SCOTUS Reports

Tag: I.R.C. § 7623

  • Berenblatt v. Commissioner, 160 T.C. No. 14 (2023): Discovery Standards in Whistleblower Award Cases

    Berenblatt v. Commissioner, 160 T. C. No. 14 (2023)

    In Berenblatt v. Commissioner, the U. S. Tax Court established stringent discovery standards for whistleblower award cases under I. R. C. § 7623. The court ruled that discovery is limited to the administrative record, and only upon a significant showing of bad faith or an incomplete record can additional materials be sought. This decision underscores the court’s adherence to the record rule and clarifies the scope of permissible discovery in whistleblower appeals, impacting future cases by setting a high bar for expanding the record beyond what the IRS designates.

    Parties

    Jeremy Berenblatt (Petitioner) v. Commissioner of Internal Revenue (Respondent). Berenblatt was the appellant in the Tax Court, challenging the IRS Whistleblower Office’s (WBO) denial of his whistleblower award claim.

    Facts

    Jeremy Berenblatt, a stock trader, was interviewed by the IRS in November 2007 regarding a tax shelter involving digital foreign exchange options known as Short Options Strategies (SOS). Berenblatt alleged that the transaction lacked economic substance and was potentially fraudulent. He later claimed that his information led to the IRS’s successful use of the economic substance theory in related litigation. In July 2015, Berenblatt filed Form 211 with the WBO, seeking an award based on his 2007 interview. The WBO denied his claim, citing that the IRS had already known the relevant information before Berenblatt’s interview. Berenblatt then appealed to the Tax Court under I. R. C. § 7623(b)(4).

    Procedural History

    Berenblatt filed a petition with the U. S. Tax Court to review the WBO’s denial of his award claim. He sought discovery from the IRS, filing motions to compel the production of documents and responses to interrogatories. The IRS produced a 765-page administrative record, asserting it was complete. The court reviewed Berenblatt’s motions under the standard of review set by the Administrative Procedure Act and the scope of review limited to the administrative record. The court granted a stay of proceedings to address the discovery disputes and issued its ruling on the motions to compel.

    Issue(s)

    Whether a whistleblower can compel discovery beyond the administrative record designated by the IRS in an appeal of a whistleblower award denial, and if so, under what circumstances?

    Rule(s) of Law

    In whistleblower award appeals under I. R. C. § 7623, the Tax Court’s review is governed by the standard of review under the Administrative Procedure Act, which permits reversal of agency action found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. ” The scope of review is generally confined to the administrative record, as articulated by the D. C. Circuit’s record rule. Discovery beyond the administrative record is permissible only upon a significant showing of bad faith or an incomplete record by the IRS. Treasury Regulation § 301. 7623-3(e) lists materials that must be included in the administrative record.

    Holding

    The Tax Court held that Berenblatt’s motions to compel discovery were largely unsupported by a significant showing of bad faith or an incomplete record. The court denied most of Berenblatt’s document and interrogatory requests, except for a request related to notes taken during his 2007 interview, which the court ordered the IRS to clarify.

    Reasoning

    The court reasoned that the IRS’s designation of the administrative record enjoys a presumption of correctness. Berenblatt’s requests for documents and interrogatory responses largely sought materials outside the administrative record and before his involvement with the IRS. The court emphasized that discovery in whistleblower cases must be limited to materials directly or indirectly considered by the WBO or those falling under categories listed in Treasury Regulation § 301. 7623-3(e). Berenblatt’s contention that the WBO should have reviewed certain documents was rejected, as there was no evidence that the WBO negligently excluded documents that could have been adverse to its decision. The court noted that the IRS had already developed the economic substance argument before Berenblatt’s interview, as evidenced by an expert report dated before the interview. The court allowed limited discovery only regarding notes from Berenblatt’s interview, as they were part of the complete record under the regulation.

    Disposition

    The court denied Berenblatt’s motions to compel discovery, except for compelling the IRS to clarify whether notes were taken during his 2007 interview and, if so, their current status.

    Significance/Impact

    This case sets a precedent for the standards governing discovery in whistleblower award appeals, reinforcing the record rule and the presumption of correctness for the IRS’s administrative record designation. It clarifies that whistleblowers must make a significant showing of bad faith or an incomplete record to obtain discovery beyond the designated record. The decision impacts future whistleblower cases by limiting the scope of discovery and emphasizing the importance of the administrative record in judicial review. It also highlights the Tax Court’s adherence to the D. C. Circuit’s precedent in whistleblower matters, affecting how such cases are litigated and the evidence considered by the court.

