SCOTUS Reports

Tag: I.R.C. § 7623(b)

  • Carter v. Commissioner, 163 T.C. No. 6 (2024): Automatic Stay and Whistleblower Awards in Bankruptcy

    Carter v. Commissioner, 163 T. C. No. 6 (2024)

    In Carter v. Commissioner, the U. S. Tax Court ruled that a taxpayer’s bankruptcy filing does not automatically stay a whistleblower award case. The decision clarifies that only cases directly concerning the debtor’s tax liability are subject to an automatic stay under 11 U. S. C. § 362(a)(8). This ruling distinguishes between the debtor’s tax liability and unrelated whistleblower claims, impacting how such cases proceed in bankruptcy.

    Parties

    John F. Carter, Petitioner, filed a whistleblower award claim against the Commissioner of Internal Revenue, Respondent, in the United States Tax Court. Carter later filed for bankruptcy, becoming a debtor in that proceeding, while the Commissioner remained the respondent in the Tax Court case.

    Facts

    John F. Carter engaged in a transaction with a target taxpayer in 2012. In May 2015, Carter filed a whistleblower claim asserting that the target incorrectly reported the transaction. The IRS Whistleblower Office (WBO) referred the claim to an IRS operating division for examination. On January 24, 2022, the WBO issued a Final Determination denying Carter a whistleblower award, stating that the information provided did not result in the collection of any proceeds or an assessment related to the issues raised. Subsequently, on May 23, 2023, Carter filed for bankruptcy, and the IRS filed a proof of claim for Carter’s unpaid tax for pre-Petition years.

    Procedural History

    Carter filed a Petition in the U. S. Tax Court to review the WBO’s denial of his whistleblower award claim. After filing the Petition, Carter filed for bankruptcy on May 23, 2023. The IRS filed a proof of claim in Carter’s bankruptcy case for unpaid tax for pre-Petition years. On August 12, 2024, Carter filed a Notice of Proceeding in Bankruptcy with the Tax Court. The Court ordered the parties to address whether the automatic stay under 11 U. S. C. § 362(a)(8) applied to the whistleblower case. The parties filed a joint status report, with Carter asserting that the automatic stay applied, while the Commissioner disagreed.

    Issue(s)

    Whether a taxpayer’s bankruptcy filing automatically stays a whistleblower award case filed by the taxpayer pursuant to 11 U. S. C. § 362(a)(8)?

    Rule(s) of Law

    Bankruptcy Code section 362(a)(8) provides an automatic stay of Tax Court proceedings “concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order for relief. ” The Tax Court has jurisdiction to determine whether a case is automatically stayed under this section. Prior Tax Court decisions have interpreted the automatic stay to apply only if the Tax Court proceeding possibly would affect the tax liability of the debtor in bankruptcy.

    Holding

    The U. S. Tax Court held that a taxpayer’s bankruptcy filing does not automatically stay a whistleblower award case under 11 U. S. C. § 362(a)(8). The Court determined that a whistleblower case does not concern the debtor’s tax liability, even if the claim involves the same transaction and facts as the debtor’s tax liability.

    Reasoning

    The Tax Court’s reasoning focused on the scope of its jurisdiction in whistleblower cases, which is limited to reviewing the IRS’s award determinations for abuse of discretion under I. R. C. § 7623(b). The Court emphasized that its review does not involve factual findings about the target taxpayer or the proper tax treatment of the transaction in question, and thus, cannot affect the debtor’s pre-Petition tax liability. The Court also considered Carter’s argument regarding potential setoff of the whistleblower award against his tax liability, concluding that the automatic stay against creditor setoff rights under 11 U. S. C. § 362(a)(7) is separate and does not necessitate a stay of the whistleblower case itself. The Court’s interpretation of the amended version of 11 U. S. C. § 362(a)(8) remained consistent with prior case law, focusing on the tax liability of the debtor as the criterion for applying the automatic stay. The Court also noted that the IRS must seek relief from stay in the bankruptcy court before exercising any right to set off a whistleblower award against the debtor’s unpaid tax liability.

    Disposition

    The U. S. Tax Court issued an order denying the automatic stay of the whistleblower award case, allowing the case to proceed despite Carter’s bankruptcy filing.

    Significance/Impact

    Carter v. Commissioner clarifies the application of the automatic stay under 11 U. S. C. § 362(a)(8) in the context of whistleblower award cases. The decision establishes that such cases do not concern the debtor’s tax liability and thus are not subject to an automatic stay triggered by a bankruptcy filing. This ruling has practical implications for whistleblowers who file for bankruptcy, as it allows their award claims to proceed independently of their bankruptcy proceedings. The decision also reinforces the limited jurisdiction of the Tax Court in whistleblower cases, focusing solely on the IRS’s award determinations and not on the underlying tax liability of the target taxpayer. Future courts may reference this case when addressing the interplay between bankruptcy and whistleblower award claims.

