Designated Orders – Discovery Issues, Delinquent Petitioners, and Determination Letters (and some Chenery): August 13 – 17

Designated Order blogger Caleb Smith from University of Minnesota Law School brings us this week’s installment of designated orders. Based on reader feedback we are trying to put more information about the orders into the headlines to better assist you in identifying the cases and issues that will be discussed. Keith

Limitations on Whistleblower Cases and Discovery: Goldstein v. C.I.R., Dkt. # 361-18W (here)

Procedurally Taxing has covered the relatively new field of “whistleblower” cases in Tax Court before (here, here and here are some good reads for those needing a refresher). Goldstein does not necessarily develop the law, but the order can help one better conceptualize the elements of a whistleblower case.

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The statute governing whistleblower awards is found at IRC § 7623. In a nutshell, it provides for awards to tipsters (i.e. “whistleblowers”) that provide information to the IRS that result in collection of tax proceeds. The amount of the award is generally determined and paid out of the proceeds that the whistleblowing brought in. On this skeletal understanding, we can surmise that there are at least two things a whistleblower must do: (1) provide a good enough tip to get the IRS to act, and (2) have that action result in actual, collected money.

Goldstein, unfortunately, fails on the second of these grounds. Apparently, his tip was just good enough to have the IRS act (by initiating an exam, proposing a rather large amount due), but not good enough to go the distance and result in any proceeds: Appeals dropped the case as “no change” largely on “hazards of litigation” grounds. And since whistleblower awards are paid out of proceeds, and the proceeds from the tip here are $0, it stands to reason that Mr. Goldstein was not in for a big payday.

So why does Mr. Goldstein bring the case? Because Mr. Goldstein believes there actually were proceeds from the tip and wants to use the discovery mechanisms of Court as a way to get to the bottom of the matter. Or, somewhat as an alternative, Mr. Goldstein wants to use discovery to show that there should have been proceeds collected from his tip.

The Court is not persuaded by either of these arguments, but for different reasons.

The question of whether the tip “should have” led to proceeds (in this case, through the assessment of tax and penalties as originally proposed in exam) is not one the Court will entertain, for the familiar reason of its “limited jurisdiction.” As the Court explained in Cohen v. C.I.R. jurisdiction in a whistleblower case is only with respect to the Commissioner’s award determination, not the “determination of the alleged tax liability to which the claim pertains.” Arguing that the IRS should have assessed additional tax certainly seems like a look at the alleged tax liability and not the Commissioner’s award determination. So no-go on that tactic.

But the question of whether the IRS actually received proceeds that it is not disclosing -and whether a whistleblower can use discovery to find out- is a bit more interesting. Here, Judge Armen distinguishes Goldstein’s facts from two other whistleblower cases that did allow motions to compel production of documents from the IRS: Whistleblower 11099-13W v. C.I.R., and Whistleblower 10683-13W v. C.I.R..

These cases, in which whistleblowers were able to use discovery to compel production both had one simple, critical, difference from Mr. Goldstein’s case: in both of those cases, there was no question that the IRS had recovered at least some proceeds from the taxpayers. In the present case, there were no proceeds, and so an element of the case is missing… and thus is dismissed.

Of course, in the skeletal way I have summarized Mr. Goldstein’s case it all sounds quite circular: Mr. Goldstein thinks there were proceeds, the IRS says there weren’t, and the Court says “well, we’d let you use discovery to determine the amount of proceeds if there were any. But the IRS says there aren’t any, so we won’t let you use the Court to look further.” In truth, the IRS did much more in Goldstein than just “say” there weren’t any proceeds. The IRS provided the Court with exhibits and transcripts detailing that there were no proceeds, because the case was closed at Appeals.

Also, to be fair to Mr. Goldstein, the reports were significantly redacted (they do deal with a different taxpayer, after all, so one must be wary of IRC § 6103, but not to an extent that causes Judge Armen much worry. And it will take more than a “hunch” for the Court to allow petitioners access to the Court or use of discovery powers.

From the outset of a whistleblower case (that is, providing the “tip”) the IRS holds pretty much all the cards. Here, it appears that the tip could well have ended up bringing in proceeds: at least it was good enough that the examiner proposed a rather large tax. Appeals reversed on “hazards of litigation” grounds –not exactly a signal that they completely disagreed some proceeds could ensue. But the whistleblower, at that point, has no recourse in court to second-guess the IRS decision.

End of an Era? Bell v. C.I.R., Dkt. # 1973-10L (here)

I am often impressed with how far the Tax Court goes out of its way to be charitable to pro se taxpayers. I am also often impressed with the Tax Courts patience. This isn’t our first (or second) run-in with the Bells, though hopefully it is the last (at least for this docket number and these tax years). As the docket number indicates, this collection case has been eight years in the making. Like Judge Gustafson, I will largely refrain from recounting the history (which can be found in the earlier orders) other than to say that the Bells have appeared to vary between dragging their feet and outright refusing to communicate with the IRS over the intervening years. This behavior (kind-of) culminated in the Court dismissing the Bell’s case for failing to respond to an order to show cause.

And yet, they persisted.

Even though the case was closed, the Bell’s insisted on their “day in court” by showing up to calendar call in Winston-Salem while another trial was ongoing. And rather than slam the door, which had been slowly closing for the better part of eight years, the Court allowed the Bells to speak their part during a break in the scheduled proceedings. The assigned IRS attorney, “naively” believing that merely because the case was closed and removed from the docket they would not need to be present, now had to scramble and drive 30 miles to court.

Of course, the outcome was pretty much foreordained anyway. The Bell’s wanted to argue now that they had documents that would make her case. Documents that never, until that very moment in the past eight years, were shared with the IRS or court. The Court generously construed the Bell’s comments as an oral motion for reconsideration (which would be timely, by one day). And then denied the motion, via this designated order.

And so ends the saga… or does it?

In a tantalizing foreshadowing of future judicial resources to be wasted, Judge Gustafson notes that the Bells have previously asked about their ability to appeal the Court’s decision. We wish all the best to the 4th Circuit (presumptively where appeal would take place), should this saga continue.

One can be fairly impressed with the generosity and patience of the Judge Gustafson in working with the pro se parties of Bell. Tax law is difficult, and Tax Court judges frequently go out of their way to act as guides for pro se taxpayers through the maze. But that patience is less apparent where the party should know better -particularly, where the offending party is the IRS…

Things Fall Apart: Anatomy of a Bad Case. Renka, Inc. v. C.I.R., Dkt. # 15988-11R (here)

It is a good bet that the parties are sophisticated when the case deals with a final determination on an Employee Stock Ownership Plan (ESOP). It is an even better bet if the Judge begins the order with a footnote that “assumes the parties’ familiarity with the record, the terms of art in this complicated area of tax law, and the general principles of summary-judgment law.” Needless to say, this is not the sort of case where either of the parties could ignore court orders, show up at calendar after the case was closed, and be allowed to speak their part.

And of course, neither parties go quite that far. However, both procedurally and substantively the arguments of one party (the IRS) fall astoundingly short of the mark.

The IRS and Renka, Inc. are at odds about whether an ESOP qualified as a tax-exempt trust beginning in 1998. The IRS’s determination (that it is not tax-exempt) hinged on the characterization of Renka, Inc. as also including a second entity (ANC) as either a “controlled group” or “affiliated service group.” If this was so, then Renka, Inc.’s ESOP also must be set up to benefit additional employees (i.e., those of ANC), which it did not.

I am no expert on ESOPs, controlled groups, or affiliated service groups, and I do not pretend to be. But you don’t have to be an expert on the substantive law to see that the IRS is grasping. Here is where procedure and administrative law come into play.

The Notice of Determination at issue is for 1998. Although the determination also says the plan is not qualified for the years subsequent to 1998, it is really just looking at the facts in existence during 1998, reaching a determination about 1998, and saying that because of those facts (i.e. non-qualified in 1998), it continues to be non-qualified thereafter. But the critical year of the Notice of Determination is 1998: that is the year that Renka, Inc. has been put on notice for, and it is the determination that is reached for that year that is before the Court. So when the Commissioner says in court, “actually, Renka, Inc. was fine in 1998, but in 1999 (and thereafter) it wasn’t qualified” there are some big problems.

