Sihota v. Internal Revenue Serv. ( 2018 )

United States Court of Appeals
for the Federal Circuit
______________________
DALWINDER SIHOTA,
Petitioner
v.
INTERNAL REVENUE SERVICE,
Respondent
______________________
2017-2252
______________________
Petition for review of an arbitrator's decision by Louis
M. Zigman.
______________________
Decided: November 13, 2018
______________________
JESSICA HORNE, National Treasury Employees Union,
Washington, DC, argued for petitioner. Also represented
by LARRY JOSEPH ADKINS, GREGORY O’DUDEN.
ALEXANDER ORLANDO CANIZARES, Commercial Litiga-
tion Branch, Civil Division, United States Department of
Justice, Washington, DC, argued for respondent. Also
represented by ROBERT EDWARD KIRSCHMAN, JR., LOREN
MISHA PREHEIM, JOSEPH H. HUNT.
______________________
Before WALLACH, LINN, and HUGHES, Circuit Judges.
2 SIHOTA v. IRS
HUGHES, Circuit Judge.
Dalwinder Sihota petitions for review of an arbitra-
tor’s decision that reinstated her employment with the
Internal Revenue Service (IRS), but imposed a ten-day
suspension and reduced her back pay. Based on the
current record, we cannot discern what charges, if any,
support the ten-day suspension and reduction in back
pay. Therefore, we vacate the arbitrator’s decision and
remand for further proceedings.
I
Ms. Sihota was employed as a Lead Customer Service
Representative for the IRS, where she worked for over 25
years. In 2011, an IRS audit determined Ms. Sihota filed
her taxes improperly in 2003. Ms. Sihota reported a loss
of income based on her purported ownership of NKRS
Transport, a trucking company. The IRS audit, however,
revealed NKRS Transport was actually owned by Ms.
Sihota’s son. The IRS determined Ms. Sihota underpaid
$5,341 in taxes.
The IRS and Ms. Sihota agreed to a tax settlement
agreement for Ms. Sihota’s 2003 federal tax liability. In
the agreement, Ms. Sihota acknowledged she was not the
owner of NKRS Transport and had “acted negligently in
obtaining a refund . . . resulting in an underpayment of
the tax required to be shown on the income tax return in
the amount of $5341.00.” J.A. 9. Pursuant to this agree-
ment, Ms. Sihota repaid the tax assessment and penalty.
Because Ms. Sihota understated her tax liability, the
IRS also terminated her employment with the agency. In
September 2011, the IRS issued a notice of proposed
adverse action. In the notice, the IRS proposed to termi-
nate or otherwise discipline Ms. Sihota based on multiple
allegations, including willful understatement of her tax
liability, failure to accurately state tax liability, and
failure to timely pay tax liability.
SIHOTA v. IRS 3
The IRS removed Ms. Sihota in May 2012. The final
removal letter states “[a]ll reasons and specifications
[stated in the Notice of Proposed Adverse Action] are
sustained.” J.A. 83. The letter further notes Ms. Sihota
was charged with “either violating Section 1203(b)(9) of
the IRS Restructuring and Reform Act of 1998 . . . or
provisions of other laws, rules or regulations, including
Title 5 CFR Section 2635.809.” Id. Section 1203(b)(9)
requires the IRS to terminate any employee who willfully
understates their federal tax liability, “unless such under-
statement is due to reasonable cause and not willful
neglect.” Internal Revenue Service Restructuring and
Reform Act of 1998, Pub. L. 105-206, § 1203, 112 Stat.
685, 721 (1998) (codified at 26 U.S.C. § 7804 note). And 5
C.F.R. § 2635.809 states “[e]mployees shall satisfy in good
faith their obligations as citizens, including all just finan-
cial obligations, especially those such as Federal, State, or
local taxes that are imposed by law.”
After Ms. Sihota was removed from the IRS, the Na-
tional Treasury Employees Union (Union) invoked arbi-
tration on her behalf. On November 26, 2012, the Union
requested a hearing for Ms. Sihota’s arbitration. That
same day, counsel for IRS responded by asking “[w]hat
dates are you looking at?” J.A. 39. The record, however,
reflects no further communications regarding Ms. Sihota’s
hearing until June 2015, when the Union contacted the
arbitrator and requested a hearing in January 2016. Id
at 41. The arbitration hearing was ultimately held in
July 2016—nearly four years after the IRS contacted the
Union about scheduling a hearing.
