tax restitution $20,000,001
criminal fine $22,050,000;
civil forfeiture $32,081,693
There was no question that collected proceeds included the tax restitution. Tax restitution is a payment with respect to Title 26 taxes and thus is a relatively easy fit in the term "collected proceeds" under § 7623(b). The dispute was over the criminal fines and civil forfeiture which are not collected under Title 26; rather, criminal fines and civil forfeitures are collected under Title 18, the general criminal code. (See Slip Op. 5 fns. 4 & 5, discussing 18 USC § 3571 (fines) and § 981(a)(1)(A) (civil forfeiture).) Bottom line, the Tax Court interpreted the term "collected proceeds" expansively and included the criminal fines and forfeitures.
An interesting point for readers of this blog is the payor of the amounts at issue. The opinion refers to the payor as the "targeted taxpayer." Actually, the payor was Wegelin & Co. ("Wegelin,", a Swiss Bank, which was not the U.S. taxpayer but was the conspirator required to pay the tax of the client-taxpayers via tax restitution in Wegelin's criminal case. The opinion does not specifically identify Wegelin, but gives enough details to identify Wegelin from the other public information. See the USAO SDNY press release dated 3/4/13, here. Technically, Wegelin was not a taxpayer per se, but I suppose the term "targeted taxpayer" was used for convenience because that concept is the usual application of § 7623(b).
One of the interesting steps in its holding was the following (Slip Op. 17-18) (bold-face supplied by JAT):
The Code itself refers to laws outside title 26 as internal revenue laws. As an example, section 6531 provides periods of limitation on criminal prosecutions:
SEC. 6531. PERIODS OF LIMITATION ON CRIMINAL PROSECUTIONS.
No person shall be prosecuted, tried, or punished for any of the various offenses arising under the internal revenue laws unless the indictment is found or the information instituted within 3 years next after the commission of the offense, except that the period of limitation shall be 6 years--
* * * * * * *
(8) for offenses arising under section 371 of Title 18 of the United States Code, where the object of the conspiracy is to attempt in any manner to evade or defeat any tax or the payment thereof.
We find the reference in section 6531(8) to 18 U.S.C. sec. 371 to be especially illuminating inasmuch as the targeted taxpayer pleaded guilty to conspiracy to defraud the IRS, file false Federal income tax returns, and evade Federal income tax, in violation of 18 U.S.C. sec. 371. n15 Finally, the phrase “internal revenue laws” dates from the earliest version of the whistleblower statute enacted in 1867. At that time, the modern title 26 did not exist; internal revenue laws meant all revenue laws. We think it erroneous to impose a post facto restriction on the meaning of the phrase not intended by Congress when it enacted the legislation. In sum, the phrase “internal revenue laws” is not limited to those laws codified in title 26.This might suggest that FBAR penalty collections would be included in collected proceeds under § 7623(b). But, readers may recall, that the Tax Court previously held that FBAR penalty collections are not included in the threshold $2,000,000 amount requirement that is required before any award may be given. In the instant opinion, the Court said:
n15 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 (N.D. Cal. Sept. 30, 2013) aff’d, ___ F. App’x ___, 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.
Our holding in this matter is not in conflict with our holding in Whistleblower 22716-13W v. Commissioner, 146 T.C. __, wherein the Court examined the $2 million threshold requirement of section 7623(b)(5)(B). See supra note 7. Section 7623(b)(5)(B) provides that for a whistleblower to qualify for the mandatory whistleblower award, “the tax, penalties, interest, additions to tax, and additional amounts in dispute [must] exceed $2,000,000.” In Whistleblower 22176-13W, the whistleblower provided information to the Government that resulted in the collection of a small tax restitution payment and Foreign Bank and Financial Accounts (FBAR) civil penalties under 31 U.S.C. sec. 5321(a) in an amount exceeding $2 million. The IRS Whistleblower Office denied the whistleblower’s claim for an award on the basis that (1) the Government had obtained complete information about the taxpayer’s activities from another source and (2) the whistleblower’s claim did not meet the $2 million threshold of section 7623(b)(5)(B) because FBAR penalties do not constitute “tax, penalties, interest, additions to tax, * * * [or] additional amounts”. In arguing his case before us, the whistleblower asserted that FBAR penalties constituted an “additional amount” as used in section 7623(b)(5)(B).
We rejected the whistleblower’s assertion. In interpreting what constitutes “additional amounts” we held that the phrase “additional amounts” as it appears in the series in section 7623(b)(5)(B), i.e., “tax, penalties, interest, additions to tax, and additional amounts”, was a term of art. We noted that the phrase “additional amounts” when used in a series that also includes “tax” and either “additions to tax” or “additions to the tax” appeared nearly 40 times in title 26, and when the words were tied together, as they are in section 7623(b)(5)(B), they had a specific technical meaning. We stated we repeatedly have held that the phrase “additional amounts”, which the whistleblower sought to extend to FBAR penalties, “is a term of art that refers exclusively to the civil penalties enumerated in chapter 68, subchapter A” of title 26 which are assessed, collected, and paid in the same manner as taxes. Whistleblower 22716-13W v. Commissioner, 146 T.C. at __ (slip op. at 19).
In reaching our holding, we determined that the wording in the threshold requirement of section 7623(b)(5)(B) (“if the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000”) is different from that of section 7623(b)(1), which provides for an award of a percentage of the collected proceeds (“including penalties, interest, additions to tax, and additional amounts”). After acknowledging that “the Supreme Court observed long ago that the word ‘proceeds’ is ‘of great generality’ * * * Phelps v. Harris, 101 U.S. (11 Otto) 370, 380 (1880)”, we explicitly rejected the whistleblower’s argument that we should read the phrase “collected proceeds” into section 7623(b)(5)(B), stating: “Congress could have employed, but did not employ, the term ‘collected proceeds’ when drafting the $2,000,000 monetary threshold.” Whistleblower 22716-13W v. Commissioner, 146 T.C. at ___ (slip op. at 22). We observed that the word “including” was not used in section 7623(b)(5)(B) and that “Congress explicitly and unambiguously provided that a whistleblower is eligible for a nondiscretionary award only ‘if the tax, penalties, interest, additions to tax, and additional amounts in dispute’ exceed $2,000,000.” Id. Moreover, we explicitly declined to entertain the Commissioner’s arguments that collected proceeds are limited to amounts collected under title 26 and that because FBAR penalties are paid under title 31, they do not constitute collected proceeds. Id. at __ n.6 (slip op. at 14).It would seem that, in light of this holding, the Tax Court is poised to hold that FBAR penalty collections would clearly be collected proceeds.