D.C. Circuit Holds Tax Court Whistleblower Award Filing Deadline Not Jurisdictional and Subject to Equitable tolling

As many of you know, the Tax Clinic at the Legal Services Center of Harvard Law School has been arguing, since its 2015 inception, that judicial filing deadlines in tax are not jurisdictional and are subject to equitable tolling under recent Supreme Court case law. Accepting this argument would upend decades of case law in the appellate courts and the Tax Court. We first made the argument in a Collection Due Process (CDP) case filed in the Tax Court. In Guralnik v. Commissioner, 146 T.C. 230, 235-238 (2016), an en banc Tax Court unanimously rejected our argument (but found another way to rule for the taxpayer). Later, in another case, Duggan v. Commissioner, 879 F.3d 1029 (9th Cir. 2018), the Ninth Circuit also held the CDP filing deadline at section 6330(d) jurisdictional and not subject to equitable tolling. (In Cunningham v. Commissioner, 716 Fed. Appx. 182 (4th Cir. 2018), the Fourth Circuit said there were no facts that would justify equitable tolling, so it passed on deciding whether the CDP filing deadline was jurisdictional.) 

The whistleblower award jurisdiction of the Tax Court at section 7623(b)(4) dates from 2006 and was copied almost verbatim from the CDP filing deadline language. In a 2-1 opinion in Myers v. Commmissioner, U.S. App. LEXIS 19757 (D.C. Cir. July 2, 2019), rev’g 148 T.C. 148 (2017), the D.C. Circuit has just held that the whistleblower award petition filing deadline is not jurisdictional and is subject to equitable tolling. The D.C. Circuit reversed the Tax Court’s dismissal of the case for lack of jurisdiction. The Tax Court had so held because it felt that the whistleblower’s failure to timely file the petition within 30 days of the issuance of various notices that the Tax Court found were notices of determination deprived the Tax Court of jurisdiction. I previously blogged on the Tax Court’s Myers opinion here. The D.C. Circuit remanded the Myers case to the Tax Court for the Tax Court to decide, in the first instance, whether the confusing nature of the determinations and their being sent by regular mail (and not even mentioning possible Tax Court review) justified equitable tolling in this case to make the Tax Court petition timely.

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Facts

Davis Myers told the whistleblowers office that he thought a company at which he had worked had misclassified employees as independent contractors. He sought a mandatory whistleblower award under section 7623(b) for a portion of the proceeds of any audit of the company. In a series of four letters written by the office to him and sent by regular mail, the office declined to pay him an award. The letters did not state that they were determinations under the statute, nor did they explain that the next step the whistleblower could take to contest the letters was to file a Tax Court petition within 30 days. Myers was puzzled what to do next. He wrote various people in the government complaining of his lack of award and mentioning the letters he had received. After getting no satisfaction form anyone, he decided to try filing a Tax Court petition – more than a year after the date on the last letter.

In the Tax Court, the IRS moved to dismiss the petition for lack of jurisdiction, arguing that the filing deadline is jurisdictional. The Tax Court asked the IRS for proof of mailing of each letter. Normally, other tickets to the Tax Court are sent certified mail, but these letters hadn’t been. The IRS conceded that it had no proof of when the letters were actually mailed. But, pointing to Myers’ correspondence with other government individuals, the IRS argued that Myers had received the letters at least by the dates of such correspondence. Since he had waited more than 30 days thereafter to file, the IRS argued that the petition was untimely. In an opinion importing some of its case law from its deficiency jurisdiction, the Tax Court granted the IRS motion.

Myers then had 30 days to file either a motion to vacate under Rule 162 or a motion for reconsideration of findings or opinion under Rule 161. He filed such a timely motion, but styled it one for reconsideration when he uploaded it electronically though the Tax Court’s efiling system. After the Tax Court denied the motion, he filed a notice of appeal of the Tax Court case, seeking an appeal to the Tenth Circuit. The notice of appeal was filed more than 90 days after the entry of the decision in the Tax Court case. Section 7483 gives an appellant only 90 days from the decision’s entry to file an appeal. But, FRAP 13 provides that if a person files a timely motion to vacate the decision, then the 90-day period to appeal starts running on the date the Tax Court rules on the motion. The FRAP does not mention motions to reconsider findings or opinions, however.

The Tenth Circuit transferred the appeal to the D.C. Circuit because, under section 7482(b)(1), the D.C. Circuit is the sole proper appellate venue for whistleblower appeals from the Tax Court.

