The Effect of an Order to Show Cause, Designated Orders August 24-28 and September 21-25, 2020

Docket No. 14410-15, Lampercht v. CIR (order here)

Up until now, I was the only designated orders’ author who had yet to cover this case which has had eight orders designated in it since March of 2018. The case’s recent orders have addressed discovery-related matters, and in this order on petitioner’s motion, the Court reconsiders a previously issued “order to show cause.” It decides to withhold its final ruling in part to allow more time for petitioners to comply, discharge it in part, and make it absolute in part.

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The Tax Court strongly encourages parties to engage in informal discovery, so it is somewhat rare to encounter an order related to discovery.  Tax Court Rule 91(f) allows the Court to issue an “order to show cause” related to stipulations when one of the parties “has refused or failed to confer with an adversary with respect to entering into a stipulation” or “refused or failed to make such a stipulation of any matter.”

The order describes the effect an “order to show cause” has on the parties and the proceedings. The case involves several different types of documents all of which appear to be difficult obtain and some which may not even exist. The first documents addressed by the Court relate to property owned by petitioners in another country. Earlier on, petitioners conveyed that their ability to obtain the documents was symmetrical to the IRS’s ability, so the Court ordered petitioners to execute a waiver which the IRS could use to obtain the documents. Even with the waiver, the IRS was unsuccessful but learned that petitioners could obtain the documents by requesting them from the local authorities where the property is located. As a result, the Court sets a specific date for the petitioners to do this or else the order will be made absolute.

Next, petitioners state that certain business-related records do not exist, and they wish to provide affidavits instead. The IRS challenges the sufficiency of the affidavits, but the Court says the IRS can press his criticisms of petitioners’ explanation at trial and dismisses the “order to show cause” as it relates to these items.

Finally, petitioners contend that they were unable to get necessary records from their bank in order to participate in the IRS’s voluntary offshore disclosure program. The IRS also needs a waiver from petitioners to attempt to obtain the bank records. The petitioners executed a waiver but it was ultimately returned because it was not notarized, and petitioners failed to provide the identity verification requested. The Court makes the “order to show cause” absolute as it relates to this item.

What is the effect of an “order to show cause” being made absolute? In this case, it means that petitioners are precluded from offering any evidence at trial with the respect to the item or the inexistence of the item. In other words, the Court will not allow petitioners to use their alleged inability to the obtain records serve as a reason for their inaction at trial.  

Docket No. 13892-19, Malone v. CIR (order here)

This next order involves the Court’s concern with a petitioner’s capacity to engage in litigation and a conflict that may arise if a certain family member tries to help him.

The tax return at issue in the case is a section 6020(b) substitute for return which didn’t account for any of petitioner’s business expenses. The case was scheduled for trial in June 2020 but was delayed due to Covid-19 and since then parties have kept the Court apprised of their progress in monthly status reports. In the reports, petitioner’s counsel repeatedly states that petitioner has not made much progress with retrieving and organizing documents due to side effects of brain surgery he had in February 2019.

Since the petitioner has not made much progress, the Court is concerned with petitioner’s capacity under rule 60(c). Petitioner’s counsel states that petitioner’s family is helping him gather documents and information but does not identify which family members are assisting him which also raises the potential conflict concern for the Court.

Petitioner may wish to challenge the IRS’s determination of his filing status. This is permitted because a substitute for returns does not constitute “separate” returns for purposes of section 6013(b) (see Millsap v. Commissioner, 91 T.C. 926 (1988)).  The 6020(b) substitute for return used married filing separate status, so the Court speculates that if petitioner challenges his filing status and files a married filing joint tax return, then petitioners’ spouse may have a conflict of interest in helping him gather documents and information, unless his spouse disavows themselves of innocent spouse relief.

Without additional information, the Court isn’t sure that petitioner’s counsel can proceed without the appointment of a representative or if petitioner does not have such a duly appointed representative, a next friend or guardian ad litem.

To resolve their concerns the Court specifically asks whether petitioner was married during the year at issue, and if so, the status of petitioner’s spouse’s tax liability that year, including whether petitioner plans to submit a joint return. The Court also asks whether petitioner’s spouse has a conflict of interest or potential conflict of interest that may prohibit them from acting on petitioner’s behalf.

Docket No. 6341-19W, Sebren A. Pierce (order here)

This order provides the Court with another opportunity to reiterate its record rule and standard of review in whistleblower cases. The Court also cites its Van Bemmelen opinion which Les mentions in his very recent post on the record rule here.

In this designated order, the Court is addressing petitioner’s motion for summary judgement. Petitioner’s case alleged that a certain State had defrauded taxpayers of more than $43 billion in connection with the incarceration of prisoners in that State who were wrongfully prosecuted. The whistleblower office’s final decision rejected the claim “because the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws.”

After pleadings were closed, petitioner filed a motion for summary judgment asserting that he is entitled to a whistleblower award of 15% to 30% of the amount and requests an advance payment of $20 million, with any discrepancies in the award amount to be resolved by IRS audit.

The Court goes on to explain that is not how summary judgment works in whistleblower cases. The Court cannot determine that petitioner is entitled to an award and force the IRS to pay up, because it is not a trial on the merits. The Court explains that the de novo standard of review petitioner desires is not possible.

