David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: presidential settlement.

President Trump's legal battle with the IRS over his leaked tax returns and subsequent settlement has been the subject of much scrutiny. This unprecedented case and resolution have experts questioning the legality of the settlement and courts considering reopening the lawsuit.

So where do things stand with the suit, and what are the potential ramifications of these decisions?

Here to talk more about this is Tax Notes legal reporter Mary Katherine Browne. MK, welcome back to the podcast.

Mary Katherine Browne: Happy to be here.

David D. Stewart: Can you remind listeners of what the terms of the settlement are?

Mary Katherine Browne: Certainly. Under the private agreement, Trump and the other plaintiffs don't receive any monetary payments. However, they receive a formal apology from the IRS and the creation of a compensation fund that would provide a systemic process to hear claims of others who have suffered from alleged weaponization and lawfare.

The "Anti-Weaponization" Fund is supposed to be a $1.8 billion fund drawn from Treasury's Judgment Fund, a standing congressional appropriation used to pay valid court judgments and settlements. The fund is designed to be overseen by a five-member commission appointed by the attorney general with one member being chosen in consultation with congressional leadership.

The commission was supposed to submit quarterly reports to the attorney general, but faces no obligation to publicly disclose its procedures, decision-making process, or the identities of fund recipients. Separately, the acting attorney general signed a May 19 order establishing a broad release clause that permanently bars the government from pursuing any claims arising from tax returns filed by Trump, his family members, affiliated individuals, trusts, and entities.

David D. Stewart: And what's happening in the courts related to this?

Mary Katherine Browne: Well, currently there's four cases challenging the Anti-Weaponization Fund. There's Floyd v. Department of Justice in the U.S. District Court for the Eastern District of Virginia. And then there's three cases in the U.S. District Court for the District of Columbia. There's Dunn v. Trump, Gordon v. Blanche, and Citizens for Responsibility and Ethics in Washington v. Department of Justice.

The case with the most activity is the Floyd case. Recently, the judge issued a permanent injunction against the Anti-Weaponization Fund stating she would drop the case if the associate attorney general and the Treasury secretary sign a declaration under penalties of perjury that they wouldn't take any action to create or operate the fund and the fund wouldn't proceed in any manner.

On June 19 the government filed a notice stating that they wouldn't be submitting a signed declaration, arguing that the declarations were unnecessary and compelling testimony from senior officials raises separation of powers' concerns.

On top of these cases, Judge Kathleen Williams of the U.S. District Court for the Southern District of Florida is considering reopening the initial Trump v. IRS case after 35 retired federal court judges filed a motion urging her to investigate whether the settlement underlying the Anti-Weaponization Fund was a product of collusion and a fraud upon the court.

David D. Stewart: I understand you recently talked with someone about this. Who did you talk to?

Mary Katherine Browne: I recently had the opportunity to chat with Brandon DeBot, senior attorney and policy director of the Tax Law Center at New York University.

David D. Stewart: And what all did you talk about?

Mary Katherine Browne: We discussed the unusual nature of the settlement and its underlying lawsuit, whether the Anti-Weaponization Fund is still around, the legalities around the fund and its associated audit ban, what Congress can do, and the consequences if neither the courts nor Congress intervene.

David D. Stewart: All right, let's go to that interview.

Mary Katherine Browne: All right. Well, hi, Brandon. Thank you for taking the time to join us on the podcast today. We have a lot to cover, but let's start with how you and the Tax Law Center got interested in this situation.

Brandon DeBot: Sure. And thanks so much for having me on. I'm Brandon DeBot. I'm a senior attorney-adviser and policy director at the Tax Law Center. We're a nonpartisan organization that's focused on protecting the integrity of the federal tax system. Many of our staff come from major law firms as well as IRS and DOJ. Most of our work is technical research papers, comment letters, amicus briefs, and the like. And we work closely with practitioners and former government officials, and our advisory board includes former officials from Republican and Democratic administrations.

Over the last couple of years, we have closely examined the laws on taxpayer privacy and political interference in the tax system. We've also launched a project on remaking tax administration, which will focus on creating an executable vision for rebuilding and reimagining how the tax system is administered. So when news began to break on this lawsuit and then the settlement, we were well positioned to examine the issues and educate the public about the potential consequences.

Mary Katherine Browne: I've been following along with all your commentary on the case and the fund. So let's dive in and go to the beginning to where this all started.

