Another Good Reason to Hate the IRS

As if anyone needs yet another reason to hate the IRS...

William P Barret of the Forbes.com blog has put together the following article on the legal battle between Robert Coleman and the IRS, and why taxpayers have one more reason to despise the federal collection agency.

From Forbes.com:

You don’t have to be a supporter of the Tea Party to hold a dim view of the Internal Revenue Service. Still, we’re going to tell you about a case that will make your blood boil.

The agency told Robert Colman of Santa Monica, Calif. he had no claim to a 15% informant’s reward after reporting his 90-year-old mother was embezzled of $1 million by a Los Angeles accountant not paying taxes on his ill-gotten loot. But the feds told Colman–in writing–he could appeal the whistleblower bounty denial by suing in the U.S. Court of Federal Claims. Yet when Colman did just that–after the accountant pleaded guilty to a tax felony involving non-reporting of the very same money–the government said Colman had no right to sue.

Astonishingly, the IRS won.

The same court, which is based in Washington, D.C., just ruled that Colman was given very bad advice but that the federal laws establishing the tribunal did not give it jurisdiction over this kind of claim when Colman sought his reward in 2003. Judge Thomas C. Wheeler wrote he was “troubled” by the IRS written assertion that Colman could sue followed by the later denial but that a party cannot confer jurisdiction upon a limited-jurisdiction federal court simply by writing that it exists. “The public rightly should expect better from its federal agencies,” he wrote. But “the parties are powerless to create jurisdiction by consent.”

According to court records, the accountant in the case, Steven Krell, who was also a lawyer, later pleaded guilty to state grand theft charges involving Colman’s mother and one other person. Besides making what was described as “significant” restitution, he served some jail time, giving up his law and accounting licenses.

Continue reading at Forbes.com...

Can IRS Be Forced To Check Out Informant's Tip?

In the next few weeks the U.S. Tax Court is expected to rule on a lawsuit with huge implications on the new whistleblower law. The case involves a request from an informant that the IRS be ordered to investigate his tips.

According to Forbes.com, the matter involves the estate of Dorothy Dillon Eweson, one of two children of famed Wall Street financier Clarence Dillon (1882-1979). She died in 2005 at age 92, leaving behind what has been estimated at $300 million held personally and in trusts.

Five years later, the estate remains mired in probate litigation. In court papers Ann S. Peipers, widow of Eweson grandson David H. Peipers, who died of Legionnaires disease at age 48 two months before his grandmother, charges that other Eweson heirs improperly maneuvered to cut back a huge inheritance for her still-minor son, a great-grandchild of Eweson.

Ann Peipers' new boyfriend, Nashville lawyer William Prentice Cooper III, sought to take advantage of the tax whistleblower law, which Congress passed in 2006. It mandates a minimum 15% reward for collections resulting from tips. In August 2008 Cooper filed with the IRS' new Whistleblower Office the first of several Form 211 applications "for award for original information."

Continue reading at Forbes.com…

UBS Informant Files Complaint With DOJ

According to ABC News.com, the key whistleblower in the UBS tax evasion case - Bradley Birkenfeld – filed a complaint on Tuesday that prosecutors made false statements to the judge who sentenced him to prison.

Attorneys for informant Bradley Birkenfeld asked for an in internal Justice Department investigation and said the "inaccurate, misleading and incomplete" allegations should be corrected. The complaint was filed with the department's Office of Professional Responsibility, which investigates ethical matters involving prosecutors and other employees.

"These statements had a material impact on Mr. Birkenfeld, and caused the Department of Justice to improperly seek jail time for one of the most important tax whistleblowers in American history," wrote Birkenfeld attorneys Stephen Kohn and Dean Zerbe in the complaint.

Justice Department spokesman Charles Miller declined comment.

Birkenfeld, 44, is scheduled to begin serving a prison term Friday of more than three years. He and his attorneys — affiliated with the National Whistleblowers Center — have embarked on a campaign to reduce or eliminate the sentence based on his disclosures, which led UBS last year to pay a $780 million fine and agree to reveal names of thousands of suspected American tax cheaters.

City to Pay for Informing on Tax Cheats

According to a new article from NBC Chicago, a few cities in the Chicago metropolitan area are going to begin offering financial rewards for citizens who provide information on tax cheats. Although the IRS has been running a whistleblower program for years, it is a new development for local governments. Check out the article explaining the new tax protocol below.

Chicago and Cook County residents aren’t the only ones about to get shocking tax news; the city is debuting a “tax whistle-blower” plan that could turn neighbor against neighbor in Chicago’s business community.

The folks at city hall will pay cash bounties to informants who turn in business tax cheats around the city. The reward would amount to some sort of percentage of the tax money that the city recovers.

"It's just another way of bringing people into compliance," Revenue Department spokesman Ed Walsh told the Sun-Times.

Courts Decided, Mental Anguish Awards Are Taxable

The day before Independence Day a D.C. federal appellate reversed their decision in the case of Murphy v. IRS. The courts decided that payments made as damages for personal injury are taxable by the United States congress. It’s no coincidence that the decision came the day before a holiday as it is clearly an effort to avoid negative publicity surrounding this milestone case.

