Lippolis v. Commissioner: Tax Court Holds $2 Million Whistleblower Amount Limitation an IRS Affirmative Defense

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In today’s guest post we welcome back Carlton Smith, who writes on yesterday’s important Tax Court Lippolis decision discussing the nature of the $2 million threshold amount limitation in whistleblower matters. Les

For the past decade, the Supreme Court — in a series of non-tax opinions — has been trying to cut back on the overuse (including its own overuse) of the term “jurisdictional”.  With one significant exception (which I will note below), the Tax Court has largely ignored these new Supreme Court restrictions on what is “jurisdictional”.  Pointedly, the Tax Court has not reexamined whether, in light of the recent Supreme Court case law, any of its prior holdings that time periods or other mandatory rules are jurisdictional need modification.  In the recent case of Lippolis v. Commissioner, 143 T.C. No. 20 (11/20/14), the Tax Court has finally applied this non-tax Supreme Court case law and found that a $2 million threshold amount limitation in a whistleblower case is not one that, if missed, results in the dismissal of the case for lack of jurisdiction.  Rather, the court holds that the threshold is non-jurisdictional and one that the IRS must plead as an affirmative defense on which the IRS will have the burden of proof.  Could Lippolis be the trigger for reexamination of the Tax Court’s other, older “jurisdictional” holdings under its non-whistleblower jurisdictions?

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Background

First, why does it matter whether a requirement is jurisdictional or merely a fact to prove to win a case?   As the Supreme Court sees it:

This question is not merely semantic but one of considerable practical importance for judges and litigants. Branding a rule as going to a court’s subject-matter jurisdiction alters the normal operation of our adversarial system. Under that system, Courts are generally limited to addressing the claims and arguments advanced by the parties. Courts do not usually raise claims or arguments on their own. But federal courts have an independent obligation to ensure that they do not exceed the scope of their jurisdiction, and therefore they must raise and decide jurisdictional questions that the parties either overlook or elect not to press.

Jurisdictional rules may also result in the waste of judicial resources and may unfairly prejudice litigants. For purposes of efficiency and fairness, our legal system is replete with rules requiring that certain matters be raised at particular times. Objections to subject-matter jurisdiction, however, may be raised at any time. Thus, a party, after losing at trial, may move to dismiss the case because the trial court lacked subject-matter jurisdiction. Indeed, a party may raise such an objection even if the party had previously acknowledged the trial court’s jurisdiction. And if the trial court lacked jurisdiction, many months of work on the part of the attorneys and the court may be wasted.

Because the consequences that attach to the jurisdictional label may be so drastic, we have tried in recent cases to bring some discipline to the use of this term. We have urged that a rule should not be referred to as jurisdictional unless it governs a court’s adjudicatory capacity, that is, its subject-matter or personal jurisdiction. Other rules, even if important and mandatory, we have said, should not be given the jurisdictional brand.

Henderson v. Shinseki, 131 S. Ct. 1197, 1202 (2011) (holding a 120-day time period to file in the Article I Court of Appeals for Veterans Claims non-jurisdictional; citations omitted).

In Arbaugh v. Y & H Corp., 546 U.S. 500 (2006), the Supreme Court had before it a Title VII employment discrimination suit.  The case had been tried before a magistrate, and the plaintiff had won a judgment.  Only later did the defendant move to dismiss the case on the ground of lack of jurisdiction.  The basis for the motion was that, to be covered by the Title VII rules, an employer must have 15 employees, and the defendant, for the first time now, argued that it did not have 15 employees.  After investigating the status of certain workers, the district court reluctantly agreed that the employer did not have 15 workers and, since the Circuit court had called the 15-employee limitation “jurisdictional”, the suit had to be dismissed at this late date.  The Supreme Court reversed, finding that the 15-employee limitation was not jurisdictional.  Setting up a rule that it called a “readily administrable bright line”, the Court wrote:  “If the Legislature clearly states that a threshold limitation on a statute’s scope shall count as jurisdictional, then courts and litigants will be duly instructed and will not be left to wrestle with the issue. But when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character.”  Id. at 515-516 (citations omitted).  In effect, the Court created a presumption that statutory requirements are not jurisdictional, which presumption can be rebutted by Congressional language or structure.  Among the reasons that the Court found the 15-employee rule not jurisdictional was that Congress placed the rule in a different section of the law than the jurisdictional grant to the courts.

