Even though there were only three orders for the week I monitored in July, there wound up being enough interesting topics to write about. The longest order is interesting because it puts a different spin on whistleblower cases before the Tax Court. The next case focuses on timely written supervisory approval for IRS penalties. Finally, there is another case dealing with trial scheduling issues due to the COVID-19 pandemic.
A Nevada Whistleblower in Family Court
Docket No. 20287-18W, Monique Epperson v. C.I.R., Order and Decision available here.
Most often we think of whistleblower claims in a certain way. It might be that the whistleblower was an employee who learned of misdeeds with regard to taxes or it might be that a person finds out through business dealings of foul play concerning tax reporting. I doubt Family Court would be in the top answers concerning whistleblowing, but that is the topic of today’s case.
read more...You see, Ms. Epperson is a Nevada resident who was involved in a child custody dispute in her local family law court system in years 2016 and 2017. Both her and her ex-husband were ordered to retain the services of various attorney, physician and psychology service providers from a list of court-approved outsource service providers. She independently contracted with those providers and paid by cash, check or credit card during those 2 tax years.
It seems that Ms. Epperson had a bone to pick with how things went in family law court, but she was creative since most people do not think about the IRS when it comes to getting even. Ms. Epperson is different because she chose to contact the IRS Whistleblower Office. In December 2017, the IRS Whistleblower Office received five Forms 211, Application for Award for Original Information, from Ms. Epperson – all dated November 28, 2017. The targets of those Forms were the Family Court and four independent contractors paid by her or her ex-husband during their court proceedings.
Her claim against the Family Court is that it should have issued Forms 1099-MISC to the various service providers because of the IRS requirement that when a business pays an independent contractor $600 or more over the course of a tax year, it should report those payments on a Form 1099-MISC issued to the independent contractor. Her claim against the contractors is that they underreported income during the tax year, which would be easier to conceal in connection with child custody matters because they are usually sealed and unavailable for public viewing.
When the IRS Whistleblower Office reviewed the claims, they combined all five whistleblower claims into one group and applied a common decision. The decision was based on the fact that the Family Court did not make payments to the independent contractors and the litigants (such as Ms. Epperson and her ex-husband) made the payments instead. As none of those individual litigants are a business, they were not required to report payments by Form 1099-MISC. The conclusion was there was no credible tax issue and the whistleblower claims were denied.
Ms. Epperson next timely filed her Tax Court petition. Over time, the IRS filed a motion for summary judgment and Ms. Epperson filed her opposition to the motion, each with unsworn declarations under penalty of perjury in support of the motions.
This Tax Court filing comes about because Congress gave whistleblowers the ability to seek judicial review of their award determinations, but that review is limited to award determinations made under IRC section 7623(b), not 7623(a). As a result, judicial review is only available for claims where the proceeds in dispute exceed $2,000,000 and an individual target taxpayer has gross income of at least $200,000 for the tax year(s) at issue.
Ms. Epperson’s claim? Unknown as to amounts paid to the Family Court, and, taken in the light most favorable to her, could have exceeded $2,000,000. The claim against the contractors was fairly small (the $13,055 paid by her and her ex-husband to the contractors). The contractors were three individuals and a corporation but nothing in the court pleadings or exhibits provides the gross income of those contractors. Again, in the light most favorable to her, their gross income could have exceeded $200,000. However, the proceeds in dispute for the contractors fell below the $2,000,000 threshold of IRC section 7623(b)(5)(B).
That threshold limitation is not jurisdictional, but it is an affirmative defense that must be raised and proven by the IRS. In this case, the IRS did not raise that defense in their answer, but raised it in their motion for summary judgment. An affirmative defense cannot be raised for the first time in a motion for summary judgment. Since that defense was raised in the motion and not the answer, it will not be considered by the Court. The fact that the contractor claims fell below the $2 million threshold was not fatal to Ms. Epperson’s petition for judicial review.
