1 DEPARTMENT OF DEFENSE DEFENSE OFFICE OF HEARINGS AND APPEALS In the matter of: ) ) ------------------------------------- ) ISCR Case No. 16-00463 ) Applicant for Security Clearance ) Appearances For Government: Charles Hale, Esq., Department Counsel For Applicant: Pro se ______________ Decision ______________ LEONARD, Michael H., Administrative Judge: Applicant contests the Defense Department’s intent to deny her eligibility for access to classified information. She did not present sufficient evidence to explain, extenuate, or mitigate the security concern stemming from her failure to timely file state and federal individual income tax returns for tax years 2011-2014. Accordingly, this case is decided against Applicant. Statement of the Case Applicant completed and submitted a Questionnaire for National Security Positions (SF 86 format) on September 9, 2015. This document is commonly known as a security clearance application. Thereafter, on June 9, 2016, after reviewing the application and the information gathered during a background investigation, the Department of Defense Consolidated Adjudications Facility, Fort Meade, Maryland, sent Applicant a statement of reasons (SOR), explaining it was unable to find that it was clearly consistent with the national interest to grant his eligibility for access to classified information. The SOR is similar to a complaint. It detailed the factual reasons for the action under the security guideline known as Guideline F for financial considerations. 2 Applicant answered the SOR on July 5, 2016; she admitted failure to timely file state and federal income tax returns for tax years 2010-2014, but she stated she had no knowledge of a past-due balance of $11,186 for a second mortgage loan; and she requested a hearing before an administrative judge. The hearing took place as scheduled on December 8, 2016. The hearing transcript (Tr.) was received December 16, 2016. The record was kept open to allow Applicant to submit additional matters; she made a timely submission per e-mail on January 6, 2017; and those matters are admitted without objections as Exhibits G through O. Findings of Fact Applicant is a 60-year-old employee who is seeking to obtain a security clearance.1 Her educational background includes a bachelor’s degree in business administration. She is employed as a buyer in a purchasing department of a federal contractor doing business in the defense industry. She has been so employed from November 2008 to present. Her total income for 2015 was about $91,000.2 In her September 2015 security clearance application, Applicant disclosed that she failed to timely file federal income tax returns for tax years 2010, 2011, 2012, and 2013.3 She estimated owing $0 in back taxes because she had paid income taxes via payroll withholding. She also disclosed two delinquent credit card accounts that she had closed and then paid off with $1,000 monthly payments. Applicant provided additional information about these matters during her October 2015 background investigation.4 She stated that her paperwork became disorganized due to a cross-town move in June 2009, which resulted in her failure to file tax returns for tax year 2010, and then the situation snowballed over the next several years. She also stated that she had since hired an accountant and was gathering up the necessary documentation to provide to the accountant. She further explained that her financial issues were the result of a downturn in the real estate business, which was her primary occupation until February 2007 and part-time job until November 2008, when she began her current employment. SOR ¶¶ 1.a and 1.b: failure to file state and federal income tax returns for tax years 2010-2014, as required. These matters are discussed together because they are factually interrelated. At the hearing, Applicant explained that she contacted an accountant in late 2014 or early 2015, but lacked sufficient funds to pay a retainer fee.5 She then made installment payments to the accountant until the retainer was paid. The 1 Tr. 5-6. 2 Exhibit B. 3 Exhibit 1. 4 Exhibit 2. 5 Tr. 53. 3 accountant was unable to complete the work during the summer of 2016, but did so in the fall. Applicant presented reliable documentation showing that she is now in compliance with state and federal tax authorities; her state and federal income tax returns for tax years 2011-2015 were prepared and submitted for processing on October 15, 2016; and she has paid all back taxes.6 For the state taxes, Applicant owed a total of $4,773 for tax years 2011, 2012, and 2013, while minor refunds for 2014 and 2015 were applied to the 2011 amount due. She resolved the state taxes with a payment of $4,977 on December 7, 2016.7 For the federal taxes, Applicant owed $11,799 for tax year 2011, which she paid on December 21, 2016.8 She owed $5,256 for tax year 2012, which she paid in early January 2017.9 She was due a refund of $1,941 for tax year 2013.10 She was due a refund of $4,511 for tax year 2014, which was applied to an amount owed for 2011, reducing the balance to $11,799.11 And she was due a refund of $5,187 for tax year 2015.12 Applicant explained that she had sufficient funds to pay the state and federal back taxes because she obtained a $46,000 loan from her 401(k) account.13 She used the remaining funds to pay off the balances on the bulk of her credit card accounts and is finalizing a plan to pay off the remainder.14 She also participated in a cash-in of paid- time-off hours through her employer whereby she traded 40 hours of time-off for 36 hours of pay, less taxes and deductions, to assist in her overall debt reduction. Applicant owns her home, which has a market value of about $325,000. She moved into the house in June 2009, and she received the house as an inheritance after her mother passed away in 2010. 