Brandon DeBot: Absolutely. So this lawsuit began as a taxpayer privacy suit under section 7431 of the tax code. It was brought by the president, his sons, and the Trump Organization over alleged taxpayer privacy violations stemming from the leaks of the president's tax returns during 2019 and 2020 by Charles Littlejohn, who accessed the returns when he was working as an IRS contractor.

Littlejohn was prosecuted by DOJ during the Biden administration. He pled guilty and was sentenced to the maximum prison term of five years under section 7213 of the tax code. In this case, the Trump plaintiffs sought $10 billion in damages over the disclosure of their tax returns. The complaint did not have any claims at issue related to broader weaponization allegations or the plaintiff's particular tax liability. In other words, it didn't have any claims related to the core relief that DOJ eventually offered.

Mary Katherine Browne: There have been several lawsuits that have sprung up from the Littlejohn disclosures. How does this case differ from those?

Brandon DeBot: It's completely different in terms of how the government has defended or, in this case, not defended the litigation. In this case, DOJ failed to take any action or even identify an attorney working on the suit from the day it was filed in January until it was dismissed on May 18.

In Griffin and Safe Harbor International, by contrast, these are two other cases stemming from the Littlejohn leaks. The government raised Littlejohn's contractor status as a defense. The government argued that it was not liable because it is only responsible under section 7431 for the violations of government employees, and Littlejohn was a contractor. The government didn't assert that defense here.

There was also a potential defense about whether the two-year statute of limitations had run on the president's claim, as an amicus brief argued that it had, but the government didn't assert that defense. There's been New York Times reporting that the IRS prepared a 25-page defense memo recommending these potential defenses and that the government moved to dismiss the complaint.

But instead of vigorously defending the government here, there was an extraordinary settlement that created a $1.8 billion compensation fund, and the acting attorney general ordered a broad release of claims, including tax audits for the president and his affiliates.

Mary Katherine Browne: All right. We're going to move on to the nitty-gritty of the Anti-Weaponization Fund. The settlement extends benefits to unidentified third-party claimants who were never parties to the initial lawsuit. In the recent Floyd case, Senators [Cory] Booker (D-N.J.) and [Bill] Cassidy (R-La.) argued that DOJ's own Justice Manual prohibits third-party payments without strong connection to the underlying violation. How far out of bounds from a normal settlement is this structure?

Brandon DeBot: This structure is an unprecedented use of the Judgment Fund, as far as we can tell, and it's difficult to see how it could be a valid use of the Judgment Fund. The Judgment Fund is a permanent, indefinite appropriation that Congress has enacted to allow the government to pay out settlements without needing separate congressional approval for each one. It's available only to pay litigants in an actual or imminent lawsuit, but here, the materials that DOJ has released state that the plaintiffs will not receive monetary payments from the fund and that the $1.8 billion payout does not represent the value of their claims.

The materials only refer to the Trump v. IRS lawsuit and other claims by those plaintiffs. So it's hard to see how payouts to those not part of the underlying litigation could be an authorized use of the Judgment Fund. I'll also add that an interesting wrinkle here that goes to how unusual this structure is, is that using the Judgment Fund means that any payouts, if they do eventually happen, should be taxable to the Trump plaintiffs, since they would've been earned by those plaintiffs. Under the standard tax rules, if they directed the payout to the fund, that should represent an assignment of income from the plaintiffs who are eligible to receive the payment to others.

Mary Katherine Browne: It's kind of interesting that you said this is an unusual case with the Judgment Fund because, when pressed, acting Attorney General Blanche told the Senate subcommittee that the Keepseagle settlement was a legal precedent for this kind of compensation structure. Do you agree with that?

Brandon DeBot: I disagree. Keepseagle is distinguishable because that settlement involved funds paid to members of a class action. Only the funds that were unclaimed by class members went into a trust fund. This case, the Trump case, was not a class action, and the settlement bars the plaintiffs from receiving distributions from the fund. The fund had nothing to do with the underlying taxpayer privacy claims.

Additionally, the Keepseagle trust fund was created after full litigation in court, and the settlement's distribution of excess funds to nonprofit organizations was approved by the court. Here, there was not even an appearance by the government, let alone litigation or approval by the court before the administration tried to create the $1.8 billion fund.

Mary Katherine Browne: If I recall correctly, Judge Williams actually deliberately said in her dismissal order that there was no settlement on record.

Brandon DeBot: That's correct. The settlement was not put before the court for approval. It was entered in separately by the parties.

Mary Katherine Browne: Is that normal?