Orders not discussed, include:

  • Docket No. 1781-14, Barrington v. CIR (order here), petitioner’s motion to compel is denied because it is inadequately supported since petitioner cannot yet show that the IRS has failed to respond to formal discovery.
  • Docket No. 18554-19W, Wellman v. CIR (order here) the IRS’s motion for summary judgment in this whistleblower case is granted and petitioner does not object.
  • Docket No. 13134-19L, Smith v. CIR (order here), the IRS’s motion summary judgment is granted in a CDP case where petitioners submitted an offer in compromise but were not current with estimated tax payments.

The Record Rule in Tax Court Whistleblower Proceedings

The Tax Court’s memorandum opinion in Neal v Commissioner highlights some of the unique aspects of whistleblower cases, including whether Tax Court should supplement the administrative record when there is a claim that the record is deficient. 

To set the stage, I include the language from the syllabus to the opinion:

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P [the petitioner] was a consultant who worked for target (“T”) and, at T’s request, assembled information to give to an IRS agent who conducted an audit. P left T in 2012, and in 2014 he submitted to R’s Whistleblower Office (“WBO”) a Form 211, “Application for Award for Original Information”, making allegations of tax issues concerning T. The WBO determined that an audit of T’s returns was already underway and that the same issue that P raised in his Form 211 in 2014 had been raised in another individual’s Form 211 that had been previously submitted in 2010 and had been forwarded to the agent. The WBO did not forward P’s Form 211 to the agent and denied P’s claim for an award on the grounds that “the information you provided did not result in the collection of any proceeds”. R made adjustments to T’s liability and collected tax. P filed a petition in the Tax Court seeking review of the WBO’s denial of an award. 

In other words, the WBO denied the award because it found that someone else had beaten Mr. Neal to the punch. Neal appealed the determination in Tax Court. The IRS moved for summary judgment based on the certified administrative record, as it argued that the earlier whistleblowing meant that with respect to Neal “no administrative or judicial action occurred and no proceeds were collected as a result of information provided in the claim.”

Neal disagreed with the facts and information in the record. He alleged that the record 1) omitted information he had provided to the agent and 2) failed to show that the WBO forwarded his Form 211 to the agent. Neal claimed to have played a prominent role with the examining agent and audit of the target even though the record did not corroborate that.

In deficiency cases, the Tax Court generally takes in evidence on a de novo basis. Not so in whistleblower cases.  As a refresher, in Kasper v Commissioner the Tax Court held that the scope of review in whistleblower cases is subject to the record rule and that the standard of review is abuse of discretion. (For my post on Kasper and more on standard and scope of review see Tax Court Decides Scope and Standard of Review in Whistleblower Cases.)

While the Tax Court is generally bound to the record, that does not mean that the Tax Court is obligated to accept what the IRS provides as the certified record. For example in Van Bemmelen v. Commissioner, the Tax Court noted that in a whistleblower case an administrative record may be “supplemented” in one of two ways:

either by (1) including evidence that should have been properly a part of the administrative record but was excluded by the agency, or (2) adding extrajudicial evidence that was not initially before the agency but the party believes should nonetheless be included in the administrative record. [citations omitted]

In Neal, the focus was on the first way, as Neal claimed that the IRS failed to include in the record relevant information pertaining to the audit and Neal’s role in eventually leading to collected proceeds from the target.  The Neal opinion is important as it highlights that an allegation that the record is inadequate is met with a presumption of administrative regularity. That means that “[a]bsent a substantial showing made with clear evidence to the contrary” [as per the Van Bemmelen case] unsupported allegations will not be enough to warrant supplementing the record.

In Neal, the Tax Court held an evidentiary hearing to resolve the challenge to the sufficiency of the administrative record.  The hearing failed to generate the facts needed for Neal to meet the bar of a “substantial showing” with “clear evidence”. For example, the IRS’s examining agent credibly testified that he did  “not ever see Mr. Neal’s Form 211, that he did not recall ever making any information requests of Mr. Neal, that he did not recall ever receiving any documents from Mr. Neal, and that he did not remember ever seeing Mr. Neal before the day of trial.” 

The Neal opinion is also interesting in that it further applies and refines the summary judgment standard in whistleblower cases, and it discusses the distinction in these cases from typical deficiency cases where the parties and the court are not similarly constrained by the record below:

[I]n a “record rule” whistleblower case there will not be a trial on the merits. In such a case involving review of final agency action under the APA, summary judgment serves as a mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. 

In Neal, the distinction between the rationales for denying the government’s summary judgment motion did not matter:

That distinction (denying the motion where the record shows a dispute of fact versus denying the motion where the record fails to support the conclusion) does not affect the outcome in this case since, as we explain below, the administrative record does not reflect any dispute of fact as to, nor any lack of support for, the WBO’s determination.

Conclusion

In A Legislative History of the Modern Tax Whistleblower Program [$], an article that came out today in Tax Notes, Dean Zerbe argues that the Tax Court’s approach to review in whistleblower cases is wrong as a matter of law. Dean was formerly chief investigative counsel and tax counsel for the Senate Finance Committee. In that capacity he was the lead counsel responsible for drafting section 7623(b), the mandatory whistleblower award provision. He believes that the legislative history supports a finding that the standard of review is de novo (which would allow the Tax Court to conduct a trial and the parties to make their own record in court). In the article Dean states that Chief Counsel and the Tax Court failed to consider that history in Kasper, which, as he notes, involved a pro se taxpayer who failed to fully brief the issue. Keith has suggested that when there are pro se cases that may trigger precedential opinions on issues, the Tax Court should have a process in place to ensure amicus involvement. The issues in those cases deserve full briefing, and there are many important Tax Court opinions involving pro se petitioners.

