WASHINGTON – Tax controversy lawyer Brad Waterman has failed to get a federal court to force the Internal Revenue Service to give him documents pertaining to a “suspected practitioner misconduct” charge filed against him in 2014 by an IRS revenue agent.

Waterman said he is considering an appeal.

Mark Scott, former head of the IRS Tax-Exempt Bond Office who now is in private practice representing whistlebowers, believes the IRS is treating Waterman unfairly.

The allegation stemmed from Waterman’s representation of the New Hampshire Health and Education Facilities Authority (NHHEFA), which issued $135.4 million of adjustable rate education loan revenue bonds in 2011 and lent the proceeds to the New Hampshire Higher Education Loan Corp. for student loans.

The IRS had charged, among other things, that the authority violated tax requirements by engaging in “loan swapping,” or reallocating student loans made the proceeds of one bond issue to another. Waterman contended that there was nothing wrong with loan swapping and eventually won the case before the IRS’s Office of Hearing Appeals.

In March 2014, IRS revenue agent Michael Marchetti filed a "suspected practitioner misconduct charge" against Waterman in connection with the case with the agency's Office of Professional Responsibility (OPR). But Waterman was not informed of the charge until six months later when OPR told him about it. OPR said it would not make further inquiries or take any disciplinary action against him, but would retain the report against Waterman in a file for 25 years where it could be referenced in any future OPR investigations or proceedings.

Waterman filed a Freedom of Information Act request to obtain the report, but said the IRS gave him only one and a half pages of the main 12 to 13 page report. He then sued the IRS in the U.S. District Court for the District of Columbia to obtain the documents.

On Jan. 24, Judge Richard Leon, who sits on the court, ruled in favor of the IRS, concluding “that the IRS’s decision to withhold the information at issue was lawful under FOIA.”

In a footnote, Leon said he declined to review the IRS documents and instead relied on the agency's detailed descriptions of them.

Waterman said he is disappointed with Leon’s ruling.

"It is troubling that – based on the deliberative process privilege – the District Court allowed the IRS to withhold the factual allegations underlying its assertion that I violated Circular 230 in connection with my representation of NHHEFA in a dispute relating to a tax accounting methodology referred to as loan swapping – a methodology which Appeals conceded was proper,” Waterman told The Bond Buyer.

Circular 230 contains certain Treasury rules governing lawyers and others who practice before the IRS.

“Absent extraordinary circumstances, such as matters of national security, the government should be required to share with a citizen charges which it lodges against him.” Waterman said. “However, the decision stands for the proposition that the IRS may withhold charges of professional misconduct in every case – like my case – in which the Office of Professional Responsibility declines to conduct an investigation. This is grossly unfair – an example of government operating in the shadows. Clearly, the IRS is hiding something. We are considering our options, including an appeal."

Mark Scott, former head of the IRS Tax-Exempt Bond Office who now has a private practice representing whistleblowers, said, “I agree with Brad. It’s unfair to potentially bring charges against somebody and not tell them why. It doesn’t seem right from a fairness standpoint.”

One of the interesting things about the tax dispute with the IRS, which may or may not have affected the allegation filed against Waterman, is that the NHHEFA submitted a request to settle the IRS loan swapping charges against it on July 30, 2012 under a special voluntary closing agreement program that the IRS had set up for student loan bonds.

The authority had agreed to pay the IRS an undisclosed sum of money to settle the dispute. But the IRS wanted NHHEFA to admit to a tax law violation and the authority refused to do so. Waterman withdrew NHHEFA’s application from the VCAP in July 2013.

In ruling on the case, Leon said the IRS withheld two sets of information based on two FOIA exemptions. One concerned the telephone numbers and email addresses of particular agency employees, which were redacted.

“I conclude that the IRS’s redaction of contract information was proper under [FOIA] Exemption 6,” the judge said.

The IRS also withheld: two memoranda, dated September 2013 and December 2013, that summarized certain facts that TEB employees believed warranted Waterman’s referral to OPR; an Aug. 26, 2014 memorandum prepared by an OPR analyst that was sent to the manager of the IRS’s Legal Analysis Branch as well as a related OPR computer print-out; and portions for a Sept. 4, 2014 email from the Legal Analysis Branch manager to an OPR attorney.

The IRS basis for withholding this information was FOIA Exemption 5, which shields from disclosure all “inter-agency or intra-agency memorandums or letters that would not be available by law to a party other than an agency in litigation with the agency.”

Leon concluded for these documents that the IRS properly relied on Exemption 5.

The judge granted the IRS summary judgment, allowing it to win the case without a trial. It denied a similar request by Waterman.

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