Whistleblower Award Rules

With this background in mind, let’s turn to the whistleblower award rules.  There has long been a provision in the IRC — currently at section 7623(a) — for the IRS to grant discretionary awards to whistleblowers.  In 2006, Congress supplemented this provision by adding a subsection (b) creating mandatory awards in certain cases.  Under paragraph (b)(1), mandatory awards may range from 15 to 30 percent of what the IRS collected (tax, interest, and penalties).  Under paragraph (b)(2), the award percentage can be no more than 10 percent if the information was all derived from public sources (e.g., court records or news media).  Paragraph (b)(3) authorizes the IRS to reduce the award for any whistleblower who planned and initiated the action leading to the underpayment and to completely eliminate the award if the whistleblower was criminally convicted concerning the underpayment.

Sections 7623(b)(4) and (5) provide:

(4)  Appeal of award determination. Any determination regarding an award under paragraph (1), (2), or (3) may, within 30 days of such determination, be appealed to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).

(5)  Application of this subsection. This subsection shall apply with respect to any action– (A) against any taxpayer, but in the case of any individual, only if such individual’s gross income exceeds $ 200,000 for any taxable year subject to such action, and (B)  if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $ 2,000,000.

The Lippolis Case

In the Lippolis case, the whistleblower provided information that resulted, the IRS said, in collection of $844,746.  The IRS sent Mr. Lippolis a letter saying that he was not entitled to an award under subsection (b), but the IRS was granting him a discretionary award of 15 percent under subsection (a).  Mr. Lippolis filed a petition in the Tax Court within 30 days of the letter.  In it, he argued that the IRS, in fact, collected more than $844,746, and he was due an award of greater than 15 percent under subsection (b).  The IRS moved to dismiss the case for lack of jurisdiction, asserting that only $844,746 was collected, so the paragraph (5) requirement in subsection (b) that the amount in dispute exceed $2 million was not met.

Citing the post-2005 non-tax Supreme Court opinions Henderson v. Shinseki; Arbaugh v. Y & H Corp.; Gonzalez v. Thaler, 132 S. Ct. 641 (2012); and Reed Elsevier, Inc. v. Muchnick, 559 U.S. 154 (2010), Tax Court Judge Colvin easily resolved the issue of whether the $2 million limitation was jurisdictional.  The court noted that paragraph (5) did not speak in jurisdictional terms.  About the only question was whether the proximity of the paragraph (5) limitation to the paragraph (4) jurisdictional grant suggested a different result.  As noted above, the Supreme Court in Arbaugh (as it has in other cases) has pointed out that by placing a requirement in a separate section of the U.S. Code from the jurisdictional grant, Congress indicates that it does not want the requirement to be treated as jurisdictional.  But, as the Tax Court noted, in Gonzalez, the Supreme Court has also said that “[m]ere proximity will not turn a rule that speaks in nonjurisdictional terms into a jurisdictional hurdle”.  132 S. Ct. at 651.  Accord Sebelius v. Auburn Regional Medical Center, 133 S. Ct. 817, 825 (2013) (“A requirement we would otherwise classify as nonjurisdictional . . . does not become jurisdictional simply because it is placed in a section of a statute that also contains jurisdictional provisions.”).

After finding the $2 million limitation not jurisdictional, the Tax Court moved on to how it would require the parties to litigate the limitation amount issue.  First, the Tax Court held that the amount requirement, like pleading the statute of limitations, was an affirmative defense, which the IRS must plead in its answer under Rule 39.  This conclusion was based on practicalities and fairness, since the IRS might be the only party in possession of all the relevant facts.  Second, the court held that the IRS would have the burden of proof on the issue of whether $2 million or less had been collected.  Why?  Well, the party pleading an affirmative defense usually has the burden of proving it. But, also, “[I]t would be unduly burdensome to require the whistleblower to provide or perhaps even know of the existence of” what may be confidential taxpayer information or records.  Sip op. at 12.

After denying the IRS’ motion to dismiss, the Tax Court gave the IRS 60 days to amend its answer to plead the affirmative defense and “to include allegations of fact supporting the amendment to the answer”.  Slip op. at 14.