The biggest problem is the Chenery doctrine. Judge Holmes quotes Chenery as holding that “a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency.” SEC v. Chenery Corp. (Chenery II), 332 U.S. 194 (1947). The IRS essentially wants to argue that the Notice of Determination for 1998 is correct if only we use the facts of 1999… and apply the determination to 1999 rather than 1998. The Chenery doctrine, however, does not allow an agency to use its original determination as a “place-holder” in this manner. Since all parties agree the ESOP met all the necessary requirements in 1998 (the determination year), the inquiry ends: the Determination was an abuse of discretion.

This is one of those cases where you can tell which way the wind is blowing well before reaching the actual opinion. Before even getting to the heart of Chenery, Judge Holmes summarizes the Commissioner’s argument as being “if we ignore all the things he [the Commissioner] did wrong, then he was right.” And although the IRS has already essentially lost the case on procedural grounds (i.e. arguing about 1999 when it is barred by Chenery), for good measure Judge Holmes also looks at the substantive grounds for that argument.

Amazingly, it only gets worse.

First off, the IRS relies on a proposed regulation for their approach on the substantive law (i.e. that the ESOP did not qualify as a tax-exempt trust). Of course, proposed regulations do not carry the force of law, but only the “power to persuade” (i.e. “Skidmore” deference). And what is the power to persuade? Essentially it is the same as a persuasive argument made on brief. Judge Holmes cites to Tedori v. United States, 211 F.3d 488, 492 (9th Cir. 2000) as support for this idea.

As an aside, I have five hand-written stars in the margin next to that point. I have always struggled with the idea that Skidmore deference means anything other than “look at this argument someone else made once: isn’t it interesting?” It is not a whole lot different than if I (or whomever the party is) made the argument on their own in the brief, except that the quote may be attributed to a more impressive name.

But if there is something worse than over-relying on a proposed regulation for your argument, it would be over-relying on a proposed regulation that was withdrawn well before the tax year at issue. Which is what happened here, since the proposed regulation was withdrawn in 1993. Ouch.

Finally, and just to really make you cringe, Judge Holmes spends a paragraph noting that even if the proposed regulation was (a) not withdrawn, and (b) subject to actual deference, it still would not apply to the facts at hand. In other words, the thrust of the IRS’s substantive argument was an incorrect interpretation of a proposed regulation that was no longer in effect. No Bueno.

There was one final designated order that I will not go into detail on. For those with incurable curiosity, it can be found here and provides a small twist on the common “taxpayers dragging their feet in collections” story, in that this taxpayer was not pro se.

 

Designated Orders the Week of July 30 – August 3

Samantha Galvin from University of Denver’s Sturm Law School brings us this week’s designated orders. We congratulate Professor Galvin on her recent promotion to associate professor (and congratulate the law school on its wise decision.)  The first order she discusses concerns a somewhat unusual taxpayer. We thank Bob Kamman for bringing the back story to our attention. If the case goes to trial and the taxpayer does not change his arguments, he may face additional penalties for taking a groundless position that needlessly burdens the Court even if it is entertaining.  Professor Galvin points you to additional information if you find his story entertaining. Keith

There were a good number of designated orders the week of July 30, most were unremarkable, but for those interested they can be found: here, here, here, here, here and here.

And of course, Chai/Graev was back but in a slightly different context this time being used as a defense to penalties in a case where (consolidated) petitioners do not want the record to be reopened. The order (here) includes an analysis of the penalty rules applicable to C Corporations, individuals and a TEFRA partnerships.

But on to the orders I found most interesting…

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Credit for Creativity

Patrick Combs v. C.I.R., Docket No: 22748-14 (Order here)

My lecture on the assignment of income doctrine typically begins with me stating that it’s an antiquated concern that is rarely at issue in today’s electronic, information reporting world. Aside from genuine identity theft cases, it’s difficult for taxpayers to argue that someone else should pay tax on income earned by them and reported to the IRS in their name – so I was delighted to see this order be designated during the week of July 30.

Before getting into the details of the order, this petitioner’s background is worth mentioning. He is a monologist whose most famous work to date is a show called “Man 1, Bank 0” which details his successful attempt at cashing a non-negotiable, fake advertisement check for nearly $100,000 and the aftermath that followed when the bank realized its error. It’s worth a Google search.

Unlike writing him off as just another tax protestor, I can’t ignore the fact that his arguments (which are almost performance-like) in Tax Court may evolve into yet another successful comedy show.

So why is he in Tax Court? Petitioner failed to report income he earned as a monologist and from rental real estate that he owned in San Diego. At the time of this order, the Court had provided petitioner with many opportunities to reach a settlement and went as far as issuing a preclusion order, which barred petitioner from introducing at trial any records he failed to disclose to the IRS by a December deadline.

Petitioner met this deadline and the documents he provided included a written statement on the theory (or the “epiphany”) of his case. His theory involves another taxpayer, Mr. Holcomb (“Mr. H.”) and while the exact nature of their relationship is not disclosed, petitioner states that he is a penniless artist entirely dependent on Mr. H. to whom he has signed over (either via trust or agency agreements) all his income and property.

As a result, petitioner does not understand how he could be liable for any tax because if there are any taxes due they are due strictly from Mr. H. and the Court should address the issue with Mr. H.

Even if the Court had a reason to address anything with Mr. H, it would be difficult to do so. Mr. H. has his own interesting background and was recently found guilty by a jury of four counts of making a false statement to a financial institution.

Petitioner’s argument that he has no rights to the income becomes contradictory when he also writes that he is authorized by Mr. H. to spend the “signed over” funds for petitioner’s personal purposes in whatever way petitioner sees fit. This arrangement, petitioner states, “goes to the heart of why I chose to be one of [Mr. H.’s] fiduciaries in the first place. I am an artist (monologist) and there is no better space for an artist to be in other than one that frees him of all concerns relative to financial liability (income tax included), while at the same time being able to properly provide for himself and his family members.” Petitioner concludes his impassioned written statement with, “in simple straight forward speak; I am a “kept” man.”

The “trust arrangement” that petitioner has with Mr. H. calls Mr. H. the “director” of petitioner’s future income and property, and in return, Mr. H. agrees petitioner is the “manager” or “general manager” of such income and property and is free to do whatever petitioner wants to do with it.

The Court calls it an anticipatory assignment of income and warns petitioner that a 6673 penalty may be in his future if he continues with his theory.

The Court grants summary judgment in part for petitioner’s failure to report income, orders the parties to submit settlement documents with respect to other issues and if no settlement is reached expects the parties to appear at trial – where I’d expect there to be an inspired performance by petitioner.

Quash a Lot

Mufram Enterprises LLC, Wendell Murphy, Jr, Tax Matters Partner, et al. v. C.I.R., Docket Nos: 8039-16, 14536-16, 14541-16 (Order here)

Next before the Court is petitioners (in a consolidated docket) motion to quash two subpoenas duces tecum, which the Court grants in part.

The case involves a property appraiser that petitioners retained as a consulting expert, and specifically not as an expert witness, to assist them in preparing their case. Before the case commenced, the appraiser had also been hired by prospective lenders to appraise the properties involved in the case.

Respondent had requested appraisals of the properties from petitioners, but petitioners said appraisals did not exist.

Respondent issued a subpoena to the appraiser requesting documents beginning when he had become petitioners’ consulting expert. Without looking at the details of the subpoena, the appraiser stated aloud that he was not surprised by the subpoena because he had done appraisals of the properties.

This prompted IRS to issue another subpoena to the appraiser for records and correspondence from the last 23 years. The subpoena also requests that the appraiser testify at trial about facts, but not as an expert witness.

Petitioner argues the first subpoena should be quashed because the documents beginning at the time the appraiser became a consulting expert are protected work product, and the Court grants this motion to quash.

