Supreme Court won’t hear whistleblower complaint about alleged IRS misconduct

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The Supreme Court decided not to review the dismissal of a lawsuit filed by three whistleblowers who claimed the Internal Revenue Service (IRS) failed to investigate their claim that institutional mortgage lenders did not comply with regulations.

The nation’s highest court refused to grant the petition for certiorari, or review, in Stone v. Commissioner of Internal Revenue, in an unsigned order on April 1. No justices dissented. The court did not explain its decision. The justices had considered the petition at their private conference on March 28. For a petition to advance to the oral argument stage, at least four of the nine justices must vote to grant it.

David E. Stone, Thomas Carroll, and David C. Depadro tipped off the IRS that several real estate mortgage investment conduits (REMICs), financial vehicles that lenders use to hold a pool of mortgages and issue mortgage-backed securities, were out of compliance with tax exemption rules. Mr. Carroll died and his wife, Kari S. Carroll, took his place as petitioner in the legal proceeding.

Americans owe $12.1 trillion on 84 million mortgages, which represents 70.2 percent of all consumer debt in the United States.

REMICs are created and controlled by the largest financial institutions in the world, according to the petition.

They hold almost all residential mortgage loans in the United States that were originated by an institutional lender. Although they hold an enormous quantity of money, Congress decided that such income would not be taxed as long as they met certain conditions laid down in the internal revenue code and the code of federal regulations.

But in reality, REMICs do not meet the required conditions for tax-exempt status in the code or the regulations, the petitioners argued.

“For example, REMICs do not timely obtain or maintain ‘qualified mortgages’ as that term is defined in the Code. REMICs do not even comply with the documentation requirements in their own internal ‘pooling and service agreements.’ For example, REMICs are required by their own internal agreements to maintain promissory notes endorsed by the owners. In practice, they do not.

“They certainly do not meet the 99% compliance threshold required by the Code of Federal Regulations. That means that, by law, REMICs are not secured creditors holding ‘qualified mortgages,’ but are instead unsecured creditors of the borrowers whose notes and mortgages they claim to own.”

This means they should be disqualified from tax-exempt status as a matter of law, the petition states.

The petitioners discovered the problem with REMICs and reported it to the IRS, which acknowledged receipt of the information.

Some IRS investigators found the information was correct but the agency refused to interview the petitioners.

“It then repeatedly ruled that it will do nothing to collect the taxes owed by REMICs. This is wrong. It cheats every American taxpayer,” the petition states.

The IRS “dropped the ball by failing to collect billions or more in taxes from the largest financial institutions in the world: the entities that underwrote and profited from virtually every residential mortgage in the United States. The big losers in this dispute are everybody else: all the American taxpayers who do follow the rules and pay their fair share of taxes within the bounds of the Code.”

The legal issue in the case, according to the petition, is whether “the Commissioner, as an arm of the executive branch, has absolute discretion and sovereign immunity under the Administrative Procedure Act [APA] to decline to collect billions of dollars in income taxes on bundled mortgages that are otherwise taxable under the Internal Revenue Code[.]”

The APA is a federal statute enacted in 1946 that governs administrative law procedures for federal executive departments and independent agencies. The late U.S. Sen. Pat McCarran (D-Nev.) said the APA was “a bill of rights for the hundreds of thousands of Americans whose affairs are controlled or regulated in one way or another by agencies of the federal government.”

The IRS did not provide its side of the story to the Supreme Court. The IRS commissioner, Danny Werfel, waived his right to respond to the petition in a document filed on March 5 by his counsel, U.S. Solicitor General Elizabeth Prelogar.

The whistleblowers originally sued in federal court in the Southern District of Florida, claiming that the IRS should have reviewed and audited at least some of the REMICs and tried to recover some of the taxes owed.

Although the IRS possesses “discretion” to decide not to audit certain taxpayers, that discretion does not include the power to write off an entire category of revenue contrary to congressional intent, the whistleblowers argued.

However, the federal district court and the U.S. Court of Appeals for the 11th Circuit found that the Administrative Procedure Act could not be used to review the IRS’s position.

The executive branch has discretion to refuse to pursue tax from non-compliant REMICs, the 11th Circuit held. The whistleblowers cannot sue under the APA to force the IRS to act, the court found.

The U.S. Department of Justice (DOJ) declined to comment on the Supreme Court’s decision.

“We don’t have a comment,” DOJ spokesman Matthew Nies said by email.

The Epoch Times also reached out to the whistleblowers’ attorney, Robert J. Hauser of Sniffen and Spellman in West Palm Beach, Florida, but had not received a reply as of press time.

This article by Matthew Vadum appeared April 2, 2024, in The Epoch Times.