petitioner's opposition to motion to dismiss...

USTAXCOURT USTAXCOURTRECEIVED eFILED

JUN 15 2017 * JUN 15 20175:55 PM

GARTH SPENCER,

Petitioner,ELECTRONICALLY FILED

v- Docket No. 8760-17W

COMMISSIONER OF INTERNAL REVENUE,

Respondent

PETITIONER'S OPPOSITION TO MOTION TO DISMISS FORFAILURE TO STATE A CLAIM UPON WHICH RELIEF CAN BE

GRANTED

SERVED Jun 15 2017

UNITED STATES TAX COURT

GARTH SPENCER,

Petitioner,

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

)))) Docket No. 8760-17W

))))

Petitioner's Opposition to Respondent'sMotion to Dismiss for Failure to State a Claim

ISSUE TO BE DECIDED

Congress amended the tax whistleblower law to provide whistleblowers with

judicial review of IRS award determinations. Petitioner seeks judicial review of the

IRS' denial of his whistleblower claim. However, due to IRS policies and taxpayer

confidentiality laws, Petitioner has no information regarding the IRS' actions or

collections related to his claim. Is Petitioner required to plead facts that he cannot

know in order to obtain judicial review?

. OPPOSITION TO MOTION TO DIsMIss

DOCKET No. 8760-17W

TABLEOFCONTENTS

BACKGROUND .......................................................................................................1

ARGUMENT.............................................................................................................2

I. Congress Intended to Provide Judicial Review for DeniedWhistleblower Claims ...........................................................................2

II. Whistleblowers with Denied Claims Lack Essential Information........5

III. Whistleblower Pleading Requirements.................................................9

IV. The Court Should Determine that Lack of IRS Action andCollected Proceeds are Affirmative Defenses.....................................12

A. Under Lippolis, Access to Information Guides PleadingRequirements............................................................................12

B. The Motion Is Wrong to Assume that IRS Action andCollected Proceeds Must be Pled by the Petitioner..................13

V. In the Alternative, the Petition Satisfies the Court's NoticePleading Standard................................................................................16

A. Tax Court Pleading Standards ..................................................17

B. The Court Should Apply its Notice Pleading Standard toWhistleblower Cases.................................................................19

C. The Motion is Wrong to Apply the Heightened PleadingStandard of Twombly and Iqbal ...............................................22

D. The Petition Provides Fair Notice and Sufficient ReliableFacts to Merit Moving the Case Forward.................................23

CONCLUSION........................................................................................................25

.. OPPOSITION TO MOTION TO DIsMIss11 DOCKET NO. 8760-17W

TABLE OF AUTHORITIES

Cases

Ascon Properties, Inc. v. Mobil Oil Co.,866 F.2d 1149 (9th Cir. 1989)............................................................................14

Ashcroft v. Iqbal,556 U.S. 662 (2009).....................................................................................17, 20

Bell Atlantic Corp. v. Twombly,550 U.S. 544 (2007)..................................................................................... 17, 20

Bennett v. Comm'r,T.C. Memo. 1997-505.................................................................................. 14, 18

Car Carriers, Inc. v. Ford Motor Co.,745 F. 2d 1101 (7th Cir. 1984)...........................................................................14

Carskadon v. Comm'r,T.C. Memo. 2003-237..................................................................................18, 24

Cohen v. Comm'r,139 T.C. 299 (2012)......................................................................... 10, 13, 14, 23

Comparini v. Comm'r,143 T.C. 274 (2014)..........................................................................................5, 9

Conley v. Gibson,355 U.S. 41 (1957)........................................................................... 14, 15, 17, 23

Cooper v. Comm'r,135 T.C. 70 (2010).......................................................................................2, 3, 8

Cooper v. Comm'r,136 T.C. 597 (2011)......................................................................... 11, 15, 16, 25

Cross v. Comm'r,T.C. Memo. 2012-344.........................................................................................22

... OPPOSITION TO MOTION TO DIsMIss111 DOCKET NO. 8760-17W

Gonzalez v. Comm'r,T.C. Memo. 2017-105.....................................................................................8, 24

Jacobson v. Comm'r,148 T.C. 4 (2017)................................................................................................22

Lippolis v. Comm'r,143 T.C. 393 (2014)......................................................................... 1 1, 12, 16, 20

Perales v. Comm'r,T.C. Memo. 2017-90...........................................................................................21

Phillips v. County of Allegheny,515 F.3d 224 (3d Cir. 2008) .................................................................. 10, 22, 23

Smith v. Comm'r,148 T.C. 21 (2017)................................................................................................8

Swierkiewicz v. Sorema N.A.,534 U.S. 506 (2002)............................................................................................15

Whistleblower 11332-13W v. Comm'r,142 T.C. 396 (2014)..........................................................................................3,9

Whistleblower 14106-10W v. Comm'r,137 T.C. 183 (2011)..............................................................................................2

Whistleblower 21276-13W v. Comm'r,147 T.C. 4 (2016)..................................................................................................9

Statutes

Internal Revenue Code sec. 6103...............................................................................5Internal Revenue Code sec. 6103(b)(2)(A)................................................................5Internal Revenue Code sec. 6104(b)..........................................................................7Internal Revenue Code sec. 7213...............................................................................5Internal Revenue Code sec. 7453...................................................................... 14, 18Internal Revenue Code sec. 7623(b)(1)............................................................ 11, 16Internal Revenue Code sec. 7623(b)(4).....................................................................3Internal Revenue Code sec. 7623(b)(5)(B)..............................................................11