Regarding the second subpoena, petitioner argues that requiring the appraiser to produce records or correspondence that pre-date 2010 (the year of the first property appraisal related to this case) is unreasonable and oppressive. The Court agrees and limits the scope of the subpoena to the appraiser’s non-work product records and correspondence beginning in 2010.

With respect with whether the appraiser will need to testify at trial, the Court will hold judgement on the matter until trial, but if IRS intends to call the appraiser it will determine whether it is as a fact or expert witness, rule on the propriety of his being called, and then determine what fee amount (either the regular or expert witness fee) the IRS should pay to him.

Motion to Compel and Section 6103

Loys Vallee v. C.I.R., Docket No: 13513-16W (Order here)

Here is another whistleblower case where the IRS is arguing that petitioner’s submission did not lead to the collection of any tax, but in this case, the administrative record does not clearly demonstrate that.

Petitioner filed motion to compel production of documents and respondent filed a motion for summary judgment.

In opposition to respondent’s motion, petitioner is (as construed by the Court) challenging the sufficiency of the administrative record. Pursuant to Kasper v. Commissioner, 150 T.C. No. 2, the Court limits the scope of its review in whistleblower cases to the administrative record, but the administrative record can be supplemented if it is incomplete or when an agency action is not adequately explained in the record.

Respondent’s position is that the returns were already selected for exam at time petitioner’s information was received as supported by declaration from IRS employees, however, the administrative record does not contain the declarations that respondent relies upon. It also appears that employees beyond the ones identified by respondent were involved in reviewing petitioner’s submission.

Petitioner’s motion to compel is broad and requests information about all of the target taxpayers in his whistleblower submission (referred to a Corporate D, Related A and Related B by the Court). There are section 6103 disclosure concerns that come with petitioner’s motion to compel. Section 6103 generally prohibits disclosure of returns or return information, but there is an exception under 6103(h)(4)(B) that return information can be disclosed in a judicial proceeding pertaining to tax administration if treatment of an item reflected on a return is directly related to resolution of an issue in the proceeding.

Without ruling on petitioner’s motion (holding it in abeyance), the Court orders respondent to file petitioner’s Form 211 (the whistleblower application) and its attachments with the Court to enable it to review petitioner’s claims. It also orders respondent to respond to petitioner’s challenge to the sufficiency of the administrative record, and denies respondent’s motion for summary judgment.

 

Designated Orders: 7/9/18 to 7/13/18

William Schmidt from the Kansas Legal Aid Society brings us this weeks designated orders. Three orders in cases involving the Graev issue keep that issue, no doubt the most important procedural issue in 2018, front and center. As with last week, there is an order in the whistleblower area with a lot of meat for those following cases interpreting that statute. Keith

For the week of July 9 through July 13, there were 9 designated orders from the Tax Court. Three rulings on IRS motions for summary judgment include 2 denials because there is a dispute as to a material fact (1st order based on employment taxes here) (2nd order involves petitioners denying both having a tax liability and receiving notice of deficiency for 2012 here) and a granted motion because petitioner was not responsive (order here). What follows are three orders where Judge Holmes takes on Chai ghouls, an exploration of a whistleblower case, and two quick summaries of cases. Overall, the Chai ghoul cases and whistleblower case made for a good week to read judicial analysis.

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Chai Ghouls

All three of these are orders from Judge Holmes that deal with Chai and Graev issues. The first two discussed were later in the week and had more analysis. As you are likely aware, the Chai and Graev judicial history in the Tax Court has led to several current cases that need analysis regarding whether there was supervisory approval regarding accuracy-related penalties, as required by Internal Revenue Code section 6751. In each of these cases, the IRS has filed a motion to reopen the case to admit evidence regarding their compliance with 6751(b)(1).

  • Docket Nos. 11459-15, Hector Baca & Magdalena Baca, v. C.I.R. (Order here).

The Commissioner filed the motion to reopen the record to admit the form. The Bacas couldn’t tell the Commissioner whether or not they objected to the motion. When given a chance to respond, they did not object. The Bacas did not raise Code section 6751 at any stage of the case (petition, amended petition, trial, or brief). The Commissioner conceded 6662(c) (negligence or disregard) penalties because the only penalty-approval form found is the one for 6662(d) (substantial understatement) penalties.

The Court’s analysis sets out the standard for reopening the record. The evidence to be added cannot be merely cumulative or impeaching, must be material to the issues involved, and would probably change the outcome of the case. Additionally, the Court should consider the importance and probative value of the evidence, the reason for the moving party’s failure to introduce the evidence earlier, and the possibility of the prejudice to the non-moving party.

The Court then analyzes those elements set out above. For example, the Court finds the penalty-approval form to be properly authenticated nonhearsay and thus admissible. Ultimately, the Commissioner had less reason to anticipate the importance of section 6751 because it was following Chai and Graev that it was clarified the Commissioner had the burden of production to show compliance with 6751 when wanting to prove a penalty.

In this case, the Court states because the Bacas did not object to the accuracy-related penalties, that is some excuse for the Commissioner’s lack of diligence. Additionally, the Court concludes that it can’t decide the Bacas would be prejudiced because they never said they would be.

Takeaway – Respond when the court requests your opinion or you may suffer consequences that could have been avoided if you had raised your hand and notified the court of your concerns.

  • Docket Nos. 19150-10, 6541-12, Scott A. Householder & Debra A. Householder, et al., v. C.I.R. (Order here).

This set of consolidated cases differ from the Bacas’ case because of an objection submitted by the petitioners. Arguments by the petitioners begin that the record should not be reopened because the Commissioner’s failure to introduce evidence of compliance with 6751(b)(1) shows a lack of diligence, and the Commissioner doesn’t offer a good reason for failing to introduce the form despite possessing it when trying the cases. They argue they would be prejudiced by reopening the record because they have not had a chance to cross-examine the examining IRS Revenue Agent on their case. They argue the form is unauthenticated and that both the declaration and the form are inadmissible hearsay.

Again, the form is found to be admissible nonhearsay. Regarding the authentication argument, the IRS recordkeeping meets the government’s prima facie showing of authenticity. The Court brings up that the Revenue Agent in question was a witness at trial that the petitioners did cross-examine, it’s just that they did not have section 6751 in mind at the time. In fact, the Court reviews a set of questions the petitioners listed and finds that those answers likely would not have helped them so comes to the conclusion that they would not be prejudiced by admitting the form.

Overall, both parties should have been more diligent to bring up section 6751. Since they did not, the lack of diligence on the Commissioner’s part is counterbalanced by the probative value of the evidence and the lack of prejudice to the petitioners if the record were reopened to admit the form.

Takeaway – The IRS is not the only party on notice of the Chai and Graev issue. Petitioners bear responsibility to raise the issue of supervisory approval just as the IRS has a responsibility to show proper authorization of the penalty. The court seems to be shifting a bit from prior determinations.

  • Docket Nos. 17753-16, 17754-16, 17755-16, Plentywood Drug, Inc., et al., v. C.I.R. (Order here).

These consolidated cases also deal with the 6751 accuracy-related penalties and the IRS motion to reopen the record to admit penalty-approval forms. While the petitioners originally disputed the penalties, they conceded penalties on some issues but did not want to concede penalties on others. As a result, they did not object to the Commissioner’s motion. The Court did not grant the motion regarding penalties determined against the corporate petitioner as it would not change the outcome of the case. In Dynamo Holdings v. Commissioner, 150 T.C. No. 10 (May 7, 2018), the Court held that section 7491(c)’s burden of production on penalties does not apply to corporate petitioners, so that, in a corporate case, where the taxpayer never asked for proof of managerial approval and so did not get into the record either a form or an admission that no form was signed, the taxpayer had the burden of production on this section 6751(b) issue and had failed. For the penalties determined against the individual petitioners, the Court granted the motion since they did not raise any objections.

In all three cases, the Court orders to grant the IRS motion to reopen the record to admit the penalty-approval form attached to the motion (with the exception of the denial of the application to Plentywood Drug, Inc.).

