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?

A Pair of Decisions Seeking Anonymity

The cases of John Doe v. United States, No. 1:19-cv-00720 (Ct. Fed. Cl. 7-29-2019) and In re: Sealed Case, No. 17-1212 (D.C. Cir. 7-26-2019) present situations in which the plaintiffs sought awards for information provided to the IRS. They come from different backgrounds to make their requests both in how the information was gathered and how often they provided information to the IRS. In one case the “old” law applied and in the other the new law governed. One plaintiff provided information from public sources and provided information on many different taxpayers. The other plaintiff provided information regarding his employer and continued to work at the employer at the request of the IRS. In one situation the court granted the protection of anonymity while in the other the court remanded the case because it found that the Tax Court considered impermissible factors in denying protection.

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Joe Doe came to the IRS with information and the IRS requested that he keep working for the company so he could continue providing information. He came forward in 2000 prior to the current whistleblower statute. Before the passage of the specific statute providing relief, the IRS had the authority to grant awards but the process was governed by administrative rules developed by the IRS over decades. He alleged that disclosure of his identity would put his or his family’s life at risk. The IRS argued that he did not make an adequate showing of the risk.

The IRS typically opposes motions to remain anonymous because of the general rule that court proceedings should be open. It may not always be vigorous in its arguments but it represents the normative position of openness of the system. In many ways the IRS is a bystander with no particular fight on the issue of anonymity and often some sympathy for the person providing the information. In some cases the IRS perceives that anonymity will make its defense more difficult.

In this case the court applied the five factor test found in the case of Does I through XIII v. Advanced Textile Corp., 214 F.3d 1058, 1067 (9th Cir. 2000). It focused on three of the tests: 1) plaintiffs interest in proceeding anonymously; 2) prejudice to the government and 3) the public interest.

Here, the court found that he made a well-founded interest in preserving his anonymity because of a reasonable fear of physical or economic harm. The court found that allowing the plaintiff to proceed anonymously would not hamstring the government’s ability to defend itself. Finally, the release of redacted documents can balance the public’s need for access with the plaintiff’s privacy concerns.

The John Doe case presents a fairly classic case of a request for protection and the court’s determination that he is entitled to protection. In contrast, the Sealed case sets up a much more difficult case with a much less sympathetic petitioner. I found myself in agreement with the Tax Court’s denial of anonymity. The decision here seems to open the door for anonymity much wider than I would open it.

The D.C. Circuit, in reversing the Tax Court, acknowledged that the petitioner in this case had no connection to the company he suggested to the IRS. In fact, the petitioner, who seemed to be trying to make a living or at least to supplement his income, searched public records for anomalies suggesting underreporting by certain companies. The IRS argued that among other reasons it wanted his name public it felt that the public had the right to know about serial filers of whistleblower claims.

The D.C. Circuit cited the Advanced Textile case but relied primarily on United States v. Microsoft, 56 F.3d 1448 (D.C. Cir. 1995) which makes perfect sense because the decision comes from its circuit. The court stated that the appropriate way to determine whether a litigant may proceed anonymously is “to balance the litigant’s legitimate interest in anonymity against countervailing interests in full disclosure.”

The presumption favors disclosure. Applying the balancing test the D.C. Circuit determines that the Tax Court abused its discretion by focusing on the serial filer issue. It found this focus improper. It also found the Tax Court failed to consider relevant factors in favor of non-disclosure and discounted the possible harm to the informant. The court remands the case for the Tax Court to properly run through the factors in the tests created by prior case law.

I anticipate that the Tax Court will continue to deny the request to proceed anonymously here. In any event the D.C. Circuit has stopped the use of serial filing of whistleblower request as a basis for always disclosing the identity of the informant. Good news for persons engaged in regularly seeking awards as a business model. This gives a fighting chance for these persons to achieve anonymity. That seems appropriate but when a party blows the whistle on an entity with which it has little or no contact, the need for anonymity will be more difficult, though certainly not impossible to demonstrate. The court must continue to run through the tests which properly balance the needs of the parties and not short circuit the test because the person providing the information does so on a regular basis.

Whistleblower Jurisdiction: Is Anyone Listening? – Designated Orders: July 22 – 26, 2019

This week featured three orders from Judge Armen, along with another brief order from Judge Kerrigan that extended the time for responding to a discovery request.

These will be among the last orders from Judge Armen. The Tax Court recently announced that Judge Armen retired from the bench, effective August 31, 2019. I’ve appeared before Judge Armen numerous times for trial sessions in Chicago. In those sessions, I always found him to be fair, thorough, and thoughtful. He always took time to walk pro se petitioners through the Court’s procedures, carefully listened to them, and explained the applicable law in an approachable manner. His presence on the bench will, indeed, be missed.

His first order is relatively unremarkable, save the exacting detail that Judge Armen uses to walk a pro se taxpayer through a relative simple issue (unsurprising, given his similar willingness to do so at trial sessions). Petitioner had contended that including unemployment income in gross income is “cruel, short-sighted, and runs afoul any theory of economic success.” That may well be, but Judge Armen painstakingly runs through the Code to demonstrate that unemployment income is specifically included in gross income under § 85 (and is otherwise generally includable under § 61(a)).