. OPPOSITION TO MOTION TO DIsMIssIV DOCKET NO. 8760-17W

Other Authorities

Charles Alan Wright & Arthur R. Miller,FEDERAL PRACTICE AND PROCEDURE (3d ed. 2004)...........................................12

Carlton M. Smith, Letter to United States Tax Courtre: Proposed Tax Court Rule Changes (Sept. 25, 2015)........................ 18, 20, 22

Carlton M. Smith, Tax Court Should Reject Twombly/Iqbal Plausibility Pleading,136 TAX NOTES 835 (Aug. 13, 2012).................................................... 18, 20, 22

Internal Revenue Manual 25.2.1.2.1 (Dec. 23, 2008)................................................5Internal Revenue Manual 35.5.2.4.1 (Dec. 31, 2012)..............................................21Internal Revenue Manual 35.5.2.4.2 (Dec. 31, 2012)..............................................21

Press Release, Grassley Highlights Potential for Whistleblowerson Big-dollar Tax Cheating (Sept. 9, 2011) .........................................................3

Press Release, Grassley on the IRS Whistleblower Office (June 3, 2015)...............4

Response from Commissioner Koskinen to Senator Grassley (undated)..................4

Staff of Joint Comm. on Taxation,Technical Explanation of H.R. 6408 (J. Comm. Print 2006)...............................3

Tax Relief and Health Care Act of 2006,Pub. L. 109-432, 120 Stat. 2958...........................................................................2

Rules

T.C. Rule 1(b) ..........................................................................................................19T.C. Rule 31(a).........................................................................................................19T.C. Rule 31(b) ........................................................................................................19T.C. Rule 31(d) ........................................................................................................19T.C. Rule 33(b) ..........................................................................................................8T.C. Rule 70(a)(1)....................................................................................................21T.C. Rule 70(c).........................................................................................................21

OPPOsITION TO MOTION TO DIsMIssy

DOCKET NO. 8760-17W

Regulations

Treas. Reg. § 301.7623-2(a)(2)..................................................................................8Treas. Reg. § 301.7623-2(a)(3)..................................................................................8Treas. Reg. § 301.7623-2(b) ......................................................................................8Treas. Reg. § 301.7623-3(c)(4)(A) ............................................................................6Treas. Reg. § 301.7623-3(c)(4)(B).............................................................................6Treas. Reg. § 301.7623-3(c)(8)..................................................................................6Treas. Reg. § 301.7623-3(e)(2)..................................................................................6

. OPPOSITION TO MOTION TO DIsMIssVI DOCKET NO. 8760-17W

Petitioner hereby responds to the Commissioner's Motion to Dismiss for

Failure to State a Claim Upon Which Relief Can be Granted, dated June 2, 2017

(the "Motion"). Petitioner respectfully requests that the Court deny the Motion.

BACKGROUND

1. Petitioner submitted a whistleblower claim to the IRS Whistleblower

Office dated May 1, 2015, alleging that a taxpayer owed $7.3 million in tax and

penalties. (Pet. ¶¶6A-B). The Whistleblower Office processed this claim, assigning

it claim number 2015-012102. (Pet. ¶6C). Approximately two years after

Petitioner's submission, the IRS denied the claim on the grounds that "the IRS

took no action based on the information that you provided." (Pet. ¶6H).

2. Petitioner requested further information from the IRS regarding the

denial of his claim, including the opportunity to review the administrative claim

file. The IRS provided no further information. (Pet. ¶¶6F-G).

3. Petitioner has no current relationship with the taxpayer. (Pet. ¶6I).

Petitioner presently cannot obtain information to confirm or disprove the IRS'

assertion that no action was taken based on Petitioner's information. (Pet. ¶6J).

4. The Petition in this case was filed on April 24, 2017. Six weeks later,

the Commissioner filed the Motion seeking to dismiss this action for failure to state

a claim. Specifically, the Commissioner argues that Petitioner is required to allege

DOCKET No. 8760-17W

facts showing that the IRS took action based on his information, and that the IRS

collected proceeds based on his information. (Mot. ¶¶l l, 14-15).

5. As of the date of this Opposition, no discovery has taken place.

ARGUMENT

L Congress Intended to Provide Judicial Review for DeniedWhistleblower Claims

6. The tax whistleblower program presently codified at section 7623 '

has existed in various forms since 1867. See Whistleblower 14106-10W v.

Comm'r, 137 T.C. 183, 186 (2011). In 2006 Congress substantially revised the

whistleblower program. Tax Relief and Health Care Act of 2006 (TRHCA), Pub.

L. 109-432, div. A, sec. 406, 120 Stat. 2958 (effective Dec. 20, 2006).

7. Congress amended section 7623, "to address perceived problems"

with the tax whistleblower law. Cooper v. Comm'r, 135 T.C. 70, 73 (2010)

("Cooper I"). For example, "most rejected claims did not provide the rationale for

the reviewer's decision." Id. The IRS made arbitrary award decisions stemming

from a "lack of standardized procedures and limited managerial oversight." Id.

8. Prior to 2006 there was no express statutory provision for judicial

review of tax whistleblower claims. Whistleblower 14106-10W, 137 T.C. at 186.

The amendment provided for judicial review of certain IRS award determinations:

' All section references are to the Internal Revenue Code unless otherwise indicated.

2 OPPOSITION TO MOTION TO DIsMIss

DOCKET No. 8760-17W

Any determination regarding an award under paragraph (1), (2), or (3)may, within 30 days of such determination, be appealed to the Tax Court(and the Tax Court shall have jurisdiction with respect to such matter).