  • Whistleblower 8391-18W v. Commissioner of Internal Revenue, 161 T.C. No. 5 (2023): Whistleblower Award Determination under I.R.C. § 7623(b)

    Whistleblower 8391-18W v. Commissioner of Internal Revenue, 161 T. C. No. 5 (U. S. Tax Ct. 2023)

    The U. S. Tax Court upheld a 22% whistleblower award under I. R. C. § 7623(b), finding no abuse of discretion by the IRS Whistleblower Office (WBO). The whistleblower sought a 30% award for information provided on a dividend withholding tax scheme, but the court affirmed the WBO’s decision based on the administrative record and applicable legal standards. The ruling clarifies the discretion afforded to the WBO in determining award percentages and reinforces the procedural requirements for whistleblower awards.

    Parties

    Whistleblower 8391-18W (Petitioner) v. Commissioner of Internal Revenue (Respondent).

    Facts

    In 2006, an IRS audit team began examining the tax returns of Redacted 4 and Redacted 5. In 2008, the Petitioner submitted a claim to the WBO, identifying Redacted 2 as a participant in a dividend tax withholding scheme. The audit team, already investigating Redacted 4 and Redacted 5, received Petitioner’s information in 2009. This information was used during the ongoing examination, leading to the collection of proceeds. In 2018, the WBO determined that Petitioner was entitled to a 22% mandatory award of the collected proceeds. The Petitioner challenged this decision, seeking a 30% award and asserting additional claims related to the timing of payment, interest, and sequestration reduction.

    Procedural History

    The WBO issued a preliminary award recommendation of 22% in 2018, followed by a final determination. The Petitioner filed a petition with the U. S. Tax Court in 2018, challenging the award percentage and other issues. Both parties moved for summary judgment. The Tax Court reviewed the administrative record under the abuse of discretion standard and denied the Petitioner’s motions while granting the Respondent’s motion for summary judgment.

    Issue(s)

    Whether the WBO abused its discretion in determining a 22% award percentage under I. R. C. § 7623(b)?

    Whether the WBO should have paid the 22% award while the Petitioner challenged the remaining 8%?

    Whether the Petitioner is entitled to interest on the award under I. R. C. § 7623(b)?

    Whether the WBO properly applied a sequestration reduction to the award?

    Rule(s) of Law

    I. R. C. § 7623(b) authorizes mandatory awards for whistleblowers whose information leads to collected proceeds, with awards ranging from 15% to 30% based on the whistleblower’s substantial contribution. Treasury Regulation § 301. 7623-4(c)(1)(i) specifies that awards depend on the extent of the whistleblower’s substantial contributions. The Tax Court reviews WBO determinations under an abuse of discretion standard, confined to the administrative record (Kasper v. Commissioner, 150 T. C. 8 (2018)).

    Holding

    The Tax Court held that the WBO did not abuse its discretion in determining a 22% award for the Petitioner. The court further held that I. R. C. § 7623(b) does not provide for the payment of interest on a mandatory award. The WBO’s application of a sequestration reduction was upheld as not constituting an abuse of discretion.

    Reasoning

    The court reasoned that the WBO’s discretion in determining award percentages is broad, guided by positive and negative factors outlined in Treasury Regulation § 301. 7623-4(b). The WBO considered the administrative record, including the fact that the audit was already underway when the Petitioner’s information was used, which justified the 22% award. The court rejected the Petitioner’s argument for a higher award based on other claims involving the same scheme, noting that each claim’s circumstances can differ. The court also found no basis for immediate payment of the 22% award while the Petitioner challenged the remaining 8%, as the regulations require final determination of all appeals before payment. The absence of an explicit statutory provision for interest on whistleblower awards, combined with the no-interest rule, led the court to deny the Petitioner’s claim for interest. The court upheld the application of the sequestration reduction, citing prior precedent.

    Disposition

    The Tax Court denied the Petitioner’s motions for partial and full summary judgment and granted the Respondent’s motion for summary judgment, affirming the WBO’s determination of a 22% award.

    Significance/Impact

    This decision reinforces the discretion afforded to the WBO in determining award percentages under I. R. C. § 7623(b), emphasizing the importance of the administrative record in such determinations. It clarifies that whistleblowers are not entitled to interest on awards and that sequestration reductions are applicable. The ruling underscores the procedural requirements for whistleblower awards, impacting how whistleblowers and the IRS approach such claims and reinforcing the Tax Court’s limited scope of review under the abuse of discretion standard.

