lot of rereading) is on page 30, where the Court correctly states that the “forfeitures resulted from an administrative action with respect to the laundering of proceeds, which in turn, arose from a conspiracy to violate Section 7601 and 7206…”   Encompassing, properly, a broad linkage and again speaks to FBAR.

As to FBAR, Dean stated:

[I]t seems clear that FBAR [penalties are] encompassed by the Court’s sweeping ruling (particularly as [the holding]  fits with the discussion in the previous Section 7623(b)(5) case, as well as the reference in footnote 15 in this case to Hom – and citing that FBAR is “tax administration”).

Our readers and tax procedure enthusiasts are likely familiar with Mr. Hom.  His cases have graced our pages somewhat frequently, most recently in late July with the Ninth Circuit holding online gambling site accounts were not subject to FBAR disclosure (well done Joe DiRuzzo).  Les had a brief write up on that found here. The footnote Dean references cites to a different Hom case in the Ninth Circuit from this year, and the note states:

Ours is not the only court to note that tax laws and related laws may be found beyond those codified in title 26. The District Court for the Northern District of California in Hom v. United States, 2013 WL 5442960 … aff’d, … 2016 WL 1161577 (9th Cir. Mar. 24, 2016), stated: “[T]he issue here is whether [31 U.S.C.] Section 5314 is either an internal revenue law or related statute (either designation would make the disclosure [of taxpayer information under sec. 6103] permissible). The United States argues that [31 U.S.C.] Section 5314 is a ‘related statute’ under Section 6103 (Dkt. No. 13 at 6). This is correct. Congress intended for [31 U.S.C.] Section 5314 to fall under ‘tax administration.’”

Hammering home that FBAR penalties are likely included in “collected proceeds”.

Dean also addressed the Chevron comment from my post regarding the regulations that were not before the Tax Court case.  I highlighted (because Les pointed it out to me) that the Tax Court’s language was akin to language used when tossing a regulation under Chevron.  Dean agreed, and provided additional insight:

The language used by the Tax Court – plain language and enforce the terms – is, as you know, right in step with the language we see from Courts when they are rejecting agency regulations under Chevron.    While the Regulations are not at issue here – see footnote 9 – it is difficult to imagine the Regulations withstanding a challenge given this holding.  However, the real hope is that the administration will not appeal the decision and seize the ruling as a chance to make the correct policy decision (as you note) and embrace the commonsense decision by the Court on defining collected proceeds broadly.

Footnote 9, for those of you interested, states both parties agree the regulations are not at issue, as the decision regarding the award was rendered prior to the effective date of the regulations.

Many thanks to Dean for his comments on the case, and congratulations on a great result.