Sec. 7623(b)(4). This provision does not impose any pleading requirements or

similar conditions on a whistleblower's right to appeal an award determination.

9. Congress intended the law to provide judicial review of all types of

IRS award determinations, including denials. Cooper I, 135 T.C. at 75 (citing Staff

of Joint Comm. on Taxation, Technical Explanation of H.R. 6408, at 89 (J. Comm.

Print 2006) ("The provision permits an individual to appeal the amount or a denial

of an award determination to the United States Tax Court * * * within 30 days of

such determination.")); Whistleblower 11332-13W v. Comm'r, 142 T.C. 396, 402

(2014) (the Court's determination that whistleblower met pleading requirements

was "consistent with TRHCA's intent to provide whistleblowers with judicial

review of award determinations").

10. Senator Charles Grassley was the principal author of the 2006

amendments to the tax whistleblower law. See Press Release, Grassley Highlights

Potential for Whistleblowers on Big-dollar Tax Cheating (Sept. 9, 2011).2

11. While admittedly not forming part of the TRHCA's legislative

history, Senator Grassley's recent comments on the whistleblower program

illustrate his intent to provide Tax Court review of IRS determinations. In 2015

2 Available at https://www.grassley.senate.gov/news/news-releases/grassley-highlights-potential-whistleblowers-big-dollar-tax-cheating.

DoCKET No. 8760-17W

Senator Grassley submitted questions to IRS Commissioner John Koskinen in

connection with a Senate hearing on the IRS' budget. See Press Release, Grassley

on the IRS Whistleblower Office; Key Court Case, Commissioner Responses to

Grassley Questions (June 3, 2015).3 The Senator stated:

I again find myself frustrated with an IRS Chief Counsel office thatseems to wake up every day seeking ways to undermine thewhistleblower program both in the courts and the awards. I am especiallyconcerned that chief counsel is throwing every argument it can think ofagainst whistleblowers in tax court. It appears at times that the ChiefCounsel's office thinks its job is to come up with hyper technicalarguments and seek to deny awards to whistleblowers . . . I ask that youroffice and the director of the whistleblower office review the chiefcounsel's wasteful and harmful litigation positions that undermine thewhistleblower program.

Response from Commissioner Koskinen to Senator Grassley (undated).4

12. As discussed below, if the Court were to adopt the pleading

requirements proposed in the Motion, then many (if not most) whistleblowers with

denied claims would be effectively precluded from obtaining judicial review. This

result would run counter to clear Congressional intent to provide judicial review

for denied whistleblower claims.

13. This Court has carefully given effect to Congressional intent when

confronted with arguments that would constrain whistleblower access to judicial

3 Available at https://www.grassley.senate.gov/news/news-releases/grassley-irs-whistleblower-office-key-court-case-commissioner-responses-grassley.

4 Available at https://www.grassley.senate.gov/sites/default/files/news/upload/IRS%20responses%20from%20IRS%20commissioner%20to%20Grassley%20from%20February%20hearing%2C%206-3-15.pdf(last visited June 12, 2017).

OPPOSITION TO MOTION TO DIsMIss

DOCKET No. 8760-17W

review. Comparini v. Comm'r, 143 T.C. 274, 282 (2014) ("we hold that we have

jurisdiction . . . If it were otherwise, the Commissioner could largely frustrate

judicial review by issuing ambiguous denials that did not seem to be, but were,

determinations"); id. at 286 ("We believe that adoption of the Commissioner's

contentions in this case would create an unnecessary trap for individuals seeking to

invoke our jurisdiction under section 7623(b)").

II. Whistleblowers with Denied Claims Lack Essential Information

14. Due to tax confidentiality laws and IRS policies, whistleblowers with

denied claims often have no information about IRS actions and collected proceeds.

15. Tax returns and return information are confidential, and unauthorized

disclosure of return information is a criminal offense. Sec. 6103; sec. 7213. Return

information includes not only the existence or amount of any payments, but also

the existence of an IRS examination. Sec. 6103(b)(2)(A).

16. Because of the confidential nature of tax information it is the policy

and practice of the IRS, and the Whistleblower Office in particular, not to disclose

taxpayer information to whistleblowers, except in narrowly specified

circumstances not applicable here. See Internal Revenue Manual 25.2.1.2.1 (Dec.

23, 2008) ("DO NOT DISCLOSE any tax return or account information to the

whistleblower about the alleged tax violator").

DoCKET No. 8760-17W

17. If the Whistleblower Office approves an award under section 7623(b)

the whistleblower is provided an opportunity to review a detailed report "that states

a preliminary computation of the amount of collected proceeds." Treas. Reg.

§ 301.7623-3(c)(4)(A). In addition the whistleblower will have the opportunity to

review the administrative claim file, which contains detailed IRS records regarding

all aspects of the whistleblower claim. Treas. Reg. § 301.7623-3(c)(4)(B); Treas.

Reg. § 301.7623-3(e)(2). In such circumstances, the whistleblower may well have

access to sufficient information to plead in a Tax Court petition any relevant facts

relating to IRS action and collected proceeds.

18. If, on the other hand, the Whistleblower Office denies an award under

7623(b) it does not provide the whistleblower with a detailed report or the

opportunity to review the administrative claim file. See Treas. Reg. § 301.7623-

3(c)(8). Although the IRS will provide the "basis for the denial" (see id.), this is

generally a terse statement with limited factual content, similar to that provided to

Petitioner in the present case (i.e., "the IRS took no action based on the

information that you provided").

