SCOTUS Reports

Tag: Collected Proceeds

  • Lewis v. Commissioner, 154 T.C. No. 8 (2020): Definition of Collected Proceeds and Application of Budget Sequestration in Whistleblower Awards

    Lewis v. Commissioner, 154 T. C. No. 8 (2020)

    In Lewis v. Commissioner, the U. S. Tax Court clarified the definition of “collected proceeds” for IRS whistleblower awards and upheld the application of budget sequestration to these awards. The court ruled that reported and paid tax does not count as collected proceeds, even if influenced by an ongoing audit, and that no future proceeds could be anticipated from an estate with no tax liability. Additionally, the court affirmed that whistleblower awards are subject to budget sequestration, rejecting claims that such reductions are inappropriate under the law.

    Parties

    Timothy J. Lewis, the petitioner, was represented by Shine Lin and Thomas C. Pliske. The respondent, the Commissioner of Internal Revenue, was represented by Joel D. McMahan and A. Gary Begun.

    Facts

    Timothy J. Lewis, a former financial manager of a closely held corporation, filed a whistleblower claim alleging tax underpayments by the corporation and its shareholders for the year 2010 and prior years. The allegations primarily concerned improper wage deductions for the shareholders’ sons and mischaracterized loans. Following Lewis’s submission, the IRS audited the corporation’s 2010 tax year and the shareholders’ 2010 and 2011 tax years, resulting in adjustments and the collection of additional taxes. The corporation changed its reporting for 2011, not deducting wages for one son, but no additional tax was collected from this change. The shareholders filed gift tax returns, using unified credits to offset gift taxes. Upon one shareholder’s death, his estate filed a return showing no tax liability. The IRS Whistleblower Office (WBO) determined Lewis’s award based on the collected proceeds from the audit, excluding the 2011 reported tax and the deceased’s unified credit, and applying budget sequestration to the award.

    Procedural History

    The WBO issued a preliminary award recommendation to Lewis, which he challenged. After revisions and further communications, the WBO issued a final decision letter, maintaining the award amount and applying sequestration. Lewis timely petitioned the U. S. Tax Court for review, contesting the exclusion of certain taxes from collected proceeds and the application of sequestration. The court reviewed the case under its jurisdiction to review mandatory whistleblower awards, as provided by I. R. C. sec. 7623(b)(4).

    Issue(s)

    Whether reported and paid tax from a year not originally audited but influenced by an ongoing audit constitutes “collected proceeds” under I. R. C. sec. 7623(c)?

    Whether the use of a unified credit by a deceased taxpayer, resulting in no estate tax liability, can be considered as potential future collected proceeds?

    Whether the WBO abused its discretion by applying budget sequestration to reduce the whistleblower award?

    Rule(s) of Law

    Under I. R. C. sec. 7623(b), a whistleblower is entitled to a mandatory award of 15% to 30% of the collected proceeds from an IRS action based on the whistleblower’s information. I. R. C. sec. 7623(c) defines “proceeds” to include penalties, interest, additions to tax, and other proceeds from laws the IRS is authorized to enforce. The Bipartisan Budget Act of 2018 amended this definition to include criminal fines and civil forfeitures. The Budget Control Act of 2011, as amended, mandates sequestration of certain government payments, including direct spending, unless specifically exempted.

    Holding

    The Tax Court held that reported and paid tax, even if influenced by an ongoing audit, does not constitute “collected proceeds” under I. R. C. sec. 7623(c). The court further held that there are no potential future proceeds from a deceased taxpayer’s estate when the estate tax return shows no tax liability. Finally, the court held that the WBO did not abuse its discretion in applying budget sequestration to the whistleblower award, as such awards are direct spending subject to sequestration under the Budget Control Act of 2011.

    Reasoning

    The court reasoned that reported and paid tax from a year not originally audited but influenced by an ongoing audit does not constitute “collected proceeds” based on prior case law, specifically Whistleblower 16158-14W v. Commissioner. The court noted that while the corporation’s change in reporting for 2011 might have been influenced by the whistleblower’s information, such tax was not “collected” by the IRS and thus not included in the award calculation. Regarding the unified credit, the court found no possibility of future proceeds from the deceased’s estate, as the estate tax return showed no tax liability, and the trust documents and applicable law indicated no future tax would be due upon the termination of the life estate. On the sequestration issue, the court rejected the argument that whistleblower awards are exempt from sequestration, finding that such awards are direct spending under the Budget Control Act, and the WBO’s application of sequestration was not an abuse of discretion. The court’s analysis included statutory interpretation, consideration of prior case law, and the application of sequestration rules as mandated by Congress.

    Disposition

    The Tax Court affirmed the WBO’s determinations regarding the calculation of collected proceeds and the application of budget sequestration to the whistleblower award. The case was resolved without further proceedings, and an appropriate order and decision were to be entered.