Brandon DeBot: So a settlement is a contract, and the contract can be entered inside or outside of court. If it is part of a court proceeding and approved by the court, then the court can enforce its terms. If it's not, then enforcement would require a separate litigation.

So it's not unusual for a settlement to be reached and not approved by the court. What's very unusual about this case is the way the settlement was reached with the president on both sides of the litigation, and then the actual substance of the settlement agreements, including the $1.8 billion fund, and then the release of tax claims that was separately entered into.

Mary Katherine Browne: On June 2 acting Attorney General Blanche told the Senate Appropriations subcommittee that the DOJ was permanently dropping the fund. In the same breath, he confirmed the underlying agreement hadn't been rescinded and that his May 19 audit ban still remains.

He also refused to put any rescission in writing and recently refused a court order in the Floyd case to sign a statement under penalties of perjury that the settlement fund was dead, wouldn't be revived in any shape or form. Given that the legal instruments creating the fund are still on the books, do you think the fund is actually dead or that its death requires something more formal?

Brandon DeBot: So I think you summarized the status really well in that the fund is not moving forward, for now, according to the government, but there hasn't been anything in writing from both sides nullifying the settlement agreement. And the president has continued to suggest interest in this concept of a compensation fund, and senior administration officials haven't agreed to say in writing that the fund is dead.

There also haven't been structural reforms blocking the administration from trying to take a similar approach in the future. So I think, for now, the fund is not moving forward, but there's nothing that's preventing the administration from attempting to resuscitate it or something similar in the future.

Mary Katherine Browne: As you're aware, along with the settlement, there is a separate order by acting Attorney General Blanche in which the government is basically banned from litigating, investigating, or continuing ongoing audits to Trump, his family, and affiliates.

Acting Attorney General Blanche claimed that anytime the IRS settles with an individual taxpayer or company as part of a settlement, it's standard to get rid of past ongoing audits. Do you agree with that statement?

Brandon DeBot: I think what DOJ has done here with acting Attorney General Blanche's addendum is unprecedented. DOJ does not have unilateral authority to agree to drop IRS audits in this litigation. DOJ's settlement authority in tax cases only extends to the matters referred to DOJ.

Here, the only relevant matter that was referred to DOJ, based on publicly available sources, is President Trump's taxpayer privacy lawsuit. DOJ settlement authority, in this case, would be limited to those claims. So I think it is incorrect that DOJ typically resolves lawsuits with a broad release of unrelated claims, including claims regarding tax liability.

Mary Katherine Browne: Is there any way to challenge the legality of this audit ban? And if so, who would have proper standing to bring suit here?

Brandon DeBot: I think it would be difficult to establish standing in court to challenge the acting attorney general's order. There may be parties that try to do so. It is possible that someone could claim affiliation with the president and attempt to invoke the acting attorney general's addendum, and it could get litigated that way. So I could imagine parties trying to challenge it, but there will be a challenge with standing.

Mary Katherine Browne: If Judge Williams does decide to open the original case and find that there has been a fraud upon the court, does that have any effect on the Anti-Weaponization Fund and this audit ban?

Brandon DeBot: I think the court's consideration of whether there's been a fraud on the court speaks to the extraordinary nature of the case and real concerns about possible collusion, given the president's role on both sides of the case, and then the outcome that was reached, we're in pretty uncharted waters.

The fraud on the court issue has now been fully briefed by both sides, but there hasn't been action by the court as of our recording today on June 23. I imagine the court's examining the briefing and its authority to determine what, if anything, it can do about the settlement and the audit release and release of other claims, and might also be considering Rule 11 sanctions if it is convinced that there's been a fraud on the court. But I don't want to speculate further on how the court might rule while that briefing is pending.

Mary Katherine Browne: In previous Tax Law Center statements, you argued that the settlement negotiations with the audit raised substantial questions under section 7217. Can you explain that argument to our listeners?

Brandon DeBot: Of course. There are serious concerns about whether there have been violations of the tax system's protections against political interference, and those concerns warrant investigation. The first provision that you mentioned is section 7217, which was enacted on an overwhelmingly bipartisan basis after President Nixon tried to use the IRS to target political enemies.

Section 7217 makes it unlawful for the president, White House staff, and certain other political officials to directly or indirectly request that the IRS terminate an audit of any particular taxpayer. Violations of section 7217 carries serious criminal penalties, including a maximum five-year term of imprisonment.