  • Thomas Shands v. Commissioner of Internal Revenue, 160 T.C. No. 5 (2023): Jurisdiction in Whistleblower Award Claims under I.R.C. § 7623(b)

    Thomas Shands v. Commissioner of Internal Revenue, 160 T. C. No. 5 (2023)

    In Thomas Shands v. Commissioner of Internal Revenue, the U. S. Tax Court ruled it lacked jurisdiction to review a whistleblower’s claim for a nondiscretionary award under I. R. C. § 7623(b). The court determined that the creation of the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) and taxpayer participation in it did not constitute an “administrative or judicial action” required for the court’s jurisdiction. This decision clarifies the scope of the Tax Court’s authority over whistleblower claims, emphasizing the necessity of IRS action based on the whistleblower’s information.

    Parties

    Thomas Shands (Petitioner) v. Commissioner of Internal Revenue (Respondent). Shands was the appellant at the Tax Court level, seeking review of the IRS Whistleblower Office’s denial of his claim for a whistleblower award.

    Facts

    Thomas Shands filed a whistleblower claim with the IRS Whistleblower Office (WBO) seeking a nondiscretionary award under I. R. C. § 7623(b) for his alleged contribution to the success of the 2011 Offshore Voluntary Disclosure Initiative (OVDI). Shands claimed his cooperation with federal agents in the arrest and subsequent guilty plea of Swiss banker Renzo Gadola spurred widespread participation in OVDI, leading to significant tax collections. The WBO denied Shands’s claim, asserting that the IRS did not proceed with an administrative or judicial action based on information Shands provided. Shands appealed the denial to the Tax Court.

    Procedural History

    Shands filed his whistleblower claim in 2012, and the WBO denied it in 2016. Shands appealed to the Tax Court in 2016. The Commissioner moved to dismiss for lack of jurisdiction, arguing that the IRS did not proceed with an action based on Shands’s information. The Tax Court granted the Commissioner’s motion to dismiss, finding it lacked jurisdiction under I. R. C. § 7623(b)(4) because no administrative or judicial action was taken by the IRS based on Shands’s information.

    Issue(s)

    Whether the creation of the IRS’s Offshore Voluntary Disclosure Initiative (OVDI) and taxpayer participation in OVDI constitute an “administrative or judicial action” under I. R. C. § 7623(b)(1), thereby conferring jurisdiction on the Tax Court to review the WBO’s denial of Shands’s whistleblower claim?

    Rule(s) of Law

    I. R. C. § 7623(b)(1) provides for nondiscretionary whistleblower awards when the IRS proceeds with an “administrative or judicial action” based on information provided by the whistleblower. Treasury Regulation § 301. 7623-2(a) defines “administrative action” as a civil or criminal proceeding that may result in collected proceeds and “judicial action” as a proceeding in any court that may result in collected proceeds. The Tax Court’s jurisdiction to review whistleblower award determinations is limited to cases where the IRS has proceeded with such an action.

    Holding

    The Tax Court held that it lacked jurisdiction to review the WBO’s denial of Shands’s whistleblower claim because the creation of OVDI and taxpayer participation in it did not constitute an “administrative or judicial action” under I. R. C. § 7623(b)(1) and Treasury Regulation § 301. 7623-2(a).

    Reasoning

    The court’s reasoning centered on the statutory and regulatory definitions of “administrative or judicial action. ” The court relied on the D. C. Circuit’s decision in Li v. Commissioner, which held that the Tax Court lacks jurisdiction over a whistleblower claim if the IRS has not proceeded with an administrative or judicial action based on the whistleblower’s information. The court found that the creation of OVDI did not constitute a “proceeding against any person” as required by the regulation, nor did taxpayer participation in OVDI constitute such an action. The court also rejected Shands’s argument that the regulations should not apply retroactively to his claim, citing the D. C. Circuit’s ruling in Bergerco Canada v. U. S. Treasury Department, which upheld the application of new regulatory criteria to pending applications. The court concluded that Shands failed to meet his burden of proving jurisdiction, and thus, the court could not review the WBO’s denial.

    Disposition

    The Tax Court granted the Commissioner’s motion to dismiss for lack of jurisdiction and dismissed Shands’s appeal.

