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  But, despite the Manual’s then requirement (since repealed) that any whistleblower award notice of determination be sent certified mail, each of these letters was sent to Myers by regular mail.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.

Waiving a Right to Contest a Whistleblower Award

The case of Whistleblower 4496-15W v. Commissioner, 148 T.C. No. 19 (May 25, 2017) concerns both the timeliness of filing a Tax Court petition in a whistleblower case and the effect of cashing a check granting an award.  Both aspects of the case deserve some discussion.  The whistleblower wins the battle concerning the timing of the filing of the petition only to lose the war on whether the signing of the check served as a waiver of the right to sue the IRS in this matter.

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The whistleblower gave the IRS some good information.  The IRS calculated that the information allowed it to recover over $14 million.  Based on that recovery, the IRS recommended an award percentage of 22% resulting in a proposed award of $3,187,630.  Because of the Budget Control Act of 2011, the IRS reduced the award by 7.3%.

On December 1, 2014, the IRS sent to the whistleblower a summary report “that explains our preliminary award recommendation in the amount of $2,954,933.00.”  The letter explained the amount recovered the percentage award and the required reduction.  It also explained that the award would be reduced by withholding.  The letter also explained the options that the whistleblower had upon its receipt.  If the whistleblower agreed with the award, “he was directed to ‘check the appropriate box, sign and date the Response to Summary Report indicating … [his] agreement’ and ‘return the signed Response’ to the Office.”  The letter gave explicit details concerning the effect of signing on future contests concerning the award stating that “by checking the box that you agree with the preliminary award recommendation, you agree to waive any judicial appeal rights with respect to the award determination, including filing a petition with the U.S. Tax Court.”

The letter also explained that the whistleblower could disagree with the proposed award recommendation and submit comments to the Office.  The letter stated that it was NOT a final determination for purposes of filing a Tax Court petition.  The whistleblower’s attorney called the Office on December 8 and 9 with questions and was told accepting the award now was conclusive.

The whistleblower and his attorney signed the letter.  The IRS sent a check dated January 15, 2015, in the reduced amount, which was further reduced by $819,107 of withholding.  The whistleblower filed a Tax Court petition on February 11, 2015, arguing that the IRS lacked legal support for reducing the recommended offer by 7.3%.  The IRS moved to dismiss the case for lack of jurisdiction arguing first that it should have been filed within 30 days of December 1, 2014.  The Court pointed out that the December 1 letter specifically stated that it was a preliminary letter and not a final determination.  Without much difficulty, the Court found that the December 1 letter was not and could not be the determination letter starting the time to file a petition in a whistleblower case.  Looking around at what could be used for that purpose, the Court concluded that the statute provided no guidance.  Here, it found that the check served the purpose of the final determination.  Since the petition was filed within 30 days of the mailing of the check, the petition was timely.  Makes sense, but the lack of a formal way to denote a final determination will continue to plague petitioners, the IRS, and the Court until Congress gets around to fixing this hole in the statute.

So, now the whistleblower got past the building guard and into the Tax Court, but he still had a problem.  He agreed not to file a Tax Court petition as part of accepting the check.  When you get a check for over $2 million I can only imagine that it is hard to pass that up for Door #2.  I am still waiting for the day I have this option.

The IRS moved to dismiss for lack of jurisdiction because of the signed agreement; however, the Court correctly pointed out that the signed agreement did not mean the court did not have jurisdiction to hear the case but could form a basis for a motion for summary judgment and the Court recharacterized the motion to that purpose.

As I read the case I thought about the form used by Appeals, Form 870-AD, which has produced a number of decisions regarding the effect of having the taxpayer sign away the ability to litigate.  Most, but not all, of those decisions have resulted in victories for the IRS with courts enforcing the signed waiver.  The Tax Court here looked at several of its prior decisions on waivers including decisions on the Appeals form.  The decisions uniformly held for the IRS.  At this point I had a strong suspicion where the Court would end up here.

The Court found that the whistleblower knowingly signed away his right to come to court.  It swatted away the arguments made by the petitioner finding the language of the letter unambiguous.  The Court states:

In sum, petitioner waived his judicial appeal rights in order to receive prompt payment of his award, and the Office fully performed its side of the bargain.  We will accordingly enforce the agreement reached by the parties, give effect to petitioner’s waiver of his right to judicial review, and grant summary judgment for respondent sustaining the Office’s determination.

