In another win for whistleblowers, the Tax Court held June 7 that the “amounts in dispute” threshold under section 7623 is not limited to the portion of “collected proceeds” attributable to whistleblower information.
In Ian D. Smith v. Commissioner, No 25605-15W (June 7, 2017), the whistleblower alleged that a business was exchanging products or services for gift certificates and not including the transactions as business income, and that the business was failing to treat gift certificates given to employees as income for W-2 purposes. The IRS examined the employment tax and income tax of the business, and ultimately assessed and made adjustments of nearly $20 million. The IRS, however, asserted that the income tax collected was not attributable to the whistleblower claim, and that only $1.8 million in employment tax was directly attributable to the whistleblower. As a result, the IRS granted a discretionary award of 10 percent under section 7623(a) for the amounts attributable to the information and a 1 percent award on other tax collected, which was then subject to a sequestration reduction under the Budget Control Act of 2011 as amended by the American Taxpayer Relief Act of 2012.
The whistleblower appealed the IRS award decision to the Tax Court, arguing that the IRS’s position that threshold limitations on “amounts in dispute” include only amounts of collected proceeds for which the whistleblower provided information was improper.
Section 7623(b) introduces a provision requiring mandatory payment to whistleblower awards, directing the payment of between 15 and 30 percent of collected proceeds. Section 7623(b)(4) grants the Tax Court jurisdiction for whistleblowers who appeal awards given under the mandatory pay provision. Under section 7623(b)(5)(B), the mandatory provision applies to any action when amounts in dispute exceed $2,000,000.
In a case of first impression, Judge Joel Gerber held that the meaning of section 7623(b)(5) is clear, and that it was Congress’s intention to limit the mandatory award to large cases. The section 7623(b) limitation on the award “focuses upon the usefulness of the whistleblower’s claim and should not be a refinement of the ‘amounts in dispute’ as used in section 7623(b)(5),” the court held.
The court focused on the use of the word “action” in subsection (b) and found that it is “in no manner linked to the concept of ‘collected proceeds’ or substantial contribution.” The word was being used without specific limitations, Gerber wrote. The Tax Court rejected the IRS’s contention that the determination of the percentage of an award applies only to portions attributable to whistleblower information. That position would “lead to anomalous results,” Gerber wrote.
“Petitioner’s whistleblower claim caused the initiation of an examination that resulted in the collection of almost $20 million of tax and penalties, almost $2 million of which was directly or indirectly attributable to petitioner’s information. In spite of those results, under respondent’s position the provisions of section 7623(b) would not be applicable in this case,” the court held.
Two other Tax Court memoranda were also released June 7 that address the $2 million threshold issue and deny the IRS’s motions for summary judgment.
“For tax whistleblowers, good things come in threes,” Dean Zerbe of Zerbe, Fingeret, Frank & Jadav PC said.
“The $2 million threshold is often a critical question of whether a whistleblower claim falls under the mandatory award program of 7623(b) or the discretionary award program of 7623(a),” Zerbe said, adding that the Tax Court in Ian Smith reached the correct decision, and that the other cases — Lippolis v. Comm., T.C. Memo. 2017-104 (2017); and Gonzalez v. Comm., T.C. Memo. 2017-105 (2017) — “make it clear that the $2 million bar is an affirmative defense for the IRS to raise, and that the Tax Court will take a hard look at the IRS justification for its defense. No mailing it in.”
IRS Getting Hammered
“The IRS is getting hammered by the Tax Court for their handling of whistleblower cases. I could not think of a more clear signal to the IRS that they are out of touch with reality in their handling of these matters,” Jeffrey Neiman of Marcus Neiman & Rashbaum LLP said. “It continues to defy common sense that the IRS takes a narrow view to shortchange the whistleblower at almost every turn. The cost it pays the whistleblower is still less than what they would otherwise spend chasing money they may never find.”
Scott A. Knott of the Ferraro Law Firm cautioned that whistleblowers need to remain vigilant of IRS positions that will challenge the jurisdiction of Tax Court review and positions that improperly reduce the awards payable.
“The Tax Court has again decided that the IRS has too narrowly interpreted the whistleblower award statute when it determined that this case should fall under the discretionary award regime of section 7623(a) instead of the mandatory award regime of section 7623(b),” Knott said. He added that it was unfortunate that the granting of summary judgment for the whistleblower on the jurisdictional threshold did not allow the Tax Court to address the sequestration reductions. “This position, for which the IRS has never articulated a legal basis, will hopefully be resolved soon in this or another case.”
Collected Proceeds Backdrop
The Smith decision comes against a backdrop of considerable debate relating to the definition of “collected proceeds” and whether it includes criminal fines and civil forfeitures. In Whistleblower 21276-13W v. Commissioner and Whistleblower 21277-13W v.Commissioner, 147 T.C. No. 4 (2016), the Tax Court ruled in favor of the whistleblower and held that such payments did constitute collected proceeds for purposes of award calculation, although the IRS has appealed that decision. Some lawmakers have also expressed concern over the IRS’s narrow interpretation of collected proceeds, drafting a letter to Treasury Secretary Steven Mnuchin in April to urge him to reconsider the government’s position.
At a June 7 Senate Finance Committee confirmation hearing, Sen. Chuck Grassley, R-Iowa, extracted a pledge from Brent J. McIntosh, President Trump’s nominee to serve as general counsel to the Treasury Department, to review the IRS and Treasury’s interpretation of “collected proceeds” under the whistleblower statute.
Grassley expressed concern that the IRS and Treasury were undermining the effectiveness of the whistleblower program — which he said has led to the recovery of $3 billion to $4 billion in taxes that would not otherwise have been collected by the IRS — by adopting a narrow interpretation of the definition of collected proceeds in order to reduce the amount that is awarded to whistleblowers. He asked McIntosh if he could be relied on to be supportive of the whistleblower program overall, and if he would be willing to review the present interpretation of collected proceeds used by the IRS and Treasury.
“I will commit to do the things that you have asked me to do,” McIntosh responded. Currently a partner at Sullivan & Cromwell LLP, McIntosh served as a legal adviser in the White House and Justice Department during the George W. Bush administration.