Observations 

Some observations:

The Tax Court has a number of jurisdictions — many of which were only granted in the last 20 years.  In only one other opinion that I know of has the Tax Court discussed any of the recent Supreme Court non-tax case law on what is jurisdictional.  That opinion is Pollock v. Commissioner, 132 T.C. 21 (2009), where Judge Holmes faced the issue of whether the 90-day period in which to file a stand-alone innocent spouse case under section 6015(e)(1) was subject to equitable tolling (as a district court judge had held with respect to the taxpayer in a related case).  In Irwin v. Department of Veterans Affairs, 498 U.S. 89 (1990), the Supreme Court held that there is a rebuttable presumption that non-jurisdictional time periods (a/k/a statutes of limitations) in the U.S. Code are subject to equitable tolling.  But was section 6015(e)(1) jurisdictional?  Section 6015(e)(1) provides:

(1)  In general. In the case of an individual against whom a deficiency has been asserted and who elects to have subsection (b) or (c) apply, or in the case of an individual who requests equitable relief under subsection (f)–

(A)  In general. In addition to any other remedy provided by law, the individual may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available to the individual under this section if such petition is filed–

(i)  at any time after the earlier of–

    (I)  the date the Secretary mails, by certified or registered mail to the taxpayer’s last known address, notice of the Secretary’s final determination of relief available to the individual, or

    (II)  the date which is 6 months after the date such election is filed or request is made with the Secretary, and

(ii)  not later than the close of the 90th day after the date described in clause (i)(I).

 

Judge Holmes held that section 6015(e)(1) spoke in jurisdictional terms, and so, citing a few Supreme Court opinions (some recent and some not), he held the time limit to file to be jurisdictional.  “The most important point to notice is that the Code here actually uses the word ‘jurisdiction’ — giving us ‘jurisdiction’ if someone files her petition within the 90-day time limit.  Statutes granting a court ‘jurisdiction’ if a case is filed by a stated deadline look more like jurisdictional time limits.”  132 T.C. at 30.  Judge Holmes also noted that the language of section 6015(e)(1) was similar to the Tax Court’s CDP appeal jurisdiction language at section 6330(d)(1), which provides: “The person may, within 30 days of a determination under this section, appeal such determination to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter).”  He noted that the Tax Court in Boyd v. Commissioner, 124 T.C. 296, 303 (2005), affd. 451 F.3d 8 (1st Cir. 2006), and Jones v. Commissioner, T.C. Memo. 2003-29, had held that section 6330(d)(1)’s time limit is jurisdictional and is not subject to tolling.  Both provisions similarly include a parenthetical jurisdictional grant within a sentence that otherwise merely sets a time limit in which a person “may” file a Tax Court petition.  He thought a similar holding, therefore, was required for both sections 6015(e)(1) and 6330(d)(1) time limits.

Unfortunately for Judge Holmes’ ruling in Pollock, he did not have the benefit of even more recent Supreme Court case law such as Henderson, in which the Supreme Court stated: “Among the types of rules that should not be described as jurisdictional are what we have called ‘claim processing rules’.  These are rules that seek to promote the orderly progress of litigation by requiring that the parties take certain procedural steps at certain specified times.  Filing deadlines, such as the 120-day filing deadline at issue here, are quintessential claim-processing rules.”  131 S.Ct. at 1203.  The Supreme Court has, essentially, recently created a rebuttable presumption that time limits are not jurisdictional.  It may still be that the parenthetical grants of jurisdictions within section 6015(e)(1) and 6330(d)(1) are considered Congress’ instruction to treat the time limits as jurisdictional (i.e., rebutting the presumption), but there is now some doubt as to this proposition, since, as noted above (and relied upon by Judge Colvin in Lippolis), the Supreme Court has more recently stated: “Mere proximity will not turn a rule that speaks in nonjurisdictional terms into a jurisdictional hurdle”.  Gonzalez, 132 S. Ct. at 651.  The Supreme Court has not yet had a case where a jurisdictional grant was inserted parenthetically in a time period in which to file.  The issue of whether the time limits of 6015(e)(1) and 6330(d)(1) are themselves jurisdictional is now a much closer question than it was when Pollock was decided.

Pollock‘s reliance on Boyd and Jones is also likely misplaced, as both those opinions did not discuss any recent Supreme Court case law and simply imported what the Tax Court had before said about the 90-day period in which to file a petition in a deficiency action.  Statements about what was “jurisdictional” in the old days were often made casually (i.e., if it was mandatory, it must be jurisdictional) and based on a now-outmoded view of construing, in a limited fashion, waivers of sovereign immunity where procedural issues are at stake.  I am not here arguing that the 90-day period in section 6213(a) is not jurisdictional.  I believe it still is jurisdictional, but only because Congress did not want late petitions to preclude paying and suing for a refund in district court, not because the language of the time limit is mandatory.