19. Therefore, a whistleblower with a denied claim is unlikely to know

the underlying facts relating to whether his information led to IRS action or

collected proceeds. Of course, in some circumstances a denied whistleblower will

have more information. A whistleblower may have an ongoing employment


DOCKET No. 8760-17W

relationship with a taxpayer in which the whistleblower is privy to tax information.

However, the existence of such exceptional cases does not change the general rule

that whistleblowers with denied claims do not know what actions are taken by the

IRS or by the relevant taxpayers.

20. Here, Petitioner has no information about the actions taken by the

IRS, or any resulting actions by the taxpayer. Petitioner has no current relationship

with the taxpayer. (Pet. ¶6I). Petitioner's request for more information about his

claim was denied by the IRS. (Pet. ¶¶6F-G).

21. The taxpayer at issue in Petitioner's claim is, admittedly, required to

publicly disclose certain tax information. See sec. 6104(b). However, it is unclear

whether payment of the tax liabilities reported by the Petitioner would appear in

the taxpayer's public disclosures. In any event, the taxpayer's disclosures are

created and made public only after a time lag far longer than the 30 day window in

which an IRS determination may be appealed to the Tax Court.5

22. Because Petitioner has no information about the IRS' actions or

collections from the taxpayer, he is unable to meet the Motion's proposed

requirements that he plead facts showing IRS action and collected proceeds. See

s For example, a tax payment made in January 2016 by a calendar year taxpayer mightbe reflected on the taxpayer's 2016 return. With an automatic filing extension, 2016returns are not due until the fall of 2017. See 2016 Instructions for Form 990-PF, atpage 7; Form 8868, Application for Automatic Extension of Time To File an ExemptOrganization Return (Rev. Jan. 2017).

DoCKET No. 8760-17W

T.C. Rule 33(b) ("The signature of counsel or a party constitutes a certificate by

the signer . . . that, to the best of the signer's knowledge, information, and belief

formed after reasonable inquiry, it is well grounded in fact").

23. Petitioner should not be required to rely on the IRS' conclusory

assertion that it, "took no action based on the information that you provided." This

assertion may simply be mistaken as to the facts. See Gonzalez v. Comm'r, T.C.

Memo. 2017-105, at 5 n.5 ("Contrary to the statement in the final determination,

the record reflects that the IRS collected tax proceeds from taxpayer 1 as a result of

the information that petitioner provided to the Whistleblower Office").

24. Furthermore, section 7623(b) and its implementing regulations

contain considerable ambiguity surrounding definitions key terms, about which the

IRS and whistleblowers may reasonably disagree. See Treas. Reg. § 301.7623-

2(a)(2) (definition of "administrative action"); Treas. Reg. § 301.7623-2(a)(3)

("judicial action"); Treas. Reg. § 301.7623-2(b) ("proceeds based on").

25. The IRS has repeatedly taken legal positions that interpret section

7623(b) in narrow ways that would keep whistleblowers out of court or limit their

awards. E.g., Cooper I, 135 T.C. at 76 (rejecting IRS argument that denial letter

was not a "determination" that confers jurisdiction on Tax Court); Smith v.

Comm'r, 148 T.C. 21, 24 (2017) (rejecting IRS argument that "amounts in

dispute" are limited to the part of collected proceeds attributable to whistleblower's


DOCKET No. 8760-17W

information). The IRS may conclude no action has been taken, or no proceeds

collected, merely because of a debatable legal interpretation. See Whistleblower

21276-13W v. Comm'r, 147 T.C. 4, 32 (2016) (rejecting IRS argument that

"collected proceeds" only include payments mandated by U.S. Code title 26). Such

an interpretation would preclude judicial review of a potentially meritorious claim.

26. Unless a denied whistleblower is provided some minimal factual

information, he cannot know how the IRS is interpreting the whistleblower law,

and cannot verify the IRS' conclusory rationale for denying a claim.

III. Whistleblower Pleading Requirements

27. The requirements for a whistleblower petition to survive a motion to

dismiss for failure to state a claim are not entirely clear. The Court has yet to

establish (i) what elements must be alleged in a whistleblower petition, or (ii) what

degree of factual specificity is required to support these allegations. Because the

Court only recently acquired jurisdiction over these cases, few decisions address

whistleblower pleading. See Comparini v. Comm'r, 143 T.C. at 283 (discussing the

Court's evolving perspective on the "developing whistleblower area").

28. On a motion to dismiss "[t]he issue is whether the claimant is entitled

to offer evidence to support the claims, not whether the claimant will ultimately

prevail on the merits." Whistleblower 11332-13W, 142 T.C. at 400.


DOCKET No. 8760-17W

29. Only one whistleblower opinion explicitly addresses the standard

applied to a motion to dismiss for failure to state a claim. Cohen v. Comm'r, 139

T.C. 299 (2012), aff'd, 550 F. App'x 10 (D.C. Cir. 2014). Cohen's discussion is

informative, but leaves significant questions unanswered:

We begin with the standard of review for a motion to dismiss for failureto state a claim. A petition should be simple, concise and direct. Rule31(b). A whistleblower petition must provide the basis on which thetaxpayer disagrees with the determination, supporting facts and a prayersetting forth the relief sought. Rule 341(b)(3)-(5). We construe allpleadings to do substantial justice. Rule 31(d). We may dismiss apetition for failure to state a claim upon which relief can be granted. Rule40. Dismissal for failure to state a claim is appropriate where, even if allof the allegations contained in a pleading are true, a claim fails as amatter of law. See Phillips v. County of Allegheny, 515 F.3d 224, 233(3d Cir. 2008).

