Tax Court Confirms $17M Informant Award For Whistleblowers

From Law 360

Law360, Washington (January 31, 2017, 5:21 PM EST) — The U.S. Tax Court on Friday awarded husband-and-wife whistleblowers $17.8 million for their role taking down a $74 million corporate tax fraud scheme, denying the IRS’ motion for reconsideration.
The decision upholds the court’s previous ruling that awards to whistleblowers should be based on all of the money collected by the U.S. government. Representatives for the unnamed petitioner praised the decision, which preserves a broad definition of the Internal Revenue Code’s reference to “collected proceeds” related to whistleblower awards, saying it provides clear guidance to the incoming administration, including treasury secretary nominee Steve Mnuchin, in similar cases going forward.

“This decision gives Treasury Secretary nominee Mnuchin and the new administration an opportunity to embrace the Tax Court’s final ruling and show that it supports the IRS whistleblower program and is serious about going after big time tax cheats,” said Dean Zerbe of Zerbe, Fingeret, Frank & Jadav PC in a statement.

Senior Tax Court Judge Julian I. Jacobs’ rejection of the IRS’ motion to reconsider upholds an August ruling that Internal Revenue Code Section 7623’s promise of a share of all collected proceeds to whistleblowers must be read in its plain meaning. That means, the judge said, that the IRS cannot exclude chunks of $74 million collected from the foreign business tax cheat to only what was paid under Title 26 of the code in calculating what to give a pair of whistleblowers based on a 24 percent share.

“We are leery of arbitrarily limiting the meaning of an expansive and general term such as ‘collected proceeds’. In drafting Section 7623(b)(1), Congress could have provided that the whistleblower’s award is to be based on taxes and other amounts assessed and collected by the IRS under Title 26. But it did not,” Judge Jacobs said in the August ruling. “Instead, Congress chose to use a sweeping term ‘collected proceeds’ as the basis of the award. The context of the statute in which the term ‘collected proceeds’ is used reinforces our conclusion. Congress revealed its intent that the mandatory whistleblower program be an expansive rewards program.”

According to the June 2015 decision, an unnamed petitioner had been arrested in Florida in 2009 over an alleged conspiracy to launder funds from the sale of pirated compact discs. He pled guilty in 2010 and agreed — in exchange for leniency — to help the IRS, FBI and other agents by providing information on the structure of various entities his clients used in their illegal activities, the ruling said.

The petitioner, while in detention, disclosed information on a foreign business alleged to help U.S. taxpayers evade federal income tax. He did not, however, have sufficient evidence to support the claims, the ruling noted, but knew of a senior officer who did. The disclosure triggered an effort between the U.S. and U.K. to lure the employee to the U.S. for questioning — a successful plot the petitioner’s wife helped in.

The foreign business was later indicted for conspiring with U.S. taxpayers and others to hide more than $1.2 billion in secret accounts. The business paid approximately $74 million to settle the claims, the ruling noted. But despite acclaim from federal agents, the pair’s April 2013 claim to the IRS’ whistleblower office was rejected for lateness. The Tax Court appeal followed in September 2013.

Title 26 covers income, estate and employment taxes, among others, meaning the IRS conceded it owed a percentage of the $20 million paid in tax restitution. But the agency had argued it did not owe on monies that included a $22 million criminal fine and another $32 million in combined civil forfeitures.

The IRS’ narrow interpretation was the subject of confirmation hearings for Mnuchin, who told Iowa Republican Senator Chuck Grassley he would be open to looking into the issue if confirmed.

“The Tax Court decision gives Mr. Mnuchin the perfect opportunity to do the right thing, accept the Tax Court ruling in favor of whistleblowers, and make it clear to all the tax crooks that the new administration is putting out the welcome mat for tax whistleblowers,” said Stephen M. Kohn, executive director of the National Whistleblower Center, who also represented the petitioners.

The IRS said it does not comment on litigation matters.

The whistleblowers are represented by Dean Zerbe, Jeremy Fingeret and Felipe Bohnet-Gomez of Zerbe Fingeret Frank & Jadav LLP, Bob Amsel of Ross Amsel, and Raben and Steve Kohn of Kohn Kohn and Colapinto LLP.

The IRS is represented by Richard L. Hatfield, John T. Arthur and Jonathan D. Tepper.

The cases are Whistleblower 21276-13W v. Commissioner of Internal Revenue and Whistleblower 21277-13W, case numbers 21276-13W and 21277-13W, in the U.S. Tax Court.

–Additional reporting by Bryan Koenig. Editing by Joe Phalon.

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Written by Weisberg Kainen Mark, PL

Weisberg Kainen Mark, PL

Weisberg Kainen Mark, PL is a Miami-based law firm focused on providing comprehensive legal support to individuals and corporate entities caught up in tax controversies or charged with a criminal act. As experienced trial lawyers with a passion for justice, our firm provides clients with compelling advocacy, attorney availability, and creative solutions to your tax or criminal law matters.