    Significance/Impact

    This decision clarifies the jurisdictional limits of the Tax Court in reviewing whistleblower award claims under I. R. C. § 7623(b). It underscores that the creation of IRS programs like OVDI and taxpayer participation in such programs do not constitute the requisite “administrative or judicial action” for Tax Court jurisdiction. The ruling may deter future whistleblower claims based on the indirect effects of their information on IRS programs, focusing instead on direct enforcement actions. It also reinforces the deference given to Treasury Regulations in defining statutory terms, impacting how whistleblower claims are evaluated and processed by the IRS and the Tax Court.

  • Michael Lissack v. Commissioner of Internal Revenue, 157 T.C. No. 5 (2021): Interpretation of Whistleblower Award Eligibility under I.R.C. § 7623(b)

    Michael Lissack v. Commissioner of Internal Revenue, 157 T. C. No. 5 (2021)

    In a significant ruling on whistleblower awards, the U. S. Tax Court upheld the IRS’s denial of a whistleblower award to Michael Lissack, who alleged unreported income by a group of entities. The court ruled that Lissack was not eligible for an award because the IRS did not collect proceeds based on the information he provided. This decision clarifies the scope of IRS actions that qualify for whistleblower awards under I. R. C. § 7623(b), emphasizing the need for a direct link between the whistleblower’s information and the IRS’s collection of proceeds.

    Parties

    Michael Lissack, as the Petitioner, sought a whistleblower award under I. R. C. § 7623(b) from the Commissioner of Internal Revenue, the Respondent. The case was adjudicated at the U. S. Tax Court.

    Facts

    Michael Lissack filed a Form 211 with the IRS, alleging that a group of entities (collectively referred to as “Target”) had failed to report millions of dollars in membership fees as gross income for the year 2008. The IRS initiated an examination based on Lissack’s claim, which concluded that the membership fees were properly treated as nontaxable deposits. However, during the examination, the IRS discovered an unrelated issue concerning an erroneous deduction claimed by Target for intercompany bad debt. The IRS expanded the examination to include this issue, ultimately disallowing the deduction and assessing a $60 million adjustment. Lissack’s claim for a whistleblower award was denied because the adjustment was unrelated to the information he had provided about the membership fees.

    Procedural History

    The IRS Whistleblower Office processed Lissack’s Form 211 and referred it to a revenue agent for examination. After determining that the membership fees were properly treated, the agent discovered the unrelated bad debt issue. The IRS assessed additional taxes based on this issue but denied Lissack’s claim for a whistleblower award. Lissack petitioned the U. S. Tax Court for review, and both parties filed cross-motions for summary judgment. The Tax Court reviewed the case under the administrative record and granted the Commissioner’s motion for summary judgment.

    Issue(s)

    Whether a whistleblower is entitled to an award under I. R. C. § 7623(b) when the IRS collects proceeds from an administrative action that was expanded to include issues unrelated to the information provided by the whistleblower?

    Rule(s) of Law

    I. R. C. § 7623(b)(1) provides that a whistleblower is eligible for an award only if the IRS proceeds with an administrative or judicial action “based on information” supplied by the whistleblower and collects proceeds “as a result of the action. ” Treasury Regulation § 301. 7623-2(b)(1) defines “proceeds based on” as an action where the whistleblower’s information “substantially contributes” to the action. The regulation also clarifies that an IRS examination may comprise multiple “administrative actions,” and only the portion of the examination directly linked to the whistleblower’s information qualifies for an award.

    Holding

    The U. S. Tax Court held that Michael Lissack was not eligible for a whistleblower award under I. R. C. § 7623(b) because the IRS did not collect any proceeds “as a result of the action” based on the information he provided. The examination of the erroneous deduction issue constituted a separate administrative action not initiated on the basis of Lissack’s claim.

    Reasoning

    The court applied the Chevron two-step test to evaluate the validity of the Treasury Regulations. At Chevron Step One, the court found that Congress had not directly spoken to the precise question of what constitutes an “administrative or judicial action” under I. R. C. § 7623(b), leaving room for the Secretary to define the term through regulation. At Chevron Step Two, the court determined that the regulations were a reasonable interpretation of the statute, defining an “administrative action” as a portion of an IRS examination and requiring a substantial contribution from the whistleblower’s information to qualify for an award. The court rejected Lissack’s argument that the IRS’s expansion of the examination to include the bad debt issue constituted a “related action” under the regulations, as it was not against a different person and did not involve substantially the same facts as his original claim. The court emphasized that the IRS did not proceed based on Lissack’s information in disallowing the bad debt deduction, and thus, he was not entitled to an award.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motion for summary judgment and denied Lissack’s cross-motion, affirming the IRS’s denial of the whistleblower award.