6 Exhibits B, C, D, and G-O. There is no paperwork for tax year 2010. As I understand IRS practice and procedure, the IRS requires a taxpayer to go back and file returns for the last six years to get in their good graces, and then make arrangements to pay what is owed. The six-year period for past-due returns is found in IRS Policy Statement 5-133 and Internal Revenue Manual 1.2.14.1.18. Given that Applicant had the assistance of a tax professional in preparing the tax returns, I’ll presume that there is no issue for tax year 2010. 7 Exhibit D. 8 Exhibits H and I. 9 Exhibits J, K, and L. 10 Exhibit C. 11 Exhibit M. 12 Exhibits N and O. 13 Tr. 54-55. 14 Exhibit G. 4 SOR ¶1.c: past-due balance of $11,186 on a second mortgage with a total loan balance of about $78,426. Applicant explained that this loan stems from a home that was foreclosed upon in about mid-2010 after being in a short-sale status for several months.15 The primary mortgage loan was redeemed by foreclosure.16 After the foreclosure, she did not receive notice of a balance due from the mortgage lender. She learned about the past-due account during the security-clearance process. She has called the mortgage lender several times and was told the account has a zero balance. She was unsuccessful in her effort to obtain written verification of a zero balance from the mortgage lender.17 The past-due second mortgage loan appears in an October 2015 credit report, but the account does not appear in more recent credit reports from November 2016.18 In addition, Applicant resides in a non-recourse state that has two anti-deficiency statutes that preclude deficiency judgments: one for mortgages and one for deeds of trust.19 In addition to the above matters, Applicant described a series of circumstances or life events that contributed to her delay in addressing the past-due tax returns.20 Those matters include the downturn in the real estate market during 2007-2008 that reduced her income and contributed to the foreclosure; her part-time employment so she could provide care to her mother who lived in another state; and a difficult teenage daughter with a serious alcohol problem that led to treatment via an inpatient rehabilitation program beginning in November 2011. At the time, Applicant described herself as consumed with self-doubt, but continued working to make ends meet, which included both legal (drunk driving) and medical bills for her daughter. As a result, Applicant did not take care of herself, which included the tax returns, as she then felt overwhelmed. She now feels embarrassed and ashamed about her circumstances, but believes her past emotional paralysis is not an indicator of her current competencies.21 A longtime friend and co-worker provided highly favorable testimony for Applicant. The witness described Applicant as very reliable, highly ethical, and painfully honest. Given her high opinion of Applicant, the witness asked Applicant to be her matron of honor at her wedding. The witness also recommended Applicant for her current job. 15 Tr. 66-68; Exhibit A. 16 Exhibit 3. 17 Exhibit G. 18 Exhibits 3 and E. 19 Exhibit F. 20 Tr. 50-53. 21 Tr. 55-56. 5 Law and Policies This case is adjudicated under Executive Order (E.O.) 10865, Safeguarding Classified Information within Industry (February 20, 1960), as amended; Department of Defense Directive 5220.6, Defense Industrial Personnel Security Clearance Review Program (January 2, 1992), as amended (Directive); and the National Security Adjudicative Guidelines for Determining Eligibility for Access to Classified Information or Eligibility to Hold a Sensitive Position (AG), effective June 8, 2017.22 It is well-established law that no one has a right to a security clearance.23 As noted by the Supreme Court in Department of the Navy v. Egan, “the clearly consistent standard indicates that security clearance determinations should err, if they must, on the side of denials.”24 Under Egan, Executive Order 10865, and the Directive, any doubt about whether an applicant should be allowed access to classified information will be resolved in favor of protecting national security. A favorable clearance decision establishes eligibility of an applicant to be granted a security clearance for access to confidential, secret, or top-secret information.25 An unfavorable clearance decision (1) denies any application, (2) revokes any existing security clearance, and (3) prevents access to classified information at any level.26 There is no presumption in favor of granting, renewing, or continuing eligibility for access to classified information.27 The Government has the burden of presenting evidence to establish facts alleged in the SOR that have been controverted.28 An applicant is responsible for presenting evidence to refute, explain, extenuate, or mitigate facts that have been admitted or proven.29 In addition, an applicant has the ultimate burden of persuasion to obtain a favorable clearance decision.30 22 The 2017 AG are available at http://ogc.osd.mil/doha. 23 Department of the Navy v. Egan, 484 U.S. 518, 528 (1988) (“it should be obvious that no one has a ‘right’ to a security clearance”); Duane v. Department of Defense, 275 F.3d 988, 994 (10th Cir. 2002) (no right to a security clearance). 24 484 U.S. at 531. 25 Directive, ¶ 3.2. 26 Directive, ¶ 3.2. 27 ISCR Case No. 02-18663 (App. Bd. Mar. 23, 2004). 28 Directive, Enclosure 3, ¶ E3.1.14. 29 Directive, Enclosure 3, ¶ E3.1.15. 30 Directive, Enclosure 3, ¶ E3.1.15. 