In Part I, we looked at how the U.S. Tax Court sustained an IRS rejection of a whistleblower claim relating to a foreign citizen who apparently was born in the U.S. The Tax Court, apparently without IRS objection, concluded that it had subject matter jurisdiction to review IRS rejections of whistleblower claims like those in Whistleblower 15977-18W v. Commissioner, which are based on the IRS conclusion that the claim provided no “‘specific and credible’ information about a federal tax issue or non-compliance.” Such information is required to avoid rejection under Treasury Regulation Section 301.7623-1(c)(4). The Tax Court then stated it would grant the IRS summary judgment on that IRS rejection if the IRS conclusion of the lack of “specific and credible” evidence is supported by the administrative record, is in accordance with law, and is not arbitrary, capricious, or an abuse of discretion.
Somewhat inexplicably, the Tax Court focused solely on the whistleblower’s allegations of the target’s U.S. citizenship. The Tax Court did not focus on whether the whistleblower’s statements as to the target’s assets would fail to constitute “‘specific and credible’ information about a federal tax issue or non-compliance.” The IRS reviewer noted in the file that the Form 211 “did not provide bank statements, financial records or source documents that would allow the Service to determine amounts, tax years…etc.”
The Tax Court did not focus on the requirement in Treasury Regulation Section 301.7623-1(c)(4) that the claims not be “speculative” to avoid rejection of the claims. In McCrory v. Commissioner, the Tax Court had pointed out that the Internal Revenue Manual, while not binding on the IRS, did concede that whistleblower allegations that are based on or supported by public information are not to be adversely viewed as purely speculative in nature.
U.S. Citizenship at Birth?
Citing the 14th amendment of the U.S. Constitution, the Tax Court in Whistleblower 15977-18W stated that the petitioner “did not provide specific and credible information sufficient to establish that the target was a citizen of the U.S. at birth.” The Tax Court did not explain why a copy of the U.S. birth certificate, coupled with the description of the parents’ perhaps non-diplomatic status at the time of the target’s U.S. birth, was not specific and credible information.
The Tax Court has granted the IRS summary judgement on the IRS rejection of whistleblower claims, by reason of the allegations not being credible, where the internal databases available to the IRS contradicted the allegations in the claim. For example, in Kansky v. Commissioner, the whistleblower alleged that the target corporation, whose business was supplying temporary personnel, improperly treated those personnel as independent contractors for employment tax purposes and issued them 1099-MISC forms rather than correctly treating those personnel as corporate employees subject to wage withholding. The IRS, reviewing its internal databases, found that the target corporation’s income tax returns showed no indication that the corporation used independent contractors or had ever issued 1099-MISC forms. The IRS rejected the whistleblower claim, and the Tax Court granted summary judgement in favor of the IRS.
By contrast, in Whistleblower 15977-18W, the IRS reviewer made no adverse comment on the whistleblower’s allegations that the birth certificate demonstrated that the target was a U.S. citizen at birth. Further, the reviewer noted that he was unable to locate a Social Security number for the target, which is consistent with the whistleblower’s claim that the target never filed tax returns. Unlike Kansky, in Whistleblower 15977-18W, the IRS internal databases apparently included nothing to contradict the whistleblower’s allegations.
U.S. Citizenship Lost?
The Tax Court further stated that, “even assuming for the sake of argument that the target was a citizen of the United States at birth, the fact that the target rose to a position of prominence and influence in Country X casts serious doubt on the proposition that the target retained U.S. citizenship status into adulthood.” However, the IRS file excerpts quoted in Whistleblower 15977-18W never mentioned the possibility of the target engaging in expatriating acts described in 8 U.S.C. Section 1481(a)(4)(A). The Tax Court never mentioned why it believed an expatriation under 8 U.S.C. Section 1481(a)(4)(A) or other provision occurred, including how the statutory requirement of intent to expatriate and the statutory presumption against expatriation were surmounted. Nor did the Tax Court mention the possible bar of Section 7701(a)(50) to prevent loss of the target’s U.S. citizenship for U.S. tax purposes.
The Tax Court in Whistleblower 15977-18W did mention that the whistleblower could not find any public record that the target exercised any of the fundamental rights or privileges of U.S. citizenship, such as obtaining a U.S. passport. Traveling on a U.S. passport has been found to evidence an intent for a U.S. citizen at birth not to have had the intent to voluntarily surrender her U.S. citizenship when she earlier performed what could otherwise be an expatriating act described in 8 U.S.C. Section 1481(a), as noted in Action S.A. v. Marc Rich & Co. However, the Tax Court did not state that it viewed the target’s lack of use of a U.S. passport as an affirmative indicium of intent to expatriate.
Criticism of Whistleblower 15977-18W
The determinations of the IRS and in Whistleblower 15977-18W, seem to show a lack of an iron will in the IRS to ferret out past tax noncompliance by accidental Americans. For example, the initial IRS reviewer of the whistleblower claim noted the target’s name was unknown and the target was not identified as a reason for rejection even though the whistleblower included the target’s birth certificate and biographical information. Another IRS technician apparently expressed doubt relating to the target’s alleged citizenship despite receiving a copy of the target’s U.S. birth certificate, stating there was “no specific and credible information about a federal tax issue or non-compliance.” The Tax Court affirmed the IRS claim rejection based on possible factual and legal assumptions about the target’s absence of current U.S. citizenship, which assumptions one might well, taking into account Walby, be characterized as frivolous or speculative.
In January 2022, two weeks after the Tax Court’s December 2021 decision in Whistleblower 15977-18W, the D.C. Circuit decided Li v. Commissioner. In Li, without any jurisdictional issue being raised by the IRS or the whistleblower, the D.C. Circuit held on its own initiative that—contrary to the Tax Court’s conclusion in Whistleblower 15977-18W, Kansky, and many other pre-2022 cases—neither the Tax Court nor the D.C. Circuit has subject-matter jurisdiction to review an IRS rejection of a whistleblower claim, not pursued by the IRS, on the grounds that the claim lacks specific and credible information. At this writing, it is unknown whether the whistleblower in Li will seek D.C. Circuit en banc review or Supreme Court certiorari.
Accidental Americans should not take too much comfort in Whistleblower 15977-18W and Li. As noted in the Tax Court opinion in Whistleblower 15977-18W, the IRS may allow the whistleblower in Whistleblower 15977-18W itself to supply additional information in support of the previously rejected claim. In other cases involving claims against accidental Americans similar to that in Whistleblower 15977-18W, the IRS could decide to proceed to examine the target.
Further, outside of the whistleblower program, there is the possibility of an IRS inquiry of the continued U.S. citizenship of accidental Americans being triggered by other events, such as through FATCA due diligence by an accidental American’s foreign financial institution. Individuals who become aware of their potential U.S. citizenship as accidental Americans should immediately consider reviewing their U.S. tax position.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Alan S. Lederman is a shareholder at Gunster, Yoakley & Stewart, P.A. in Fort Lauderdale, Fla.
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