Myers had been pro se to this point. But, for the D.C. Circuit, Joe DiRuzzo and Alex Golubitsky entered appearances on Myers’ behalf. The Harvard Federal Tax Clinic filed an amicus brief in the D.C. Circuit case.

D.C. Circuit Rulings

Initially, in its ruling, the D.C. Circuit addressed whether it had proper appellate jurisdiction from the Tax Court. Only one Circuit had ruled precedentially on the issue, the Ninth in Nordvik v. Commissioner, 67 F.3d 1489, 1493-1494 (9th Cir. 1995). In Nordvik, the court held that, despite FRAP 13’s lack of mention of a motion for reconsideration, such a motion also triggers the running of the 90-day period beginning from the date the Tax Court rules on the motion. In Myers, the D.C. Circuit reasoned that many Tax Court petitioners file pro se, and there is no explanation in Tax Court rules as to the difference between the two types of motions. Indeed, the motions are governed by similar review standards. Further, in non-tax appeals, motions for reconsideration are treated the same as motions to vacate a judgment – i.e., both postponing the appeal period until after such motions are ruled on. In order not to create a trap for unwary pro se filers, the D.C. Circuit held that motions for reconsideration are treated the same as motions to vacate the decision for purposes of the 90-day period to appeal under FRAP 13. Thus, Myers had filed a timely notice of appeal within 90 days of the Tax Court’s ruling on his motion for reconsideration.

Regarding the question of whether the Tax Court whistleblower award petition’s filing deadline is jurisdictional, the appellate court took a liberal view of Myers’ pro se pleadings to consider this issue and the issue of equitable tolling (even though Myers had never mentioned that exact doctrine before the Tax Court).

But first, contrary to some of Myers’ arguments, the D.C. Circuit held that the letters were proper notices of determination, since there was no legal requirement that the notices be sent certified mail, mention Tax Court review, or mention a 30-day filing period to contest them. Further, the D.C. Circuit did not disturb the Tax Court’s holding that Myers actually received the letters more than 30 days before he filed the Tax Court petition, and the 30-day period started no later than the date of provable receipt.

Turning to whether Myers could be forgiven for not filing timely, this raised two separate questions: Whether the filing deadline is jurisdictional and, if not, whether it is subject to equitable tolling?

Section 7623(b)(4) provides: “Any determination regarding [a whistleblower] 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).” This language is virtually the same as the CDP jurisdiction language at section 6330(d)(1), from which it was copied. Section 6330(d)(1) provides: “The person may, within 30 days of a [CDP] determination under this section, petition the Tax Court for review of such determination (and the Tax Court shall have jurisdiction with respect to such matter).” Both provide a deadline for filing a Tax Court petition 30 days after the issuance of a determination, and both contain an ending parenthetical stating “and the Tax Court shall have jurisdiction with respect to such matter”.

PT had published a post by Texas Tech Prof. Bryan Camp criticizing Guralnik’s holding that the CDP filing deadline is jurisdictional. The post can be found here. In the clinic’s amicus brief in Myers, we quoted Bryan’s criticism of the Tax Court’s logic that the jurisdictional grant was made in the same breath as the filing deadline, so the filing deadline must also be jurisdictional. In its Myers opinion, although the D.C. Circuit did not cite Bryan’s blog post, it clearly borrowed from it in coming to its conclusion.

Under recent Supreme Court case law, a filing deadline is almost never jurisdictional. But, Congress can override that conclusion by making a “clear statement” that the filing deadline is intended to be jurisdictional. The D.C. Circuit acknowledged that it may be pushing the law a bit farther than the Supreme Court had so far in its cases, but the D.C. Circuit simply did not see that Congress had made a clear statement that the filing deadline in section 7623(b)(4) is jurisdictional by inserting the parenthetical grant “with respect to such matter”. The D.C. Circuit wrote:

The IRS contends this constitutes a “clear statement” because the Congress “placed the jurisdictional language in the same sentence and subsection as the time limit.” As our amicus points out, however, the Supreme Court has explicitly rejected “proximity-based arguments” to that effect. See Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145, 155 (2013) [where a single sentence contained both the jurisdictional grant and a filing deadline, but the Supreme Court still held the filing deadline not jurisdictional] . . . .

On the contrary, the jurisdictional grant is separated from the rest of the provision by being put in parentheses and introduced by the word “and,” which announces a new independent clause. We therefore do not attach dispositive significance to the proximity between the provision setting the time period and the jurisdictional grant. . . .

