Keith and I are both in Chicago to attend the Tax Court’s Judicial Conference. I am looking forward to seeing some old friends and colleagues, attending panels on a range of topics, and speaking on a panel with Keith, Nina Olson and Judge Peter Panuthos about the role that taxpayer rights play in representing taxpayers.
One of the panels I will attend is called “A Trip Through the Tax Court’s Exotic Jurisdiction.” I am especially looking forward to that, as I have been writing lately about the role that administrative law generally and the APA in particular plays in cases that are not traditional deficiency cases. Last week in updating the Saltzman Book treatise as part of our regular three times a year update I have revisited Kasper v Commissioner, a case we on PT discussed briefly when it came out and which is one of the more interesting procedure cases of the past year. As readers may recall, that case held that the standard of review in whistleblower cases is arbitrary and capricious and the scope of that review is limited to the administrative record.
In reaching its conclusion, Kasper revisits and places in context the Tax Court’s approach in other cases that are not traditional deficiency cases. Tax procedure can be complex enough when dealing with straightforward deficiency cases (consider for example the Borenstein case that PT discussed which Keith and Georgia State Tax Clinic Director Ted Afield have just filed an amicus brief that looks at an odd situation when a taxpayer filed an original return with a refund claim just prior to filing a petition). Congress over the past few decades has added to the Tax Court’s basket a number of other types of cases, including the whistleblower provisions Kasper addressed, CDP which 20 years on still presents a steady stream of tough issues (see Lavar Taylor’s latest guest posts on alter egos) and the rules relating to employment tax determinations under Section 7436.
All of this is preface for a recent Program Manager Technical Advice that discusses the limits of Section 7436. Readers may recall that 7436 provides that the Tax Court has jurisdiction to determine in employment tax audits whether someone is properly classified as an employee or whether the employer is entitled to so-called 530 relief (essentially a safe harbor allowing escape from liability if certain conditions are satisfied). There have been a bunch of interesting procedural issues spinning off 7436; for example I discussed last year the Tax Court order that concluded that Section 7436 did not provide it jurisdiction to determine whether an S corp’s wages were artificially low:
Section 7436(a)(1) only confers jurisdiction upon this Court to determine the “correct and the proper amount of employment tax” when respondent makes a worker classification determination, not when respondent concludes that petitioner underreported reasonable wage compensation, as is the case here.
The PMTA involves a similar legal issue in a different context. In the PMTA, the IRS considered a non-US corporate taxpayer with a US Sub. The overseas parent sent its employees into the US to provide computer and engineering services to US clients. The overseas parent paid the employees for the engineering and computer work they did in the US. The overseas parent did not withhold on the payments it made to its employees for the work those employees performed in the US, essentially arguing that it was not engaged in business in the US and was able to rely on statutory and regulatory exceptions on overseas employers who have temporary employees working in the US and who earn limited salaries (while some treaties have specific rules on this the PMTA indicates that the parent resided in a jurisdiction that did not have a treaty with the US).
IRS examined and concluded that the parent should have withheld on the wages that were paid to its employees. The PMTA concludes that its conclusion regarding the withholding liability would not be a determination under 7436 and the parent was not entitled to go to Tax Court:
[T]here is no dispute that the [nonresident alien(NRA) parent corp] performing computer and engineering services on behalf of the foreign corporation are employees, that the services were performed within the United States, and that such NRAs received compensation from the foreign corporation for those services. Rather, the foreign corporation is asserting that it is not liable for income tax withholding because it was not engaged in a trade or business within the United States. This argument is not based on a position that the NRAs are not employees. Thus, there is no actual controversy over the worker classification of the NRAs. Rather, the foreign corporation’s disagreement is premised on the position that the NRAs are employees, but that because the employees worked for a foreign corporation while temporarily in the United States and were compensated less than a threshold amount the foreign corporation did not have a trade or business within the United States
Conclusion
Of course the IRS does not get to decide the contours of the Tax Court’s jurisdiction but as the PMTA discusses IRS employment tax audits can raise issues not squarely within the language of 7436. Absent Tax Court jurisdiction, taxpayers can get court review in the federal district courts or the Court of Federal Claims. That comes after assessment, and some payment of the tax, triggering other issues and perhaps more litigation costs.
About Leslie Book
Recently, the IRS whistleblower office (in Table 3 (page 15) of its FYE 2017 report to Congress — available at 2018 TNT 5-27) reported that it had 95 section 7623(b) claims open in litigation (and, in a footnote that baffles me, another 302 claims “closed prior to litigation”). There are thus very few whistleblower award actions in the Tax Court.
So far, in the 12 years since the Tax Court has had whistleblower award litigation, it has ruled on only a few issues. The Tax Court has ruled, inter alia, (1) on what is a valid notice that can be appealed to the Tax Court, (2) that the 30-day period to file in the Tax Court is jurisdictional, and, (3), only recently, the scope and standard of Tax Court review. There are a lot more questions that the Tax Court hasn’t yet ruled on, such as how it will determine that an award was too low a percentage.
The sole appellate venue on appeal from the Tax Court for whistleblower award cases is the D.C. Circuit. Section 7482(b)(1) (flush language). The Circuit court has ruled on even fewer whistleblower award issues than the Tax Court. So, this area is, for now, still in its infancy of judicial guidance.
I just wanted to alert PT readers that there are a few important whistleblower cases pending in the D. C. Circuit that may result in the overturning of some of what the Tax Court has already done in this area. In one of them, Meyers v. Commissioner, 148 T.C. No. 20 (2017), D.C. Cir. Docket No. 18-1003, the taxpayer will be asking that the Circuit court overturn the Tax Court’s ruling that pretty much any definitive letter from the whistleblower office (even one not denominated a notice of determination or mentioning Tax Court appeal rights) triggers a 30-day period in which to file a Tax Court petition. Briefing in Myers is just beginning.
So, people should not be shocked if even much of what the Tax Court has already done in this area of minor Tax Court jurisdiction is upended.