The Tax Court has also held that the 30-day time limit in section 7623(b)(4) is jurisdictional and not subject to equitable tolling.  It did so in Friedland v. Commissioner, T.C. Memo. 2011-90.  But Friedland did not cite or discuss any of the recent Supreme Court non-tax case law on jurisdiction.  It simply cited old Tax Court deficiency jurisdiction opinions and the Boyd CDP opinion for holding that the 30-day period is jurisdictional.  Since the jurisdictional grant of the whistleblower jurisdiction is also simply a parenthetical within a time limit, I am not so sure that Friedland is right, either.

Courts of Appeals have been faster than the Tax Court in relying on this recent non-tax Supreme Court case law to decide the jurisdictional nature of requirement in tax statutes.  For example, the D.C. Circuit (the Circuit to which all whistleblower cases are appealable under the flush language of section 7482(b)(1)) has held that, in light of Henderson, the two-year period in section 7433 in which to file a district court suit for damages for unauthorized collection actions is not jurisdictional.  Keohane v. United States, 669 F.3d 325, 330  (D.C. Cir. 2011).  Section 7433(a) grants jurisdiction for the suit, but section 7433(d)(3) states:  “Notwithstanding any other provision of law, an action to enforce liability created under this section may be brought . . . only within 2 years after the date the right of action accrues.”  Citing and discussing Henderson and other non-tax cases, the Fifth Circuit, by contrast, has held that the 150-day time period for partners to bring TEFRA partnership suits in Tax Court under section 6226 is jurisdictional.  A.I.M. Controls v. Commissioner, 672 F.3d 390, 393-395 (5th Cir. 2012).

 Final Observations on Jurisdiction and Tax

Some final observations on “jurisdiction” and tax cases:  I have blogged before on the case of Volpicelli v. United States, currently pending in the 9th Circuit. The issue in that case is whether the 9-month period in section 6532(c) to file a wrongful levy suit is jurisdictional or otherwise a non-jurisdictional statute of limitation subject to equitable tolling under the presumption in Irwin. In the briefs, the parties all rely on the non-tax Supreme Court case law in arguing their respective positions.  The oral argument happened on October 7.  While, from the statements of the judges at oral argument, I now expect that the 9th Circuit will hold the time period both not jurisdictional and subject to tolling, it is likely that the court will first, before ruling, await the opinions in the most recent Supreme Court cases to face the jurisdictional and equitable tolling issues. I have also blogged before on those Supreme Court cases, Wong and June, which will have their Supreme Court oral arguments on December 10.  In those cases, the issue is whether two different time periods in the Federal Tort Claims Act (i.e., the 2-year period in which to file an administrative claim and the 6-month period after claim disallowance to bring a district court lawsuit) are jurisdictional or subject to equitable tolling.  A ruling that the 6-month period is tollable would likely lead a court of appeals in a later case to hold that the 2-year period at section 6532(a) to file a tax refund lawsuit is also not jurisdictional and is subject to tolling — a complete reversal of all case law so far on this time limit (though that case law almost all pre-dates 2000).

So, there is much currently happening on the issue of what is jurisdictional.  It is great that the Tax Court in Lippolis has started catching up on non-tax developments.  Now there may be more developments to come in the tax area holding mandatory requirements (time periods or otherwise) not to be jurisdictional.  I’m happy to see that the Tax Court has finally caught the wave.

Comments

  1. I think Carlton Smith reveals carelessness in his Lippolis. I say this because he failed to comment on the Commissioner’s seemingly contradictory motion.

    On one hand, the Commissioner moved to dismiss Lippolis for lack of jurisdiction because the tax amount in dispute did not exceed the I.R.C. § 7623(b)(5)(B) $2 million dollar minimum requirement. On the other hand, the Commissioner “acknowledges that section 7623(b)(5)(B) itself is not ‘jurisdictional in character’”. How, though, can it be both?

    The Commissioner’s real position must have been that the Whistleblower Office made its determination solely under I.R.C. § 7623(a), rather than under either I.R.C. §§ 7623(b)(1), (2), or (3). Therefore, he must have intended to reason, the Tax Court lacked jurisdiction to hear Lippolis’s petition because there was no “determination regarding an award under paragraph (1), (2), or (3).”

    Yes, the Commissioner did rely on the $2 million plus requirement. As I see it, however, the Commissioner’s Lippolis motion is akin to his conduct in our previously discussed Craig v. Commissioner CDP case. In Craig, the Commissioner argued that the Tax Court lacked jurisdiction because the Appeals Office issued a mere Decision Letter, not a Notice of Determination.