The IRS counters that “the test is whether Congress made a clear statement, not whether it made the clearest statement possible.” See Duggan v. Commissioner, 879 F.3d 1029, 1034 (9th Cir. 2018). True enough, but we are not saying the Congress must “incant magic words in order to speak clearly.” Auburn, 568 U.S. at 153. The Congress need only include words linking the time period for filing to the grant of jurisdiction . . . .

Our dissenting colleague reads “such matter” in the parenthetical to provide the connection that makes the filing period jurisdictional. We agree that “such matter” means “the subject of litigation previously specified,” which is “an appeal to the Tax Court.” Dissent 3. In our view, however, the type of appeal to which “such matter” refers is most naturally identified by the subject matter of the appeal – namely, “any determination regarding an award under paragraph (1), (2), or (3)” – and not by the requirement that it be filed “within 30 days of such determination.”

Slip Op. at 16-19 (some citations omitted).

The majority distinguished the three recent court of appeals opinions in which the Harvard clinic had unsuccessfully argued that the innocent spouse filing deadline at section 6015(e) is also not jurisdictional (Rubel v. Commissioner, 856 F.3d 301(3d Cir. 2017), Matuszak v. Commissioner, 862 F.3d 192 (2d Cir. 2017), and Nauflett v. Commissioner, 892 F.3d 649 (4th Cir. 2018)) because the language in the innocent spouse jurisdictional grant contains an “if” condition that is not present in the CDP or whistleblower award provision. The D.C. Circuit wrote:

[Section 6015(e)(1)(A)] differs from the provision at hand in one critical respect: The grant of jurisdiction is followed by an “if” clause that expressly conditions jurisdiction upon timely filing. There is no conflict, therefore, between this case and the cited decisions. Indeed, we think § 6015(e)(1)(A) just shows one way the Congress could have more clearly conditioned the Tax Court’s jurisdiction upon timely filing in § 7623(b)(4), viz., with a parenthetical that stated “the Tax Court shall have jurisdiction with respect to such matter if the appeal is brought within such period.”

Footnote on slip op. at 18-19.

In his forthcoming law review article in The Tax Lawyer, Prof. Camp makes the similar distinction, concluding that section 6330(d)(1)’s filing deadline is not jurisdictional, while section 6015(e)(1)(A)’s filing deadline is jurisdictional. See “New Thinking About Jurisdictional Time Periods in the Tax Code.

The D.C. Circuit in Myers noted that its holding is “in some tension with that of another circuit regarding a similarly worded provision of the Internal Revenue Code, 26 U.S.C. §6330(d)(1)”, citing the Ninth Circuit’s opinion in Duggan and the Tax Court’s opinion in Guralnik, and writing:

This provision is nearly identical in structure to the one at hand. Nevertheless, for the reasons given above, we cannot agree that ‘timely filing of the petition [is] a condition of the Tax Court’s jurisdiction’ simply because ‘the filing deadline is given in the same breath as the grant of jurisdiction.’ Duggan, 879 F.3d at 1034.

Slip op. at 20.

Moving on to whether the filing deadline is subject to equitable tolling, the Myers court noted that in Irwin v. Dept. of Veterans Affairs, 498 U.S. 89 (1990), the Supreme Court laid down a rebuttable presumption that nonjurisdictional federal statutes of limitations are subject to equitable tolling. The Myers court dismissed the DOJ’s argument that the filing deadline, even if not jurisdictional, is not subject to equitable tolling because, the DOJ argued, the whistleblower award Tax Court filing deadline is similar to the internal administrative filing deadline held not subject to equitable tolling in the Auburn case. The scheme in Auburn involved health care providers seeking reimbursements from Medicare internal boards, where the providers were represented by counsel and were repeat players before the boards. The Myers court wrote:

None of these other indicators of legislative intent is present in this case: The Tax Court is not an “internal” “administrative body” and Tax Court petitioners are typically pro se, individual taxpayers who have never petitioned the Tax Court before. Moreover, the IRS points to no regulation or history of legislative revision that might contradict the Irwin presumption. That the whistleblower award statute is not unusually protective of claimants is the only consideration on the IRS side of the ledger. Without more, we are not persuaded to set aside a presumption that has been so consistently applied. See, e.g. Young v. United States, 535 U.S. 43, 49 (2002) (“It is hornbook law that limitations periods are customarily subject to equitable tolling”) (cleaned up).