    Significance/Impact

    This case significantly clarifies the scope of whistleblower awards under I. R. C. § 7623(b), emphasizing that a whistleblower’s information must directly contribute to the IRS’s collection of proceeds to qualify for an award. The decision upholds the validity of Treasury Regulations defining “administrative action” and “proceeds based on,” providing guidance for future whistleblower claims. It also highlights the importance of the whistleblower’s information in triggering and contributing to the specific IRS action that leads to collected proceeds. This ruling may influence how whistleblowers frame their claims and how the IRS evaluates eligibility for awards, potentially affecting the incentives for reporting tax noncompliance.

  • Whistleblower 21276-13W v. Commissioner of Internal Revenue, 155 T.C. No. 2 (2020): Enforcement and Interpretation of Tax Court Decisions

    Whistleblower 21276-13W v. Commissioner of Internal Revenue, 155 T. C. No. 2 (U. S. Tax Court 2020)

    In a significant ruling, the U. S. Tax Court upheld the enforceability of its decisions while denying whistleblowers’ motions to enforce payment of awards without sequester reductions. The case clarified that judicial decisions must be interpreted in light of parties’ settlements, impacting how future litigants approach agreements and court orders in tax disputes.

    Parties

    Whistleblower 21276-13W and Whistleblower 21277-13W, petitioners, sought whistleblower awards against the Commissioner of Internal Revenue, respondent, in the U. S. Tax Court.

    Facts

    Whistleblowers claimed awards under I. R. C. § 7623(b) for information leading to the collection of approximately $74 million from a targeted business. Following two prior Tax Court opinions, the parties reached a partial settlement agreeing on a 24% award on certain collected proceeds and stipulating to a sequester reduction. The settlement left one issue unresolved regarding the classification of $54 million as collected proceeds. The Tax Court’s second opinion resolved this issue in favor of the whistleblowers, calculating their awards based on the full amount of collected proceeds. The Commissioner subsequently paid the awards, applying the agreed-upon sequester reduction and withholding taxes. More than eight months after the final payments, the whistleblowers moved the Court to enforce the January 2017 decisions without the sequester reductions.

    Procedural History

    The case began with two prior Tax Court opinions addressing eligibility and the scope of collected proceeds for whistleblower awards. After the first opinion, the parties partially settled, resolving some issues and leaving others for judicial determination. The second opinion ruled on the remaining issue, leading to the entry of decisions in January 2017 specifying the gross award amounts. The Commissioner appealed these decisions, but the appeal was dismissed upon the parties’ stipulation. Following payment of the awards with sequester reductions, the whistleblowers filed motions to enforce the decisions, which the Court addressed in its final opinion.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to enforce its decisions, and whether the whistleblowers are entitled to the award amounts specified in the January 2017 decisions without the sequester reductions?

    Rule(s) of Law

    The U. S. Tax Court, established as a court of record under I. R. C. § 7441, possesses the authority to enforce its decisions as per I. R. C. § 7456(c). Whistleblower awards are subject to the Budget Control Act of 2011, which mandates sequester reductions on discretionary spending, including whistleblower awards.

    Holding

    The Tax Court held that it has jurisdiction to enforce its decisions and that the whistleblowers’ motions to enforce the January 2017 decisions without sequester reductions were denied, as the motions ignored the terms of the partial settlement and misinterpreted the decisions.

    Reasoning

    The Court reasoned that, as a court of record, it inherently possesses the authority to enforce its decisions, aligning with longstanding Supreme Court precedent. The decisions in question were interpreted as calculating gross award amounts based on the parties’ stipulations, not as mandating payment without regard to sequester reductions agreed upon in the settlement. The Court emphasized the importance of adhering to the terms of settlements, which the whistleblowers’ motions disregarded. The Court’s analysis also considered the futility of remanding the case to the IRS Whistleblower Office, given the parties’ stipulations and the clear legal outcome. The Court further clarified that the motions sought enforcement, not mere clarification of the decisions, necessitating an examination of the Court’s enforcement powers. The Court’s decision to deny the motions was based on the interpretation of the January 2017 decisions in light of the settlement agreement.

    Disposition

    The Tax Court denied the whistleblowers’ motions to enforce the January 2017 decisions without sequester reductions.

    Significance/Impact

    This decision underscores the enforceability of Tax Court decisions and the binding nature of settlement agreements in tax disputes. It serves as a reminder to litigants of the importance of fully disclosing settlement terms to the Court to avoid post-decision litigation. The case also reaffirms the application of sequester reductions to whistleblower awards, affecting future claims and settlements in this area. Furthermore, it clarifies the scope of the Tax Court’s jurisdiction to enforce its decisions, providing guidance for practitioners and litigants on the interplay between court orders and settlement agreements.