Marrita Murphy was awarded damages for emotional distress and loss of reputation after she complained to the whistleblower office about environmental hazards at her job at the New York Air National Guard. After winning her whistleblower case in 1994 she was awarded $70,000.00 by the Department of Labor Administrative Review. Murphy claimed that the Guard blacklisted her and gave her bad references after she made her complaint to the Labor Department about Environmental conditions.

Shortly after receiving the money she found herself paying a hefty tax bill of more then $20,000.00. However Murphy asked for a refund of the tax on grounds that her damages were not income, but compensation for a personal injury which cannot be taxed. She fought the tax bill and eventually found herself in a legal battle against the United States Internal Revenue Service.

On August 22nd 2006, a D.C. federal appellate panel decided in Murphy v. IRS, that Murphy’s award was not income but compensation for the loss of a personal attribute, which could not be taxed. The court noted that Murphy was awarded damages for emotional distress and loss of reputation. The court was essentially treating her award as they would treat awards for physical injuries, which are protected from.

After the decision there was quite a bit of backlash form the government as well as from bloggers and legal experts around the world. The ruling raised the wider issue on the constitutionality of the tax code provisions that allows for taxing of awards from personal injuries. Legal experts around the country claimed the ruling was a significant threat to the IRS’s ability to collect taxes and that it would open the door for other constitutional challenges to the tax code. This case could "launch a thousand constitutionality arguments that people would have thought laughable before," claimed Yale Professor Michael Graetz.

Although the IRS called for a full appeals court to hear the matter, the same three-judge panel decided to rehear the case. On December 22nd, the Friday before Christmas, the panel announced they would rehear the case instead of allowing the entire D.C. Circuit to review the case. Although there is no supporting evidence, it seems likely that the court made this announcement in such proximity to the holiday in order to avoid negative publicity for having to rehear a popular case. This is a tactic known to most political scientists as it often used in political media representation.

During the hearing the IRS urged the court to treat damages to people differently from damages to property. The IRS claimed that compensation awarded for the loss of an arm or leg is not a payment to make the person whole, but rather the payment was part of a "forced sale." According to this logic if a person suffers mental breakdowns because they witnessed the death of their child any payment for the mental illnesses can be taxed because the victim was forced to sell their mental health for the amount of the award. Therefore any money gained from a forced sale would be considered income of the victim and can be taxed.

After hearing both side’s arguments the court agreed with the IRS’s "forced sale" argument saying that "Murphy’s situation seems akin to an involuntary conversion of assets; she was forced to surrender some part of her mental health and reputation in return for monetary damages," –Murphy v. IRS, p. 2. The court announced on July 3rd that Murphy must pay taxes on the income she received from the Labor Department. Again, the courts issued their announcement just before another national holiday, making another obvious attempt to avoid negative publicity by manipulating the media.

"We reject Murphy’s argument in all aspects," claimed Chief Justice Douglas H. Ginsburg. "We hold that a tax upon such damages is within Congress’s power to tax. Murphy no doubt suffered from certain physical manifestations of emotional distress, but the money awarded her was for mental pain and anguish and for injury to professional reputation."

"We conclude (1) Murphy’s compensatory award was not received on account of personal physical injuries, and therefore is not exempt from taxation pursuant to § 104(a)(2) of the IRC; (2) the award is part of her "gross income," as defined by § 61 of the IRC; and (3) the tax upon the award is an excise and not a direct tax subject to the apportionment requirement of Article I, Section 9 of the Constitution. The tax is uniform throughout the United States and therefore passes constitutional muster. The judgment of the district court is accordingly affirmed."
"Murphy intends to seek further review in the courts," said her attorney David Colapinto. "The decision makes a mockery of make-whole remedies under civil rights law. So don’t get hurt, because you’re never going to be made whole. Uncle Sam will take a tax cut."

"The Court’s reversal stands reality on its head. When whistleblowers suffer retaliation, they do not ‘sell’ their mental health," continued Colapinto. "If people are injured in a car accident, they do not ‘sell’ their arms or legs. These are real human losses, and compensation to restore that human loss was never indented to be ‘income’ under our Constitution or the tax code."

"This decision is a terrible setback for all victims of civil rights abuses. It permits congress to enact retaliatory taxes, stripping people from the constitutional protections afforded property. Damages to whistleblowers are not part of a business transaction – forced or otherwise. They are part of harm caused by illegal conduct. This decision threatens fundamental human rights," claimed Setphen Kohn, President of the National Whistleblower Center.

Further Reading

TaxProf Blog: D.C. Circuit Panel Reverses Itself in Murphy, Upholds Constitutionality of Taxation of Award for Nonphysical Injury

Associated Press: Court: Mental Anguish Awards Are Taxable

NY Times: Nonphysical Injury Awards May Be Taxed, Court Rules

National Whistleblower Center Press Release: Court Reverses Itself On Key Tax Case

Roth & Co.: 'Murpyh' Goes Out With A Whimper

WSJ Law Blog: D.C. Circuit Reverses Itself in Tax Ruling