Slip op. at 22.

The D.C. Circuit remanded the case to the Tax Court for the Tax Court to determine, in the first instance, whether the facts in Myers required equitable tolling.

Observations

The D.C. Circuit is the sole appellate jurisdiction for whistleblower award ruling appeals from the Tax Court. So, this is a nationwide victory for whistleblowers. But, the DOJ might seek reconsideration en banc or cert. because of the split with the Ninth Circuit in Duggan. I would not be shocked if the Supreme Court would grant cert., since it has always been the position of the Tax Court and the government that the filing of a timely petition is necessary to any of its jurisdictions. See Tax Court Rule 13(c). Yet, the Supreme Court has never said anything about the jurisdictional nature of the Tax Court’s filing deadlines or whether they are subject to equitable tolling.

In sum, I am delighted to report that, after a series of disappointing losses involving Tax Court filing deadlines, we finally have a winner — and one that might generate a Supreme Court opinion, depending on how the Solicitor General feels about the case.

The Perils of Sealing (and Designated Orders: April 29 – May 3, 2019)

Bill Schmidt and I had been debating whether the Tax Court judges had grown tired of my writing style. No designated orders at all were issued in my last assigned week of April 1 through 5, and no orders were released through May 1 either. But thankfully for our loyal readers, Judges Buch and Halpern each came through with an order on May 2.  Judge Halpern’s order discusses a clarification in this CDP case as to the proper scope of Appeals’ review on remand. The order itself is not very substantive. So let’s move on to Judge Buch’s order…

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Docket No. 4891-18W, Whistleblower 4891-18W v. C.I.R. (Order Here)

Well, we did have two cases this week. At some point between when our Designated Orders team logged the cases and now, Judge Buch ordered this docket to be sealed—a relatively rare occurrence in the U.S. Tax Court, but certainly one that occurs more often in the whistleblower context. It’s unclear whether the order of May 2 itself ordered sealing (if so, why designate the order?) or if that came in a subsequent order. Moving forward, I’ll remember to actually download whistleblower orders rather than simply noting the web link. Otherwise, I might again feel like Obi-Wan Kenobi looking for hidden records in the Jedi archives.

Since there’s nothing more to discuss regarding the order itself, I’ll use the remainder of this post to discuss the logistics of seeking to seal part (or all) of a record in Tax Court. I will also suggest changes for the Court’s sealing process in whistleblower cases.  Prior posts from Sean Akins and Bob Kamman discuss the substantive rationales for sealing or redacting documents in Tax Court.

Privacy Protections in the Tax Court

Whistleblowers often have an incentive to seal the information disclosed in a Tax Court case, especially their identity. After all, the Whistleblower has revealed damaging information about another taxpayer and understandably might face adverse consequences if the taxpayer learns of it. Yet, the Tax Court has ruled that not all Whistleblower cases are automatically sealed and not all taxpayers may proceed anonymously. See Whistleblower 14377-16W v. C.I.R., 148 T.C. 510 (2017).

So, how does one seal all or part of a case in the Tax Court? There are different rules for different case types. Tax Court Rule 345 sets forth privacy protections for petitioners in a Whistleblower action; Rule 103 governs Protective Orders in discovery disputes; and Rule 27 governs privacy protections generally, including redactions, sealing individual documents, and limiting electronic access to case information.  

Let’s put aside those categorizations for a moment and think about these protections functionally. Conceptually, there could be three possible levels of privacy protection:

  • Level 1: Redaction or abbreviation of sensitive information within a publicly available document.
  • Level 2A: Sealing or redaction of an entire document, within a publicly available docket.
  • Level 2B: Sealing of all documents within a publicly available docket.
  • Level 3: Sealing the entire docket, with no public access to the docket.

Most Tax Court practitioners are familiar with Level 1 privacy protections. These appear routinely for LITCs that file petitions for taxpayers challenging the denial of refundable tax credits. We must often allege facts regarding minor children (i.e., where the child lived, their age, and their relationship to the taxpayer). Rule 27(a) provides that filings “should refrain from including or should take appropriate steps to redact . . . [1] Taxpayer identification numbers, [2] Dates of birth, [3] Names of minor children, and [4] Financial account numbers,” and provides guidance on how to redact this information (e.g., listing a child’s initials instead of the full name). Beyond these prescribed redactions, the Court may also require further redactions under Rule 27(d), including issuing a protective order under Rule 103(a).