  • Whistleblower 22716-13W v. Commissioner, 146 T.C. 84 (2016): Exclusion of FBAR Penalties from Whistleblower Award Thresholds

    Whistleblower 22716-13W v. Commissioner, 146 T. C. 84 (2016)

    The U. S. Tax Court ruled that Foreign Bank Account Report (FBAR) penalties, which are assessed under Title 31, do not count toward the $2 million threshold for mandatory whistleblower awards under I. R. C. § 7623(b). This decision clarifies that only penalties under the Internal Revenue Code can be considered for eligibility in such awards, impacting how whistleblowers can qualify for nondiscretionary rewards in cases involving offshore accounts.

    Parties

    Whistleblower 22716-13W, the petitioner, sought review of the IRS Whistleblower Office’s denial of his claim for an award. The Commissioner of Internal Revenue, the respondent, moved for summary judgment, contending that the petitioner’s claim did not meet the $2 million threshold for a nondiscretionary award under I. R. C. § 7623(b).

    Facts

    In 2010, the petitioner filed a Form 211 with the IRS Whistleblower Office, alleging cooperation with the Department of Justice and IRS Criminal Investigation Division concerning an investigation into two Swiss bankers, Martin Lack and Renzo Gadola. The petitioner claimed that his cooperation led to information about these bankers’ involvement in tax evasion by U. S. persons using undeclared offshore accounts. In 2011, the petitioner filed a claim for an award after learning that Taxpayer 1, who had been assisted by Gadola, agreed to pay a substantial FBAR civil penalty as part of a guilty plea for filing a false tax return. Taxpayer 1 admitted to using Swiss bank accounts to conceal income and assets from U. S. authorities, and agreed to pay an FBAR penalty exceeding $2 million and a small amount of restitution for unpaid federal income tax. The petitioner’s claim was based on the total amount paid by Taxpayer 1, asserting that his involvement in Gadola’s arrest led to Taxpayer 1’s arrest and subsequent penalties.

    Procedural History

    The IRS Whistleblower Office initially informed the petitioner of a legal opinion concluding that FBAR penalties, being assessed under Title 31, were not eligible for nondiscretionary awards under I. R. C. § 7623(b). The petitioner sought immediate review in the U. S. Tax Court, but the court dismissed the case for lack of jurisdiction, as no final determination had been made. On September 6, 2013, the IRS issued a final determination letter denying the petitioner’s claim on two grounds: the government obtained information about Taxpayer 1’s offshore accounts directly from the Swiss bank without the petitioner’s assistance, and the claim did not meet the $2 million threshold because FBAR penalties were not considered “additional amounts” under I. R. C. § 7623(b)(5)(B). The petitioner timely petitioned the Tax Court for review. The Commissioner filed an answer, raising the $2 million threshold as an affirmative defense. On May 29, 2015, the Commissioner moved for summary judgment based on the petitioner’s failure to satisfy the $2 million threshold, which the court granted.

    Issue(s)

    Whether FBAR civil penalties assessed under Title 31 constitute “additional amounts” within the meaning of I. R. C. § 7623(b)(5)(B), thereby counting towards the $2 million threshold for eligibility for a nondiscretionary whistleblower award?

    Rule(s) of Law

    I. R. C. § 7623(b)(5)(B) provides that a whistleblower is eligible for a nondiscretionary award only if “the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000. ” The term “additional amounts” is a term of art in the Internal Revenue Code, specifically referring to civil penalties set forth in Chapter 68, Subchapter A, which are assessed, collected, and paid in the same manner as taxes. FBAR penalties are assessed under 31 U. S. C. § 5321, not under the Internal Revenue Code, and thus are not “additional amounts” as defined by I. R. C. § 6665(a)(1).

    Holding

    The U. S. Tax Court held that FBAR civil penalties do not constitute “additional amounts” within the meaning of I. R. C. § 7623(b)(5)(B) and therefore must be excluded in determining whether the $2 million “amount in dispute” requirement has been satisfied for eligibility for a nondiscretionary whistleblower award.

    Reasoning

    The court’s reasoning was based on a textual analysis of the statute. It noted that the term “additional amounts” is a term of art in the Internal Revenue Code, consistently used to refer to specific civil penalties under Chapter 68, Subchapter A. The court referenced prior decisions such as Bregin v. Commissioner and Pen Coal Corp. v. Commissioner, which established that “additional amounts” refers to penalties assessed, collected, and paid in the same manner as taxes under the Internal Revenue Code. The court also cited Williams v. Commissioner, which held that FBAR penalties do not fall within the court’s jurisdiction as “additional amounts. ” The court rejected the petitioner’s arguments based on the broader language of I. R. C. § 7623(a) and the term “collected proceeds” in § 7623(b)(1), emphasizing that the specific language of § 7623(b)(5)(B) controlled the issue at hand. The court also dismissed policy arguments suggesting that FBAR penalties should be treated as taxes for whistleblower purposes, stating that any gaps in the statute could only be addressed by Congress.