As the Tax Court hears more whistleblower appeals it will confront many thorny issues surrounding the adequacy of the record.  The record rule, and its exceptions, is a more familiar issue for other courts used to a constrained review of administrative agency actions.  In addition, it is possible that there will be challenges to the standard of review and record rule in circuit courts, as Kasper may not be the last word on that issue. 

A Family Court Spin on Whistleblowing, Supervisory Approval, and Trial Scheduling: Designated Orders 7/6/20 to 7/10/20

Even though there were only three orders for the week I monitored in July, there wound up being enough interesting topics to write about.  The longest order is interesting because it puts a different spin on whistleblower cases before the Tax Court.  The next case focuses on timely written supervisory approval for IRS penalties.  Finally, there is another case dealing with trial scheduling issues due to the COVID-19 pandemic.

A Nevada Whistleblower in Family Court

Docket No. 20287-18W, Monique Epperson v. C.I.R., Order and Decision available here.

Most often we think of whistleblower claims in a certain way.  It might be that the whistleblower was an employee who learned of misdeeds with regard to taxes or it might be that a person finds out through business dealings of foul play concerning tax reporting.  I doubt Family Court would be in the top answers concerning whistleblowing, but that is the topic of today’s case.

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You see, Ms. Epperson is a Nevada resident who was involved in a child custody dispute in her local family law court system in years 2016 and 2017.  Both her and her ex-husband were ordered to retain the services of various attorney, physician and psychology service providers from a list of court-approved outsource service providers.  She independently contracted with those providers and paid by cash, check or credit card during those 2 tax years.

It seems that Ms. Epperson had a bone to pick with how things went in family law court, but she was creative since most people do not think about the IRS when it comes to getting even.  Ms. Epperson is different because she chose to contact the IRS Whistleblower Office.  In December 2017, the IRS Whistleblower Office received five Forms 211, Application for Award for Original Information, from Ms. Epperson – all dated November 28, 2017.  The targets of those Forms were the Family Court and four independent contractors paid by her or her ex-husband during their court proceedings.

Her claim against the Family Court is that it should have issued Forms 1099-MISC to the various service providers because of the IRS requirement that when a business pays an independent contractor $600 or more over the course of a tax year, it should report those payments on a Form 1099-MISC issued to the independent contractor.  Her claim against the contractors is that they underreported income during the tax year, which would be easier to conceal in connection with child custody matters because they are usually sealed and unavailable for public viewing.

When the IRS Whistleblower Office reviewed the claims, they combined all five whistleblower claims into one group and applied a common decision.  The decision was based on the fact that the Family Court did not make payments to the independent contractors and the litigants (such as Ms. Epperson and her ex-husband) made the payments instead.  As none of those individual litigants are a business, they were not required to report payments by Form 1099-MISC.  The conclusion was there was no credible tax issue and the whistleblower claims were denied.

Ms. Epperson next timely filed her Tax Court petition.  Over time, the IRS filed a motion for summary judgment and Ms. Epperson filed her opposition to the motion, each with unsworn declarations under penalty of perjury in support of the motions.

This Tax Court filing comes about because Congress gave whistleblowers the ability to seek judicial review of their award determinations, but that review is limited to award determinations made under IRC section 7623(b), not 7623(a).  As a result, judicial review is only available for claims where the proceeds in dispute exceed $2,000,000 and an individual target taxpayer has gross income of at least $200,000 for the tax year(s) at issue. 

Ms. Epperson’s claim?  Unknown as to amounts paid to the Family Court, and, taken in the light most favorable to her, could have exceeded $2,000,000.  The claim against the contractors was fairly small (the $13,055 paid by her and her ex-husband to the contractors).  The contractors were three individuals and a corporation but nothing in the court pleadings or exhibits provides the gross income of those contractors.  Again, in the light most favorable to her, their gross income could have exceeded $200,000.  However, the proceeds in dispute for the contractors fell below the $2,000,000 threshold of IRC section 7623(b)(5)(B).

That threshold limitation is not jurisdictional, but it is an affirmative defense that must be raised and proven by the IRS.  In this case, the IRS did not raise that defense in their answer, but raised it in their motion for summary judgment.  An affirmative defense cannot be raised for the first time in a motion for summary judgment.  Since that defense was raised in the motion and not the answer, it will not be considered by the Court.  The fact that the contractor claims fell below the $2 million threshold was not fatal to Ms. Epperson’s petition for judicial review.

In reviewing the administrative record, there is explanation as to the determination regarding the Family Court but not explanation regarding the determination for the contractors.  The evidence indicates that there was a determination regarding the Family Court and the claims against the contractors were sent along in conjunction with that determination.  In the Court’s conclusion, there was no abuse of discretion regarding the Whistleblower Office determination regarding the Family Court but the IRS did not satisfy the burden of showing entitlement to summary judgment regarding the contractors.

The IRS motion for summary judgment with respect to the Family Court claim was granted while the motion for summary judgment with respect to the contractor claims was denied without prejudice.  The IRS Whistleblower Office determination with respect to the Family Court claim was sustained.

Supervisory Approval for IRS Penalties

Docket No. 15309-15, Jesus R. Oropeza, v. C.I.R., Order available here.

