Taxing Lessons From Court Decisions

Decisions — Collecting the money

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Image source: Free Picture: FiftiesID: 64981 John Hix Dreamstime Stock Photos
Image source: Free Picture: FiftiesID: 64981 John Hix Dreamstime Stock Photos

This is not a trick question: What sum would you rather receive, $4.8 million or $17.8 million?

As you might imagine, the taxpayers in 147 T.C. No. 4 (Whistleblower 21276-13W and 21277-13W) would prefer the IRS pay them $17.8 million for the information they provided that led to tax restitution, a criminal fine, and civil forfeitures totaling $74.1 million. The IRS says the $4.8 million is the correct amount.

At issue is the meaning of the term “collected proceeds,” which is not defined in the tax statute. The statute (see below for the entire wording) says a whistleblower is entitled to an award that amounts to a percentage “of the collected proceeds (including penalties, interest, additions to tax, and additional amounts).” Does “collected proceeds” refer to the $20 million in tax restitution only, or are the criminal fine of $22 million and civil forfeitures of $32.1 million included?

Both the IRS and the Whistleblowers agree the Whistleblowers are entitled to 24% of the collected proceeds, and that the $20 million in tax restitution meets the definition of collected proceeds.

However, the IRS says the definition of collected proceeds is clear under the plain language of code section 7623, and means that only the proceeds assessed and collected under a provision of the tax code may be used to pay a whistleblower award because section 7623 relates solely to violations of federal tax laws. Under the IRS’s interpretation, the Whistleblowers in this case are entitled to 24% of the tax restitution of $20 million (which equals an award of $4.8 million).

The Whistleblowers agree the definition of collected proceeds is clear under the plain language of code section 7623. But the Whistleblower’s interpretation is that the collected proceeds include the entire amount collected because the payment results from violations of the tax code. That means the Whistleblowers are entitled to 24% of $74.1 million (which equals an award of $17.8 million).

Here are the relevant code sections. Part (a) of section 7623 authorizes payments to whistleblowers, and part (b) describes the determination of the amount.

From Internal Revenue code section 7623(a): Expenses of detection of underpayments and fraud, etc.: (a) In general, the Secretary, under regulations prescribed by the Secretary, is authorized to pay such sums as he deems necessary for—

(1) detecting underpayments of tax, or

(2) detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same,
in cases where such expenses are not otherwise provided for by law. Any amount payable under the preceding sentence shall be paid from the proceeds of amounts collected by reason of the information provided, and any amount so collected shall be available for such payments.

From Internal Revenue code section 7623(b)(1): Awards to whistleblowers: (1) In general, if the Secretary proceeds with any administrative or judicial action described in subsection (a) based on information brought to the Secretary’s attention by an individual, such individual shall, subject to paragraph (2), receive as an award at least 15 percent but not more than 30 percent of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions) or from any settlement in response to such action. The determination of the amount of such award by the Whistleblower Office shall depend upon the extent to which the individual substantially contributed to such action.

Note: The tax court says the “administrative or judicial actions” alluded to by section 7623(b)(1) relate to (1) the detection of underpayments of tax or (2) the detection and bringing to trial and punishment of persons guilty of violating the internal revenue laws or conniving at the same.

 

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Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Right answer!
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For the Whistleblowers.

Section 7623(b)(1) uses plain language. The words and terms in question are commonly understood. The term for amounts used to calculate the award is “collected proceeds.” The term “collected proceeds” means all proceeds collected by the government from the party whom the Whistleblowers reported. The term is broad and sweeping; it is not limited to amounts assessed and collected under title 26 (the internal revenue code).

To reflect the aforesaid, and on the bases of

(1) the IRS’s acknowledgment that the Whistleblowers are entitled to an award under section 7623(b) for information brought to the IRS’s attention;

(2) the agreement that the award should be 24% of the proceeds collected from the party whom the Whistleblowers reported;

(3) the agreement that the party whom the Whistleblowers reported paid the government $74,131,694 in tax restitution, a criminal fine, and civil forfeitures;

(4) the agreement that $20,000,001 restitution payment constitutes collected proceeds for purposes of an award under section 7623(b); and

(5) the holdings we herein make, namely that the criminal fine of $22,050,000 and the civil forfeitures of $32,081,693 are collected proceeds for purposes of an award under section 7623(b),

we conclude that the Whistleblowers are entitled to a $17,791,607 (24% × $74,131,694) award under section 7623(b).

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