  • Whistleblower 972-17W v. Commissioner of Internal Revenue, 159 T.C. No. 1 (2022): Disclosure of Taxpayer Information in Whistleblower Proceedings

    Whistleblower 972-17W v. Commissioner of Internal Revenue, 159 T. C. No. 1 (U. S. Tax Ct. 2022)

    In a landmark decision, the U. S. Tax Court ruled that the IRS must provide unredacted administrative records in whistleblower cases, affirming its jurisdiction to review whistleblower claims and interpreting I. R. C. § 6103(h)(4)(A) to allow for such disclosures. This ruling impacts how whistleblower cases are handled, emphasizing the court’s role in ensuring transparency and fairness in the award process.

    Parties

    Whistleblower 972-17W, as Petitioner, filed a petition against the Commissioner of Internal Revenue, as Respondent, in the U. S. Tax Court.

    Facts

    Whistleblower 972-17W provided information to the IRS about three target taxpayers. The IRS initiated actions against these taxpayers and collected proceeds. Despite this, the IRS Whistleblower Office (WBO) denied the whistleblower’s claim for an award under I. R. C. § 7623(b). The whistleblower petitioned the U. S. Tax Court for review. The Court ordered the Commissioner to submit both redacted and unredacted copies of the administrative record, which included the target taxpayers’ returns and return information. The Commissioner complied with the redacted copy but sought to be excused from filing the unredacted copy, citing I. R. C. § 6103 confidentiality concerns. The Court ordered an in camera review of the unredacted records, prompting the Commissioner to move for modification of the order, arguing that disclosure was not permitted under § 6103.

    Procedural History

    The whistleblower filed a petition in the U. S. Tax Court after the WBO denied the claim for an award. The Court initially ordered the Commissioner to submit the administrative record, both redacted and unredacted. The Commissioner complied with the redacted record but moved to modify the order regarding the unredacted record. The Court denied this motion, ordering an in camera review of the unredacted documents. The Commissioner then requested the Court to reconsider its order, leading to the present decision.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to hear this whistleblower case under I. R. C. § 7623(b)(4)?

    Whether I. R. C. § 6103(h)(4)(A) authorizes the Commissioner to submit the unredacted administrative record to the Court for in camera review?

    Rule(s) of Law

    I. R. C. § 7623(b)(4) grants the Tax Court jurisdiction over appeals of determinations regarding whistleblower awards under § 7623(b)(1), (2), or (3).

    I. R. C. § 6103(h)(4)(A) permits the disclosure of returns or return information in a judicial proceeding pertaining to tax administration if “the taxpayer is a party to the proceeding, or the proceeding arose out of, or in connection with, determining the taxpayer’s civil or criminal liability, or the collection of such civil liability, in respect of any tax imposed [by the Code]. “

    Holding

    The U. S. Tax Court has jurisdiction to hear this whistleblower case as per I. R. C. § 7623(b)(4), given that the IRS had proceeded with an action against the target taxpayers and collected proceeds.

    I. R. C. § 6103(h)(4)(A) authorizes the Commissioner to submit the unredacted administrative record to the Court for in camera review, as the case arose in connection with determining the civil and criminal liabilities of the target taxpayers.

    Reasoning

    The Court’s jurisdiction was affirmed based on the reasoning in Li v. Commissioner, where the D. C. Circuit established that the Tax Court’s jurisdiction depends on the IRS proceeding with an action against the target taxpayers. The Court found that the case before it satisfied this criterion, as the IRS had indeed acted and collected proceeds based on the whistleblower’s information.

    The Court interpreted I. R. C. § 6103(h)(4)(A) to allow disclosure of the unredacted administrative record. It emphasized that the phrase “in connection with” is broad, encompassing any logical or causal connection to the determination of the target taxpayers’ liabilities. The Court rejected the Commissioner’s narrower interpretation, which required a direct legal liability or sanction from the government and a pre-existing relationship between the parties. The Court found that the whistleblower’s case was inextricably linked to the determination of the target taxpayers’ liabilities, as the IRS’s actions and outcomes were direct causes of the proceeding, and the whistleblower’s contribution to those actions was central to the merits of the case.

    The Court also addressed the Commissioner’s arguments based on legislative history and statutory purpose, concluding that these did not support a narrower reading of § 6103(h)(4)(A). The legislative history provided illustrative examples but was not exhaustive, and the statutory purpose of balancing confidentiality with other interests supported the Court’s broader interpretation. The Court noted that the Commissioner could still seek redactions under other rules if necessary, but could not use § 6103(a) to resist disclosure when § 6103(h)(4)(A) applied.