I do not know if petitioner will appeal this determination.  A quick search indicated that an appeal has not yet been filed.  While the result here does not surprise me, a few courts have struck down waiver paragraphs like this.  Look at Whitney v. United States, 826 F.2d 896 (9th Cir. 1987) where the court found that the Form 870-AD, standing alone, does not estop a taxpayer from later seeking a refund.  Other courts, such as Arch Engineering Co., Inc. v. United States, 783 F.2d 190, 192 (Fed.Cir.1986) (dicta); Lignos v. United States, 439 F.2d 1365, 1367 (2d Cir.1971); Uinta Livestock Corp. v. United States, 355 F.2d 761 (10th Cir.1966); cf. Cain v. United States, 255 F.2d 193, 199 (8th Cir.1958) (Van Oosterhout, J., dissenting) that follow this view look for the IRS to enter into a closing agreement if it wants to bind the taxpayer.  Most courts, represented by cases such as Flynn v. United States, 786 F.2d 586, 591 (3d Cir.1986) (dicta) (also applying contract principles); Elbo Coals, Inc. v. United States, 763 F.2d 818, 821 (6th Cir.1985); General Split Corp. v. United States, 500 F.2d 998, 1004 (7th Cir.1974); Cain v. United States, 255 F.2d 193, 199 (8th Cir.1958) prevent the taxpayer from coming into court after signing the Form 870-AD based on equitable estoppel.  Maybe a whistleblower will find a sympathetic ear before one of the circuit courts that looks kindly on the taxpayer coming into court after signing the Form 870-AD.  The closing agreement argument has some appeal.  If not, whistleblowers will have to make some hard choices when they receive the check from the IRS because it looks like they will be stuck with the award they receive unless they fight before cashing the check.

 

Designated Orders: 7/24 – 7/28/2017

Professor Patrick Thomas of Notre Dame discusses last week’s designated orders. Les

Last week’s orders follow up on some previously covered developments in the Tax Court, including the Vigon opinion on the finality of a CDP case and the ongoing fight over the jurisdictional nature of section 6015(e)(1)(A). We also cover a very odd postal error and highlight remaining uncertainties in the Tax Court’s whistleblower jurisprudence. Other orders this week included a Judge Jacobs order and Judge Wherry’s order in a tax shelter case. The latter case showcases the continuing fallout from the Graev and Chai opinions.

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Deposits in a CDP Liability Challenge? – Dkt. # 14945-16L, ASG Services, LLC v. C.I.R. (Order Here)

The first order this week follows on the heels of the Vigon division opinion, about which Keith recently wrote. In a challenge to the underlying liability in a CDP case, ASG paid the liabilities at issue in full in August 2016, and the Service quickly followed with a motion to dismiss for mootness, given that no further collection activity would take place. Judge Gustafson (Vigon’s author) orders ASG to answer three hypotheses, which attempt to distinguish ASG from Vigon.

Judge Gustafson contrasts ASG’s situation with the taxpayer in Vigon, given that the Service has not indicated an inclination to assess the liabilities again in ASG. Indeed, this may be because the IRS cannot assess ASG’s liabilities a second time due to the assessment statute of limitations under section 6501. As a corollary, Judge Gustafson posits that ASG is asking for a refund of the tax, without any contest as to a collection matter. Thus, as in Greene-Thapedi, the court may lack jurisdiction to entertain the refund suit. Finally, the Court notes that even if the refund claim could proceed, ASG would need to show that it had filed a claim for a refund with the Service. Judge Gustafson requests a response from ASG (and the Service) on these suggestions.

Separately, ASG noted in its response to the motion to dismiss that “Petitioner paid the amounts to stop the running of interest.” Judge Gustafson therefore ordered ASG to document whether these remittances were “deposits”, rather than “payments,” along with the effect on mootness. Under section 6603, deposits are remittances to the Service that stop underpayment interest from running. However, deposits are ordinarily always remitted prior to assessment, during an examination. The Service must return the deposit to the taxpayer upon request, and, if at the end of the examination the resulting assessment is less than the deposit, the Service must refund the remainder.

It’s unclear whether a remittance made during a CDP proceeding challenging the underlying liability could be treated as a deposit, though Judge Gustafson seems to be opening the door to this possibility.

The Continuing Saga of Section 6015(e)(1)(A) – Dkt. # 21661-14S, Vu v. C.I.R. (Order Here)

Vu is one of four innocent spouse Tax Court cases in which Keith and Carl Smith have argued that the period under section 6015(e)(1)(A) to petition the Tax Court from the Service’s denial of an innocent spouse request is not jurisdictional. Les wrote previously about this case when Judge Ashford issued an opinion dismissing the case for lack of jurisdiction. Vu is unique among the four cases; in the three other Tax Court dockets (Rubel, Matuszak, and Nauflett), petitioners argue that the time period is not jurisdictional and is subject to equitable tolling in circumstances where the Service misled the taxpayers into filing late. In contrast, Ms. Vu filed too early, but by the time she realized this, it was too late to refile. As a result, Judge Ashford dismissed the case for lack of jurisdiction, because of an untimely petition.