Cohen at 301-02. Absent from this passage is discussion of (i) what elements must

be alleged in a whistleblower petition, or (ii) what degree of factual specificity is

required to support these allegations.

30. The Court did not need to grapple with such questions, as Cohen was

easily resolved based on the pleadings. The petitioner himself alleged that

"respondent denied his claim for an award without instituting an administrative or

judicial action or collecting any proceeds." Id. at 299-300. As such, no possible set

of facts consistent with the petitioner's allegations could have given rise to a

whistleblower award. See Cooper v. Comm'r, 136 T.C. 597, 600 (2011) ("Cooper


DOCKET No. 8760-17W

II") ("a whistleblower award is dependent upon both the initiation of an

administrative or judicial action and collection of tax proceeds"); sec. 7623(b)(1).

31. Another opinion, arising in the context of a motion to dismiss for lack

of jurisdiction, further clarified pleading requirements for whistleblower petitions.

Lippolis v. Comm'r, 143 T.C. 393 (2014). In Lippolis the petition did not allege an

amount in dispute exceeding $2 million. M. at 398; see sec. 7623(b)(5)(B). The

Commissioner argued that this warranted dismissal.

32. In Lippolis the Court implicitly recognized that pleading requirements

for whistleblower cases are not fully developed, and must be established by the

Court. See id. ("We next decide whether section 7623(b)(5) creates an affirmative

defense that must be pleaded in the answer . . . or whether it is an element of

petitioner's case and must be pleaded in the petition").

33. The Court took a practical approach to assign pleading requirements

based on the nature of the information in question, the parties' access to the

information, and the prejudicial effect of strict pleading requirements. M. at 400

("It would be unduly burdensome to require the whistleblower to provide or

perhaps even to know of the existence of those records").

34. Based on the petitioner's lack of access to relevant information, which

was readily available to the Commissioner, the Court concluded that the $2 million

11 SS

DoCKET No. 8760-17W

amount in dispute requirement is an affirmative defense, which the petitioner was

not required to plead in his petition. M. at 401.

IV. The Court Should Determine that Lack of IRS Action and CollectedProceeds are Affirmative Defenses

A. Under Lippolis, Access to Information Guides PleadingRequirements

35. Following the logic of Lippolis, the Court should determine that lack

of IRS action and collected proceeds are affirmative defenses. As such, Petitioner

is not required to plead IRS action or collected proceeds in the Petition.

36. The Court in Lippolis reasoned from the premise that "In deciding

whether a statute provides an affirmative defense, courts often consider practicality

and fairness." M. at 398-99 (collecting authorities from Circuit Courts of Appeal).

The opinion quotes from a leading civil procedure treatise:

"Fairness" probably should be viewed as a shorthand expressionreflecting the judgment that all or most of the relevant information on aparticular element of a claim is within the control of one party or that oneparty has a unique nexus with the issue in question and therefore thatparty should bear the burden of affirmatively raising the matter.

Id. at 398 n.5 (quoting 5 Charles Alan Wright & Arthur R. Miller, FEDERAL

PRACTICE AND PROCEDURE § 1271, at 603 (3d ed. 2004)).

37. As discussed above, information revealing the existence of IRS action

and collected proceeds is unavailable to Petitioner and other whistleblowers whose

claims are denied. Such information should be easily accessible to the


DOCKET No. 8760-17W

Commissioner in the administrative claim file. In fact, the Commissioner has

already demonstrated his access to information regarding Petitioner's claim by

alleging facts in the Motion that are not mentioned in the Petition. (Mot. ¶l)

(setting forth date Whistleblower Office received Petitioner's Form 211, type of

taxpayer, and nature of liability).

38. The Court should follow the logic of Lippolis to determine that IRS

action and collected proceeds are affirmative defenses.

B. The Motion Is Wrong to Assume that IRS Action and CollectedProceeds Must be Pled by the Petitioner

39. The Motion's legal discussion assumes that IRS action and collected

proceeds must be pled in the Petition. However, the Motion cites to no legal

authority so holding. The Motion offers no policy rationale to explain why the

burden of pleading IRS action and collected proceeds should fall on

whistleblowers. The Motion fails to acknowledge that Tax Court procedures are

not settled in this area.

40. The Motion's legal discussion begins with a citation to Cohen, and

largely consists of a recitation of Cohen's language regarding pleading standards.

(Mot ¶¶9-11). Insofar as it paraphrases Cohen, the discussion is unobjectionable.

41. The Commissioner then asserts, "a petition must contain allegations

respecting all the material elements necessary to sustain recovery." (Mot. ¶9). For

this proposition the Motion cites Ascon Properties, Inc. v. Mobil Oil Co., 866 F.2d

DoCKET No. 8760-17W

1149 (9th Cir. 1989). As the Motion acknowledges, Ascon considered complaints

in federal district courts, not Tax Court petitions.6 However, the Tax Court writes

its own procedural rules, and is not required to follow the procedures of the district

courts. Sec. 7453; Bennett v. Comm'r, T.C. Memo. 1997-505, at *14-15.