There are pending cross-motions for partial summary judgment in this case on the issue of whether the IRS secured timely written supervisory approval subject to IRC section 6751(b)(1) for the notice of deficiency.

In January 2015 – the revenue agent assigned to this case sent the petitioner a Letter 5153 and attached a revenue agent report asserting a 20% accuracy-related penalty attributable to one or more of the options under IRC section 6662(b)(1), (2), (3), or (6).  In the report, the agent stated that that the underpayment application is zero where a 40% penalty under 6662(h), (i), or (j) would be applied.  Two weeks later, the revenue agent’s immediate supervisor signed a civil penalty form approving a 20% penalty for substantial understatement [6662(b)(2)].  The penalty form did not cite any of the other three grounds or a 40% penalty.

In May 2015 – the revenue agent and someone who is potentially his immediate supervisor prepared a joint memo for IRS Chief Counsel.  The memo, signed by both, recommends the penalty be increased from 20% to 40% under 6662(i) on the ground that the petitioner engaged in a “nondisclosed noneconomic substance transaction.”  Five days later, the IRS issued a notice of deficiency asserting a 40% penalty for a “nondisclosed noneconomic substance transaction” but said it was a 40% 6662(b)(6) penalty.  In the alternative, the notice determined a 20% penalty attributable to negligence or substantial understatement of income tax.

The Court asks for the parties to submit briefs on the following issues by August 7: Assuming, for the purpose of argument, that the IRS did not secure timely supervisory approval for the penalty or penalties asserted in the revenue agent report –

  • Should the report be regarded as asserting all four types of 20% penalty, including the 20% penalty for engaging in a noneconomic substance transaction under section 6662(b)(6)?, and
  • If the 6662(b)(6) penalty was asserted in the report but not timely approved, can the IRS urge there was secured approval for a “40% section 6662(b)(6) penalty under 6662(i) even though the latter subsection operates only to increase the 6662(b)(6) penalty, which hypothetically was not timely approved?

I would make an argument in this case under the Taxpayer Bill of Rights about right # 10, the right to a fair and just tax system.  It seems to me there is a bit of a whipsaw effect going on here because of the quick movement between a 20% penalty and a 40% penalty.  First, the petitioner learns of a 20% penalty.  Later, the IRS stance is that it is a 40% penalty or, in the alternative, a 20% penalty.  Where is the finality for a taxpayer in those kind of changes?

Trial Scheduling Issues in the Pandemic

Docket No. 14546-15, 28751-15 (consolidated), YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, et al. v. C.I.R., Order available here.

In November 2019, these consolidated cases were set for trial to commence September 14, 2020 in New York, New York.  Because of COVID-19 concerns, an order issued in April 2020 cancelled the Special Trial Session and struck the cases from the calendar.  The parties later agreed to have a Special Trial Session commencing Tuesday, October 13, by remote trial proceeding.  This order gives instructions regarding the trial and amends the pretrial schedule so that the pretrial schedule spans the end of July through the end of September 2020.

I did have a thought that maybe this was not meant to be a designated order.  Usually, all cases that are consolidated are listed in the daily designated orders.  In this case, there was only one of the two consolidated cases that were included in the designated orders.  I am not entirely convinced either way, though this case does lay out the pretrial schedule and addresses other concerns in the COVID-19 trial scheduling era so it may be useful reference.

 

The IRS Loves Ambiguity, Designated Orders May 4-8 and June 1-5, 2020

The orders designated during my weeks in May and June didn’t address anything we haven’t covered before, with the exception of an order (here) referencing the Tax Court’s opinion in Lacey v. Commissioner, 153 T.C. No. 8 (2019). I started digging into the opinion to include it as part of my post, but Patrick Thomas had the same idea and did an excellent job covering it (here).

The Lacey opinion reflects the Court’s displeasure with the IRS’s use of boilerplate, ambiguous correspondence. The IRS’s use of standardized notices in many cases is understandable, however, there are times when the IRS owes a taxpayer more than a vague list of possible reasons for why it is disregarding an issue.

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The Court takes issue with IRS’s use of “and/or” in whistleblower determinations in Lacey and in CDP Notices of Determination in Alber v. Commissioner, T.C. Memo. 2020-20. I have also seen vague boilerplate responses sent in other cases (identity theft and offer in compromise examples come to mind) at a preliminary stage when IRS has decided the matter isn’t worth looking into further.

Not all cases are eligible for Tax Court review, but all taxpayers deserve to know why the IRS is not continuing to work on their case.

The IRS loves the “efficiency” of ambiguous correspondence. This is exemplified in its plan to send out notices with incorrect dates as a result of the Covid-19 shutdown (which Keith covered here). The IRS benefits from the confusion created by ambiguous correspondence because it delays or prevents taxpayers from responding in a timely or appropriate way.

The recent orders and decisions reflecting the Court’s view of ambiguous correspondence could prompt a change in IRS practices. We are at a time when everyone is imagining the ways things could be, looking at new and improved ways to operate, and resetting their expectations. The IRS desperately needs to upgrade its technology in response to Covid-19, and more generally, to finally join the rest of us in today’s world. As part of any upgrades or improvements, the IRS should consider ways that it can communicate more clearly in the responses it sends to taxpayers.