    Disposition

    The court granted the Commissioner’s motion for summary judgment, ruling that the petitioner’s claim did not satisfy the $2 million threshold under I. R. C. § 7623(b)(5)(B) and was therefore ineligible for a nondiscretionary whistleblower award.

    Significance/Impact

    This decision has significant implications for whistleblowers seeking awards under I. R. C. § 7623(b), particularly in cases involving undisclosed offshore accounts. By excluding FBAR penalties from the calculation of the $2 million threshold, the court’s ruling may reduce the incentives for whistleblowers to report such violations, as these penalties can often exceed the related income tax liabilities. The decision underscores the importance of statutory text in determining eligibility for whistleblower awards and highlights the distinction between penalties under Title 26 and Title 31. Subsequent courts have followed this interpretation, and it remains a key precedent in whistleblower litigation involving offshore accounts and FBAR penalties.

  • Whistleblower One v. Comm’r, 145 T.C. 204 (2015): Scope of Discovery in Whistleblower Award Cases

    Whistleblower One 10683-13W v. Commissioner of Internal Revenue, 145 T. C. 204, 2015 U. S. Tax Ct. LEXIS 38, 145 T. C. No. 8 (U. S. Tax Court, 2015)

    In a landmark ruling, the U. S. Tax Court expanded whistleblower rights by allowing discovery beyond the administrative record in claims under I. R. C. § 7623(b). The court ruled that the IRS cannot unilaterally define what constitutes the administrative record, thus whistleblowers can compel production of relevant documents and interrogatory responses. This decision significantly broadens the scope of evidence whistleblowers may access, potentially increasing their ability to substantiate claims for tax evasion awards.

    Parties

    Whistleblower One 10683-13W, Whistleblower Two 10683-13W, and Whistleblower Three 10683-13W, as petitioners, filed their claim in the U. S. Tax Court against the Commissioner of Internal Revenue, as respondent.

    Facts

    In 2006, the petitioners filed a whistleblower claim with the Internal Revenue Service (IRS), alleging a tax evasion scheme (TES) by a specific target corporation. They claimed that their information led to an IRS investigation, which initially disallowed the TES and issued a legal memorandum disallowing similar transactions. However, the IRS later reversed its decision on the target’s use of the TES as part of a larger compromise that involved over $50 million in tax adjustments. The petitioners also informed the IRS of a related sham debt obligation, which resulted in a disallowed loss deduction of over $20 million. The petitioners sought discovery to ascertain who reviewed their information, details of the IRS’s investigation, the issuance of the legal memorandum, and the collection of proceeds from the target.

    Procedural History

    The petitioners moved to compel the production of documents and responses to interrogatories under I. R. C. § 7623(b)(4). The respondent objected, arguing that the requested information was outside the administrative record and not discoverable. The U. S. Tax Court reviewed the motions and objections, applying a standard of relevancy as governed by Fed. Tax Ct. R. 70(b). The court issued an order granting the motions, finding the requested information relevant to the whistleblower’s claim.

    Issue(s)

    Whether the scope of discovery in a whistleblower award case under I. R. C. § 7623(b)(4) is limited to the administrative record as defined by the respondent, or whether the court can compel production of documents and responses to interrogatories that are relevant to the petitioners’ claim but outside the respondent’s purported administrative record?

    Rule(s) of Law

    Fed. Tax Ct. R. 70(b) provides that the scope of discovery includes “any matter not privileged and which is relevant to the subject matter involved in the pending case,” and it is not a ground for objection that the information sought will be inadmissible at trial if it appears reasonably calculated to lead to discovery of admissible evidence. I. R. C. § 7623(b) mandates awards to whistleblowers who provide information leading to the collection of tax proceeds, and the entitlement to an award hinges on whether there was a collection of proceeds attributable to the whistleblower’s information.

    Holding

    The U. S. Tax Court held that even if the court’s scope of review were limited to the administrative record, the respondent cannot unilaterally decide what constitutes the administrative record. The court further held that the requested information was relevant to the petitioners’ claim and granted the motions to compel production of documents and responses to interrogatories.