42. Furthermore, far from supporting the Commissioner's broadly phrased

proposition, this passage of Ascon merely contains a discussion of conflicting case

law interpreting the Supreme Court's notice pleading standard set forth in Conley

v. Gibson, 355 U.S. 41 (1957). Ascon, 866 F.2d at 1155 ("dismissal must be

reversed unless it appears to a certainty that the plaintiff is entitled to no relief

under any set of facts that could be proved . . . however . . . conclusory allegations

without more are insufficient to defeat a motion to dismiss for failure to state a

claim.") (internal citations and quotes omitted). Ultimately Ascon concluded that

the precise contours of the Conley pleading standard need not be decided, as the

complaint at issue pled sufficient facts to meet even a stricter standard.

43. Admittedly, other cases may be read to support the Commissioner's

proposition, at least as applied to federal district court complaints. E.g., Cg

Carriers, Inc. v. Ford Motor Co., 745 F. 2d 1101, 1106 (7th Cir. 1984) ("In

practice, a complaint . . . must contain either direct or inferential allegations

6 The Motion's citations to "id." following the cite to Ascon appear intended to referto the previously cited authority, Cohen. (Mot ¶¶9-11). These "id." cites refer todiscussions of Tax Court rules, but there is no discussion of Tax Court rules in Ascon,which was not a tax case and did not originate in Tax Court.

14 SS

DOCKET No. 8760-17W

respecting all the material elements necessary to sustain a recovery under some

viable legal theory") (internal quotes omitted).

44. However, yet other authority shows that the Commissioner's

proposition is far from a universal rule, even when limited to its proper context of

federal district court complaints. See Conley, 335 U.S. at 45-46 ("a complaint

should not be dismissed for failure to state a claim unless it appears beyond doubt

that the plaintiff can prove no set of facts in support of his claim which would

entitle him to relief"); Swierkiewicz v. Sorema N.A., 534 U.S. 506, 512 (2002)

("Given that the prima facie case operates as a flexible evidentiary standard, it

should not be transposed into a rigid pleading standard for discrimination cases").

45. Therefore, the Commissioner's broad assertion that "a petition must

contain allegations respecting all the material elements necessary to sustain

recovery," should not be credited. It does not fully reflect the complexity of the

law in the federal district and appellate court context cited by the Commissioner.

Moreover, the Commissioner cites no Tax Court authority for this point.

46. Concluding its discussion of legal authorities, the Motion cites to

Cooper II, stating "the elements of a whistleblower award under section 7623(b)

require proof that respondent (1) initiated an administrative or judicial action

against a taxpayer based on petitioner's information and (2) collected tax proceeds

from the target of that action based on such information." (Mot ¶l2).

DOCKET No. 8760-17W

47. Petitioner does not dispute that IRS action and collected proceeds are

necessary for a whistleblower award. See sec. 7623(b)(1). Nor does Petitioner

dispute that evidence regarding IRS action and collected proceeds is properly

considered on the more developed factual record of a motion for summary

judgment, as was the case in Cooper II. Cooper II, 136 T.C. at 599-601 (granting

summary judgment to Commissioner where he introduced memorandum

summarizing "the facts, legal analysis and legal conclusion" supporting award

denial, which showed no IRS action or collected proceeds).

48. However, it does not automatically follow, as the Commissioner

seems to argue, that whistleblowers are required to affirmatively allege IRS action

and collected proceeds in their petitions. It is not the case that every necessary

condition for recovery under a legal theory must be alleged in the initial pleading.

See Lippolis, 143 T.C. at 401 ($2 million amount in dispute required for mandatory

award under section 7623(b), but does not have to be alleged in the petition).

V. In the Alternative, the Petition Satisfies the Court's Notice PleadingStandard

49. As argued above, the Motion should be denied because the Court

should determine that lack of IRS action and collected proceeds are affirmative

defenses to be pled by the Commissioner.


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50. In the alternative, the Court should apply its traditional notice

pleading standard, under which the Petition states a claim by providing fair notice

to the Commissioner of the nature of this action and the grounds on which it rests.

A. Tax Court Pleading Standards

51. The legal standard to be applied in determining whether a Tax Court

petition will overcome a motion to dismiss for failure to state a claim is not entirely

clear. The Tax Court has traditionally applied the lenient notice pleading standard

of Conley v. Gibson, 355 U.S. 41 (1957). However, following two recent Supreme

Court decisions, the federal district courts have adopted a stricter plausibility

pleading standard. Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft

v. Iqbal, 556 U.S. 662 (2009).

52. Under Conley, courts merely require that a pleading give the

defendant fair notice of the plaintiff's claim and the grounds on which it rests.

Under this rule, "a complaint should not be dismissed for failure to state a claim

unless it appears beyond doubt that the plaintiff can prove no set of facts in support

of his claim which would entitle him to relief." Conley, 335 U.S. at 45-46.

53. Following the Supreme Court's decisions in Twombly and Iqbal, a

complaint in federal district court must now plead "enough facts to state a claim to

relief that is plausible on its face." Twombly, 550 U.S. at 570.

17 SS

DoCKET No. 8760-17W

54. Since the Supreme Court decided Twombly and Iqbal, the Tax Court

has neither adopted the plausibility pleading standard nor rejected Conley's notice

pleading standard. See generally Carlton M. Smith, Tax Court Should Reject

Twombly/Iqbal Plausibility Pleading, 136 TAX NOTES 835 (Aug. 13, 2012);

Carlton M. Smith, Letter to United States Tax Court Chief Judge Michael B.

Thornton re: Proposed Tax Court Rule Changes (Sept. 25, 2015) (the article and

letter collectively referred to herein as "Carlton M. Smith").7

55. A number of Tax Court memorandum decisions pre-dating Twombly

and Iqbal apply the notice pleading standard. E.g., Carskadon v. Comm'r, T.C.