Other orders designated in May:

  • Docket No. 17614-13 and 17603-13 , Vincent J. Fumo v. CIR. Orders (here and here) granting the IRS’s motion in limine to preclude testimony from an Assistant U.S. Attorney and two revenue agents regarding the ‘manner and motives’ behind examination of petitioner’s income and excise tax liabilities.
  • Docket No. 9946-19L, Linnea Hall McManus & John McManus v. CIR. Order and decision (here) granting the IRS’s motion for summary judgement in a CDP case where petitioners did not provide requested information.

Other orders designated in June:

  • Docket No. 16492-18, Vishal Mishra and Ritu Mishra v. CIR. Order (here) granting the IRS’s motion for entry of decision in its favor, because petitioners are disputing already-conceded accuracy related penalties.
  • Docket No. 11152-18 L, Xavier Pittmon v. CIR. Order and decision (here) granting the IRS’s motion to dismiss, because the petitioner cannot contest his liability in his CDP case.  

Whistleblower Week – Designated Orders, March 2 – 6, 2020

This week was apparently Whistleblower Week at the Tax Court, featuring three separate whistleblower orders from Judges Copeland, Jones, and Kerrigan. We’ll also discuss a short order on limited entries of appearance (which has less importance after the Court’s recent administrative order regarding limited entries of appearance in the time of COVID-19), as well as an order to dismiss a deficiency case for lack of jurisdiction.

Other orders included:

  • An excellent refresher from Judge Urda on motions to vacate under Tax Court Rule 162 and Federal Rule of Civil Procedure 60(b).
  • An order from Judge Toro granting a motion to dismiss from Petitioner in a standalone innocent spouse case.
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The Whistleblower Orders

There were three orders granting summary judgment to Respondent in whistleblower cases. (There were technically four, but the orders in the unconsolidated Keane cases are essentially identical).

  • Docket No. 10662-19W, Horsey v. C.I.R. (Order Here)
  • Docket Nos. 22897-18W, 23240-18W, Keane v. C.I.R. (Orders Here & Here)
  • Docket No. 22395-18W, Lambert v. C.I.R. (Order Here)

These cases follow the Tax Court’s decision from last fall in Lacey v. Commissioner, 153 T.C. No. 8 (2019), which held that the Court has jurisdiction under I.R.C. § 7623(b)(4) to review decisions of the Whistleblower Office to reject a claim for failing to meet threshold requirements in the regulations applicable to whistleblower claims. See Reg § 301.7623-1(c)(1), (4). The Court has long held that it has no jurisdiction to force the IRS to audit or collect proceeds from target taxpayers and that if the IRS fails to audit and collects no proceeds from the target, the Court likewise has no jurisdiction to review the decision not to audit or collect proceeds. Cohen v. Commissioner, 139 T.C. 299, 302 (2012).

In Lacey, it was undisputed that the IRS did not audit the taxpayer and collected no proceeds. However, the Court determined that an initial rejection of the whistleblower complaint without a referral to the IRS operating division could be reviewed for abuse of discretion. The Court noted that permissible reasons for rejection at this level included those threshold regulatory requirements: that the whistleblower’s complaint provides specific and credible information that the whistleblower believes will lead to collected tax proceeds; reports a failure to comply with the internal revenue laws; identifies the persons believed to have failed to comply; provides substantive information, including all available documents; and does not provide speculative information. Under the regulations, the Whistleblower Office should first determine whether the claim is deficient in this regard, and if not, forward the case to an IRS operating division (e.g., LB&I for large business taxpayers, etc.).

At that point, a “classifier” in the operating division takes over, and determines whether to proceed with an audit. However, they too could determine that the claim was deficient for any of the reasons the initial classifier could. In Lacey, the Court denied summary judgment to Respondent because the administrative record was not sufficiently clear to discern whether the Whistleblower Office considered the whistleblower’s claim at all; thus it was likewise impossible to determine why the claim was rejected.

In these three cases, however, the Court has no trouble of the kind that tripped up the IRS in Lacey. In all of the cases, the IRS neither audited nor collected proceeds from the target taxpayers. And the Whistleblower Office, in each case, did refer the case to a “classifier” in the relevant operating division. That employee, in turn, determined that the initial claim was speculative and recommended that the IRS not proceed with further investigation of the target taxpayers. Unlike Lacey, all of this information was apparently included in the administrative record, and so the Court could grant summary judgment more easily.

In Keane, Judge Jones noted that the IRS may continue to run into problems where it rejects claims using “and/or” language in the determination letter. Here, the classifier rejected the claim because “the information provided was speculative and/or did not provide specific or credible information regarding tax underpayment or violations of internal revenue laws.” This is important, because under the Chenery doctrine, the Court may only review the IRS determination for the reasons that the IRS actually relied on in making its determination. See Lacey, 153 T.C. at *14 (citing Kasper v. Commissioner, 150 T.C. 8, 23-24 (2018)). Using “and/or” language makes the grounds for the IRS determination unclear. While Judge Jones notes that the record support both reasons here, other cases might be closer.

Judge Jones cites a memorandum opinion from Judge Gustafson, who raised a similar concern earlier this year. See Alber v. Commissioner, T.C. Memo. 2020-20. This aligns with his analogous view of the IRS’s practice in issuing Notices of Determination in CDP cases, where the IRS typically writes that “There was a balance due when the Notice of Intent to Levy was issued or when the NFTL filing was requested.” In a previous order (covered here), Judge Gustafson wondered whether someone at Appeals actually did verify that a balance due existed, given the lack of clarity in the notice.