In reviewing the administrative record, there is explanation as to the determination regarding the Family Court but not explanation regarding the determination for the contractors. The evidence indicates that there was a determination regarding the Family Court and the claims against the contractors were sent along in conjunction with that determination. In the Court’s conclusion, there was no abuse of discretion regarding the Whistleblower Office determination regarding the Family Court but the IRS did not satisfy the burden of showing entitlement to summary judgment regarding the contractors.
The IRS motion for summary judgment with respect to the Family Court claim was granted while the motion for summary judgment with respect to the contractor claims was denied without prejudice. The IRS Whistleblower Office determination with respect to the Family Court claim was sustained.
Supervisory Approval for IRS Penalties
Docket No. 15309-15, Jesus R. Oropeza, v. C.I.R., Order available here.
There are pending cross-motions for partial summary judgment in this case on the issue of whether the IRS secured timely written supervisory approval subject to IRC section 6751(b)(1) for the notice of deficiency.
In January 2015 – the revenue agent assigned to this case sent the petitioner a Letter 5153 and attached a revenue agent report asserting a 20% accuracy-related penalty attributable to one or more of the options under IRC section 6662(b)(1), (2), (3), or (6). In the report, the agent stated that that the underpayment application is zero where a 40% penalty under 6662(h), (i), or (j) would be applied. Two weeks later, the revenue agent’s immediate supervisor signed a civil penalty form approving a 20% penalty for substantial understatement [6662(b)(2)]. The penalty form did not cite any of the other three grounds or a 40% penalty.
In May 2015 – the revenue agent and someone who is potentially his immediate supervisor prepared a joint memo for IRS Chief Counsel. The memo, signed by both, recommends the penalty be increased from 20% to 40% under 6662(i) on the ground that the petitioner engaged in a “nondisclosed noneconomic substance transaction.” Five days later, the IRS issued a notice of deficiency asserting a 40% penalty for a “nondisclosed noneconomic substance transaction” but said it was a 40% 6662(b)(6) penalty. In the alternative, the notice determined a 20% penalty attributable to negligence or substantial understatement of income tax.
The Court asks for the parties to submit briefs on the following issues by August 7: Assuming, for the purpose of argument, that the IRS did not secure timely supervisory approval for the penalty or penalties asserted in the revenue agent report –
- Should the report be regarded as asserting all four types of 20% penalty, including the 20% penalty for engaging in a noneconomic substance transaction under section 6662(b)(6)?, and
- If the 6662(b)(6) penalty was asserted in the report but not timely approved, can the IRS urge there was secured approval for a “40% section 6662(b)(6) penalty under 6662(i) even though the latter subsection operates only to increase the 6662(b)(6) penalty, which hypothetically was not timely approved?
I would make an argument in this case under the Taxpayer Bill of Rights about right # 10, the right to a fair and just tax system. It seems to me there is a bit of a whipsaw effect going on here because of the quick movement between a 20% penalty and a 40% penalty. First, the petitioner learns of a 20% penalty. Later, the IRS stance is that it is a 40% penalty or, in the alternative, a 20% penalty. Where is the finality for a taxpayer in those kind of changes?
Trial Scheduling Issues in the Pandemic
Docket No. 14546-15, 28751-15 (consolidated), YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, et al. v. C.I.R., Order available here.
In November 2019, these consolidated cases were set for trial to commence September 14, 2020 in New York, New York. Because of COVID-19 concerns, an order issued in April 2020 cancelled the Special Trial Session and struck the cases from the calendar. The parties later agreed to have a Special Trial Session commencing Tuesday, October 13, by remote trial proceeding. This order gives instructions regarding the trial and amends the pretrial schedule so that the pretrial schedule spans the end of July through the end of September 2020.
I did have a thought that maybe this was not meant to be a designated order. Usually, all cases that are consolidated are listed in the daily designated orders. In this case, there was only one of the two consolidated cases that were included in the designated orders. I am not entirely convinced either way, though this case does lay out the pretrial schedule and addresses other concerns in the COVID-19 trial scheduling era so it may be useful reference.
About William Schmidt
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