Comments: I must admit when Judge Holmes mentions Chai ghouls in his orders it makes me think of Ghostbusters (Chai ghoul bustin’ makes him feel good?). In looking over these three cases, it seems to me they have the same result no matter what the petitioners did. It is understandable when the petitioners never objected to the penalties or the approval form. However, the Householders objected and still got the same result. Perhaps I am more sympathetic to the petitioners, but the reasoning also does not follow for me that petitioners would not be prejudiced by admitting a form that allows them to have additional penalties added on to their tax liabilities. 

Whistleblowers and Discovery

Docket No. 972-17W, Whistleblower 972-17W v. C.I.R. (Order here).

By order dated April 27, 2018, the Court directed respondent to file the administrative record as compiled by the Whistleblower Office. Petitioner filed a motion for leave to conduct discovery, the IRS followed with an opposing response and the petitioner filed a reply to respondent’s response. On June 25, the Court conducted a hearing on petitioner’s motion in Washington, D.C., where both parties appeared and were heard.

Internal Revenue Code section 7623 provides for whistleblower awards (awards to individuals who provide information to the IRS regarding third parties failing to comply with internal revenue laws). Section 7623(b) allows for awards that are at least 15 percent but not more than 30 percent of the proceeds collected as a result of whistleblower action (including any related actions) or from any settlement in response to that action. The whistleblower’s entitlement depends on whether there was a collection of proceeds and whether that collection was attributable (at least in part) to information provided by the whistleblower to the IRS.

On June 27, 2008, the petitioner executed a Form 211, Application for Award for Original Information, and submitted that to the IRS Whistleblower Office with a letter that identified seven individuals who were involved in federal tax evasion schemes. The first time the petitioner met with IRS Special Agents was in 2008 and several meetings followed. The IRS focused on and investigated three of the individuals listed on petitioner’s Form 211 following those initial meetings.

The first taxpayer (and I use that term loosely for these three individuals) was the president of a specific corporation. In 2013, that individual was convicted of tax-related crimes including failing to file personal and corporate tax returns due in 2006, 2007, and 2008. This person received millions of dollars in unreported dividends (from a second corporation, also controlled by this individual). This individual was ordered to pay restitution of $37.8 million.

The second individual was the chief financial officer of the corporation. This person received approximately $13,000 per month from the corporation in tax year 2006 but failed to report that as taxable income, and did not file a tax return in 2007. After amending the 2006 tax return and filing the 2007 tax return, the criminal investigation ended. The Revenue Officer assessed trust fund recovery penalties for the final quarter of tax year 2006 and all four quarters of tax year 2007. This taxpayer filed amended tax returns for 2005 and 2006 in March 2009 and filed delinquent returns for 2007 and 2008 in July 2010. The IRS filed liens to collect trust fund recovery penalties of approximately $657,000 and income tax liabilities of $75,000 for tax years 2005 and 2006.

The third individual was an associate of the first two but had an indirect connection with the corporation. This taxpayer had delinquent returns for 2003-2011 and there was a limited scope audit for tax years 2009 and 2010. The IRS filed tax liens for unpaid income taxes totaling approximately $2.4 million for tax years 2003 to 2011.

For each of the individuals, the IRS executed a Form 11369, Confidential Evaluation Report, on petitioner’s involvement in the investigations. For taxpayer 1, the IRS Special Agent stated that all information was developed by the IRS independent of any information provided by petitioner. For taxpayer 2, the form includes statements the Revenue Officer discovered the unreported income and petitioner’s information was not useful in an exam of the 2009 and 2010 tax returns. For taxpayer 3, the form states the taxpayer was never the subject of a criminal investigation (which is inconsistent with the record) and that petitioner’s information was not helpful to the IRS.

The petitioner seeks discovery in order to supplement the administrative record, contending the record is incomplete and precludes effective judicial review of the disallowance of the claim for a whistleblower award. Respondent asserts the administrative record is the only information taken into account for a whistleblower award so the scope of review is limited to the administrative record and petitioner has failed to establish an exception.

The Court notes the administrative record is expected to include all information provided by the whistleblower (whether the original submission or through subsequent contact with the IRS). The Court’s review of the record in question is that it contains little information, other than the original Form 211, identifying or describing the information petitioner provided to the IRS. While the record indicates that there were multiple meetings concerning the three taxpayers, there are few records of the dates and virtually no documents of the information provided. The Court agreed with the petitioner that the administrative record was materially incomplete and that the circumstances justified a limited departure from the strict application of the rule limiting review to the administrative record.

The Court states the petitioner met the minimal showing of relevant subject matter for discovery since the administrative record was materially incomplete and precluded judicial review. The information petitioner seeks is relevant to the petitioner’s assertion that the information provided led the IRS to civil examinations and criminal investigations for the three taxpayers and led to the assessment and collection of taxes that would justify an award under section 7623(b). The IRS did not deny petitioner’s factual allegations and did not argue the information sought would be irrelevant so failed to carry the burden that the information sought should not be produced.

The Court limited petitioner’s discovery to three interrogatories concerning conversations with a Revenue Officer and two Special Agents, two requests for production of documents concerning notes and records of meetings with those three individuals.

Petitioner sought nonconsensual depositions if the IRS did not comply with the interrogatories and requests for production of documents. Since the Court directed the IRS to respond to the granted discovery requests, it is premature to consider the requests for nonconsensual depositions at this time. The footnote cites Rule 74(c)(1)(B), which calls that “an extraordinary method of discovery” only available where the witness can give testimony not obtained through other forms of discovery.

Respondent is ordered to respond to those specific interrogatories and requests for production of documents by August 17, 2018.

Comment: On the surface, this step forward looks to be a win for the petitioner as there seems to be a cause and effect that justifies a substantial whistleblower award. I discussed the case with an attorney with a whistleblower case in his background who commented that to get a whistleblower award the whistleblower had to be the first one to make the reporting and the information had to be outside public knowledge (though that was outside the tax world). From his experience, the government made it difficult to win a whistleblower award and I would say that looks to be the case here.

Miscellaneous Short Items

  • The Petitioner Wants to Dismiss? – Docket No. 11487-17, Gary R. Lohse, Petitioner, v. C.I.R. (Order here). Petitioner files a motion to dismiss for lack of jurisdiction, stating the notice of deficiency is not valid. The judge denies his motion because there is a presumption of regularity that attaches to actions by government officials and nothing submitted by the petitioner overcomes that presumption.
  • Petitioner Wants a Voluntary Audit – Docket No. 24808-16 L, Tom J. Kuechenmeister v. C.I.R. (Order here). Petitioner filed a motion for order of voluntary audit, also claiming that the IRS was negligent in allowing the third party reporter to issue the forms 1099-MISC for truck driving. As Tax Court is a court of limited jurisdiction, the Court cannot order the IRS to conduct a voluntary audit. While the petitioner was previously warned about possible penalties up to $25,000, this motion was filed prior to the warning so no penalty assessed for this motion. Petitioner’s motion is denied.

Takeaway: Each time here, the petitioner does not understand the purpose of the Tax Court. The petitioners may have come to a better result by treating Tax Court motions as surgical tools rather than as blunt weapons.

 

Designated Orders 7/2/2018 – 7/6/2018

Samantha Galvin from University of Denver’s Sturm Law School brings us this week’s designated orders. The first two orders she discusses demonstrate the difficulty pro se taxpayers have in determining when to appeal an adverse decision while the third order is a detailed opinion regarding the factors necessary to obtain a whistleblower award. The whistleblower case reminds us that many dispositive orders have the same amount of analysis as many opinions but when issued as an order lack any precedent and generally fly under the radar of those looking for Tax Court opinions. Keith

The week of July 2nd started off light but ended with a decent amount of designated orders – three are discussed below. The six orders not discussed involved the Court granting: 1) a petitioner’s motion to compel the production of documents under seal (here); 2) respondent’s motion for summary judgment when a petitioner did not respond nor show up at trial (here); 3) respondent’s recharacterized Motion to File Reply to Opposition to Motion for Summary Judgment (here); 4) respondent’s motion for summary judgment on a petitioner’s CDP case for periods that were already before the Tax Court and Court of Appeals (here); 5) respondent’s motion for summary judgment in CDP case where petitioners’ did not provide financial information (here); and 6) an order correcting the Judge’s name on a previously filed order to dismiss (here).