What to distill from Lacey and these orders? First, the Tax Court can review an initial rejection from the Whistleblower Office—even if no proceeds are collected. Second, if an employee of the IRS operating division decides not to pursue collection after referral from the Whistleblower Office, that will generally be sufficient to resolve the case in favor of the IRS—though one might reasonably suspect a different result could lie if that classifier failed to meaningfully review the case, as potentially occurred in Lacey with the Whistleblower Office. Finally, if the administrative record provides multiple reasons for rejecting the claim in an “and/or” formulation, this could prove problematic for the IRS under Chenery if at least one reason isn’t supported in the administrative record.

Docket No. 722-19L, Jenkins v. C.I.R. (Order Here)

This short order from Judge Gale deals with a defective limited entry of appearance. Counsel attempted to file a motion to dismiss for Petitioners based on an electronically filed “limited” entry of appearance. However, the Tax Court’s previous administrative order authorizing limited entries of appearance only allowed her to do so on paper, and then only at the trial session itself. So, the Court struck the motion. Counsel found an easy remedy here, however, and simply entered an appearance normally, filed the motion to dismiss; the Court granted it days later.  

On May 29, the Court issued a new administrative order that authorizes the filing of a limited entry of appearance electronically, at any time during the pendency of a Tax Court case. It offers much more flexibility for practitioners to limit their representation to a prescribed proceeding. This includes the trial session itself, as did the previous order, but can also include motion hearings, pre-trial conferences, and other matters at anytime between the issuance of the Notice Setting Case for Trial until the adjournment of the trial session. Because the end of representation isn’t necessarily as clear-cut under this new order, the attorney must file a Notice of Completion at the end of the limited appearance; the Court is not required to approve the end of the representation.

Docket No. 18705-18S, Patten v. C.I.R. (Order Here)

This is the order that keeps a tax attorney up at night. It explains, in minute detail, the process by which an attorney missed the 90-day jurisdictional deadline to file a Tax Court petition in a deficiency case.

The Notice of Deficiency was dated June 22, 2018; the Petition was filed with the Tax Court on September 21, 2018: the 91st day after June 22. Apparently, Respondent’s counsel didn’t notice this in filing the Answer, but Judge Leyden’s chambers did. She issued an order to show cause, directing Respondent to provide the “postmarked U.S. Postal Service Form 3877 or other proof of mailing” regarding the notice of deficiency. After all, it’s not the date listed on the Notice of Deficiency that controls under the statute; it’s the date of mailing of the Notice of Deficiency. See I.R.C. § 6213(a).

Chief Counsel responded to the order and attached Form 3877 showing that the Notice was indeed mailed to Petitioner’s last known address by certified mail (along with two other addresses). The Notice sent to the last known address was returned, as was one of the other notices. But it looks like one notice was successfully delivered. (Of course, that’s irrelevant to the validity of the Notice itself, as Respondent established that the Notice was sent to the taxpayer’s last known address by certified mail. See I.R.C. § 6212.)

Respondent also showed that Petitioner, through his attorney, mailed the petition to the Court on September 19, 2018. As we know, the Court received it on September 21, 2018—one day late. Ordinarily, documents are “filed” when they are received—either by the IRS or the Tax Court.

So, can’t the mailbox rule under I.R.C. § 7502 save the taxpayer’s petition? Not here. Petitioner’s attorney, in his response to the order, acknowledged that the petition was mistakenly sent via FedEx Express, rather than FedEx Overnight due to an “office slipup”. While section 7502(f) allows taxpayers to use private delivery services, such as FedEx, UPS, or DHL, instead of the USPS, practitioners and petitioners alike must ensure that they are using a “designated delivery service.”

What’s a designated delivery service? Section 7502(f)(2) defines the type of services that the Secretary may designate, and Reg. § 301.7502-1(e)(2)(ii) describes the process of designating the service (i.e., publishing it in the Internal Revenue Bulletin). And in practice, the Secretary does so periodically—most recently in Notice 2016-30. The list also appears more accessibly on the IRS website.

So, does FedEx Express appear on this list of designated delivery services? No. Therefore, it can’t trigger the mailbox rule under section 7502. The petition is filed late, and the Tax Court has no jurisdiction to decide the case. Judge Leyden therefore dismisses the case—which involves liabilities for four separate tax years—for lack of jurisdiction.

The lesson for practitioners? Mail the petition so the Court receives it before the deadline. Otherwise, mail the petition via USPS certified mail. Train your office staff to only mail petitions to the Tax Court via USPS certified mail. Is there a good reason to ever use a private delivery service when mailing a Tax Court petition? I don’t see one, given the very real risks involved that bear out here. 

For the Second Time in About Five Years, the SG Decides Not to Take a Tax Equitable Tolling Case to SCOTUS

Just another short update on Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019), on which I blogged here.  In that opinion, the D.C. Circuit held that the 30-day deadline in section 7623(b)(4) in which to file a whistleblower award petition in the Tax Court is not jurisdictional and is subject to equitable tolling under recent non-tax Supreme Court case law.  The DOJ had initially sought en banc rehearing of the Myers opinion, contending that the opinion could not be reconciled with the opinion in Duggan v. Commissioner, 879 F.3d 1029 (9th Cir. 2018), on which I blogged hereDuggan held that the 30-day deadline in section 6330(d)(1) in which to file a Collection Due Process petition in the Tax Court is jurisdictional and not subject to equitable tolling.  Since the 2006 language of section 7623(b)(4) was rather obviously cribbed from the 2000-version language in section 6330(d)(1), I agree with the DOJ that the two opinions cannot be reconciled.

