No automatic stay in whistleblower case

The Tax Court held that a taxpayer’s case involving the review of a denial of a whistleblower award was not subject to an automatic stay due to the taxpayer’s bankruptcy filing.

Background

John Carter filed a whistleblower claim with the IRS Whistleblower Office (WBO) in May 2015 claiming that the target of the claim had incorrectly reported a transaction that Carter had engaged in with the target. The WBO referred Carter’s claim to an IRS operating division for examination as part of its ongoing audit of the target for other tax years.

In January 2022, the WBO issued a final determination denying the claim, in which it stated Carter’s information did not result in the collection of any proceeds or result in an assessment regarding the issues raised in his claim. Carter petitioned the Tax Court to review the WBO’s denial of the claim.

Subsequently, in August 2024, Carter filed for bankruptcy. In the case, the IRS filed a proof of claim for unpaid tax for prepetition years, but the record did not establish when or how it assessed the unpaid tax.

When the Tax Court learned of Carter’s bankruptcy filing, it requested that the parties address whether an automatic stay of the Tax Court proceedings applied. Carter argued that an automatic stay applied because his whistleblower claim concerned his tax liability. This was because the claim and his tax liability arose from the same transaction and involved the same operative facts. In the alternative, he argued that the potential for a setoff of his whistleblower award against his tax liability meant that his Tax Court case concerned his tax liability.

Tax Court’s decision

The Tax Court held that Carter’s bankruptcy filing, pursuant to Bankruptcy Code Section 362(a)(8), did not automatically stay the proceedings in his Tax Court case because the resolution of the whistleblower case would not affect his tax liability.

A taxpayer’s bankruptcy filing generally triggers an automatic stay of Tax Court proceedings involving a debtor-taxpayer’s tax liability. The automatic stay operates to temporarily bar actions against or concerning the debtor or property of the debtor or the bankruptcy estate.

The current version of Bankruptcy Code Section 362(a)(8) stays Tax Court proceedings “concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief” under the Bankruptcy Code. The Tax Court had not previously interpreted the current version of this section, but it had interpreted the previous version of the statute.

The previous version of Section 362(a)(8) contained the phrase “concerning the debtor” instead of “concerning the tax liability of a debtor.” The court had narrowly interpreted the phrase “concerning the debtor” to mean that the automatic stay “should not apply unless the Tax Court proceeding possibly would affect the tax liability of the debtor in bankruptcy” (Kovitch, 128 T.C. 108, 112 (2007)).

The Tax Court found that there was no reason to change its prior interpretation of Bankruptcy Code Section 362(a)(8) based on the amendment of the statute. According to the court, the amendment clarified that the automatic stay applies only in cases involving the tax liability of the debtor-taxpayer.

The Tax Court explained that under Sec. 7623(b), it has jurisdiction to review an IRS determination to deny a whistleblower award. However, the jurisdiction is limited to a review of whether the IRS abused its discretion in denying the whistleblower award. The Tax Court does not have jurisdiction to review or determine the whistleblower claim target’s tax liability or to review the IRS’s decision not to proceed with an administrative action against the target or its decision not to assert that the target incorrectly reported its tax liability.

Based on its jurisdiction, the Tax Court found that, in Carter’s case, its decision did not involve any factual findings about the target’s and his transaction or its proper tax treatment. Thus, it concluded that its review of the denial of his whistleblower claim could not affect the amount of Carter’s prepetition tax liability in his bankruptcy case, and, consequently, an automatic stay did not apply.

The Tax Court also rejected Carter’s setoff argument. As the court noted, Bankruptcy Code Section 362(a)(7) imposes an automatic stay on a creditor’s setoff rights. Thus, the statute’s automatic stay of the IRS’s right to set off Carter’s whistleblower award against his tax liability was separate from the automatic stay that applies to Tax Court cases concerning a debtor’s tax liability. Before the IRS could exercise any right to set off a whistleblower award against Carter’s unpaid tax liability, it would be required to obtain relief from the stay from the bankruptcy court. Thus, the court reasoned that “there is no need for the bankruptcy filing to prevent this Court from determining whether [Carter] is in fact entitled to a whistleblower award.”

Reflections

While Carter’s case involved the review of a whistleblower award denial, the principle involved is not limited to this type of case. For example, in Kovitch, the Tax Court held that a bankruptcy filing by the former husband of a taxpayer, who intervened in the taxpayer’s Tax Court innocent-spouse relief case, did not trigger an automatic stay. The court held that an automatic stay did not apply because the former husband’s joint tax liability would not be affected by the court’s decision regarding the wife’s request for innocent-spouse relief. 

Carter, 163 T.C. No. 6 (2024)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.