During the July 2016 hearing, the Union conceded
Ms. Sihota “acted negligently in obtaining a refund,” but
argued that “[a]cting negligently does not rise to the level
of acting willfully.” J.A. 162. The Union asserted the
“only issue” before the arbitrator was “whether or not the
action was willful.” J.A. 188. According to the Union, the
IRS “sustain[ed] the [section] 1203(b)(9) portion of the
4 SIHOTA v. IRS
charge, but they d[id] not say that they [were] sustaining
the secondary issue or the in-the-alternative issue that
[Ms. Sihota] violated other laws, rules, or regulations.”
J.A. 188.
At the hearing, the arbitrator and IRS agreed the only
disputed issue was whether Ms. Sihota violated
§ 1203(b)(9):
Arbitrator Zigman: So therefore, the charge that
is before me is the one that was sustained, which
is 1203(b)(9) and not the alternative . . . . Okay?
...
[IRS Counsel]: Correct.
Arbitrator Zigman: And no other charges that
we’re dealing with?
[IRS Counsel]: Correct.
J.A. 189.
The arbitrator ultimately concluded Ms. Sihota’s
inclusion of the NKRS Transport loss on her 2003 federal
tax return did not constitute willful neglect. The arbitra-
tor determined Ms. Sihota never admitted to intentionally
understating her tax liability, and she credibly explained
how “she believed, in good faith, that she was the owner of
NKRS.” J.A. 23 (emphasis in original).
Nevertheless, the arbitrator found, “[b]ased on [Ms.
Sihota’s] failure for not having provided an accurate 2003
federal tax return because of negligence, the [IRS] did
have the right to take corrective action.” J.A. 29. Be-
cause negligence is “a much less serious act” than willful
understatement of tax liability, J.A. 20, the arbitrator
held that removal was not justified “[g]iven [Ms. Sihota’s]
long twenty-five year history, the absence of any other
documented disciplinary actions cited by the [IRS], other
than three in some twenty-five years.” J.A. 28. Accord-
SIHOTA v. IRS 5
ingly, the arbitrator reinstated Ms. Sihota’s employment
with the IRS and imposed a ten-day suspension instead.
The arbitrator also determined Ms. Sihota was not
entitled to over three years of back pay that accrued after
her removal. In reducing Ms. Sihota’s back pay, the
arbitrator relied ostensibly on the doctrine of laches. The
arbitrator noted “the Union presented no evidence to
justify the three year wait” to schedule a hearing. J.A. 31.
Accordingly, he “found the [IRS]’s argument persuasive
that the [IRS] should not be liable for back wages during
the period between the date of the removal, May 24, 2012,
up until the date when the Union requested to schedule
the hearing on June 12, 2015.” J.A. 31.
Ms. Sihota petitions for review of the arbitrator’s de-
cision. We have jurisdiction under 28 U.S.C. § 1295(a)(9).
See also 5 U.S.C. §§ 7121(b)(2)(B), 7703(b)(1).
II
Under 5 U.S.C. § 7121(f), “judicial review shall apply
to the award of an arbitrator in the same manner and
under the same conditions as if the matter had been
decided by the [Merit Systems Protection] Board.” In
reviewing the arbitrator’s decision, we “hold unlawful and
set aside any agency action, findings, or conclusions found
to be (1) arbitrary, capricious, an abuse of discretion, or
otherwise not in accordance with the law; (2) obtained
without procedures required by law, rule, or regulation
having been followed; or (3) unsupported by substantial
evidence.” 5 U.S.C. § 7703(c).
A
We first address whether the arbitrator had authority
to impose a ten-day suspension even though Ms. Sihota
did not willfully understate her tax liability. Ms. Sihota
contends the only charge before the arbitrator was under
section 1203(b)(9), which requires willful understatement
of federal tax liability. Because the arbitrator did not
6 SIHOTA v. IRS
sustain this charge, Ms. Sihota argues the arbitrator
exceeded his authority by issuing a ten-day suspension.
In response, the government asserts the ten-day suspen-
sion was properly based on Ms. Sihota’s negligent failure
to provide an accurate 2003 tax return, which was an
alternate charge before the arbitrator.
In Burroughs v. Department of the Army, we held the
MSPB can impose a penalty for a charge only if every
element of the charge is proven. 918 F.2d 170, 172 (Fed.
Cir. 1990). We explained that “[i]t is not permissible for
the MSPB to split a single charge of an agency into sever-
al independent charges and then sustain one of the newly-
formulated charges, which represents only a portion of the
original charge.” Id. And we emphasized that “[i]f the
agency fails to prove one of the elements of its charge,
then the entire charge must fail.” Id. By contrast, the
arbitrator may impose a lesser penalty if he “sustains
fewer than all of the agency’s charges . . . so long as the
agency has not indicated either in its final decision or
during proceedings before the Board that it desires that a
lesser penalty be imposed on fewer charges.” Lachance v.