Rule 27(c) also provides the possibility of Level 2 protection for information protected under Rule 27(a) if the Court orders it. The party would file an unredacted document under seal, while filing a redacted copy publicly. Presumably, this would allow the Court to view the unredacted information to the extent that the information would prove useful to a case’s disposition.

In the discovery context, Rule 103(a) provides for both Level 1 and Level 2 protection, within the discretion of the Court. For example, the Court may order “that a deposition or other written materials, after being sealed, be opened only by order of the Court.” Rule 103(a)(6). The Rule provides for other instances whereby the Court can order nondisclosure of a certain fact—which could presumably be accomplished by either Level 1 or Level 2 protection, again subject to the Court’s discretion.

Finally, Rule 345 provides for Level 2A and 2B protections in the Whistleblower context. While Rule 340 through 344 were promulgated shortly after the introduction of the Tax Court’s whistleblower jurisdiction in 2008, Rule 345 was promulgated in 2012 after the IRS and the National Taxpayer Advocate raised concerns primarily regarding the confidentiality of the target taxpayer, who is not a party to a whistleblower proceeding. Accordingly, Rule 345(b) provides protections for the taxpayer against whom the whistle was blown. The Rule specifically requires that parties “shall refrain from including … the name, address, and other identifying information of the taxpayer to whom the claim relates.” The Rule also requires filers to include a reference list, to be filed under seal, such that each redaction is appropriately identified.  Note the difference between Rule 27(a) (“should refrain from including, or should take appropriate steps to redact”) and Rule 345(b) (“shall refrain from including, or shall take appropriate steps to redact…”). Rule 345 redactions are mandatory.

Rule 345(a) Motions to Proceed Anonymously—and the Related Sealing of the Tax Court Docket

On the other hand—and at issue in the whistleblower cases I discuss below—Rule 345(a) provides anonymity to the whistleblower only if he or she asks for it in the Tax Court proceeding and the Tax Court deems an anonymous proceeding appropriate. (The explanatory note accompanying Rule 345’s promulgation does not fully explain the necessity for or expound on the mechanics of an anonymity motion—though it does so for Rule 345(b)). To proceed anonymously, the petitioner must, along with the petition, file a motion, which must set forth “a sufficient, fact-specific basis for anonymity.” Upon filing the motion “the petition and all other filings shall be temporarily sealed pending a ruling by the Court . . . .” (emphasis added).

This seems to require automatic Level 2B protection (i.e., sealing all documents in the record), but not necessarily Level 3 protection (i.e., sealing the record itself) while the motion is adjudicated. But after the Court rules on the motion, there is no provision within Rule 345(a) for further privacy protections beyond anonymity of the petitioner and accompanying redactions in filed documents.

Nevertheless, the Tax Court’s current practice—as I discovered with the designated order this week—is to seal the entire docket pending resolution of the motion—and potentially thereafter as well. Because the entire docket is sealed, it’s frankly hard to tell when or why the Court would unseal a docket. Had Judge Buch’s order not been publicly accessible weeks earlier when we noted its existence, we wouldn’t even know that this particular docket existed.

What would justify an anonymous proceeding under Rule 345(a)? The Court engages in a balancing test between (1) the public’s right to know the whistleblower’s identity and (2) the potential harm to the whistleblower if his or her identity is revealed. See Whistleblower 14377-16W v. Comm’r, 148 T.C. 510, 512 (2017). The whistleblower, per Rule 345(a) must allege a “sufficient, fact-specific basis for anonymity.” The Court has determined that plausible threats of physical harm (see Whistleblower 12568-16W v. Comm’r, 148 T.C. 103, 107 (2017); Whistleblower 11332-13W v. Comm’r, 142 T.C. 396, 398 (2014); Whistleblower 10949-13W v. Comm’r, T.C. Memo. 2014-94), damage to employment relationships (see Whistleblower 14106-10W v. Comm’r, 137 T.C. 183 (2011)), and risk of losing employment-related benefits (see Whistleblower 13412-12W v. Comm’r, T.C. Memo. 2014-93) all constitute sufficient privacy interests for the petitioner to proceed anonymously.