    Disposition

    The Court denied the Commissioner’s motion to modify its order, affirming its jurisdiction and the applicability of I. R. C. § 6103(h)(4)(A) to authorize the submission of the unredacted administrative record for in camera review.

    Significance/Impact

    This decision significantly impacts whistleblower litigation by affirming the Tax Court’s jurisdiction over cases where the IRS has acted on whistleblower information and collected proceeds. It also clarifies the scope of § 6103(h)(4)(A), allowing for the disclosure of unredacted administrative records in such cases, which enhances transparency and the ability of whistleblowers to challenge WBO determinations effectively. The ruling may influence future cases by setting a precedent for the interpretation of “in connection with” in the context of tax administration proceedings, potentially affecting the confidentiality of taxpayer information in whistleblower cases.

  • McCrory v. Commissioner, 156 T.C. No. 6 (2021): Jurisdictional Limits of Tax Court in Whistleblower Award Cases

    McCrory v. Commissioner, 156 T. C. No. 6 (U. S. Tax Court 2021)

    In McCrory v. Commissioner, the U. S. Tax Court ruled it lacked jurisdiction over a whistleblower’s petition challenging a preliminary award recommendation under I. R. C. § 7623(a). The court clarified that only a final determination, not a preliminary award, triggers its jurisdiction, impacting how whistleblowers can challenge IRS decisions on awards.

    Parties

    Suzanne J. McCrory, the Petitioner, filed pro se against the Commissioner of Internal Revenue, the Respondent, in the U. S. Tax Court, docket number 9659-18W.

    Facts

    Suzanne J. McCrory submitted 21 Forms 211 to the IRS Whistleblower Office (WBO), alleging underreported tax obligations by 21 taxpayers. The WBO, after using her information to collect proceeds from two taxpayers, sent McCrory a preliminary award recommendation under I. R. C. § 7623(a) of $962. 92. McCrory did not accept or reject this recommendation but instead requested access to the administrative file, which was denied. She then filed a petition with the Tax Court, seeking review of the preliminary award recommendation.

    Procedural History

    McCrory filed a petition in the U. S. Tax Court to review the preliminary award recommendation under I. R. C. § 7623(a). The Commissioner moved to dismiss for lack of jurisdiction, arguing that the preliminary award recommendation was not a “determination” as required for Tax Court jurisdiction under I. R. C. § 7623(b)(4). The Tax Court granted the Commissioner’s motion to dismiss, holding that it lacked jurisdiction because no final determination had been issued.

    Issue(s)

    Whether a preliminary award recommendation under I. R. C. § 7623(a) constitutes a “determination” within the meaning of I. R. C. § 7623(b)(4), thereby conferring jurisdiction on the U. S. Tax Court?

    Rule(s) of Law

    I. R. C. § 7623(b)(4) grants the U. S. Tax Court jurisdiction over appeals of determinations regarding whistleblower awards under paragraphs (1), (2), or (3) of § 7623(b). The court has held that jurisdiction is established when the Commissioner issues a written notice that embodies a final administrative decision regarding the whistleblower’s claims in accordance with established procedures.

    Holding

    The U. S. Tax Court held that a preliminary award recommendation under I. R. C. § 7623(a) does not constitute a “determination” within the meaning of I. R. C. § 7623(b)(4). Therefore, the court lacked jurisdiction over McCrory’s petition because no final determination had been issued.

    Reasoning

    The court reasoned that a preliminary award recommendation does not represent a final administrative decision because the award amount remains subject to change based on a final determination of tax. The letter explicitly stated that the award was preliminary and subject to revision, indicating it was not a final decision. The court referenced prior cases, such as Whistleblower 4496-15W v. Commissioner, which established that a determination occurs when the award amount is finalized, typically upon issuance of an award check. McCrory’s failure to accept the preliminary award and the absence of a final decision letter or award check further supported the court’s conclusion that no determination had been made. The court also noted its limited jurisdiction under § 7623(b)(4) and its inability to intervene in the administrative process or compel a final decision.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motion to dismiss for lack of jurisdiction, as no determination under I. R. C. § 7623(b)(4) had been issued to McCrory.

    Significance/Impact

    This ruling clarifies that the U. S. Tax Court’s jurisdiction over whistleblower award disputes is limited to final determinations, not preliminary recommendations. It underscores the procedural requirements whistleblowers must follow to challenge IRS decisions on awards and highlights the court’s inability to intervene in ongoing administrative processes. The decision impacts the strategic considerations of whistleblowers in pursuing claims and challenges related to their awards.