There's been recent New York Times reporting with details about how the president discussed the audits and how his advisers received drafts of the settlement, which suggests that officials covered by section 7217, including the president, may have sought to influence the acting attorney general to give the release, including release of tax audits that he gave in his May 19 order.

I'll note there's also another long-standing statute that may be relevant. Section 7212 makes it a crime to corruptly interfere in a particular tax audit or investigation, and it covers everyone, both government officials and private citizens.

Reporting suggests that those involved in negotiating the settlement were aware of at least one pending audit of President Trump, which, according to The New York Times, had recently entered into settlement talks and had likely more than $100 million in dispute. So that suggests they may have been trying to interfere with that audit through the negotiations that led to this agreement.

So there are serious concerns about potential violations of both of these statutes, and those warrant investigation, including who was involved and the substance of this negotiations. Oversight bodies, including Congress and future administrations, should thoroughly investigate to determine whether there were violations.

Mary Katherine Browne: On June 22 an amicus brief was filed in Trump v. IRS by a coalition of former officials that argued that though there's a carveout in section 7217 for the attorney general in the statute, he can't do for the president what the president can't legally do for himself. I'm curious what your thoughts on this argument are.

Brandon DeBot: I agree with the argument that the attorney general can't do for the president what the president can't do for himself here, and that goes in my mind to section 7217's prohibition on indirect interference in audits.

Mary Katherine Browne: Unfortunately, I do have to ask this question, and that's how likely do you think it is that we're going to see legal ramifications under [section] 7217?

Brandon DeBot: I don't want to predict how likely it might be, but I think it's important that there be thorough investigation, and there are many bodies that could undertake that investigation. First, as I mentioned, Congress could investigate. Additionally, section 7217 has a mandatory reporting requirement by IRS employees who receive a request that they believe is improper, and they are required, and face criminal penalties if they do not report to the Treasury Inspector General for Tax Administration.

So Congress included that provision as a way to ensure that potential violations of these laws could be investigated. And then I think a future administration could also choose to investigate and hold people accountable for any wrongdoing in this series of events.

Mary Katherine Browne: You mentioned Congress, which leads me to this question. What can Congress do in this situation?

Brandon DeBot: Yeah. Members of Congress in both parties have expressed major concerns about the $1.8 billion fund and the release of claims. And there's in fact a lot that Congress could do. Congress should fully unwind the settlement as quickly as possible and then ensure that similar presidential self-dealing can't be attempted again.

There are three core components to this. First, Congress should directly block the release of claims and add more guardrails, so that powerful officials in future administrations can't try to effectively close their own audits. That includes just nullifying the release of claims directly, as some members, including Senator Cassidy and Senator Wyden, have proposed, and that could also include preventing the IRS from entering into final closing agreements with the president and other powerful officials, and extending the statute of limitations.

Second, Congress should not only fully block the $1.8 billion fund before any payments are made, but also ensure that this type of attempt can't be made again. As I mentioned earlier, there's nothing currently blocking the administration from trying something similar in the future. And third, it's important for Congress to investigate the potential criminal violations of the tax code's protections against political interference that we've been discussing.

Mary Katherine Browne: And that leads me to this final question. If Congress doesn't act and the courts ultimately decide not to block the audit ban or the fund, what are the practical consequences and ramifications for our legal system?

Brandon DeBot: I think there is a potential loss of revenue and a really concerning loss of trust. On the revenue side, audits could be closed that might have otherwise resulted in additional taxes paid, directly reducing revenue and increasing budget deficits. As one example, there's The New York Times reporting that President Trump's company recently entered into settlement talks for one long-running audit with likely more than $100 million still potentially in dispute. But given how broad the release is, it could potentially cost revenue from many other audits of the president and his affiliates.

And then on trust, there are real risks that violations of the protections that are supposed to ensure neutrality, and that the tax laws apply the same without regard to politics or other characteristics that should be irrelevant, could erode trust in the tax system. The idea that a different set of rules apply to different taxpayers could erode trust.

The idea that statutes passed by Congress can be ignored with unauthorized actions has far-reaching implications for the tax code and could also erode trust. And this settlement and this taxpayer privacy lawsuit and the release of claims are part of a broader story of the breaking down of guardrails designed to prevent politicization of federal tax administration. And that's especially concerning because trust is extremely important to our tax system, which relies on voluntary compliance for the overwhelming majority of revenue collection.

Mary Katherine Browne: Thank you so much. You've given us a lot to think about.

Brandon DeBot: Thanks so much for having me on.

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