But under this analysis, it’s merely the petitioner’s identity that remains confidential. Upon filing a motion to proceed anonymously, the record is automatically sealed as a precautionary matter, even though Rule 345(a) does not mandate this practice (“The petition and all other filings shall be temporarily sealed . . . .”) Sealing the record as a substantive matter is another question entirely. The Court addressed this matter in Whistleblower 14106-10W v. Commissioner, where the petitioner had requested the record to be sealed and, in the alternative, to proceed anonymously. The Court granted petitioner the alternative relief sought, as a “less drastic” form of relief that would still preserve the public’s right to an open court system. See Whistleblower 14106-10W, 137 T.C. at 189-91, 206-07. (This case occurred before the Court’s introduction of Tax Court Rule 345 in 2012.) Unfortunately, the Court didn’t delve too deeply into possible considerations that would justifying sealing the record.

So, here we are. The Tax Court apparently believes it has the inherent authority to seal the record in its entirety (as its current practice makes abundantly clear). As a statutory matter, notwithstanding any textual deficiency in Rule 345(a), the Tax Court could rely on its broad authority under section 7461(b)(1), and under its own rules. The Court can, under Rule 27(d), “require redaction of additional information” and may issue a protective order under Rule 103(a). That “additional information” and/or the protective order could presumably cover the entire docket.

Why Seal the Entire Docket? A Proposal for Change

What’s the normative basis for withholding all information from the public after a motion to proceed anonymously has been filed? There could be information in the petition or other filings that reveal the Whistleblower’s identity, trade secrets, or other confidential information. This is an understandable concern. However, the Rule’s automatic and complete approach sweeps too far against the public’s right to an open court system, including access to court records.

Under the common law, the public has a right to access judicial records. Openness and access are the baselines. As Judge Thornton intones in Whistleblower 14106-10W:

“[T]his country has a long tradition of open trials and public access to court records. This tradition is embedded in the common law, the statutory law, and the U.S. Constitution . . . . Consistent with these principles, section 7458 provides that hearings before the Tax Court shall be open to the public. And section 7461(a) provides generally that all reports of the Tax Court and all evidence received by the Tax Court shall be public records open to the inspection of the public.”

Whistleblower 14106-10W at 189-90.

Indeed, secret dockets were completely unheard of in English common law or during the country’s founding. See Press-Enterprise Co. v. Sup. Ct. Cal., 464 U.S. 501, 505-08 (1984). For an entertaining dive into this history and a review of other sealed dockets in more recent history, see Stephen W. Smith, Kudzu in the Courthouse: Judgments Made in the Shade, 3 Fed. Cts. L. Rev. 177 (2009).

This history has provided a basis for some courts to find that sealing dockets in their entirety violates the public’s First Amendment right of access to the courts. For example, Connecticut state courts maintained a “secret docket” throughout the 80s and 90s, hiding the misadventures of the state’s rich and famous litigants. The Second Circuit held that the public generally had a First Amendment right to access the courts’ docket information, subject to a case-by-case balancing of the individual litigants’ privacy interests. See Hartford Courant Co. v. Pellegrino, 380 F.3d 83 (2d. Cir. 2004). Additionally, the Eleventh Circuit held that the Middle District of Florida’s completely sealed criminal docket violated the First Amendment. See United States v. Valenti, 987 F.2d 708, 715 (11th Cir. 1993).

Of course, any court, including the Tax Court, may seal as much of the record as necessary. The Tax Court possesses statutory authority to do so in IRC § 7461(b)(1) and under its own Rules as previously described. The Supreme Court has recognized that a right of public access must be balanced against other interests. See Globe Newspaper Co. v. Sup. Ct., 457 U.S. 596, 606-07 (1982); Press-Enterprise Co., 464 U.S. at 510.

But when is sealing necessary and to what extent? No statutory mandate binds the Tax Court’s hands (unlike in, for example, qui tam actions under 31 U.S.C. § 3730(b), which in a 2009 study represented a plurality of sealed civil cases in federal district court). The appropriate use of its sealing authority lies entirely in the Court’s discretion.

Outside the Tax Court, openness of records is a presumption, able to be overcome only “where countervailing interests heavily outweigh the public interests in access.”  United States v. Pickard, 733 F.3d 1297, 1302 (10th Cir. 2013) (citing Colony Ins. Co. v. Burke, 698 F.3d 1222, 1241 (10th Cir. 2012). Other circuits have adopted the Supreme Court’s test from the criminal context in Globe Newspaper Co., where the Court held that “the presumption of openness may be overcome only by an overriding interest based on findings that closure is essential to preserve higher values and isnarrowly tailored to serve that interest.” 457 U.S. at 606-07; see, e.g., United States v. Ochoa-Vasquez, 428 F.3d 1015, 1030 (11th Cir. 2005).

