Originally published on Forbes.com.
I consider hiding money offshore a particularly pernicious form of tax avoidance. I also find the concept of IRS rewards for whistleblowing very disturbing. So it was tough to know which way to root in the most recent regular Tax Court decision- Whistleblower 22716-13W v Com. I’ve decide I’ll call old WB 22716-13W, Doc Flute, for short. You and I don’t know who he is, but it seems likely that he may be the physician discussed in this 2014 New York Times story by Gretchen Morgenson.
Back To The UBS Scandal
Doc Flute had been helping the IRS nail Martin Lack and Renzo Gadola. They both worked for UBS and helped American citizens hide assets overseas. They both ended up being sentenced to probation, but poor Renzo then ended up getting fined by Switzerland for information he turned over. Damned if you do. Damned if you don’t. Or maybe it is – Fined if you do. Locked up if you don’t. You can’t please everybody.
Anyway one of the taxpayers that Gadola had been “helping” ended up paying the IRS a relatively small amount of income tax avoided on his foreign accounts and a whopping big penalty for failing to file information returns (FBAR) on foreign bank accounts. Those penalties can be really nasty- like 50% of the highest balance in the account. At any rate the penalty for this particular taxpayer was north of $2,000,000 which is the threshold for mandatory whistleblower awards.
A Catch
There was a catch though. The IRS Chief Counsel ruled that since the FBAR penalty falls under Title 31 of the US Code rather than Title 26, it does not produce “collected proceeds” eligible for a non-discretionary award. The Tax Court framed the issue this way.
Section 7623(b)(5) makes a whistleblower eligible for a nondiscretionary award only if his claim satisfies two monetary thresholds. The parties appear to agree that Taxpayer 1’s gross income exceeded $200,000. See sec. 7623(b)(5)(A). In order to prevail, therefore, petitioner must show that “the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000” with respect to his Taxpayer 1 claim. See sec. 7623(b)(5)(B). Petitioner does not contend that FBAR payments constitute “tax,” “interest,” or “additions to tax,” nor does he contend that they are “penalties” under the Internal Revenue Code. The focus of the parties’ dispute, and the question we must decide, is whether FBAR payments constitute “additional amounts” within the meaning of section 7623(b)(5)(B).
There is a pretty lawyerly discussion from there. The bottom line is:
As these cases show, we have consistently held that “additional amounts,” particularly when it appears in a series that also includes “tax” and “additions to tax,” is a term of art that refers exclusively to the civil penalties enumerated in chapter 68, subchapter A. “Additional amounts” appears in section 7623(b)(5)(B) in conjunction with “tax” and “additions to tax,” and we find no reason to give that term a different meaning in this section than it has elsewhere. In Williams, we ruled that an FBAR civil penalty is not an “additional amount” for purposes of our deficiency or CDP jurisdiction. Petitioner has supplied no textual basis, either in the language of the statute or the structure of the Code, for reaching a different conclusion with respect to the whistleblower provision at issue here.
FBAR civil penalties are not among the tax-related penalties enumerated in chapter 68, and they are not “assessed, collected, and paid in the same manner as taxes.
So no big payday for Doc Flute.
Other Coverage
Jack Townsend covered the case.
The issue is whether “including” is illustrative permitting other items fairly characterized as collected proceeds to be included or limiting so that only the items mentioned after including are in the base. (I am sure there are at least mini-canons of statutory interpretation on that issue but have not researched them.)
The Tax Times has a nice summary. The Tax Whistleblower Report speculates that the decision was a follow-on to an earlier case. The Whistleblowers Protection Blog had a mixed review of the decision quoting Stephen M. Kohn ED of the National Whistleblower Center:
The Tax Court’s opinion unfortunately will have a chilling impact on whistleblowers coming forward – especially whistleblowers blowing the whistle on illegal offshore accounts held by millionaires and billionaires. Individuals need to have confidence that when they come forward that they will be awarded if the whistleblower’s information is used by the government and results in collected proceeds.
The good news though is that the Court found that the policy arguments put forward by the National Whistleblower Center in its amicus brief to be well-grounded and reasoned – and the Tax Court stated that Congress could fix the problem. Congress needs to accept the Tax Court’s invitation and immediately clarify the statute that whistleblowers who blow the whistle on offshore tax cheats and other big time tax criminals are entitled to an award.
Lew Taishoff came through for us with a clever title – FBAR Or FUBAR? – Part Deux (Nothing like a veteran with an apparent high quality liberal arts education.)
That it’s bad policy, and will discourage whistleblowers from unmasking offshore dodgers, to the detriment of our already overburdened fisc, is sad but true. Judge Lauber says, don’t blame us, talk to Congress.
Good luck with that.