The case of Whistleblower 4496-15W v. Commissioner, 148 T.C. No. 19 (May 25, 2017) concerns both the timeliness of filing a Tax Court petition in a whistleblower case and the effect of cashing a check granting an award. Both aspects of the case deserve some discussion. The whistleblower wins the battle concerning the timing of the filing of the petition only to lose the war on whether the signing of the check served as a waiver of the right to sue the IRS in this matter.
The whistleblower gave the IRS some good information. The IRS calculated that the information allowed it to recover over $14 million. Based on that recovery, the IRS recommended an award percentage of 22% resulting in a proposed award of $3,187,630. Because of the Budget Control Act of 2011, the IRS reduced the award by 7.3%.
On December 1, 2014, the IRS sent to the whistleblower a summary report “that explains our preliminary award recommendation in the amount of $2,954,933.00.” The letter explained the amount recovered the percentage award and the required reduction. It also explained that the award would be reduced by withholding. The letter also explained the options that the whistleblower had upon its receipt. If the whistleblower agreed with the award, “he was directed to ‘check the appropriate box, sign and date the Response to Summary Report indicating … [his] agreement’ and ‘return the signed Response’ to the Office.” The letter gave explicit details concerning the effect of signing on future contests concerning the award stating that “by checking the box that you agree with the preliminary award recommendation, you agree to waive any judicial appeal rights with respect to the award determination, including filing a petition with the U.S. Tax Court.”
The letter also explained that the whistleblower could disagree with the proposed award recommendation and submit comments to the Office. The letter stated that it was NOT a final determination for purposes of filing a Tax Court petition. The whistleblower’s attorney called the Office on December 8 and 9 with questions and was told accepting the award now was conclusive.
The whistleblower and his attorney signed the letter. The IRS sent a check dated January 15, 2015, in the reduced amount, which was further reduced by $819,107 of withholding. The whistleblower filed a Tax Court petition on February 11, 2015, arguing that the IRS lacked legal support for reducing the recommended offer by 7.3%. The IRS moved to dismiss the case for lack of jurisdiction arguing first that it should have been filed within 30 days of December 1, 2014. The Court pointed out that the December 1 letter specifically stated that it was a preliminary letter and not a final determination. Without much difficulty, the Court found that the December 1 letter was not and could not be the determination letter starting the time to file a petition in a whistleblower case. Looking around at what could be used for that purpose, the Court concluded that the statute provided no guidance. Here, it found that the check served the purpose of the final determination. Since the petition was filed within 30 days of the mailing of the check, the petition was timely. Makes sense, but the lack of a formal way to denote a final determination will continue to plague petitioners, the IRS, and the Court until Congress gets around to fixing this hole in the statute.
So, now the whistleblower got past the building guard and into the Tax Court, but he still had a problem. He agreed not to file a Tax Court petition as part of accepting the check. When you get a check for over $2 million I can only imagine that it is hard to pass that up for Door #2. I am still waiting for the day I have this option.
The IRS moved to dismiss for lack of jurisdiction because of the signed agreement; however, the Court correctly pointed out that the signed agreement did not mean the court did not have jurisdiction to hear the case but could form a basis for a motion for summary judgment and the Court recharacterized the motion to that purpose.
As I read the case I thought about the form used by Appeals, Form 870-AD, which has produced a number of decisions regarding the effect of having the taxpayer sign away the ability to litigate. Most, but not all, of those decisions have resulted in victories for the IRS with courts enforcing the signed waiver. The Tax Court here looked at several of its prior decisions on waivers including decisions on the Appeals form. The decisions uniformly held for the IRS. At this point I had a strong suspicion where the Court would end up here.
The Court found that the whistleblower knowingly signed away his right to come to court. It swatted away the arguments made by the petitioner finding the language of the letter unambiguous. The Court states:
In sum, petitioner waived his judicial appeal rights in order to receive prompt payment of his award, and the Office fully performed its side of the bargain. We will accordingly enforce the agreement reached by the parties, give effect to petitioner’s waiver of his right to judicial review, and grant summary judgment for respondent sustaining the Office’s determination.
I do not know if petitioner will appeal this determination. A quick search indicated that an appeal has not yet been filed. While the result here does not surprise me, a few courts have struck down waiver paragraphs like this. Look at Whitney v. United States, 826 F.2d 896 (9th Cir. 1987) where the court found that the Form 870-AD, standing alone, does not estop a taxpayer from later seeking a refund. Other courts, such as Arch Engineering Co., Inc. v. United States, 783 F.2d 190, 192 (Fed.Cir.1986) (dicta); Lignos v. United States, 439 F.2d 1365, 1367 (2d Cir.1971); Uinta Livestock Corp. v. United States, 355 F.2d 761 (10th Cir.1966); cf. Cain v. United States, 255 F.2d 193, 199 (8th Cir.1958) (Van Oosterhout, J., dissenting) that follow this view look for the IRS to enter into a closing agreement if it wants to bind the taxpayer. Most courts, represented by cases such as Flynn v. United States, 786 F.2d 586, 591 (3d Cir.1986) (dicta) (also applying contract principles); Elbo Coals, Inc. v. United States, 763 F.2d 818, 821 (6th Cir.1985); General Split Corp. v. United States, 500 F.2d 998, 1004 (7th Cir.1974); Cain v. United States, 255 F.2d 193, 199 (8th Cir.1958) prevent the taxpayer from coming into court after signing the Form 870-AD based on equitable estoppel. Maybe a whistleblower will find a sympathetic ear before one of the circuit courts that looks kindly on the taxpayer coming into court after signing the Form 870-AD. The closing agreement argument has some appeal. If not, whistleblowers will have to make some hard choices when they receive the check from the IRS because it looks like they will be stuck with the award they receive unless they fight before cashing the check.