Dean Zerbe Adds Insights to Whistleblower “Collected Proceeds” Tax Court Case

On August 4th, I wrote about the Tax Court’s second holding in Whistleblower 21276-13W v. Commissioner, and how the Court held that “collected proceeds” included criminal fines and civil forfeitures.   That post can be found here.  In the post, we noted that Dean Zerbe was the attorney on the prior case who successfully obtained the whistleblower award, and we assumed he was the lead attorney on this case, but the attorney of record was sealed.

Dean was one of the primary architects of the whistleblower statute, and one of the leading practitioners in this area, so it is not surprising to see him attached to these important cases.  Dean reached out to me last week and confirmed he was the lead attorney on this case also.  He also provided some feedback on the post and some of the issues we highlighted.  I’ve recreated some of Dean’s insightful comments below.  It probably goes without saying, any errors and coarse language are assuredly mine .


I will not recreate my prior post, but will add a few excerpts to provide context to Dean’s comments.  The key issue was:

Under Section 7623(b), certain whistleblowers are entitled to mandatory awards if certain requirements are met.  That amount can be between 15% and 30% of the “collected proceeds” under (b)(1), which has a parenthetical indicating that is “(including penalties, interest, additions to tax, and additional amounts),” and the sentence further states these amounts can be “resulting from the action (including any related actions) or from any settlement in response to such action.”

As stated above, the Service took the position collected proceeds did not include criminal penalties and civil forfeitures.  The Service based this on the claim that Section 7623 should only apply to proceeds assessed and collected under the federal tax laws found in Title 26 of the United States Code.  As the fines and forfeitures here were imposed under Chapter 18, they could then not be “collected proceeds” subject to the statute; unlike the restitution, which as per 2010 law can be assessed and collected in the same manner as tax.

The Court held “internal revenue laws” were not simply those under Title 26, and included the fines and forfeitures.  This implicates FBAR penalties also, although not explicitly stated in the holding.  Dean’s thoughts on the holding generally were as follows:

I read  the case as the Court seeking to get rid of any shadows or dark corners about what is included in “collected proceeds” and not wanting to see this litigated again and again (there are a lot of these cases in the pipeline).  [My impression] is the Tax Court will not engage in hair splitting.  See page 26, “In sum, we herein hold that the phrase “collected proceeds” is sweeping in scope and is not limited to amounts assessed and collected under Title 26.”    And again on page 29, “We have already explained that ‘collected proceeds’ is a broadly defined term:  It encompasses ‘the total amount brought in’ by the Government.”   And then again, of course, the language in first paragraph of page 32.  There is nowhere to hide with those statements.

I think one of the more interesting points in this opinion (which deserves a lot of rereading) is on page 30, where the Court correctly states that the “forfeitures resulted from an administrative action with respect to the laundering of proceeds, which in turn, arose from a conspiracy to violate Section 7601 and 7206…”   Encompassing, properly, a broad linkage and again speaks to FBAR.

As to FBAR, Dean stated:

[I]t seems clear that FBAR [penalties are] encompassed by the Court’s sweeping ruling (particularly as [the holding]  fits with the discussion in the previous Section 7623(b)(5) case, as well as the reference in footnote 15 in this case to Hom – and citing that FBAR is “tax administration”).

Our readers and tax procedure enthusiasts are likely familiar with Mr. Hom.  His cases have graced our pages somewhat frequently, most recently in late July with the Ninth Circuit holding online gambling site accounts were not subject to FBAR disclosure (well done Joe DiRuzzo).  Les had a brief write up on that found here. The footnote Dean references cites to a different Hom case in the Ninth Circuit from this year, and the note states:

Ours is not the only court to note that tax laws and related laws may be found beyond those codified in title 26. The District Court for the Northern District of California in Hom v. United States, 2013 WL 5442960 … aff’d, … 2016 WL 1161577 (9th Cir. Mar. 24, 2016), stated: “[T]he issue here is whether [31 U.S.C.] Section 5314 is either an internal revenue law or related statute (either designation would make the disclosure [of taxpayer information under sec. 6103] permissible). The United States argues that [31 U.S.C.] Section 5314 is a ‘related statute’ under Section 6103 (Dkt. No. 13 at 6). This is correct. Congress intended for [31 U.S.C.] Section 5314 to fall under ‘tax administration.’”

Hammering home that FBAR penalties are likely included in “collected proceeds”.

Dean also addressed the Chevron comment from my post regarding the regulations that were not before the Tax Court case.  I highlighted (because Les pointed it out to me) that the Tax Court’s language was akin to language used when tossing a regulation under Chevron.  Dean agreed, and provided additional insight:

The language used by the Tax Court – plain language and enforce the terms – is, as you know, right in step with the language we see from Courts when they are rejecting agency regulations under Chevron.    While the Regulations are not at issue here – see footnote 9 – it is difficult to imagine the Regulations withstanding a challenge given this holding.  However, the real hope is that the administration will not appeal the decision and seize the ruling as a chance to make the correct policy decision (as you note) and embrace the commonsense decision by the Court on defining collected proceeds broadly.

Footnote 9, for those of you interested, states both parties agree the regulations are not at issue, as the decision regarding the award was rendered prior to the effective date of the regulations.

Many thanks to Dean for his comments on the case, and congratulations on a great result.

