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.