Memo. 2003-237, at *5-6 ("Generally, we may dismiss a petition for failure to

state a claim upon respondent's motion when it appears beyond doubt that

petitioner can prove no set of facts in support of his claim which would entitle him

to relief.") (citing Conley); Carlton M. Smith supra ¶54 (Conley is cited in about

50 Tax Court memorandum opinions). This standard has served the Tax Court well

over many years, and there is no compelling reason to depart from it now.

56. The standard of Twombly and Iqbal is an interpretation of the Federal

Rules of Civil Procedure, relating to procedural (as opposed to evidentiary)

matters. The Tax Court writes its own procedural rules, and so is not required to

follow Twombly and Iqbal. Sec. 7453; Bennett v. Comm'r, T.C. Memo. 1997-505,

7 Letter available at https://www.ustaxcourt.gov/rules/suggestions/Carlton_M_Smith_9-25-15.pdf.


DOCKET No. 8760-17W

at *14-15. However, where the Tax Court Rules of Practice and Procedure do not

specify a procedural rule, "the Court or the Judge before whom the matter is

pending may prescribe the procedure, giving particular weight to the Federal Rules

of Civil Procedure to the extent that they are suitably adaptable to govern the

matter at hand." T.C. Rule 1(b).

57. As such, although the Tax Court is not required to adopt the

plausibility pleading standard of Twombly and Iqbal, the continued application of

the Conley notice pleading standard is not entirely free from doubt.

B. The Court Should Apply its Notice Pleading Standard toWhistleblower Cases

58. The Court does not appear to have considered the issue of whether

Conley on the one hand, or Twombly and Iqbal on the other, should govern

pleading in whistleblower cases. The Court should apply its traditional notice

pleading standard in whistleblower cases for the following six reasons.

59. First, the Tax Court rules employ the language and philosophy of

notice pleading. T.C. Rule 31(a) ("The purpose of the pleadings is to give the

parties and the Court fair notice of the matters in controversy and the basis for their

respective positions"); T.C. Rule 31(b) ("Each averment of a pleading shall be

simple, concise, and direct. No technical forms of pleading are required."); T.C.

Rule 31(d) ("All pleadings shall be so construed as to do substantial justice").

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60. Second, as discussed above, Congress intended for the 2006

amendment to section 7623 to provide judicial review of denied whistleblower

claims. The drafter of that amendment, Senator Grassley, has since spoken out

against the Commissioner's attempts to limit whistleblowers' access to this Court.

61. Third, also as discussed above, denied whistleblowers lack access to

essential information which is easily available to the Commissioner. Therefore it is

unfair to require such petitioners to make detailed factual pleadings without any

information from the IRS. See Lippolis, 143 T.C. at 398.

62. Fourth, because many whistleblower petitioners are self-represented

(as is the case generally with Tax Court petitioners), they should not be required to

meet a heightened pleading standard of which they are likely unaware. See Carlton

M. Smith supra ¶54 (approximately 70% of Tax Court petitioners are self-

represented).

63. Fifth, the concerns that motivated the Supreme Court to adopt the

heightened standard of Twombly and Iqbal are not present in Tax Court

whistleblower cases. The Supreme Court justified its heightened standard through

lengthy discussion of the "potentially enormous expense of discovery," and the

attendant risk of "in terrorem" nuisance settlements. Twombly, 550 U.S. at 558-

59; see also Iqbal, 556 U.S. at 685. No doubt, such concerns are pressing in federal

district court in the context of a private antitrust class action (Twombly), or a

DoCKET No. 8760-17W

Bivens action against the government for violations of an individual's

constitutional rights (Iqbal).

64. However, these concerns do not apply in the context of a Tax Court

whistleblower case where discovery is cheap, informal, and easily controlled by

the Court. See T.C. Rule 70(a)(1) (informal discovery); T.C. Rule 70(c)

(limitations on discovery). Furthermore, the IRS does not enter nuisance

settlements with Tax Court petitioners. Internal Revenue Manual 35.5.2.4.1 (Dec.

31, 2012) ("Cases and issues are to be settled on the merits"); Internal Revenue

Manual 35.5.2.4.2 (Dec. 31, 2012) ("No case is to be settled on a so-called

nuisance basis").

65. Sixth and finally, whistleblower cases that will not result in an award

can effectively be disposed of by the Commissioner at the summary judgment

stage. See Perales v. Comm'r, T.C. Memo. 2017-90, at *6 (summary judgment

granted where Commissioner showed lack of IRS action and collected proceeds);

id. at *4 ("The purpose of summary judgment is to expedite litigation and avoid

costly, time-consuming, and unnecessary trials"); id. (to survive a motion for

summary judgment the non-moving party "must set forth specific facts showing

there is a genuine dispute for trial") (internal citations omitted). Similarly, if a

whistleblower determines through informal discovery that maintaining a Tax Court


DOCKET No. 8760-17W

case is not warranted, the case may be voluntarily dismissed with the Court's

permission. See Jacobson v. Comm'r, 148 T.C. 4 (2017).

C. The Motion is Wrong to Apply the Heightened Pleading Standardof Twombly and Iqbal

66. The legal authorities cited in the Motion do not compel the Court to

adopt the Twombly and Iqbal pleading standard. The Motion fails to acknowledge

the uncertain state of the law regarding pleading standards in Tax Court cases.