Tax Court Decision – Good News For Whistleblowers

Today we are pleased to welcome first time guest poster Dean Zerbe, who is a nationally known expert regarding tax whistleblower actions.  Dean is the national managing director of the Washington DC office of the Alliant Group, the senior policy analyst for the National Whistleblowers Center, and a partner in ZFF&J, his law firm specializing in tax controversy and whistleblower actions.  Dean was also the primary architect of the whistleblower statute while Senior Counsel and Tax Counsel to the Chairman of the Senate Finance Committee, Senator Grassley, and represented Bradley Birkenfeld in his whistleblower claim involving UBS – the largest tax whistleblower case  in US history.  Mr. Zerbe discussed this case and other aspects of the whistleblower statute at the 2013 Villanova Law School Shachoy  Symposium on tax administration, where he was enlightening and entertaining.  In this post, Dean discusses his recent whistleblower case decided by the Tax Court, where the Court found the IRS incorrectly claimed the whistleblower’s information had not led to the collection of tax.  Mr. Zerbe highlights the importance of the Tax Court and its de novo review of whistleblower cases in this discussion of a very important holding. Steve

In a major opinion — 144 TC 15 (Whistleblower 21276-13W v. IRS), the Tax Court brushed aside IRS arguments that tax whistleblowers must first file a Form 211 with the IRS whistleblower office to be eligible for a tax whistleblower award under Section 7623(b).

As lead counsel for the whistleblowers in this case, there are a number of critical points for whistleblowers and practitioners to understand from this case — the first tax whistleblower case that was subject to an evidentiary trial with attorneys that has been held by the Tax Court.  I apologize that in fast reading and even faster writing – I may not get or capture or express all nuances or subtleties – but here is a first take on this important opinion.

First, the IRS initially stated to the two tax whistleblowers (husband and wife) that they were not receiving an award because the information they provided did not lead to the collection of any proceeds (see page 17 of the opinion).  Thanks to discovery – this was proven to be completely and wholly inaccurate.  In fact, the government agents stated that “but for” the whistleblowers the case against the taxpayer would not have happened – that the whistleblowers work was “essential.” See page 14 of the opinion.

For whistleblowers getting communication from the IRS whistleblower office about their case – there will now be an understandable skepticism about the accuracy of those statements.   This decision and the actions of the IRS in this case are not going to make administration of the IRS whistleblower program easier – and could have easily been prevented by the IRS.

Second, the case underscores the importance of providing for de novo review of whistleblower cases by the Tax Court (an issue that the Tax Court here sidestepped but is an issue currently being considered by the Tax Court).  To allow for only a review for abuse of discretion based on the administrative file – as has been argued by the IRS Chief Counsel’s office – would completely undermine the intent of Congress of protecting whistleblower’s rights.   In this case – the whistleblowers would have been shown the door and been denied an award had it been subject to only abuse of discretion and the administrative file.


The administrative file in this case – as the Tax Court was at pains to point out (see page 4 of the opinion) – consisted basically of the Form 211’s filed by the whistleblower and the IRS correspondence with the whistleblower.  In short – plenty of nothing.  That administrative file is created and controlled by the IRS.  The tax whistleblower is in a different position than a taxpayer in tax court – the whistleblower has no independent or outside information (in the vast majority of cases) of what has happened in an examination or audit of the taxpayer.  To allow for only a review of abuse of discretion based on the administrative file created by the IRS in the case of a tax whistleblower – is to effectively gut the whistleblower program.

This decision by Judge Jacobs gives a detailed factual road map of why whistleblowers must be allowed de novo review and discovery.  Otherwise, the ultimate Congressional goals of the tax whistleblower law are frustrated.  (A brief sidenote:  previous to Section 7623(b) being created in 2006 – whistleblowers could go to Federal Claims Court to have their Section 7623(a) award claim reviewed – and the review was essentially meaningless with the decisions being a parade of tears for whistleblowers.  The Federal Claims Court cases were subject to a standard of abuse of discretion and it was the extremely rare day that a whistleblower got good news from the Federal Claims Court – key reasons why the authority to review whistleblower cases under 7623(b) was essentially transferred to the Tax Court with its tradition of de novo review and its expertise in the tax laws as well as the IRS).

The Jacobs decision also reminds us all of the enormous benefit of tax whistleblowers in tax administration.  The decision showcases something that many of us know already – that in the area of criminal investigations the IRS will often work hand-in-glove with the whistleblower.  The IRS civil division still seems to treat working with whistleblowers as a foreign land (and no, just debriefing the whistleblower for an hour in a pro forma setting is not “working with the whistleblower”).   With the IRS having to face the challenges of a reduced work force – it’s past time for the civil divisions to learn from CI and start fully utilizing whistleblowers and their lawyers (as was intended on the law – modeled after the False Claims Act success) to assist in examinations and audit.  Leadership has to come from the top of the IRS on this – not just words on a memo – there needs to be a hard push to break the culture.

Underscoring the Court’s decision is a commonsense effort to recognize Congressional intent and allow the whistleblower program to work (stating that the statute shouldn’t be interpreted to lead to an absurd result – p. 24 of opinion).  The Court saw that requiring a Form 211 prior to filing would harm the effort of getting information to agents (noting that the IRS agent testified that he would not suspend his investigation to permit whistleblowers to file forms with the whistleblowers office).   One of the more telling statements from Judge Jacobs is his comments that the 2006 changes to the law were based (in part) on improving the process by which awards were issued –the process was problematic (page 23 of the opinion – emphasis added).  It is certainly the case – as the author of the 2006 laws – that providing greater protections for the rights of tax whistleblowers to awards and ensuring proper and fair processing of awards was critical to the reforms.     There is much in Judge Jacob’s writing that will, I predict, give much comfort to tax whistleblowers for years to come.

Overall – a good day for tax whistleblowers.  My hope is that this will start to put to bed this and other nonsense arguments being made in tax court against whistleblowers.  Finally, the Court gives us with the facts a good reminder of the importance and benefit of the whistleblower program – and the risks that whistleblowers often face.   Once again, the Tax Court shows that it understands its role provided by Congress to serve as a protector of the whistleblower’s rights.