After the D.C. Circuit denied rehearing, the Solicitor General had to consider seeking certiorari in Myers.  Clearly, there was some struggle in the DOJ to figure out what to do, since the SG twice requested extensions of the time to file a cert. petition.  But, the last extension expired on March 2, and no further extension was sought or petition was filed by that date.  Thus, the D.C. Circuit’s opinion in Myers now controls all Tax Court whistleblower award cases under Golsen, since, under section 7482(b)(1), unlike most Tax Court cases, whistleblower award cases are only appealable to the D.C. Circuit.

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This is the second time in about five years that the DOJ, after losing a tax equitable tolling case and being unsuccessful in seeking en banc rehearing because of a conflict among the Circuits, has, in the end, decided not to seek cert.  The prior case was Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), on which I blogged hereVolpicelli held that the then-9-month (now 2-year) deadline in section 6532(c) in which to file a district court wrongful levy complaint is not jurisdictional and is subject to equitable tolling under recent non-tax Supreme Court case law.  Volpicelli is in conflict with several section 6532(c) opinions of other Circuits, including Becton Dickinson and Co. v. Wolckenhauer, 215 F.3d 340 (3d Cir. 2000), but all of the conflicting cases were decided before the new Supreme Court case law on jurisdiction began in 2004.

I am a little bummed out by the SG’s chickening out on seeking cert. in Myers, since in both Volpicelli and Myers, I wrote or co-wrote amicus briefs in the cases on behalf of tax clinics with which I had been then affiliated (Cardozo and Harvard, respectively).  And, more than the usual amicus, I was otherwise instrumental in pushing these cases forward as test cases.  I guess it is just my luck that any potential Supreme Court case I help generate gets passed on by the SG after much furor and ado below.  Given that I am retired and now just volunteering with the Harvard clinic, Myers was likely my last chance at getting to SCOTUS on an issue I cared strongly about.  But, maybe I should be like Yoda and sigh, “After all, there is another”.  In Boechler, P.C. v. Commissioner, Eight Circuit Docket No. 19-2003, the Eight Circuit has been asked to hold the section 6330(d)(1) filing deadline not jurisdictional and subject to equitable tolling.  Keith and I (on behalf of the Harvard clinic) are amicus there, as well.  Oral argument is expected shortly in Boechler, as the briefing is complete.

In a December post, I pointed out that the Tax Court had been holding back from deciding a number of whistleblower award cases pending the SG’s action regarding cert. in Myers.  See Tax Court orders in Aghadjanian v. Commissioner, Docket No. 9339-18W (dated 9/4/19 and 12/9/19); McCrory v. Commissioner, Docket No. 3443-18W (dated 9/4/19 and 12/6/19); Bond v. Commissioner, Docket No. 5690-19W (dated 10/8/19); Bond v. Commissioner, Docket No. 6267-19W (dated 10/30/19); Bond v. Commissioner, Docket No. 6982-19W (dated 11/5/19).  That has continued in other dockets.  See Tax Court orders in Berleth v. Commissioner, Docket No. 21414-18W (dated 1/22/20 and 2/2/20); Friedel v. Commissioner, Docket No. 11239-19W (dated 2/14/20); Damiani v. Commissioner, Docket No. 14914-19W (dated 2/18/20).

And, in the remand of Myers from the D.C. Circuit, we can all look forward to the Tax Court for the first time being confronted with deciding what constitutes substantive grounds for equitable tolling of a Tax Court filing deadline.  To decide this question, the Tax Court will have to borrow case law from other courts, including the Supreme Court, since the Tax Court has never before believed it had the power to grant equitable tolling.

Qui Tam Initiator Denied Right to Intervene in Criminal Case

In United States v. Wegeler, No. 17-1717 (3rd Cir. 2019) the Third Circuit refused to allow the person who brought a qui tam suit against the taxpayer to intervene in the taxpayer’s criminal tax case.  I would never have thought of having a third party participate in a criminal case.  So, the idea of making sure someone was convicted by becoming an intervenor in a criminal case caught my eye.  The outcome here does not surprise me from the perspective of granting an entrée into the criminal proceeding but, for reasons discussed below, does bother me if the outcome is no recovery for coming forward with the information.

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Before the whistleblower provisions created a statutory means of pursuing a monetary recovery for spilling the beans to the IRS, the qui tam provisions offered one way to do it.  Just as monetary awards for providing the IRS with information existed before and remain available to those who provide information to the IRS without going through the statutory provisions, qui tam suits remain an option.  The person with the information brings a suit against the third party for taking from the government and hopes that the government will intervene, take over the case, win the case and produce a recovery for the party who initiated the qui tam action.  Qui tam actions were never much of a path to recovery in the tax area, but they have existed as one path since the Civil War.

The Third Circuit had a reaction to the effort of the relator to intervene in the criminal prosecution similar to my reaction.  It explained:

the Supreme Court has observed, “in American jurisprudence at least, a private citizen lacks a judicially cognizable interest in the prosecution or non[-]prosecution of another.” Linda R.S. (“Linda”) v. Richard D., 410 U.S. 614, 619 (1973).