67. The Motion sets forth plausibility pleading standards and cites to

Twombly and Iqbal for support, parenthetically indicating that Twombly has

abrogated the Supreme Court's "plaintiff-deferential standard in Conley." (Mot.

¶l 1). However, absent from the Motion is any authority indicating that the Tax

Court has adopted the stricter pleading requirements of Twombly and Iqbal, or that

the Tax Court has abrogated Conley. This is because no such authority exists.8

68. Nonetheless, the Motion's citation to Phillips v. County of Allegheny,

515 F.3d 224, 233 (3d Cir. 2008) merits closer inspection, if only because this

citation is taken from Cohen, a case discussing whistleblower pleading.

69. Phillips was decided shortly after Twombly, and analyzes Twombly at

length. However Cohen contains no mention of Twombly, and nothing in Cohen

8 Only one published Tax Court opinion appears to even mention Twombly or Iqbal,and then only in passing. Cross v. Comm'r, T.C. Memo. 2012-344, at *8 (quotingfrom petitioner's brief). Nor do the Court's unpublished orders support theCommissioner's position. See Carlton M. Smith supra ¶54.

DoCKET No. 8760-17W

suggests that the Tax Court's citation to Phillips was intended as an endorsement

of Twombly's plausibility pleading standard.

70. The Court in Cohen cited Phillips for the proposition that "Dismissal

for failure to state a claim is appropriate where, even if all of the allegations

contained in a pleading are true, a claim fails as a matter of law." Cohen, 139 T.C.

at 302. This statement does not describe anything particular to Twombly or

plausibility pleading. Rather, it is equally true under Conley's notice pleading

standard. A claim fails as a matter of law when no set of facts consistent with the

allegations could entitle a petitioner to relief. See Conley, 335 U.S. at 45-46.

71. Therefore, Cohen's citation to Phillips should not be construed as an

endorsement of plausibility pleading standards. On the contrary, the logic of

Phillips supports the use of a lenient notice pleading standard in whistleblower

matters. Even after Twombly, Phillips recognized that "[c]ontext matters in notice

pleading," and "[f]air notice under [Federal Rule of Civil Procedure] 8(a)(2)

depends on the type of case." Phillips, 515 F.3d at 232. What is required is merely

a "short and plain statement," and "some showing sufficient to justify moving the

case beyond the pleadings to the next stage of litigation." Id. at 232-33.

D. The Petition Provides Fair Notice and Sufficient Reliable Facts toMerit Moving the Case Forward

72. The Petition satisfies the Court's notice pleading standard because

there is a set of facts consistent with the Petition that would entitle Petitioner to

DoCKET No. 8760-17W

relief. See Carskadon, T.C. Memo. 2003-237, at *5-6. Petitioner alleges that he

lacks sufficient information to confirm or disprove the IRS' assertion that it took

no action based on his claim. (Pet. ¶6J). Informal discovery of the administrative

claim file may reveal that the IRS took action and collected proceeds. See

Gonzalez v. Comm'r, T.C. Memo. 2017-105, at 5 n.5 ("Contrary to the statement

in the final determination, the record reflects that the IRS collected tax proceeds

from taxpayer 1 as a result of the information that petitioner provided").

73. Moreover, the Petition goes beyond bare allegations under which

entitlement to relief is merely a theoretical possibility. Even under a notice

pleading regime the Court may serve a gatekeeping role by disposing of clearly

hopeless cases at the pleading stage. Here, the Petition makes a threshold showing

of sufficient reliability and factual specificity to merit moving the case forward.

74. The Petition was filed with a copy of the Commissioner's

determination. The Petition identifies the claim number assigned to Petitioner's

whistleblower claim. (Pet. ¶6C). The Petition identifies reported liabilities well in

excess of the $2 million threshold for section 7623(b) claims. (Pet. ¶6B).

75. Here, the Petition's allegations have put the Commissioner on notice

as to the nature of this action and the basic facts on which it rests. This is readily

apparent from the Motion's allegations about Petitioner's whistleblower claim that

are not contained in the Petition. (Mot. ¶l) (setting forth date Whistleblower Office


DOCKET No. 8760-17W

received Petitioner's Form 211, type of taxpayer, and nature of liability). Such

allegations show that the Commissioner has the relevant facts at his disposal.

76. While Commissioner may argue that the Petition does not provide

notice of certain facts on which an award determination would ultimately turn (i.e.,

what action was taken and what proceeds were collected), as discussed above, it is

premature to require such information from Petitioner at the pleading stage.

77. The Petition likewise provides fair notice of the relief requested. Only

one form of relief is available in whistleblower cases - the determination of

whether an award is due, and if so, the amount. See Cooper II, 136 T.C. at 600.

This relief is explicitly requested in the Petition. (Pet. at Prayer B).

78. Therefore, the Commissioner is on notice as to the nature of this

controversy and the grounds on which it rests, and Petitioner has made a sufficient

factual showing to warrant moving the case beyond the pleading stage. Because

Petitioner may be entitled to relief under the Petition's allegations, the case should

conmtue.

CONCLUSION

79. For the foregoing reasons Petitioner respectfully requests that the

Court deny the Motion.


DOCKET No. 8760-17W

Date: June 15, 2017 /s/ Garth SpencerGarth Spencer (pro se)GLANCY PRONGAY & MURRAY LLP

230 Park Avenue, Suite 530New York, NY 10169(646) [email protected] Court Bar Number SG0682


DOCKET NO. 8760-17W

petitioner's opposition to motion to dismiss...

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