    Significance/Impact

    The decision in Lewis v. Commissioner provides critical guidance on the definition of “collected proceeds” for whistleblower awards, clarifying that reported and paid tax does not qualify even if influenced by an ongoing audit. This ruling impacts how whistleblower claims are evaluated and awarded, potentially affecting the financial incentives for reporting tax violations. Additionally, the court’s affirmation of the application of budget sequestration to whistleblower awards reinforces the fiscal policy measures enacted by Congress, ensuring that such awards are subject to the same budgetary constraints as other forms of direct spending. This decision may influence future cases and legislative considerations regarding the funding and payment of whistleblower awards.

  • Whistleblower 16158-14W v. Commissioner of Internal Revenue, 148 T.C. No. 12 (2017): Interpretation of Collected Proceeds under Section 7623(b)(1)

    Whistleblower 16158-14W v. Commissioner of Internal Revenue, 148 T. C. No. 12, 2017 U. S. Tax Ct. LEXIS 13 (U. S. Tax Ct. 2017)

    In a significant ruling, the U. S. Tax Court clarified that whistleblower awards under Section 7623(b)(1) do not include proceeds from a taxpayer’s voluntary compliance for years not examined by the IRS. The court rejected the whistleblower’s claim that a corporation’s change in withholding tax reporting after an IRS examination should count as “collected proceeds,” affirming that only proceeds from direct IRS actions are eligible for awards. This decision underscores the narrow scope of whistleblower awards and emphasizes the importance of direct IRS action in determining eligibility.

    Parties

    The petitioner, Whistleblower 16158-14W, sought an award from the respondent, the Commissioner of Internal Revenue, for information provided regarding a taxpayer’s alleged failure to withhold and pay over taxes. The case was heard by the United States Tax Court.

    Facts

    In January 2009, the whistleblower submitted a Form 211 to the IRS, alleging that a corporation failed to withhold taxes on payments of interest and dividends to foreign persons for the years 2006 through 2008. The whistleblower, an employee of the corporation, later supplemented the submission to include the years 2009 through 2014. The IRS expanded an ongoing audit for 2006 through 2008 to address the whistleblower’s allegations but concluded the examination with a “no change” letter, indicating no adjustments were made. The IRS did not conduct an examination for the subsequent years, despite the whistleblower’s additional submissions. The corporation updated its recordkeeping system after 2008, which the whistleblower claimed led to collected proceeds. The IRS Whistleblower Office denied the whistleblower’s award claim, prompting the petition to the Tax Court.

    Procedural History

    The whistleblower timely petitioned the U. S. Tax Court upon receiving a determination letter from the IRS Whistleblower Office denying an award. The Commissioner filed a motion for summary judgment, arguing that the whistleblower was not entitled to an award due to the lack of collected proceeds. The whistleblower contended that the corporation’s change in reporting for years after the IRS examination should be considered “collected proceeds. ” The court held a hearing and ordered briefs, ultimately granting the Commissioner’s motion for summary judgment.

    Issue(s)

    Whether amounts collected by the IRS as a result of a taxpayer’s voluntary change in reporting for years not examined by the IRS constitute “collected proceeds” under Section 7623(b)(1) of the Internal Revenue Code?

    Rule(s) of Law

    Section 7623(b)(1) of the Internal Revenue Code provides that a whistleblower shall receive an award of 15% to 30% of the collected proceeds resulting from an administrative or judicial action based on information provided by the whistleblower. The term “collected proceeds” is not defined in the statute but has been interpreted by the court as “all proceeds collected by the Government from the taxpayer” resulting from such actions.

    Holding

    The court held that amounts collected by the IRS due to a taxpayer’s voluntary change in reporting for years not examined by the IRS do not constitute “collected proceeds” under Section 7623(b)(1). Therefore, the whistleblower was not entitled to an award for the years 2006 through 2008, as there were no collected proceeds from those years, nor for the subsequent years, as no administrative or judicial action was taken by the IRS for those years.

    Reasoning

    The court’s reasoning focused on the statutory requirement that an award under Section 7623(b)(1) must be based on collected proceeds resulting from an IRS action. The court noted that the IRS did not take any action for the years after 2008, and thus, any changes in the taxpayer’s reporting for those years were not attributable to an IRS action. The court emphasized that “collected proceeds” are limited to those resulting directly from IRS actions, not from a taxpayer’s voluntary compliance. The court also considered the administrative burden and speculative nature of attributing voluntary compliance to IRS actions, rejecting the whistleblower’s argument that the IRS should monitor changes in reporting post-examination. Furthermore, the court found no evidence of a “related action” or an “implied settlement” that would justify including the subsequent years’ proceeds as part of the award.

    Disposition

    The court granted the Commissioner’s motion for summary judgment, affirming that the whistleblower was not entitled to an award under Section 7623(b)(1) for the years in question.

    Significance/Impact

    This decision clarifies the scope of “collected proceeds” under Section 7623(b)(1), emphasizing that only proceeds resulting from direct IRS actions are eligible for whistleblower awards. The ruling may impact future whistleblower claims by limiting awards to proceeds directly resulting from IRS examinations, rather than from voluntary compliance or changes in taxpayer behavior post-examination. It also underscores the importance of the IRS taking specific actions in response to whistleblower information, as opposed to merely monitoring taxpayer behavior. This case may influence how whistleblowers and the IRS approach future claims and the interpretation of related regulations and Internal Revenue Manual provisions.