  • Ringo v. Commissioner, 143 T.C. No. 15 (2014): Jurisdiction in Whistleblower Award Determinations

    Ringo v. Commissioner, 143 T. C. No. 15 (2014)

    In Ringo v. Commissioner, the U. S. Tax Court clarified its jurisdiction over whistleblower award determinations under I. R. C. § 7623. Mica Ringo challenged a letter from the IRS Whistleblower Office denying him an award. The Court held that such a letter constituted a ‘determination’ sufficient to invoke its jurisdiction, even if the IRS later claimed it was sent in error. This ruling reaffirms the Court’s authority to review IRS decisions on whistleblower awards, impacting how such cases are handled and reinforcing legal oversight of administrative actions.

    Parties

    Mica Ringo, the Petitioner, filed a petition against the Commissioner of Internal Revenue, the Respondent, in the United States Tax Court.

    Facts

    Mica Ringo submitted a Form 211 application for a whistleblower award to the IRS Whistleblower Office on February 17, 2011, and an amended application on October 6, 2011. On November 7, 2012, the Whistleblower Office sent Ringo a letter stating he was ineligible for an award because the information he provided did not result in the collection of any proceeds. Ringo timely filed a petition with the Tax Court on December 7, 2012. On June 11, 2013, the Whistleblower Office informed Ringo that the November 7, 2012, letter was sent in error and that his application was still under consideration. The Commissioner then moved to dismiss the case for lack of jurisdiction.

    Procedural History

    Ringo filed a petition with the U. S. Tax Court on December 7, 2012, challenging the November 7, 2012, determination by the IRS Whistleblower Office. The Commissioner moved to dismiss the case for lack of jurisdiction, arguing that the November 7, 2012, letter was not a definitive determination because the Whistleblower Office was still considering Ringo’s application. The Tax Court independently assessed its jurisdiction and denied the Commissioner’s motion to dismiss.

    Issue(s)

    Whether a letter from the IRS Whistleblower Office denying a whistleblower award, which is later claimed to be sent in error, constitutes a ‘determination’ under I. R. C. § 7623(b)(4) sufficient to invoke the jurisdiction of the U. S. Tax Court?

    Rule(s) of Law

    I. R. C. § 7623(b)(4) provides that ‘[a]ny determination regarding an award under paragraph (1), (2), or (3) may, within 30 days of such determination, be appealed to the Tax Court (and the Tax Court shall have jurisdiction with respect to such matter). ‘

    Holding

    The U. S. Tax Court held that the November 7, 2012, letter from the IRS Whistleblower Office constituted a ‘determination’ under I. R. C. § 7623(b)(4), and thus, the Tax Court had jurisdiction over the matter. The Court further held that the subsequent June 11, 2013, letter stating that the initial determination was sent in error did not terminate the Court’s jurisdiction.

    Reasoning

    The Court reasoned that its jurisdiction depends on the facts as of the time the petition was filed. The November 7, 2012, letter clearly stated that Ringo was ineligible for an award, which satisfied the requirement of a ‘determination’ under I. R. C. § 7623(b)(4). The Court cited precedent such as Cooper v. Commissioner, which held that a letter not labeled as a determination but stating ineligibility for an award is sufficient to invoke the Court’s jurisdiction. The Court also drew an analogy to notices of deficiency, noting that even if the IRS later concedes or claims error, the initial determination provides a basis for jurisdiction. The Court emphasized that its jurisdiction, once invoked, is not ousted by subsequent events, relying on cases like Charlotte’s Office Boutique, Inc. v. Commissioner. The Court rejected the Commissioner’s argument that the June 11, 2013, letter negated the November 7, 2012, determination, stating that the Court’s jurisdiction was unaffected by the IRS’s continued consideration of Ringo’s application.

    Disposition

    The U. S. Tax Court denied the Commissioner’s motion to dismiss for lack of jurisdiction.

    Significance/Impact

    Ringo v. Commissioner has significant implications for whistleblower cases under I. R. C. § 7623. It clarifies that the Tax Court’s jurisdiction is invoked by the IRS’s initial determination of ineligibility, even if that determination is later claimed to be erroneous. This ruling strengthens the oversight role of the Tax Court over IRS decisions on whistleblower awards, ensuring that taxpayers have a reliable avenue for appeal. It also underscores the principle that once jurisdiction is properly invoked, it cannot be easily divested by subsequent administrative actions or errors. This case may influence how the IRS handles whistleblower award determinations and communications to ensure clarity and finality in their decisions.