The Court’s current approach strikes the wrong balance, as it hides cases from public view in their entirety. This automatic and complete approach also portends serious First Amendment concerns. This prophylactic approach allows for no individualized assessment of the privacy interests at stake; while that interest is adjudicated later, this only relates to the anonymity decision, not whether to seal the entire docket. Further, the automatic and complete sealing that occurs seems decidedly untailored.  

In my view, a more reasonable and less constitutionally problematic approach would be that of the U.S. Court of Appeals for the D.C. Circuit. We can run through an example to see this difference. In Tax Court Docket 14377-16W, the case is sealed. Trying to pull up the case on the Tax Court’s website reveals the following:

But, we have some insight into what occurred in this case because the Court issued a reviewed opinion in Whistleblower 14377-16W v. Commissioner, 148 T.C. 510 (2017). The Court denied petitioner’s motion to proceed anonymously, but, allowing for the possibility that petitioner would appeal that interlocutory decision, changed the case’s caption and continued to seal the docket to preserve petitioner’s anonymity.

Petitioner took the Tax Court up on its invitation and appealed the decision to the Eighth Circuit. The IRS objected to venue, because under the catchall provision of section 7482, proper venue for whistleblower cases lies in the D.C. Circuit, where the case was eventually transferred.

The dockets for both the Eighth Circuit and D.C. Circuit proceedings are partially open to the public—or at least, the part of the public that pays for PACER access. The Eighth Circuit docket even allows for access to some underlying motions, orders, and other documents. Notably, the Tax Court record and petitioner’s appellate motion to proceed under seal themselves remain sealed. This approach has some drawbacks, however, as petitioner revealed his identity in one of the unsealed filings. I will not do the same on this blog, but the filing remains available to anyone with a PACER account. Additionally, petitioner’s address is listed on the docket itself. While the former may be a foot fault on petitioner’s part, the latter seems an oversight by the Eighth Circuit. 

The D.C. Circuit docket, in contrast, allows for no public access to any underlying document. It does helpfully list every proceeding on the docket itself. For example, we know that after the initial briefs were filed, the D.C. Circuit appointed an amicus to argue petitioner’s position (and file subsequent briefs). Oral argument was held on April 2, 2019 in a sealed courtroom and we’re now awaiting the D.C. Circuit’s opinion.

Could the Tax Court follow suit? The Court need not amend its Rule 345(a) to do so, given that textually, it requires only that the underlying filings are sealed. If the Court is concerned about petitioners inadvertently disclosing their private information, the Court may wish to amend Rule 345(b), which requires the filing of various identifying information on the petition itself in all cases. The Court could require any petitioner seeking anonymity to file an original petition under seal, while filing a redacted petition for public view. The petitions are not available online in any case, and so the Court could alternatively deny access to the underlying filings to parties who request hard copies while it adjudicates the motion for anonymity.

Anonymity would still need to be maintained online, but only orders and opinions are available online to non-parties. For these documents, the Court would have responsibility to ensure appropriate redactions. The Petitioner is also identified in the online docket, but it seems easy enough to change a petitioner’s name to “Whistleblower [Docket Number]” online.

The D.C. Circuit’s approach seems to strike the right balance: let the public know what’s going on generally, while preserving petitioners’ potential right to anonymity. By releasing select, non-sensitive information, the Court instills confidence in the public that secrecy has not affected the Court’s adherence to procedure and precedent. The Tax Court, which has in the past remedied its prior opaque nature, seems to have the legal and technical ability to follow the same approach; it ought to do so.


IRS’s “Trust Me, it Wasn’t Yours” Defense Doesn’t Fly, Designated Orders 3/11 – 3/15/2019

There were only two orders designated during the week of March 11. The most interesting of the two contains the quote from where the title of this post originates and is potentially a step in the right direction for the whistleblower petitioner. The second order (here) was a bench opinion for an individual non-filer.

In Docket No. 101-18W, Richard G. Saffire, Jr. v. C.I.R. (order here), Judge Armen is not impressed with IRS’s dodgy behavior. The IRS objected to petitioner’s previously filed motion to compel the production of documents, so petitioner is back before the Court with a reply countering that objection. Based on the iteration of what parties have agreed upon and what the record has established, it seems as though the IRS dropped the ball while reviewing petitioner’s whistleblower claim.