Devall, 178 F.3d 1246, 1260 (Fed. Cir. 1999). That is, the
arbitrator may impose a penalty if he sustains one or
more charges, but he cannot impose a penalty based on a
portion of a single charge. Burroughs, 918 F.2d at 172;
accord Lachance, 178 F.3d at 1260.
If the only charge before the arbitrator was under sec-
tion 1203(b)(9), then the arbitrator could not impose any
penalty. Section 1203(b)(9) requires the IRS to remove
any employee who willfully understates their federal tax
liability. § 1203(b)(9), 112 Stat. at 721. Because the
arbitrator held Ms. Sihota did not act willfully, he had no
authority to impose any penalty under section 1203(b)(9).
As we explained in Burroughs, it is impermissible to split
a charge and impose a penalty based on a newly formu-
lated charge. 918 F.2d at 172.
SIHOTA v. IRS 7
The arbitrator could have, however, imposed a miti-
gated penalty if he had sustained an alternate charge
against Ms. Sihota. Lachance, 178 F.3d at 1260. Here,
the arbitration decision explains the ten-day suspension
was based on Ms. Sihota’s negligence in obtaining a
refund. The arbitrator found Ms. Sihota had failed “to
timely pay her federal tax liability,” and the IRS had
authority to take corrective action based on her failure.
J.A. 29.
Ms. Sihota argues the arbitrator could not base the
suspension on alternate charges because those issues
were not submitted for arbitration. “It is a settled rule
that an arbitrator’s authority is limited by the issues the
parties present to him for decision; he must ‘stay[] within
the areas marked out for his consideration,’ and may not
go ‘beyond the submission.’” Minn. Nurses Ass’n v. N.
Mem’l Health Care, 822 F.3d 414, 418 (8th Cir. 2016)
(quoting United Steel Workers of Am. v. Enter. Wheel &
Car Corp., 363 U.S. 593, 598 (1960)). The record of the
arbitration hearing supports Ms. Sihota’s contention that
the only charge before the arbitrator was under section
1203(b)(9). During the hearing, the Union argued the
final decision letter sustained the section 1203(b)(9)
portion of the charge but did not sustain any alternative
charges. And the arbitrator stated “the charge that is
before me is the one that was sustained, which is
1203(b)(9) and not the alternative because the letter . . .
says that the charge is 1203(b)(9).” J.A. 55. Likewise,
counsel for the IRS confirmed there are “no other charges
that we’re dealing with.” J.A. 55.
Despite this colloquy at the hearing, we are not con-
vinced the arbitrator was foreclosed from imposing a
mitigated penalty based on alternate charges. The Notice
of Proposed Adverse Action listed a variety of allegations,
including willful understatement of tax liability, failure to
accurately state tax liability, and failure to timely pay tax
liability. J.A. 80. And the final removal letter stated
8 SIHOTA v. IRS
“[a]ll reasons and specifications are sustained.” J.A. 83.
Thus, it appears the IRS removed Ms. Sihota based on her
failure to accurately state her tax liability in addition to
her alleged willful understatement of her tax liability.
Indeed, it was undisputed that Ms. Sihota at least acted
negligently. In her tax settlement agreement with the
IRS, Ms. Sihota admitted she “acted negligently in obtain-
ing a refund . . . resulting in an underpayment of the tax
required.” J.A. 9. And at the arbitration hearing, the
Union conceded “the taxpayer acted negligently in obtain-
ing a refund.” J.A. 162.
From this record, we cannot discern which charges
were properly considered by the arbitrator or which
charges support the ten-day suspension. Accordingly, we
vacate and remand for further proceedings. On remand,
the arbitrator must determine which charges were sub-
mitted for arbitration. If, as Ms. Sihota alleges on appeal,
the only charge at issue was under section 1203(b)(9),
then the arbitrator must reinstate Ms. Sihota without
imposing any penalty.
B
The arbitrator also limited Ms. Sihota’s back pay
award by over three years. Ms. Sihota contends the
arbitrator’s decision violated the Back Pay Act. The
government argues we should uphold the arbitrator’s
reduction of Ms. Sihota’s back pay as a mitigated penalty.
The Back Pay Act states that an employee “affected
by an unjustified or unwarranted personnel action” is
entitled to receive “an amount equal to all or any part of
the pay, allowances, or differentials, as applicable which
the employee normally would have earned or received
during the period if the personnel action had not occurred,
less any amounts earned by the employee through other
employment during that period.” 5 U.S.C.