  • Whistleblower 11332-13W v. Commissioner of Internal Revenue, 142 T.C. 396 (2014): Jurisdictional Scope of Whistleblower Awards under I.R.C. § 7623

    Whistleblower 11332-13W v. Commissioner of Internal Revenue, 142 T. C. 396 (2014)

    The U. S. Tax Court ruled that it has jurisdiction over whistleblower award determinations when information is provided both before and after the enactment of I. R. C. § 7623(b) in 2006. Whistleblower 11332-13W’s continuous provision of information regarding a tax fraud scheme to the IRS and DOJ, which led to over $30 million in recovered taxes, allowed the court to deny the Commissioner’s motion to dismiss for lack of jurisdiction. This decision expands the scope of judicial review for whistleblower claims, reinforcing the legal protections for whistleblowers who aid in tax enforcement.

    Parties

    Whistleblower 11332-13W, as Petitioner, filed the case against the Commissioner of Internal Revenue, as Respondent, in the United States Tax Court.

    Facts

    Whistleblower 11332-13W (W) was employed by an entity involved in a tax fraud scheme. After raising concerns about the scheme, W faced intimidation and was subsequently terminated. W initially attempted to report the scheme in 2005 but succeeded in gaining government interest in June 2006. W provided information to the Department of Justice (DOJ) and Internal Revenue Service (IRS) from June 2006 through the fall of 2009, which formed the basis for the government’s action against the target taxpayers. W’s involvement in the investigation posed risks to W and W’s family, including receiving threats from the targets. In 2008, W filed a Form 211 for an award under I. R. C. § 7623(a), and resubmitted in 2011 seeking an award under § 7623(b). The government recovered over $30 million through a settlement with one of the targets. The IRS Whistleblower Office granted W a discretionary award under § 7623(a) but denied the request under § 7623(b).

    Procedural History

    W filed a timely petition in the U. S. Tax Court seeking review of the IRS’s award determination. The Commissioner moved to dismiss the case for lack of jurisdiction, arguing that the information provided by W before December 20, 2006, the effective date of § 7623(b), was used in the government’s action. W opposed the motion, asserting that W provided information both before and after December 20, 2006. The Tax Court, considering W’s allegations as true for the purposes of the motion, denied the Commissioner’s motion to dismiss.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to review the Commissioner’s whistleblower award determination when the whistleblower provided information both before and after the effective date of I. R. C. § 7623(b), enacted on December 20, 2006?

    Rule(s) of Law

    I. R. C. § 7623(b) mandates the payment of nondiscretionary whistleblower awards when the Commissioner proceeds with an action based on information provided by the whistleblower. The Tax Court has exclusive jurisdiction over appeals of such award determinations. I. R. C. § 7623(b)(4) provides for judicial review of nondiscretionary award determinations.

    Holding

    The U. S. Tax Court has jurisdiction to review the Commissioner’s whistleblower award determination where the whistleblower alleged that they provided information to the IRS and DOJ both before and after the effective date of I. R. C. § 7623(b), enacted on December 20, 2006.

    Reasoning

    The court considered the allegations in W’s petition as true for the purposes of deciding the motion to dismiss. The court analyzed the intent of the Tax Relief and Health Care Act of 2006 (TRHCA), which amended § 7623 to provide judicial review of nondiscretionary whistleblower awards. The court found persuasive the rationale in Dacosta v. United States, where the Court of Federal Claims determined that the Tax Court had exclusive jurisdiction over claims involving information provided before and after the enactment of TRHCA. The court noted that W’s post-December 20, 2006, information was not merely confirmatory but formed the basis and details of the government’s action against the targets. The court concluded that if W’s allegations were proven at trial, they would establish that the Commissioner proceeded using information provided after December 20, 2006, thus entitling W to judicial review of the award determination. The court rejected the Commissioner’s argument that only pre-December 20, 2006, information was used, as it was a factual dispute to be resolved at trial, not on a motion to dismiss.

    Disposition

    The court denied the Commissioner’s motion to dismiss for lack of jurisdiction, thereby allowing the case to proceed to trial.

    Significance/Impact

    This decision expands the jurisdictional reach of the U. S. Tax Court in reviewing whistleblower award determinations under I. R. C. § 7623(b). It underscores the importance of continuous cooperation between whistleblowers and government agencies in tax enforcement, providing whistleblowers with greater legal protections and access to judicial review. Subsequent cases have cited this ruling to affirm the Tax Court’s jurisdiction over similar claims, reinforcing the court’s role in overseeing the whistleblower program. The decision also highlights the complexities involved in determining the timing and nature of information provided by whistleblowers, which may impact future interpretations of the whistleblower statute.