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Petitioner is a retired CPA from New York and his whistleblower claim involved an investment company (the target taxpayer), a related entity (the advisor) and allegations of an improperly claimed tax exempt status. The claim was received in January of 2012. After it was submitted, but before it was formally acknowledged, petitioner also met with IRS’s Criminal Investigation Division.

In June 2012, the IRS determined that the claim met the procedural requirements under section 7623(b) and the ball was then passed to the IRS’s compliance function to determine whether the IRS should proceed with an exam or investigation.

In August two attorneys from IRS’s counsel’s office in the Tax Exempt and Government Entities (TEGE) Division, as well as a revenue agent from the TEGE Division, held a lengthy conference call with petitioner at the IRS’s request. According to petitioner, none of the IRS employees acted as though they had heard about the target taxpayer, its advisor, or issues raised by the claim previously. After the call, the IRS requested additional information which petitioner provided at the beginning of September 2012.

A technical review of the claim was completed at the end of September 2012, and the ball was again passed, this time to an IRS operating division for field assignment.

This is where the ball was apparently dropped as far as the claim itself was concerned. For five years petitioner did not receive any concrete information about the claim other than the fact that it was still open, but during that time petitioner learned from public information sources that a large amount of money was collected from the target taxpayer and that the SEC collected more than $1 million from the advisor.

Then in September 2017 petitioner received a preliminary denial letter followed by a final determination denying the claim because the IRS stated the issues raised by petitioner were identified in an ongoing exam prior to receiving petitioner’s information, petitioner’s information did not substantially contribute to the actions taken and there were no changes in the IRS approach to the issue after reviewing petitioner’s information.

Petitioner petitioned the Court. Three months later the Court granted the parties’ joint motion for a protective order allowing respondent to disclose returns, return information and taxpayer return information (as defined in section 6103(b)(1), (2) and (3)) related to the claim.  

Then petitioner requested the administrative file and five categories of documents related to the case. The IRS provided the administrative file, but it was heavily redacted and a large portion of the unredacted parts consisted of copies of the petitioner’s submission. IRS Counsel also sent information on three of the five categories, but it said that two of the categories of documents (regarding the exam of the target taxpayer and its advisor and communications between the IRS and SEC) were outside the scope of the administrative file, irrelevant to the instant litigation and were protected third-party information under section 6103.

IRS acknowledges that section 6103(h)(4)(B) permits disclosure in a Federal judicial proceeding if the treatment of an item on a taxpayer’s return is directly related to the resolution of an issue in the proceeding.

This is where the IRS’s “trust me- it wasn’t yours” defense comes into play. The IRS says the information does not bear on the issue of whether petitioner is entitled to an award because respondent did not use any of petitioner’s information. In other words, the IRS refuses to show the petitioner what information it used to investigate and collect from the target taxpayer, because it wasn’t the petitioner’s information that was used. The IRS also argues that the petitioner’s request is overbroad and unduly burdensome.

The Court finds this explanation insufficient and grants petitioner’s motion to compel discovery (with some limitations) finding that most of the documents that petitioner requests are directly relevant to deciding whether petitioner is entitled to a whistleblower award, and therefore, discoverable. The Court suggests that the information petitioner requests should be disclosed pursuant to section 6103(h)(4)(B). The Court allows respondent to redact some information (mainly, identifying information about the alleged second referral source), but orders respondent to provide an individual and specific basis for each redaction.

It’s a little odd that IRS has been so reluctant to provide the petitioner with information, but it doesn’t necessarily suggest that the reason is because petitioner is in fact entitled to an award. Now that the Court has intervened, hopefully the information will provide petitioner with a satisfactory answer as to why the IRS denied his award. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

And yet, they persisted.

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

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

And so ends the saga… or does it?

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

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

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

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

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

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

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

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

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

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

Amazingly, it only gets worse.

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

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

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

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

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

 

Designated Orders the Week of July 30 – August 3

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

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

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

But on to the orders I found most interesting…

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Credit for Creativity

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

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

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

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

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

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

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

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

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

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

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

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

Quash a Lot

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

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

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

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

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

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

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

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

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

Motion to Compel and Section 6103

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

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

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

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

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

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

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

 

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

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

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

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Chai Ghouls

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Whistleblowers and Discovery

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Miscellaneous Short Items

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

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

 

Designated Orders 7/2/2018 – 7/6/2018

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

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

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Ring the Final (Tax Court) Bell on Bell

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

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

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

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

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

Appeal after Computations

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

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

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

A Disappointed “Whistleblower”

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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