6 In Egan, the Supreme Court stated that the burden of proof is less than a preponderance of evidence.31 The Appeal Board has followed the Court’s reasoning, and a judge’s findings of fact are reviewed under the substantial-evidence standard.32 Discussion Under Guideline F for financial considerations, the suitability of an applicant may be questioned or put into doubt when that applicant has a history of excessive indebtedness or financial problems or difficulties. The overall concern is: Failure or inability to live within one’s means, satisfy debts, and meet financial obligations may indicate poor self-control, lack of judgment, or unwillingness to abide by rules and regulations, all of which can raise questions about an individual’s reliability, trustworthiness, and ability to protect classified or sensitive information. . . .33 The concern is broader than the possibility that a person might knowingly compromise classified or sensitive information to obtain money or something else of value. It encompasses concerns about a person’s self-control, judgment, and other important qualities. A person who is financially irresponsible may also be irresponsible, unconcerned, or negligent in handling and safeguarding classified or sensitive information. In analyzing the facts of this case, I considered the following disqualifying and mitigating conditions: AG ¶ 19(c) a history of not meeting financial obligations; AG ¶ 19(f) failure to file or fraudulently filing annual federal, state, or local income tax returns or failure to pay annual federal, state, or local income tax as required; AG ¶ 20(b) the conditions that resulted in the financial problem were largely beyond the person’s control (e.g., loss of employment, a business downturn, unexpected medical emergency, a death, divorce, or separation, clear victimization by predatory lending practices, or identity theft), and the individual acted responsibly under the circumstances; and AG ¶ 20(g) the individual has made arrangements with the appropriate tax authority to file or pay the amount owed and is in compliance with those arrangements. 31 Egan, 484 U.S. at 531. 32 ISCR Case No. 01-20700 (App. Bd. Dec. 19, 2002) (citations omitted). 33 AG ¶ 18. 7 The evidence here supports a conclusion that Applicant has a problematic financial history sufficient to raise a security concern under Guideline F. With that said, the past-due balance for the second mortgage loan is now old business, as it is related to a foreclosure that occurred in 2010. Moreover, Applicant was unaware of any past- due balance until a credit report was obtained during the course of her 2015 background investigation. The mortgage lender, which does business in a non-recourse state, has informed her that the account has a zero balance. And the past-due account does not appear on the most recent credit reports from 2016. Given these circumstances, I have no concern about this particular matter. Nevertheless, Applicant’s tax problem with both state and federal tax authorities is a serious matter. Not only did Applicant fail to timely file tax returns for multiple tax years, she also owed back taxes for multiple tax years. Her tax problem bears close examination and is a matter of serious concern to the federal government.34 It suggests that she has a problem with complying with well-established governmental rules and systems. Voluntary compliance with such rules and systems is essential for protecting classified or sensitive information. An applicant who has a history of not fulfilling their tax obligations may be said not to have demonstrated the high degree of judgment and reliability required for access to classified or sensitive information. I considered Applicant’s evidence of mitigation, reform, and rehabilitation. First, I considered the series of circumstances or life events noted above. Obviously, the circumstances were largely beyond her control. I have empathy for any person who goes through such difficult circumstances, and I can see how the circumstances contributed to Applicant’s delay in addressing her tax problem. Still, many people go through similar or more difficult circumstances and at the same time continue to meet their tax obligations. Second, she deserves credit for taking action to hire a tax professional to prepare and file the tax returns. Likewise, she deserves credit for obtaining a loan from her 401(k) account to pay the back taxes. As of January 2017, it appears Applicant is in compliance with her state and federal income tax obligations through the most recent tax year of 2015. I also considered both the timing and length of compliance, which are issues of fact I am allowed to weigh. Concerning the timing, I note that Applicant filed the tax returns in mid-October 2016 and she paid the back taxes in December 2016 and January 2017. Those events were in close proximity to the scheduled hearing in this case after years of neglect. Concerning the length of compliance, I note that Applicant has been in compliance with state and federal tax authorities for less than one year after years of noncompliance. Those circumstances, along with her age, experience, and maturity at the time of the conduct, militate against a favorable decision. On balance, Applicant’s favorable evidence is outweighed by the nature, extent, and seriousness of her tax problem. Her tax problem does not amount to a per se rule 34 The General Accountability Office (GAO) expressed serious concern over the relationship between tax delinquents and clearance holders in its July 28, 2014 report, Security Clearances: Tax Debts Owed by DOD Employees and Contractors, http://www.gao.gov/assets/670/665052.pdf. 8 against a favorable clearance decision. But considering the totality of facts and circumstances of this case, I am not persuaded that Applicant is an acceptable national security risk. Following Egan and the clearly consistent standard, I have doubts or concerns about Applicant’s reliability, trustworthiness, good judgment, and ability to protect classified information. In reaching this conclusion, I weighed the evidence as a whole and considered if the favorable evidence outweighed the unfavorable evidence or vice versa. I also considered the whole-person concept. Accordingly, I conclude that she did not meet her ultimate burden of persuasion to show that it is clearly consistent with the national interest to grant her eligibility for access to classified information. Formal Findings The formal findings on the SOR allegations are: Paragraph 1, Guideline F: Against Applicant Subparagraph 1.a: Against Applicant Subparagraph 1.b: Against Applicant Subparagraph 1.c: For Applicant Conclusion In light of the record as a whole, it is not clearly consistent with the national interest to grant Applicant access to classified information. Michael H. Leonard Administrative Judge