  • Whistleblower 21276-13W v. Commissioner of Internal Revenue, 147 T.C. 121 (2016): Definition of ‘Collected Proceeds’ in Whistleblower Awards

    Whistleblower 21276-13W v. Commissioner of Internal Revenue, 147 T. C. 121 (2016)

    In a landmark decision, the U. S. Tax Court expanded the definition of ‘collected proceeds’ under I. R. C. sec. 7623(b) to include criminal fines and civil forfeitures, not just tax payments. This ruling significantly broadens the scope of whistleblower awards, potentially increasing the financial incentives for reporting tax evasion and fraud. It clarifies that whistleblowers can receive awards based on a percentage of all proceeds collected by the government, not limited to those collected under Title 26.

    Parties

    Whistleblower 21276-13W and Whistleblower 21277-13W, petitioners, v. Commissioner of Internal Revenue, respondent.

    Facts

    The petitioners, a husband and wife, sought whistleblower awards under I. R. C. sec. 7623(b) for information leading to the detection of tax underpayments and violations of internal revenue laws. The targeted taxpayer pleaded guilty to conspiring to defraud the IRS, file false Federal income tax returns, and evade Federal income tax, in violation of 18 U. S. C. sec. 371. The taxpayer paid $74,131,694 to the Government, consisting of tax restitution of $20,000,001, a criminal fine of $22,050,000, a civil forfeiture of $15,821,000 representing gross fees received from U. S. clients, and relinquishment of claims to $16,260,693 previously forfeited. The IRS Whistleblower Office initially rejected the petitioners’ claims as untimely, but the Tax Court held in a prior decision that the claims were timely and ordered the parties to resolve their differences. The parties agreed that the petitioners were eligible for an award of 24% of the collected proceeds, but disagreed on whether the criminal fine and civil forfeitures constituted ‘collected proceeds’ under sec. 7623(b).

    Procedural History

    The IRS Whistleblower Office initially denied the petitioners’ claims for awards, administratively closing their cases. The petitioners appealed to the U. S. Tax Court. In Whistleblower 21276-13W v. Commissioner, 144 T. C. 290 (2015), the court held that the claims were timely, ordered the parties to attempt resolution, and retained jurisdiction. The parties subsequently agreed that the petitioners were eligible for an award of 24% of the collected proceeds, but could not agree on the amount of collected proceeds. The court then issued a supplemental opinion to address the issue of what constitutes ‘collected proceeds’ under sec. 7623(b).

    Issue(s)

    Whether criminal fines and civil forfeitures paid by a taxpayer in connection with a violation of internal revenue laws constitute ‘collected proceeds’ for purposes of calculating a whistleblower award under I. R. C. sec. 7623(b)?

    Rule(s) of Law

    I. R. C. sec. 7623(b)(1) provides that if the Secretary proceeds with any administrative or judicial action based on information brought to the Secretary’s attention by an individual, the individual shall receive an award of at least 15% but not more than 30% of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action. The term ‘collected proceeds’ is not statutorily defined.

    Holding

    The U. S. Tax Court held that criminal fines and civil forfeitures paid by the taxpayer in connection with violations of internal revenue laws constitute ‘collected proceeds’ for purposes of calculating a whistleblower award under I. R. C. sec. 7623(b).

    Reasoning

    The court’s reasoning focused on statutory interpretation and the plain meaning of the term ‘collected proceeds’. The court noted that the language of sec. 7623(b)(1) is plain and expansive, using terms such as ‘any administrative or judicial action’, ‘any related actions’, and ‘any settlement in response to such action’. The court rejected the Commissioner’s argument that ‘collected proceeds’ should be limited to amounts collected under Title 26, holding that internal revenue laws are not limited to those codified in Title 26. The court cited examples of internal revenue laws found outside Title 26 and noted that the term ‘proceeds’ is broad and general. The court also distinguished between the discretionary award program under sec. 7623(a), which requires awards to be paid from collected proceeds, and the mandatory award program under sec. 7623(b), which uses collected proceeds only for calculating the award amount. The court concluded that criminal fines and civil forfeitures, being part of the total amount brought in by the Government as a result of the whistleblower’s information, constitute ‘collected proceeds’ under sec. 7623(b).

    Disposition

    The court awarded the petitioners $17,791,607, representing 24% of the total $74,131,694 paid by the taxpayer, including the tax restitution, criminal fine, and civil forfeitures.

    Significance/Impact

    This decision significantly expands the scope of whistleblower awards under I. R. C. sec. 7623(b) by including criminal fines and civil forfeitures in the definition of ‘collected proceeds’. It provides a strong incentive for whistleblowers to come forward with information about tax evasion and fraud, as they may now receive awards based on a broader range of government collections. The decision clarifies the distinction between the discretionary and mandatory whistleblower award programs and reaffirms the court’s commitment to interpreting statutory language according to its plain meaning. The ruling may lead to increased whistleblower activity and more aggressive enforcement of tax laws by the IRS.