Shades of Graev and Whistleblower Awards: Designated Orders 6/10/19 to 6/14/19

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While we come to another week for designated orders, this week only had a set of three released on the same day.  Two of the designated orders are based on bench opinions from Judge Carluzzo while another order comes from Judge Gustafson.  I will begin with Judge Carluzzo’s bench opinions, which touch on Graev regarding supervisor approval.  At the end, Judge Gustafson’s order delves into IRS approvals of a different sort, this time for whistleblower awards.

Taxpayer Substantations and Supervisor Approval for More Graev Considerations

Docket No. 13675-18S, Michael Hanna & Christina Hanna v. C.I.R., Order available here.

The first order does not stand out at the beginning as Mr. Hanna testified regarding his medical expenses and employee business expenses.  He provided no other proof regarding his medical expenses, vehicle expense deduction, or purchases of tools and supplies.  Since there was no substantiation, the judge sustained those denied deductions.

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Docket No. 11648-18S, David L. McCrea & Denise McCrea v. C.I.R., Order available here.

The second order also does not seem terribly noteworthy.  Ms. McCrea ran a business as a wholesale seller of herbal medical products.  At first, the McCreas disagreed with an IRS assessment of their beginning inventory and purchases, but came to accept the IRS adjustments. 

The McCreas still disagreed with the IRS regarding their ending inventory.  The McCreas want the value to be the amount on their Schedule C for 2014.  The IRS, however, provided a different exhibit received by the IRS revenue agent during the course of examination.  The document is a physical inventory, which the petitioners claim is taken at the end of each year.  The results are provided each year on a document to their return preparer, who claimed he used the document to prepare their tax return, but did not supply the document to the IRS.  In fact, it seems a mystery for the petitioners who provided the document to the IRS.  Even though the parties’ exhibits are similar, there are items omitted from the Schedule C document that are on the IRS exhibit.  The difference between the two values is $21,112.

Judge Carluzzo finds a compromise.  The ending value on the Schedule C shall be supplemented with the items on the IRS exhibit that are not shown on the Schedule C.  The result needs to be calculated and will either match the Schedule C or a lesser amount.

The likely reason both orders were designated by Judge Carluzzo comes from an examination in both cases of 6662(a) penalties.  The evidence in each case showed that a supervisor approved imposition of a penalty on a date that preceded the issuance of the notice of deficiency.  The petitioners for each case were first formally advised regarding the imposition of the penalty on a date that preceded issuance of the notes.  As a result, the IRS imposition of the section 6662(a) penalties were rejected.

Takeaway:  Judge Carluzzo is reviewing 6662(a) penalties and will reject those penalties if they do not line up correctly in the timeline.

Whistleblower Claim Remanded to Whistleblower Office for Further Consideration

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

In a whistleblower case, one of the main questions under IRC section 7623(b) is “whether the IRS collected proceeds as the result of an administrative or judicial action using the whistleblower’s information.”

Petitioner Loys Vallee provided information to the Whistleblower Office, but he was denied a claim by the IRS for a whistleblower award.  At issue before the Tax Court is the completeness of the administrative record.  Mr. Vallee filed a motion to compel production of documents in 2017 that led to what the IRS contends is the complete administrative record in 2018.  The parties filed their responses concerning the completeness of the record and it is now before the judge to make a decision.

The debate concerns the number of individuals who received the information and whether they forwarded that information to other IRS employees.  Partially, this debate is supported by the fact that not all the declarations stated that they did not forward Mr. Vallee’s filed information to any other group or person than those stated in the declaration.  Mr. Vallee provides his own list of individuals who had access to the information he provided.

Mr. Vallee makes statements concerning Corporation D, Related A, and Related B in his submissions to the Court.  Corporate D and Related A consolidated and he argued the consolidation allowed Corporate D to use Related A’s accumulated tax credits to satisfy its own tax liability in a method known as refund netting.  The Tax Court notes that Mr. Vallee did not use the term refund netting in his Form 211 or the lengthy attachments so cannot advance a new claim or try to cure deficiencies in previous claims.

The Court reviews the information from the IRS and notes there is an issue with what they provided.  The IRS states that the four individuals they cite that received the information followed the protocol of the Internal Revenue Manual (IRM) and kept the petitioner’s information confidential.  They have provided a declaration for one individual named and state there was no need to follow up with the other three individuals since her form provides feedback about the division.  Judge Gustafson disagrees, stating that while the actions discussed indicate the individuals followed IRM provisions, the IRS needs to provide affidavits or declarations concerning the other three individuals.  The declaration in question provided cannot cover personal knowledge about the actions of the other three individuals.

The judge says that there are still two unanswered questions regarding Mr. Vallee’s entitlement to a whistleblower award.  Who received the Form 211 information and what did they do with it?  Was that information used in an examination that resulted in the collection of proceeds?  Even though Mr. Vallee argues against remand, the judge shows that it is proper in a whistleblower award determination for remand regarding an insufficient administrative record.

Ultimately, the case is remanded to the Whistleblower Office for further consideration of those two questions and development of the administrative record.  The Whistleblower Office is to issue a supplemental determination with an explanation of the determination regarding the two questions.  They are to certify additions to the administrative record and that what has been provided constitutes the entire administrative record.  The judge ends by requiring the parties to provide (joint or separate) timetables for further administrative proceedings.

Takeaway:  There have been several looks at whistleblower claims in designated order blog posts in Procedurally Taxing.  While I do not know how much the IRS approves whistleblower claims, we get to review the denials.  From this vantage point, it seems like the IRS will fight the claims as much as possible.  The IRS basically attacks the claims on either of two fronts: (1) no action was taken by the IRS against anyone mentioned in the information provided or (2) any actions taken by the IRS concerning the individuals or businesses mentioned in the information provided by the whistleblower was based on other information and not based on the information provided by the whistleblower.

Mr. Vallee is fighting in Tax Court concerning the completeness of the administrative record and Judge Gustafson supports that fight by requiring the IRS to update who received that information and what actions they took.  Ultimately, the answer to be settled is whether the IRS took action against the businesses in question based on Mr. Vallee’s submission, settling whether he truly has a whistleblower claim.

William Schmidt About William Schmidt

William Schmidt joined Kansas Legal Services in 2016 to manage cases for the Kansas Low Income Taxpayer Clinic and became Clinic Director January 2017. Previously, he worked on pro bono tax cases for the Kansas City Tax Clinic, the Legal Aid of Western Missouri Low Income Taxpayer Clinic and the Kansas Low Income Taxpayer Clinic. He records and edits a tax podcast called Tax Justice Warriors.

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