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Ring the Final (Tax Court) Bell on Bell

Docket No. 1973-10L, Doug Stauffer Bell and Nancy Clark Bell v. CIR (Order here)

This first order is for a case that William Schmidt blogged about (here). Bob Kamman also followed up on this case, in the comments to William’s post, with useful background information that sheds light on the petitioners’ circumstances. In the last designated order, the Court had ordered petitioners to show cause as to why the Court should not dismiss their case for failure to prosecute no later than June 28. Petitioners did not respond to the order to show cause, so the Court has dismissed the case.

If you recall the petitioners filed for bankruptcy three separate times while their Tax Court case was pending but ultimately failed to complete the bankruptcy process each time. Then they prematurely appealed to the Fourth Circuit, which dismissed their case for lack of jurisdiction after finding that the IRS appeals’ determination (issued after remand by the Court) was not “a final order nor an appealable interlocutory or collateral order.”

Now that the Court has dismissed their case it becomes appealable, however, the petitioners’ lack of meaningful participation in the process up to this point unfortunately does not bode well for an appeal.

The next order I discuss also involves a premature attempt to appeal a not-yet-final Tax Court decision.

Appeal after Computations

Docket No. 12871-17, Duncan Bass v. CIR (Order here)

This case is pending under rule 155 and it is somewhat understandable why petitioner thought the decision was final. Petitioner was served a bench opinion on June 8, 2018, and subsequently appealed to the Fifth Circuit, however, the bench opinion was an interlocutory order and the Court withheld entry of its decision for the purposes of permitting parties to submit computations, as rule 155(a) allows.

Interlocutory orders are generally not appealable, but there is an exception for “orders that include a statement that a controlling question of law is involved with respect to which there is a substantial ground for differences of opinion” and “an immediate appeal from that order may materially advance the ultimate termination of the litigation.” The order in this case does not contain such a statement. As a result, the Court orders the parties to continue to comply with rule 155 to resolve the computational issues so that the Court may enter a final, and thus appealable, decision.

A Disappointed “Whistleblower”

Docket No. 8179-17W, Robert J. Rufus v. CIR (Order here)

The petitioner in this case is an accountant who was hired to help prepare a statement of marital assets as part of a divorce proceeding, which gave him access to his client’s soon-to-be ex-husband’s (“the ex-husband’s”) tax information. This information led petitioner to believe that the ex-husband had underreported gifts and treated gifts as worthless debts. He provided information about these two violations in an initial and supplemented submission to the Whistleblower Office, which ultimately denied him an award.

In this designated order, respondent moves for summary judgment on petitioner’s challenge of the denial of the award. Respondent argues that it did not abuse its discretion in denying the award because, although the ex-husband was audited and tax was assessed, the IRS did not rely on the information petitioner provided.

Regarding petitioner’s initial submission, the IRS examined the ex-husband’s underreporting of gifts but found that there was not enough independent, verifiable data to support a gift tax assessment. The ex-husband had also filed amended returns which included worthless debts of $23 million and generated losses which he carried back and forward in amended 2003, 2004, and 2006 returns. Petitioner was aware of these amended returns and provided the IRS with information about the worthless debts in a supplemented submission, alleging that the debts were actually gifts to family and friends. According to respondent, the large refund amounts claimed on the returns are what triggered the audit, rather than petitioner’s information.

The information petitioner sent was never seen or used until after the case was closed because the assigned revenue agent believed, for unexplained reasons, that the information was based on grand jury testimony and was tainted. In the audit, the revenue agent concluded the ex-husband failed to substantiate the bad debts he claimed and assessed tax accordingly.

The Whistleblower office sent petitioner a letter denying his claim regarding the gift tax liabilities to which petitioner responded stating that his claim involved the gift tax liabilities and the treatment of gifts as worthless debts. The Whistleblower Office then sent a final determination reviewing each item, and with respect to the worthless debt the IRS stated that it had identified the issue prior to receiving information from petitioner.

Petitioner petitioned Tax Court on that final determination arguing that the exam was initiated due to his information and the information was directly, and indirectly, beneficial to the IRS and resulted in the assessment of tax, penalties, and interest but he offered no evidence to support these claims. He also argued that respondent was too focused on the timing of his supplemented submission in an attempt to deny the award.

A whistleblower is entitled to an award if the secretary proceeds with any administrative or judicial action based on information submitted by the whistleblower. Additionally, the award is only available if the whistleblower’s target’s gross income exceeds $200,000, and if the amount or proceeds in dispute exceed $2,000,000. The IRS must take action and collect proceeds in order to entitle the whistleblower to an award. If the IRS’s action causes the whistleblower’s target to file an amended return, then the amounts collected based on the amended return are considered collected proceeds.

Since the petitioner in this case did not provide additional evidence, the Court reviews the administrative record which reflects that petitioner’s first submission was related to the gift tax issue, on which no proceeds were collected. The administrative record also reflects that petitioner’s supplemented submission about the worthless debts was not used in the exam of the amended returns and the revenue agent received the information after the returns were already selected for exam. Based on its review of the administrative record, the Court grants respondent’s motion for summary judgment.

 

Designated Orders in Krug v. Commissioner, 5/29/18 & 6/13/18

Patrick Thomas and William Schmidt today discuss two designated orders by Judge Halpern in an unusual whistleblower case. The Court seeks further explication of a Social Security Act provision relating to inmate services, which Respondent alleges dooms the petitioner’s claim. Patrick and William take us through the tangle of applicable statutes. Christine

Docket No. 13502-17W, Gregory Charles Krug v. C.I.R. (Order here).

As promised in Patrick and William’s recent designated orders posts, this post looks at Krug v. Commissioner, a whistleblower case assigned to Judge Halpern, and is co-authored by both Patrick and William.

This order stems from Respondent’s motion for summary judgment, which actually resulted in two designated orders: the June 13 order discussed below, and one from May 29. In both orders, the Court is confused by Respondent’s arguments, and as such, declines to dispose of the motion without further argument. The May 29 order sets the motion for a hearing during a trial session on June 4. The later order discusses that hearing, but still reserves judgment until Respondent provides further information.

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Specifically, Respondent asks the Court to uphold the IRS denial of a whistleblower award, because the entity against which the whistleblower complained was not required to withhold employment taxes or federal income tax. Respondent submitted a Form 11369, Confidential Evaluation Report on Claim for Award, which evaluated Petitioner’s administrative claim for a whistleblower award. This form included the following language:

Social Security and Medicare wages are excluded from inmate services under the provision of Section 218(c)(6) of the Social Security Act. The Federal income tax withholding is dependent on the amount of wages paid which is less than the minimum wage. FIT on these wages would be dependent on other income (investment) earned by the inmates, and whether or not they file a joint return. Because of these unknown factors, this claim will be declined.

So, it appears the whistleblower notified the IRS that a prison was not withholding Social Security, Medicare, or Federal income taxes on wages paid to inmates. The IRS denied a whistleblower award claim, noting that the prison has no such withholding requirements.

Judge Halpern does not understand the relevance of the explanation. The Federal income tax reference seems inapplicable, he says, given that petitioner’s claim relates to “employment taxes.” He further notes that though section 218(c)(6) of the Social Security Act “does address services by inmates, we do not understand the relevance of the provision to petitioner’s claim.” In the May 29 order, he asked Respondent to clarify its argument at the June 4 trial session.

Apparently, Respondent’s explanation was insufficient. Judge Halpern notes in the June 13 order that, “as indicated in the transcript of the hearing, the Court was not satisfied with counsel’s explanation of why payments for the services of inmates are not subject to withholding for employment taxes.” Petitioner did not appear for the hearing. In fact, the petitioner has not been responsive to orders beginning February 8. Looking at the docket, there could be an issue of whether the Court has the petitioner’s correct address.