    Likewise, in Lippolis, the Commissioner argued that the Whistleblower Office made a mere 7623(a) decision, not a 7623(b) determination. For that reason, Lippolis is a slender reed in support of Carlton’s jurisdiction v. claims processing argument.

    On another matter, Carlton’s view that the 90 day deficiency petition period in I.R.C. § 6213(a) is jurisdictional for other than its obvious reason is certainly novel. I must mull that one over. For now, though, do I correctly recall:

    During the U.S. Board of Tax Appeals days, a taxpayer could file a deficiency petition and, if he lost that case, could file a post-payment refund claim with the Bureau of Revenue and a refund suit in a U.S. District Court?

    If my recall serves me well, then how could Congress have been concerned that a “late filed” Tax Court petition would preclude a refund claim and suit that a timely filed petition would not preclude?

    • Carl Smith says:

      Jason,

      I agree with you that I was confused by Judge Colvin’s opinion about the nature of the IRS’ motion — i.e., was the motion really based on a 7623(a) letter not giving jurisdiction? But, I decided not to mention that, since it is not particularly important to the holding of the court. The court has an independent duty to inquire into its jurisdiction, no matter what the IRS argued. It also may be that the judge felt (but didn’t note) that the letter suggested that the IRS wasn’t going to give the whistleblower any (b) reward, so the court would treat the letter as one also finally disallowing any award under (b).

      As to 6213(a)’s 90-day period being jurisdictional, imagine what would happen if a person missed the 90-day deadline by filing late in the Tax Court and the Tax Court found that it still had jurisdiction in the case, but that the suit failed and had to be dismissed because of the late-filing. Section 7459(d) states:

      “If a petition for a redetermination of a deficiency has been filed by the taxpayer, a decision of the Tax Court dismissing the proceeding shall be considered as its decision that the deficiency is the amount determined by the Secretary. An order specifying such amount shall be entered in the records of the Tax Court . . . unless the dismissal is for lack of jurisdiction.”

      This means that a late-filed petition would produce a decision upholding the deficiency on the merits. Paying the tax then and suing for a refund would not work because the district court would say the year had already been litigated on the merits, and the Tax Court holding was res judicata. I don’t think this is what Congress had in mind, though I don’t have any legislative history handy to prove it. (I no longer have access to the legislative history research materials over at Cardozo, where I used to teach).

      As I recall, the ability to lose the non-binding case in the BTA, but then file a later suit in district court only was possible from 1924 to 1926. In 1926, Congress instituted direct appeal from the Tax Court to the courts of appeals.

      Note that no greater harm comes to the a whistleblower if he misses, say, the 7623(b)(4) 30-day periods and files in the Tax Court late if the 30-days period were treated as non-jurisdictional. The Tax Court would uphold the IRS position on the merits, but this does not preclude the whistleblower from an alternative path in, say, district court to contest the award because Congress has made the Tax Court the exclusive location for whistleblower contests. There never was an alternative path.

      In innocent spouse, if the 90-day period in 6015(e)(1) were not jurisdictional, then a late-filed petition would result in a decision stating the taxpayer is not relieved of liability under 6015. While this may have res judicata effect on future cases in which the taxpayer wants to argue she is not liable (e.g., in a 7403 collection suit), I am not so sure the Tax Court’s decision would have res judicata or collateral estoppel effect. There is no case law on this, and there is no parallel to 7459(d) for innocent spouse (or CDP for that matter). Further, many district courts have said that the Tax Court is the exclusive place to litigate 6015 claims, so, once again, even a jurisdictional loss by the taxpayer in Tax Court could not today be turned around by paying and suing for a refund in district court.

      If the 30-day period in 6330(d)(1) were not jurisdictional, then a Tax Court dismissal would simply allow the IRS collection action to go forward. This is what one would expect, even if the dismissal had been for lack of jurisdiction. There is a question in my mind about CDP cases that contained a contest to the underlying liability under 6330(c)(2)(B). Do those contests get treated as having been finally resolved by the Tax Court’s dismissal if the 30-day period is not jurisdictional, giving rise to res judicata effect, and precluding a later refund lawsuit in district court? I would hope not, but I have never seen a ruling on this issue from a district court. Certainly, there would be no collateral estoppel, since the issue of the underlying liability would not have been actually litigated to opinion — as the court’s opinion would likely only deal with the late-filing issue.

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