§ 5596(b)(1)(A)(i). An arbitrator, however, can deny or
reduce back pay as a form of mitigated penalty. Am. Fed.
SIHOTA v. IRS 9
of Gov. Emps., Local 2718 v. Dep’t of Justice, 768 F.2d
348, 350 (Fed. Cir. 1985). But if an arbitrator reduces
back pay as a mitigated penalty, the period of withheld
back pay is effectively a “time-served” suspension that
must be reasonable under the Douglas factors. Green-
street v. Soc. Sec. Admin., 543 F.3d 705, 710 (Fed. Cir.
2008); see Douglas v. Veterans Admin., 5 M.S.P.B. 313,
332–33 (1981). The period of withheld back pay cannot be
based only on the time served, since this “would make the
penalty depend not on the Douglas factors . . ., but on the
speed with which (1) the employee or his representative
handled the case, and (2) the tribunal rendered its deci-
sion.” Greenstreet, 543 F.3d at 710.
To the extent the arbitrator limited back pay as a mit-
igated penalty, we find that his decision was arbitrary
and capricious. To start, if the only charge before the
arbitrator was under section 1203(b)(9), then the arbitra-
tor had no authority to impose any mitigated penalty.
And even if the arbitrator sustained an alternate charge,
his decision to reduce Ms. Sihota’s back pay by more than
three years is still unsupported by any analysis of the
Douglas factors. The arbitrator found a ten calendar day
suspension was reasonable given Ms. Sihota’s “long
twenty-five year history [and] the absence of any other
documented disciplinary actions, other than three in some
twenty-five years.” J.A. 28. Nothing in the arbitrator’s
decision supports what is effectively a three year “time-
served” suspension, and the arbitrator never considered
whether such a penalty is “within the parameters of
reasonableness.” Douglas, 5 M.S.P.B. at 333. As a result,
even if the arbitrator’s reduction of back pay was a miti-
gated penalty, we find that reducing back pay by over
three years is arbitrary and capricious.
Further, the arbitrator’s reliance on the doctrine of
laches was legal error. Laches “bars a plaintiff from
maintaining a suit if he unreasonably delays in filing a
suit and as a result harms the defendant.” Nat’l R.R.
10 SIHOTA v. IRS
Passenger Corp. v. Morgan, 536 U.S. 101, 121 (2002).
“Laches requires proof of (1) lack of diligence by the party
against whom the defense is asserted, and (2) prejudice to
the party asserting the defense.” Costello v. United
States, 365 U.S. 265, 282 (1961). Notably, “[t]he bar of
laches [is] predicated on the prejudice to a defendant’s
case from the tardy entry of a prayer for compensation.”
Albemarle Paper Co. v. Moody, 422 U.S. 405, 440 (1975)
(Marshall, J. concurring). “The lapse of time carries with
it the memory and life of witnesses, the muniments of
evidence, and other means of proof.” Costello, 365 U.S. at
282 (quoting Brown v. Cty. of Buena Vista, 95 U.S. 157,
161 (1877)).
The arbitrator misapplied the doctrine of laches here.
As the Supreme Court observed in Costello, laches bars a
claim where the plaintiff’s lack of diligence prejudices the
defendant’s access to witnesses and other evidence. Id.Laches does not reduce monetary damages that accrue
while a dispute is pending. Even if laches were applica-
ble, the arbitrator made no findings to suggest the IRS
was prejudiced by the Union’s delay. See id. (refusing to
apply laches where a 27-year delay did not prejudice
petitioner’s access to evidence). For instance, the arbitra-
tor did not find that witnesses became unavailable or
evidence was lost. Instead, the arbitrator simply stated
the IRS should not be liable for three years of back pay
because the Union failed to schedule a hearing. To be
sure, the Union’s three year delay is inexplicable and
might have barred Ms. Sihota’s claim altogether if the
IRS could show prejudice. Nevertheless, after allowing
Ms. Sihota’s claim to proceed, the arbitrator cannot rely
on laches to reduce her back pay. On remand, the arbi-
trator may reduce back pay as a mitigated penalty if he
sustains any alternate charges. Any reduction, however,
must be within the tolerable limits of reasonableness.
SIHOTA v. IRS 11
III
We vacate the arbitrator’s imposition of a ten-day
suspension because the current record is unclear on
whether the arbitrator considered any charges aside from
those under section 1203(b)(9). We also vacate the arbi-
trator’s decision to reduce Ms. Sihota’s back pay. On
remand, the arbitrator must determine which charges
were submitted for arbitration and whether any charges
support a ten-day suspension or a reduction in back pay.
VACATED AND REMANDED
COSTS
No costs.