Shortly after the opinion, Keith and Carl entered an appearance in Vu and filed motions to reconsider, vacate, and remove the small tax case designation, arguing that the Service forfeited the right to belatedly raise a nonjurisdictional statute of limitations defense.

Last week, Judge Ashford denied those motions. Substantively, Judge Ashford relied on the opinions of the Second and Third Circuits in Matuszak v. Commissioner and Rubel v. Commissioner, which hold that the time limitation in section 6015(e)(1)(A) is jurisdictional. (The Tax Court also recently ruled against the petitioner in Nauflett, but Keith and Carl plan to appeal this to the Fourth Circuit). Given that, therefore, Judge Ashford believed there to be no “substantial error of fact or law” or “unusual circumstances or substantial error” that would justify granting a motion to reconsider or motion to vacate, she denies those two motions.

To compound matters, Vu also filed her petition requesting a small case designation; decisions in small tax cases are not appealable. While Vu moved to remove the small case designation, Judge Ashford denied that motion as well. The standard for granting a motion to remove a small case designation is whether “the orderly conduct of the work of the Court or the administration of the tax laws would be better served by a regular trial of the case.” In particular, the court may grant such a motion where a regular decision will provide precedent to dispose of a substantial number of other cases. But because Judge Ashford views there to already be substantial precedent against Vu’s position, she denies this motion as well.

Keith and Carl plan to appeal Vu to the Tenth Circuit anyway, arguing that the ban on appeal of small tax cases does not apply where the Tax Court mistakenly ruled that it did not have jurisdiction to hear a case. This argument will be one of first impression.

A second argument will be that the denial of a motion to remove a small case designation is appealable. In Cole v. Commissioner, 958 F.2d 288 (9th Cir. 1992) the Ninth Circuit dismissed an appeal from an S case for lack of jurisdiction, noting that neither party had actually moved to remove the small case designation. In Risley v. Commissioner, 472 Fed. Appx. 557 (9th Cir. 2012), where there is no mention of the issue of a motion to remove the small tax case designation, the court raised, but did not have to decide, whether it could hear an appeal from an S case if there was a due process claim. A due process violation allegation might be another occasion for appealing an S case, but there will be no due process violation alleged in the appeal of Vu.

Keith and Carl also note that they will not be filing a cert petition in either Matuszak or Rubel. They will only do so if they can generate, through Nauflett or Vu, a circuit split on whether the time period under section 6015(e)(1)(A) is jurisdictional.

Postal Error? – Dkt. # 9469-16L Marineau v. C.I.R. (Order Here)

In Marineau, Judge Leyden tackles the Service’s motion for summary judgment in a CDP case. The facts start as is typical: the Service filed a motion for summary judgment, and the Petitioner responded that the Service hadn’t sent the Notice of Deficiency to their last known address in Florida. Dutifully, the Service responded with a copy of the Notice of Deficiency showing the taxpayer’s Florida address and a Form 3877 indicating the NOD was sent by certified mail to that address. Both the NOD and the Form 3877 have the same US Postal Service tracking number.

But then things take a turn. The Service also submitted a copy of the tracking record for that tracking number from the post office. It shows that the NOD was sent from Ogden, Utah, but that it was attempted to be delivered in Michigan, rather than Florida. The NOD was unclaimed and eventually returned to the Service.

Judge Leyden appears to be as perplexed as I am by this situation. So, she ordered the Service to explain what happened. I’ll be looking forward to finding out as well.

Remand and Standard of Review in a Whistleblower Action – Dkt. # 28731-15W Epstein v. C.I.R. (Order Here)

In this whistleblower action, the Service and the Petitioner apparently agreed that the Petitioner was entitled to an award (or perhaps, an increased award). The Service filed a motion to remand the case so that a new final determination letter could be issued. The Petitioner opposed this motion, as he believed that the Tax Court could decide the issue for itself, without need to remand.

Judge Lauber appears to be cautious towards remanding a case, for two reasons: first, it’s unclear whether the Court has the authority to remand a whistleblower case. While CDP cases are subject to remand, due to the abuse of discretion standard applicable in most cases, cases in which the Court may decide an issue de novo are, according to Judge Lauber, generally not subject to remand. (I’m not sure that’s entirely correct, as CDP cases challenging the underlying liability are indeed subject to remand.) Relatedly, the Court isn’t yet even sure what the standard of review for a whistleblower case is.

Judge Lauber manages to avoid these issues. Because the Court retains jurisdiction where the Service changes its mind about the original whistleblower claim post-petition (see Ringo v. Commissioner), Judge Lauber does not believe there’s any point in remanding the case for issuance of a new letter. The Service can simply issue the letter now, and the Court can enforce any resulting settlement through a judgment. Of course, it can’t hurt to not have to decide the tricky issues surrounding the Court’s standard of review and possibility of a remand

 

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.