The other two orders are in pro se Whistleblower cases. Both grant summary judgment to the government because there was no administrative or judicial action to collect unpaid tax or otherwise enforce the internal revenue laws. For the Tax Court to obtain jurisdiction under IRC § 7623(b)(4), the IRS must commence such an action.

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Docket No. 17586-18W, Hammash v. C.I.R. (Order Here)

Petitioner submitted a Form 211, Application for Award for Original Information, with the IRS Whistleblower office, alleging that a certain business underreported taxes, and that the Petitioner had previously reported the business to the “IRS in California”. (One wonders whether Petitioner means an IRS office in California, or the California Franchise Tax Board; my clients often refer to the Indiana Department of Revenue as the “Indiana IRS”.) But, there wasn’t any further explanation or supporting documentation of the alleged malfeasance.

According to Respondent’s exhibits, the Whistleblower Office denied an award and didn’t otherwise refer the case for further investigation. The Petitioner timely filed a petition; from a review of the docket, it seems he may been represented by a POA at the administrative level, as a motion to proceed anonymously was originally filed by someone not admitted to practice before the Tax Court. The Court struck it from the record soon thereafter.

In any case, the particulars don’t really matter here. The limited information provided in the Form 211 isn’t what dooms Petitioner’s case; rather, it’s that the IRS never initiated an administrative or judicial proceeding to collect tax from the allegedly delinquent taxpayer.

For the Tax Court, this is a jurisdictional requirement under IRC § 7623(b)(4). The Tax Court is authorized to review a “determination regarding an award under [§ 7623(b)(1)-(3)]. IRC § 7623(a)(1), (2), and (3) provide for various awards. Paragraph (1) authorizes an award “[i]f the Secretary proceeds with any administrative or judicial action” related to detecting underpayments of tax or detecting and bringing to trial and punishment criminal tax violators. See IRC § 7623(a), (b)(1); see also Cohen v. Commissioner,139 T.C. 299, 302 (2012). Paragraph (2) and (3) awards are likewise premised upon an “action described in paragraph (1)”. Moreover, the government must collect some unpaid tax from the target taxpayer pursuant to such action, for the Tax Court to obtain jurisdiction.  

Neither an investigative action nor collection of proceeds occurred here. Petitioner didn’t provide any evidence to the contrary in the Tax Court proceeding; indeed, after the Tax Court struck his representative’s motion to proceed anonymously, he seemed to not participate at all. Therefore, summary judgment was appropriate and the Court sustained Respondent’s whistleblower determination.

Docket  No. 19512-18W, Elliott v. C.I.R. (Order Here)

This whistleblower claim contained substantially more detail than Hammash, but nevertheless Petitioner finds herself in the same situation.

Petitioner filed a Form 211, which according to the Court, alleged “a brokerage services firm . . . that was custodian for a certain qualified retirement plan was mishandling former plan participants’ accounts.” Unlike in Hammash, where it appears no outside review occurred, here the Whistleblower Office did forward the claim to a Revenue Agent at the IRS Tax Exempt and Government Entities division. The RA sent the claim back to the Whistleblower Office, noting that TEGE does not investigate custodians, but rather investigates qualified plans themselves.

The Whistleblower Office didn’t send the claim on to any other division of the IRS. Instead, it issued a denial letter essentially identical to the one in Hammash, noting that the information provided was speculative, lacked credibility, and/or lacked specificity.

Petitioner argued that her information was, in fact, credible and specific, and asked the Court to compel Respondent to investigate the claim.

While this case involved a much more engaged Petitioner with facially troubling allegations, one fact remains: it’s undisputed that the IRS did not conduct an administrative or judicial action to recoup any unpaid tax or otherwise prosecute violations of the internal revenue laws. No proceeds were collected either. Further, the Court cannot, under the limited jurisdiction provided in IRC § 7623, determine the proper tax liability of the target taxpayer or require the IRS to initiate an investigation. See Cooper v. Commissioner, 136 T.C. 597, 600 (2011).

Thus, the Court granted Respondent’s motion for summary judgment and sustained Respondent’s administrative denial of the whistleblower award claim.

One small nitpick: here and in Hammash, the Court determined that it lacked jurisdiction. Yet it “sustained” Respondent’s administrative determination. While it arrives at the same conclusion, I don’t believe that’s the proper result under Cohen or Cooper. Under those cases, the Court lacks the power to sustain or overturn the determination to deny the claim; it should therefore dismiss the case for lack of jurisdiction, rather than sustaining Respondent’s determination.