To us, it seems that Judge Halpern and Respondent are talking past each other. Judge Halpern is correct, in that, on its face, section 218(c)(6) of the Social Security Act (42 U.S.C. § 418) has nothing to do with withholding obligations. Rather, Section 218 provides a mechanism through which State and local governments may allow their employees to participate in Social Security and Medicare. Originally, States were not automatically obligated to participate in these programs. After the addition of Code section 3121(b)(7)(F) in 1991, with limited exceptions, all state employees are required to participate in Social Security, including its withholding requirements. Today, all states have a Section 218 agreement with the federal government.

Separately, Code section 3101(a) imposes Social Security and Medicare taxes, which section 3102(a) requires to be withheld from employee wages. Section 3121(b) defines “employment” broadly, with a number of exceptions. An exception exists for any employee of “a State . . . or any instrumentality . . . “. IRC § 3121(b)(7). Importantly, an exception to the exception exists for any states who have entered into an agreement with the federal government under Section 218 of the Social Security Act, or where the employee is “not a member of a retirement system of such State . . .” IRC § 3121(b)(7)(E), (F). As noted above, all 50 states have these agreements, and all state employees are generally—agreement or not—required to withhold these taxes.

And there’s where the rubber meets the road: Inmates of penal institutions are, under Social Security Act section 218(c)(6), excluded from any agreement under that section, as the Service notes. Further, even where no agreement is in force, section 3121(b)(7)(F)(ii) specifically exempts withholding obligations for state employers for wages paid to inmates in a penal institution.

Regarding the withholding of federal income tax, while such a tax might not be strictly characterized as an “employment tax”, employers are nevertheless generally obligated to withhold such taxes from employee wages. Reporting such a failure could charitably fall under the ambit of “employment taxes” when a pro se taxpayer uses this term. And further, section 3401 contains no blanket waiver on the definitions of “wages” or “employment” in mandating withholding obligations under section 3402(a)(1).

So, to us, there appears to be a live issue regarding income tax withholding requirements, but a fairly straightforward argument that no Social Security or Medicare tax withholdings were required. The Service says in the Form 11369 that the employer needed more information to make this determination (other income, marital status, etc.). But isn’t it the employer’s problem that they didn’t collect that information?

We’re also confused why the IRS would make only this argument. A whistleblower award under section 7623 is premised upon the IRS “proceed[ing] with any administrative or judicial action described in [7623(a)] based on information brought to the Secretary’s attention by an individual.” The “administrative or judicial action” could include “(1) detecting underpayments of tax, or (2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same…” If Respondent’s argument is that the prison in question wasn’t required to withhold, then surely the IRS also did not take “administrative or judicial action” to detect an underpayment or other malfeasance. That seems a much stronger argument for upholding the denial.

Further, Judge Halpern, in his second order, advises Respondent’s counsel to review Kasper v. Commissioner, 150 No. 2 (2018), which we’ve discussed before. Kasper holds (1) Tax Court review of a whistleblower award denial is generally limited to the administrative record; (2) the standard of review is abuse of discretion; and (3) the Chenery rule applies, meaning that the Tax Court can only uphold the Service’s decision on the same grounds that the Service itself made the decision.

How does Kasper affect this case? Because the standard of review is now conclusively an abuse of discretion standard in the Tax Court, it’s easier for the Tax Court to uphold the denial of a whistleblower claim.

But we may also be missing a critical fact: did the whistleblower’s claim relate to unpaid wages, as in Kasper? Without access to the other documents in the Tax Court’s docket, we can’t know for sure. If so, then Judge Halpern seems to suggest that regardless of whether a prison is required to withhold Social Security and Medicare taxes for wages paid to inmates, the Court could uphold the decision on the basis that no withholding was necessary, because no wages were paid. But, if that’s the case, why not just order that here? If only Tax Court motions and briefs were publicly accessible, we wouldn’t be left to wonder.

The June 13 order requires Respondent and Petitioner to file a memorandum on or before August 3 addressing the Court’s concerns with the Form 11369’s relevance. In the meantime, the Court has taken the motion for summary judgment under advisement.

What Makes a Whistleblower Notice of Determination?

Carlton Smith brings us a thought-provoking discussion of the Myers whistleblower case which raises important issues of Tax Court jurisdiction and tax exceptionalism. Christine

There is a case pending in the D.C. Circuit that may upend several Tax Court precedents concerning what constitutes a valid notice of determination concerning a whistleblower award.  Such notices give the Tax Court review jurisdiction under section 7623(b)(4).  In Myers v. Commissioner, 148 T.C. No. 20 (June 5, 2017), the Tax Court followed its prior precedent of Cooper v. Commissioner, 135 T.C. 70, 75-76 (2010), which held that there is no particular form for a whistleblower award notice of determination, and that multiple letters from the Whistleblower Office indicating that an award was not being granted each constituted tickets to the Tax Court.  In an appeal of Myers, the whistleblower is challenging those holdings, which have never been reviewed by an appellate court.  Under section 7482(b)(1)’s flush language, all appeals from Tax Court whistleblower award cases go to the D.C. Circuit – not the Circuit of residence.  So, under Golsen, the Tax Court will have to accept anything the D.C. Circuit rules in the appeal of Myers.

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Facts

Myers sought an award with respect to a former employer of his.  He told the IRS that the employer had misclassified him and many of his co-workers as independent contractors.  It is unclear whether the IRS ever used this information to conduct an administrative proceeding.  In one letter to Myers, the IRS alleged that it did not collect $2 million – the threshold for awards under section 7623(b)(5) – which may imply it did audit the employer and collect some money.  Starting in 2009 and going through 2014, Myers exchanged correspondence with the Whistleblower’s Office.  In a series of four letters written to him in 2013 and 2014, the Office made clear that it was not giving him an award.  But, despite the Manual’s then requirement (since repealed) that any whistleblower award notice of determination be sent certified mail, each of these letters was sent to Myers by regular mail.  Further, none of the letters stated therein that this was a notice of determination, that review was available in the Tax Court, or that he had 30 days to file a Tax Court petition.

Myers was representing himself, and he was frustrated and did not know what to do to pursue his claim.  Eventually, in 2015, Myers filed a Tax Court petition, and the IRS moved to dismiss the petition for lack of jurisdiction as untimely.

Tax Court Proceedings

In the Tax Court, Myers resisted the IRS motion, arguing that the letters were not valid notices of determination, particularly since they were not sent certified mail, but also because they did not alert him to the possibility of filing in the Tax Court.  Of course, if he were right on this, then perhaps the correct ruling would be for the court to dismiss the case for lack of jurisdiction for lack of a ticket to the Tax Court, rather than for untimely filing.

But, Myers also argued that, if the letters constituted valid notices of determination, then the Tax Court had jurisdiction because either equitable tolling or estoppel should prevent the IRS from arguing that he filed too late.

The case was first discussed in a phone call with Special Trial Judge Guy, and then a hearing on the motion was held before Judge Ashford.  The transcript of the hearing is here.  At the hearing, Judge Ashford’s concern was how the IRS could prove the date of mailing of the letters, when they were not sent certified mail.  But, the judge also wondered why the IRS couldn’t just fix the problem by now sending a notice of determination by certified mail.  Here’s the judge speaking at pp. 47-48 of the transcript:

I’m going to take this matter under advisement. I am still — I mean, based on the testimony, you know, of both Ms. Carr and Mr. Myers, you know, Mr. Arthur and Mr. Barnes, I am still troubled, to be frank with you, by the fact that all of these letters or determinations, you know, they’re ambiguous. They give no clue as to — first, you know, like I said, at the outset starting the 30 days — starting the 30-day clock, so to speak.

And it just seems like, you know, the Internal Revenue Service issuing these letters, they can easily frustrate judicial review, you know, by issuing ambiguous denials.

You know, I don’t know whether, you know, it’s a matter of — and I think Judge Guy may have alluded to this when you all had a telephone conference. You know, the IRS whistleblower office, you know, issuing, you know, another, you know, denial letter certified mail, you know, so that — so that The Court, you know, can proceed, I guess.

