WASHINGTON – Tax controversy lawyer Brad Waterman has filed a lawsuit against the Internal Revenue Service to obtain a report on alleged misconduct that a revenue agent filed against him in 2014.
While the IRS declined to pursue the allegations, it put the report in an administrative file on Waterman, which is to be kept open for 25 years and possibly added, if true, to any other reports of misconduct, according to court documents.
Waterman, who has practiced law for 40 years and currently mostly represents issuers fighting the IRS over muni bonds while splitting his time between Vermont, the District of Columbia, and Florida, suggests the agency's actions are "payback" for his winning a student loan bond case for a New Hampshire issuer.
But he's also upset that he wasn't made aware of the "Report of Suspected Practitioner Misconduct" until months after it was filed and the IRS now won't give him all of the documents relating to the case.
In his suit against the IRS, which he filed in U.S. District Court for the District of Columbia on Sept. 12, Waterman asked the court to: order the IRS to disclose the report in its entirety; charge the IRS with violating the Privacy Act and the Freedom of Information Act; and reimburse him for "reasonable costs" and attorney's fees.
According to Waterman, the legal battle stems from $135.4 million of adjustable-rate education loan revenue bonds issued in 2011 by the New Hampshire Health and Education Facilities Authority (NHHEFA), which Waterman represented.
NHHEFA lent the proceeds to the New Hampshire Higher Education Loan Corp., which used the proceeds for student loans.
On July 30, 2012, just one day before the filing deadline, NHHEFA submitted an application under the IRS' special voluntary closing agreement program for student loans. The authority, through the corporation that was the conduit borrower in the deal, proposed paying the IRS an undisclosed sum of money to settle tax issues.
IRS claimed at that time that student loan bond issuers and their conduit borrowers, such as NHHEFA and the NHHELC, had engaged in loan swapping by taking student loans financed from one bond issue and allocating them to bonds other than those that financed the loans. The IRS contended that this constituted a tax law violation that jeopardized the tax-exempt status of the bonds.
According to the federal tax code, yields on student loans cannot be more than 2% above the yields of the bonds used to make the loans.
Though NHHEFA was willing to settle under the special VCAP, the IRS said it wanted the issuer to admit to a tax law violation.
The authority refused and then Waterman withdrew NHHEFA's application from the IRS' VCAP in July 2013.
The IRS opened an audit of the student loan bonds and in November 2013 issued a Notice of Proposed Issue suggesting the bonds were taxable. The following month, the IRS sent the issuer a proposed adverse determination that the bonds were taxable. NHHEFA responded by appealing the ruling to the IRS Office of Appeals.
Waterman won the case.
But In April 2014, Michael Marchetti, a revenue agent with the IRS' Tax-Exempt Bond Office, filed a report of suspected practitioner misconduct against Waterman to the IRS' Office of Professional Responsibility, according to court documents.
Neither TEB nor OPR sent Waterman a copy of the report and he was unaware that TEB had begun a proceeding against him.
OPR section manager Takisha McGee notified Waterman in September 2014 that OPR would not investigate further, but said the office would retain the allegations in Waterman's permanent file for 25 years to be included, if true, as cumulative conduct if another referral relating to him was made during that span. OPR said Waterman could file a response to the report to be included in the file.
But both OPR and TEB refused to provide him with the report of alleged misconduct.
Waterman in January 2016 submitted a request under FOIA as well as the Privacy Act for documents including "correspondence, memoranda, notes, reports, and other documents" prepared by a number of IRS officials, including TEB director Rebecca Harrigal and TEB field operations manager Allyson Belsome.
On April 19, Reinita House, acting disclosure manager of "IRS Disclosure Office 08," told Waterman in a letter that 20 full pages and two partial pages of the 54-page report would be withheld due to FOIA exemptions, but Waterman protested that the letter didn't address his rights under the Privacy Act.
In May, Waterman appealed the denial of access to the records to the IRS Office of Appeals. The appeal was denied.
Waterman then filed suit three months later, a case that is being heard by Judge Richard Leon.
Waterman said it's unfair that a report of misconduct is filed against him and then he can't get all of the documents.
"My client elected to challenge TEB's assertion that loan swapping is improper." Waterman said. "Appeals agreed with my client's position. Given these circumstances, the report of suspected practitioner misconduct seems to be 'payback.' This is confirmed by the decision of the OPR not to bother with an investigation."
"I look forward to responding to the report - whatever it may say," Waterman added. "It is unfortunate and distressing that neither TEB nor the OPR would provide a copy and that I must litigate to secure a copy. After all, we live in the United States of America."