DOJ Seeks En Banc Rehearing of D.C. Cir. Myers Whistleblower Opinion

On July 2, 2019, the D.C. Circuit held that the 30-day filing deadline for bringing a Tax Court whistleblower award review suit at section 7623(b)(4) is not jurisdictional and is subject to equitable tolling. Myers v. Commissioner, 928 F.3d 1025. I blogged on the opinion here. Upset at its first loss in one of the cases in which Keith and I and the Harvard clinic have been making this argument as to various Tax Court filing deadlines (including in our amicus brief in Myers), the DOJ, on September 12, 2019, petitioned the D.C. Circuit to rehear the case en banc as to both the jurisdiction and equitable tolling rulings.

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I won’t repeat in detail from my prior post how the D.C. Circuit reasoned that the filing deadline is not jurisdictional under recent Supreme Court non-tax case law. But, basically, the court held that, while the Code section clearly gave the Tax Court jurisdiction to hear such cases, the Code section was not sufficiently clear, by using the words “such matter” in a parenthetical, that Congress also wanted the filing deadline to be jurisdictional. Absent such a “clear statement”, the Supreme Court’s current position is that filing deadlines are not jurisdictional. In the DOJ’s rehearing petition, the DOJ basically repeats what it argued before – that “such matter” necessarily implies the filing deadline as well as the subject matter of the case.

When the D.C. Circuit ruled (2 to 1) against the DOJ on this argument, the court stated that it recognized how its ruling was “in some tension with” both Duggan v. Commissioner, 879 F.3d 1029 (9th Cir. 2018), and Guralnik v. Commissioner, 146 T.C. 230 (2016), each of which held that the section 6330(d)(1) Collection Due Process Tax Court filing deadline is jurisdictional and not subject to equitable tolling on language virtually identical to that in section 7623(b)(4).

My favorite passage from the rehearing petition is one with which I wholly agree:

The majority recognized that its holding “is in some tension” with that of the Ninth Circuit regarding “a similarly worded provision of the Internal Revenue Code, 26 U.S.C. § 6330(d)(1).” (Add.20.) But that is an understatement (to say the least). It is simply not possible to reconcile the decision in this case with Duggan.

The petition makes no new arguments, with the exception of (in the equitable tolling section) adding information (not previously given to the court) about how many whistleblower award claims are received each year — over 10,000. The DOJ argues that there would be huge administrative problems if equitable tolling were allowed because a lot of those claimants (including ones whose claims were long ago turned down) could now file late in the Tax Court. That, of course, is pure speculation. What the DOJ doesn’t mention is that, up to now, there have only been about 100 whistleblower award cases under 7623(b)(4) pending in the Tax Court at a time. This latter figure appeared in the appellant’s brief from a 2017 report of the whistleblower office.

In its rehearing petition, the DOJ also raised the specter that some awards may already have been given to one whistleblower, but if late Tax Court petitions are allowed, equitable tolling could lead to duplicate awards. I seriously doubt that is a real concern. Equitable tolling is a matter of equity. If a court saw that by a petitioner waiting so long, the IRS could now be in a situation to have to pay two awards, no doubt that is an equitable fact the court would consider in deciding whether tolling should be allowed.

The DOJ also makes an argument that it did not make before to the panel below — that there should be no equitable tolling because there is a cottage industry of lawyers that brings whistleblower award suits. In Sebelius v. Auburn Regional Medical Center, 568 U.S. 145 (2013), the Supreme Court held that there should be no equitable tolling because the Medicare concerns who were seeking reimbursement decision reviews before administrative boards were sophisticated companies who elected continuously to participate in the Medicare system and were well-represented by counsel. The Myers court pointed out that, by contrast, the Tax Court generally is a place where petitions are filed pro se by people who have never filed before — like Myers himself. So, it distinguished Auburn.

It troubles me that the DOJ did not give statistics to support its argument on how many whistleblowers (percentagewise) file pro se and represented Tax Court petitions. In any event, whistleblowers can’t be said to have elected to participate in the award system. Mr. Myers simply felt that his former employer had misclassified both him and other similar workers as independent contractors and suggested an audit.

Observations

I am told by people who do appellate work full time that the D.C. Circuit is stingy with grants of rehearings en banc. So, I am not expecting the petition to be granted. Then, the question will be whether the Solicitor General seeks cert.

This may be a similar situation to when, as an amicus, I helped persuade the Ninth Circuit in Volpicelli v. United States, 777 F.3d 1042 (9th Cir. 2015), that the filing deadline in section 6532(c) for a district court wrongful levy suit is not jurisdictional and is subject to equitable tolling under recent Supreme Court case law. The DOJ also filed a petition for a rehearing en banc with the Ninth Circuit – pointing to a clear conflict with opinions of other Circuits holding the filing deadline jurisdictional and not subject to equitable tolling (though those opinions predated the 2004 change in Supreme Court case law on jurisdiction). The Ninth Circuit did not grant the en banc rehearing. Then, the DOJ did not pursue the matter by filing a cert. petition.

But, I would be happy to see the jurisdiction and equitable tolling issues elevated to the Supreme Court. So, I am not hoping for a similar SG abandonment of the Myers case. In the rehearing petition, the DOJ argues that this is a matter of exceptional importance to the IRS. But, then, people seeking rehearing always say that.

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.