When she wrote her opinion in Myers, though, Judge Ashford followed Cooper and held that each of these letters constituted notices of determination, and she got around the issue of the date the IRS sent the letters by holding that Mr. Myers’s actions in responding to them shows that he received the letters in sufficient time to petition the Tax Court within 30 days after the date of the letters, so his later Tax Court filing was untimely.  She imported into the whistleblower award jurisdiction the similar case law from deficiency jurisdiction holding that if one actually received a notice of deficiency – one that was either not sent certified mail or not properly addressed – with enough time left on the 90-day period to file a petition, then the notice of deficiency was valid.  She also observed that the Tax Court could not equitably toll the whistleblower award filing period, citing Friedland v. Commissioner, T.C. Memo. 2011-90, since the filing period is jurisdictional.  As a side note, when Friedland came out, I questioned whether it was correct in light of recent Supreme Court case law that now only rarely makes filing deadlines jurisdictional and the existing presumption in favor of finding that statutes of limitations running against the government are subject to equitable tolling.  See my “Friedland:  Did the Tax Court Blow its Whistleblower Jurisdiction?”, Tax Notes Today, 2011 TNT 100-10 (May 24, 2011).

Myers moved to reconsider the opinion, in part because both Judges Guy and Ashford had considered asking the IRS to just issue a proper notice of determination by certified mail.  In an order, Judge Ashford denied the motion, writing in part:

[P]etitioner places undue import on what transpired during a telephone conference the Court held with the parties before the hearing on respondent’s motion to dismiss and at the hearing. What the Court suggested to respondent was just that — a suggestion (to potentially resolve a previously unaddressed legal question).  Indeed, as a court of limited jurisdiction, sec. 7442, we lack the authority to order respondent to take such a specific action as reissuing a determination letter. Cf. Cooper v. Commissioner, 136 T.C. 597, 600 (2011) (no authority under sec. 7623 to order Commissioner to initiate examination on basis of whistleblower information). The suggestion in any event (and respondent’s apparent disinclination to take up the Court’s suggestion) does not cause us to question the direct evidence that petitioner received actual notice of the Whistleblower Office’s determination letters significantly more than 30 days before he filed his petition with the Court.

If Judge Gustafson is reading this post, his ears must have just pricked up, since he had a much ballyhooed whistleblower case a while ago in which he indicated that he was not so sure that the Tax Court did not have the power to order the IRS to issue a whistleblower award notice of determination where the IRS had unreasonably delayed in sending such a notice.  Indeed, an amicus brief was submitted to him in that case, Insinga v. Commissioner, T.C. Docket No. 4609-12W.  Here’s what he wrote in a 2013 order in Insinga:

The amicus curiae (National Whistleblower Center) argues in the alternative that where an award determination has been unreasonably delayed, the Tax Court has jurisdiction–in light of § 7623(b)(4) and under § 706(1) of the Administrative Procedures Act (“APA”), 5 U.S.C. § 551 et seq.–to “compel agency action unlawfully withheld or unreasonably delayed”. Respondent counters that the APA itself confers no jurisdiction and that the mandamus statute (28 U.S.C. § 1361) by its terms gives jurisdiction only to “[t]he district courts”. Respondent is correct; but the “All Writs Act” (28 U.S.C. § 1651) applies to “all courts established by Act of Congress” (cf 26 U.S.C. § 7441, establishing the U.S. Tax Court); and the U.S. Court of Appeals for the D.C. Circuit has held in Telecommunications Research and Action Center v. FCC, 750 F.2d 70, 75 (D.C. Cir. 1984) (“TRAC“), that, in view of the APA and the All Writs Act, “it is clear–and no party disputes this point–that” if a statute (there, 28 U.S.C. § 23421(1)) confers on a court exclusive jurisdiction to review a final agency order, then even before the final order has been issued, the court has “jurisdiction over claims of unreasonable [agency] delay”. (The D.C. Circuit would appear to be the default venue for any appeal in this case; see 26 U.S.C. § 7482(b)(1).)

We have not decided whether the reasoning in TRAC applies to the Tax Court and its jurisdiction under § 7623(b)(4). Nor have we decided whether, if the APA does not directly apply, this case nonetheless presents one of those instances in which the Tax Court, “in appropriate circumstances, borrow[s] principles of judicial review embodied in the APA.” Ewing v. Commissioner, 122 T.C. 32, 54 (2004) (Thornton, J., concurring).

We believe we ought not to reach those questions if we do not need to do so.

Before Judge Gustafson had to rule on this issue, the Insinga mater became moot when the IRS issued a notice of determination and the parties settled the Insinga case.

Appellate Proceedings

Still acting pro se, Myers appealed the Tax Court’s dismissal of his case to the Tenth Circuit.  At the urging of the DOJ, though, the Tenth Circuit transferred the appeal to the Circuit with correct venue, the D.C. Circuit, per the following order.

At this point, Joe DiRuzzo and Alex Golubitsky tendered their legal services pro bono to Mr. Myers and filed an opening brief in his case in the D.C. Circuit.  In that brief, they did not contest whether Mr. Myers received the letters in time to file a Tax Court petition, but rather argued, first, that the letters did not constitute notices of determination.  Rather than immediately asking the Tax Court to dismiss the case for lack of jurisdiction for lack of the predicate notice of determination, they argued that, under the TRAC opinion cited by Judge Gustafson in his Insinga order, the Tax Court had the power under the All Writs Act to order the IRS to issue a notice of determination to Myers and that the Tax Court should exercise that power.  They also noted that the Federal Circuit last year held that the Article I Court of Appeals for Veterans Claims (the “Veterans Court”), under the All Writs Act, had the power to order the VA to issue the predicate tickets to the Veterans Court if they had been unreasonably delayed.  Monk v. Shulkin, 855 F.3d 1312 (Fed. Cir. 2017).  (As an aside, the Monk case is one Tax Court judges should read and ponder, since the Federal Circuit also held in that case that, despite the lack of Veterans Court rules authorizing class actions, the Veterans Court also had the power to hear class actions.  Might the Tax Court also have class action powers, despite no current class action rules?  Monk may be the subject of another post, but I just flag the opinion here as worth reading by all tax procedure buffs for several reasons.)

In the alternative, if the letters were valid notices, Messrs. DiRuzzo and Golubitsky argued that the 30-day filing deadline in section 7623(b)(4) was not jurisdictional under current Supreme Court case law that now rarely makes filing deadlines jurisdictional, and the petition should be held timely under the doctrine of equitable tolling because of the misleading behavior of the IRS in this case.  The Harvard Federal Tax Clinic filed an amicus brief in Myers (written by Keith and me) limited to the argument that the filing deadline is not jurisdictional.  This is just another case in our campaign against judicial tax filing deadlines still being considered jurisdictional.

The DOJ has not yet filed its answering brief in Myers, so the government position on many of these issues is not yet known.  This should be an interesting case to follow for many reasons.  PT will keep you posted on further interesting developments therein.

Don’t Expect a Whistleblower Award for Giving the IRS Privileged Information and General Information from the Judicial Conference on this Issue

At the recent Tax Court judicial conference, there was a specific breakout session dedicated to whistleblower cases. I attended the session not because my clinic has, or will ever have, a whistleblower case but because I have blogged a number of these cases which are coming out now with regularity. Since the jurisdictional basis is relatively new, many of the decisions set precedent. From going to this session, I now know that generally we have picked the most important issues to cover with our blog posts. Sadly, we have still not recruited a regular guest poster with expertise who could offer insights someone not litigating this type of case cannot offer. Anyone practicing in this area who would like to send us guest posts would be most welcome.

In addition to discussing and linking to information provided at the Judicial Conference about Whistleblowers, I will discuss a recent case involving the denial of any award. The case points out the difficulty that a claimant will have if the IRS determines that the information is privileged and the claimant disagrees. The Tax Court does not become the forum for litigating whether the IRS made the right decision regarding the privilege just as it does not second guess the IRS on whether it makes a good decision to pursue cases based on the information provided.