Jean Charte insists that she is the anomaly. Her case rests on the False Claims Act (“FCA”), 31 U.S.C. §§ 3729–3733 (2012), which is a statute that Congress enacted during the Civil War to stem fraud against the federal government. United States v. Bornstein, 423 U.S. 303, 309 (1976). The FCA includes a qui tam provision to encourage actions by private individuals — called relators — who are entitled to a portion of the amount recovered, subject to certain limitations. See § 3730(b), (d). In turn, a relator is required to provide the government with the information she intends to rely on so that the government can make an informed decision as to whether it should intervene. § 3730(b)(2). In the event that the government elects to pursue what is ultimately its claim through an “alternate remedy,” the statute provides that the relator retains the same rights she would have had in the FCA action. § 3730(c)(5).

This case started with Ms. Charte providing information about Mr. Wegeler alleging that he had defrauded the Education Department.  After initiation the qui tam action, she provided all of the information to the DOE required by the statute.  The government determined that Mr. Wegeler’s actions were so egregious that they required criminal prosecution rather than continuation of the FCA action.  The government succeeded in the prosecution and also obtained a judgment for $1.5 million in restitution.  Because it went the criminal route and because it obtained a plea agreement and a restitution order by going that route, the government did not pick up the FCA case. Ms. Charte thus faced the prospect of receiving nothing for having uncovered the wrongdoing and initiating the action that led to the prosecution.  To avoid that outcome and after learning of the plea agreement, Ms. Charte sought to intervene in the criminal case.

The district court denied her motion to intervene.  The Third Circuit stated:

Her appeal to us thus presents a question of first impression for our Court: whether a criminal proceeding constitutes an “alternate remedy” to a civil qui tam action under the FCA, entitling a relator to intervene in the criminal action and recover a share of the proceeds pursuant to § 3730(c)(5). The

Third Circuit denies Ms. Charte’s right to intervene and states that she can pursue her monetary judgement by continuing the FCA case on her own.  By this point, those few of you still reading this post may be wondering how a qui tam action involving the defrauding of DOE has anything to do with tax.  Turns out the government decided to go after Wegeler for tax evasion rather than for false billing of DOE.  The opinion does not make clear if the decision to pursue tax evasion stemmed from the ability to obtain a tax conviction easier than a conviction for false billing practices, but since the time of Al Capone, tax has served as a back-up for all sectors of the government, as proving tax fraud sometimes comes easier than other criminal provisions.

Ms. Charte probably did not realize she could have made a whistleblower referral to the IRS when, as an employee of a school run by Wegeler, she uncovered false billing.  Her focus was on telling the people who were harmed by the false billing.

The Third Circuit discusses the FCA proceedings and other matters related to her efforts that have nothing to do with tax.  I will not take up more space discussing a procedure that will have little overlap with anything most of our readers do, but there does seem to be one lesson here for parties bringing a qui tam or similar action regarding the defrauding of the government.  That lesson could be that at the same time they bring the qui tam action they should make a whistleblower referral to the IRS.  Since no one knows when the tax code might be used to prosecute someone for fraudulent activity in a non-tax area nor if the information the relator uncovered and brought to light will result in a tax prosecution, maybe it’s best to hedge your bets and bring the IRS in at the beginning.  It could also happen in many cases like the Wegeler case that the person defrauding one part of the government is also cheating on the IRS.  I don’t know enough about the private pursuit of remedies for uncovering fraud to pretend that I am an expert, but it appears that filing a whistleblower document with the IRS could not have hurt and could have resulted in an alternative method for recovering a reward.

If Ms. Charte does not receive any award here, it seems that the government is, in part, the loser because it has benefited from information without encouraging others with similar information to come forward.  Seems like the government should look for a way to reward Ms. Charte and not to cut off rights.  It took courage and effort to come forward and to initiate the qui tam proceeding.  The information seems to obviously have been valuable.  The relator deserves some recognition for that effort.  

D.C. Circuit Denies DOJ En Banc Rehearing Petition in Myers Whistleblower Case

Just a short update:  In Myers v. Commissioner, 928 F.3d 1025 (D.C. Cir. 2019), on which I blogged here, the majority of a 3-judge panel held that the 30-day deadline in section 7623(b)(4) to file a whistleblower award petition in the Tax Court is not jurisdictional and is subject to equitable tolling.  In a petition for en banc rehearing in Myers, on which I blogged here, the DOJ argued that not only was the panel wrong, but it had set up a clear conflict with the Ninth Circuit in Duggan v. Commissioner, 879 F.3d 1029 (9th Cir., 2018).  In Duggan, the Ninth Circuit held that the very-similarly-worded 30-day deadline in section 6330(d)(1) to file a Collection Due Process petition in the Tax Court is jurisdictional and not subject to equitable tolling.  On October 4, 2019, the D.C. Circuit issued an order denying the DOJ’s petition for en banc rehearing.  In the order, the court noted that none of the 11 D.C. Circuit judges (plus Senior Judge Ginsburg, who wrote the opinion) requested a vote on the petition for en banc rehearing.  Thus, that means that even dissenting Judge Henderson did not ask for a vote on the petition. 

Now, the Solicitor General will have to decide how upset the government is and whether to file a petition for certiorari with the Supreme Court.  Will the apparent indifference of all of the judges of the D.C. Circuit to reviewing the matter en banc suggest to the Solicitor General that maybe a majority of the Supreme Court will also think the Myers opinion is correct?