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The Conference

The non-judicial panel members for the whistleblower breakout session included: Erica L. Brady, of The Ferraro law Firm (a PT guest blogger); Bryan C. Skarlatos, of Kostelanetz & Fink, LLP; and Robert T. Wearing, of the IRS Office of Chief Counsel. The panel was co-moderated by The Honorable John O. Colvin and The Honorable Daniel A. Guy. During the session, documents were provided to attendees that were useful in following the presentation. The documentation was: first, an outline of the issues in whistleblower litigation; second, accompanying attachments to the outline of the whistleblower litigation issues; third, a general whistleblower outline on representing tax whistleblowers and defending against them; fourth, an outline on IRC section 6103 and the use and protection of taxpayer return information in whistleblower cases; and fifth, a copy of Form 11369 Confidential Evaluation Report on Claim for Award.

The Court provided some statistics on these cases during its presentation. Assuming my handwritten notes correctly captured the data provided, 101 whistleblower cases filed so far have requested permission to proceed anonymously. The Tax Court granted the request in about half of these cases, which is about the same number that were represented. The Court reminded us that the venue for appeal of these cases lies with the D.C. Circuit and stated that three cases were currently on appeal to that court. The number of petitioners seeking relief under this provision increased gradually until 2016 before dropping off in 2017. There were 56 whistleblower petitions filed in 2016 and only 45 in 2017. One panelist suggested fewer claims were filed because taxpayers and practitioners learned more about these claims. The number of IRC section 7623(b) claims has continued to rise each year. One surprising, but not too shocking, statistic was that it takes about seven and one-half years for a claim to go through the process to payout or denial.

Over 14,000 determinations have been made so far by the IRS whistleblower office but it is not clear how many of the determinations are for claims submitted under (a) and how many under (b). It is assumed that most are under (a). Last year the IRS made 242 awards, only 27 of which were under (b). Another thing I learned at the conference, related to the amount of time these cases take, is that the IRS has a relatively new program in which they try to follow up with a whistleblower each year.

The Case

On March 20, 2018, the Tax Court issued its most recent whistleblower opinion in the case of Whistleblower 23711-15W v. Commissioner, T.C. Memo 2018-34. In this sealed case, the Court granted summary judgment to the IRS because it did not initiate administrative or judicial action based on the information provided. The problem with the information was that the whistleblower, an attorney, got the information (in the view of the IRS) in a privileged context. The IRS decided that it could not use the information provided to it in order to create a case. There is not enough information in the opinion to permit a detailed analysis of the information and the privilege. The attorney must have thought that the information was not privileged. The attorney had enough concerns about the information in order to request and receive a sealing of the record of the case but that does not speak to the privilege. The IRS whistleblower office gave the information to Chief Counsel of the IRS, which opined that the privilege attached.

Petitioner had previously been employed as an attorney by the law firm that represented the reported party and alleged, based on information gathered during that relationship, that the taxpayer had “engaged in tax evasion using offshore entities.” Based on the advice received from Chief Counsel’s office, the IRS did not do anything with the information. Since the IRS showed the Tax Court that it did not collect any tax based on the tip, the Court sustained the motion for summary judgment filed by the IRS.

The whistleblower argued that the IRS should have “dug deeper” in reviewing the returns of the reported party but the Court had little trouble brushing aside this argument.

Petitioner disputed that the information was covered by the attorney client privilege. The Court stated “in reviewing the Office’s determination, however, we do not have authority to second guess the IRS’s decision not to proceed with administrative or judicial action. Our authority is limited to ascertaining whether the IRS in fact proceeded with such action and collected proceeds as a result.”

This case shows once again that whistleblowers will not get anywhere arguing to the Tax Court that the IRS failed to make good use of the valuable information provided. It also shows the value of providing the IRS with information about where the information came from and legal support for the ability of the IRS to use the information. The petitioner here disagreed with the determination of the Chief Counsel attorney that the petitioner gathered the information in a privileged setting. Petitioner should have anticipated the concern and provided a detailed legal supporting memo along with the information. Maybe the end result would not have changed, but by heading off concerns at the outset the whistleblower has a better chance that the IRS will accept the information that might otherwise cause it concern. Since the petitioner cannot use the Tax Court to settle any dispute regarding privilege, the petitioner must try to head off the concern before it gets to the stage of keeping the IRS from using the information.

 

Tax Court Decides Scope and Standard of Review in Whistleblower Cases

In a fully reviewed Tax Court opinion, Kasper v Commissioner, the Tax Court held that the scope of review in whistleblower cases is subject to the record rule and that the standard of review is abuse of discretion. The opinion is an important development in the progression of treating tax cases as a subset of cases within the mainstream of administrative law generally and the Administrative Procedure Act.

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The opinion concerns whistleblower claim relating to a former employee’s allegations that his employer had a longstanding pattern of uncompensated overtime for its employees. The whistleblower claim connected to taxes because it claimed that the millions of dollars in unpaid overtime would have led to substantial employment tax on the compensation.

The IRS rejected the claim in 2011, and in so doing sent a boilerplate rejection that was not really responsive to the particulars of the claim. In a bankruptcy proceeding involving Kasper’s former employer, IRS collected over $37 million in taxes relating to unpaid withholdings. Kasper wanted some of that, connecting his whistleblower claim to the IRS actions in the bankruptcy proceeding.

The opinion notes that the parties tried the case to “establish the contents of the administrative record and ordered the parties to brief the issues of the scope and standard of review in whistleblower cases to help us figure out both what we can look at and how to look at the IRS’s work in whistleblower cases.”

The opinion clears the fog on the scope and standard of review in whistleblower cases. In so doing, it explores an issue we have covered in PT and an area that I have discussed extensively in IRS Practice and Procedure, especially in revised Chapter 1.7, namely the precise relationship between the APA and the workings of the IRS.

The importance of Kasper is that it establishes that whistleblower cases, unlike deficiency cases which predate the APA and which have a defined set of procedures establishing a clear legislative exception to the path of judicial review of agency action, are subject to the same rules as applied to court review of other agency adjudications. There are there main aspects of that principle:

  • Scope of Review: Tax Court review of whistleblower determinations are subject to the record rule, meaning that the parties are generally bound to the record that the agency and party made prior to the agency determination
  • Standard of Review: the Tax Court will review whisitleblower determinations on an abuse of discretion basis; and
  • Chenery Rule Applies: The Tax Court can uphold the Whistleblower Office determination only on the grounds it actually relied on when making its determination.

What makes Kasper one of the most significant tax procedure cases of the new year is that in reaching those conclusions it walks us through and synthesizes scope and standard of review and Chenery principles in other areas, such as spousal relief under Section 6015 and CDP cases under Section 6220 and 6330.

In what I believe is potentially even more significant is its discussion of exceptions within the record rule that allow parties to supplement the record at trial.   To that end the opinion lists DC Circuit (which it notes in an early footnote would likely be the venue for an appeal even though the whistleblower lived in AZ ) summary of those exceptions:

  • when agency action is not adequately explained in the record;
  • when the agency failed to consider relevant factors;
  • when the agency considered evidence which it failed to include in the record;
  • when a case is so complex that a court needs more evidence to enable it to understand the issues clearly;
  • where there is evidence that arose after the agency action showing whether the decision was correct or not; and
  • where the agency’s failure to take action is under review

As I observe in IRS Practice and Procedure, the clarity so to speak of cases such as Kasper in bringing categories of tax cases within the confines of administrative law is belied by the complexity and at times uncertainty surrounding basic administrative law principles. As  Kasper notes, there can be (and often are) disputes about what is the agency record, and nontax cases establish that the agency itself does not have the final word on what constitutes the record.

On the merits, the Tax Court concluded that the information that Kasper provided did not lead to the collection of the employment taxes in the bankruptcy case. Even though the whistleblower office did not consider the evidence pertaining to the bankruptcy court proceedings, the opinion notes that the IRS would have filed its proof of claim in the ordinary course, so its error in note considering the information was harmless.