    Reasoning

    The court’s reasoning was grounded in the liberal standard of relevancy in discovery, as established in Melea Ltd. v. Commissioner, 118 T. C. 218 (2002). The court rejected the respondent’s argument that discovery should be limited to the administrative record, citing Thompson v. DOL, 885 F. 2d 551 (9th Cir. 1989), and Tenneco Oil Co. v. DOE, 475 F. Supp. 299 (D. Del. 1979), which state that an agency cannot unilaterally define the administrative record. The court emphasized that the requested information was essential to determining whether collections of proceeds were attributable to the whistleblowers’ information, a key inquiry under I. R. C. § 7623(b). The court also noted that the respondent’s lack of response to the motions suggested an incomplete administrative record, further justifying the need for discovery. The court addressed confidentiality concerns by including specific protective order provisions in its order granting the motions, as per the requirements of I. R. C. § 6103.

    Disposition

    The U. S. Tax Court granted the petitioners’ motions to compel production of documents and responses to interrogatories, with instructions for the respondent to comply under the specified protective order.

    Significance/Impact

    The Whistleblower One decision significantly impacts the field of tax whistleblower law by broadening the scope of discovery available to whistleblowers. It underscores the court’s authority to review and compel evidence beyond what the IRS may consider part of the administrative record, thereby enhancing whistleblowers’ ability to substantiate their claims. This ruling may encourage more whistleblowers to come forward with information on tax evasion schemes, knowing they have a greater chance of accessing necessary evidence to support their claims for awards. The decision also sets a precedent for other administrative law cases, where the completeness and accuracy of an administrative record may be challenged through discovery. Subsequent courts have cited this case when addressing the scope of review and discovery in administrative proceedings, indicating its doctrinal importance and practical implications for legal practice.

  • Whistleblower 11332-13W v. Commissioner, 142 T.C. 21 (2014): Jurisdiction over Whistleblower Award Claims under I.R.C. § 7623(b)

    Whistleblower 11332-13W v. Commissioner, 142 T. C. 21 (2014)

    The U. S. Tax Court ruled that it has jurisdiction to review IRS whistleblower award determinations when the whistleblower provided information both before and after the enactment of the 2006 Tax Relief and Health Care Act. This decision ensures judicial oversight of awards under I. R. C. § 7623(b), which mandates minimum awards for information leading to tax recovery, enhancing accountability and incentivizing whistleblower participation in detecting tax fraud.

    Parties

    Whistleblower 11332-13W, the petitioner, filed a claim against the Commissioner of Internal Revenue, the respondent, in the U. S. Tax Court. The whistleblower sought review of the Commissioner’s determination on an award claim under I. R. C. § 7623(b).

    Facts

    Whistleblower 11332-13W discovered a tax fraud scheme involving their employer and related entities. After initial attempts to report the scheme were met with intimidation and lack of response, the whistleblower successfully engaged with the Department of Justice (DOJ) and the Internal Revenue Service (IRS) in June 2006. From June 2006 through the fall of 2009, the whistleblower continuously provided detailed information and documents concerning the scheme, which led to the IRS recovering over $30 million in taxes, penalties, and interest from one of the target taxpayers through a Non-Prosecution Agreement. The whistleblower filed a Form 211 in 2008 and resubmitted it in 2011, seeking an award under I. R. C. § 7623(b). The IRS granted a discretionary award under § 7623(a) but denied the claim under § 7623(b).

    Procedural History

    The whistleblower filed a petition in the U. S. Tax Court seeking review of the Commissioner’s award determination. The Commissioner moved to dismiss for lack of jurisdiction, arguing that the Tax Court lacked jurisdiction because the information provided by the whistleblower predated the effective date of I. R. C. § 7623(b) on December 20, 2006. The whistleblower opposed the motion, asserting that the court had jurisdiction because they had provided information both before and after the enactment date of § 7623(b). The Tax Court denied the Commissioner’s motion to dismiss.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to review the Commissioner’s whistleblower claim award determinations under I. R. C. § 7623(b) when the whistleblower provided information both before and after the enactment of the Tax Relief and Health Care Act of 2006, effective December 20, 2006?

    Rule(s) of Law

    I. R. C. § 7623(b) mandates a minimum award of 15% of collected proceeds resulting from administrative or judicial action based on information provided by a whistleblower. The Tax Court has exclusive jurisdiction over appeals of award determinations under § 7623(b)(4). The Internal Revenue Manual (IRM) and IRS Notice 2008-4 provide procedural guidance on whistleblower claims and awards.

    Holding

    The U. S. Tax Court held that it has jurisdiction to review the Commissioner’s whistleblower claim award determinations under I. R. C. § 7623(b) when the whistleblower has alleged that they provided information both before and after the effective date of the Tax Relief and Health Care Act of 2006, December 20, 2006.

    Reasoning

    The court’s reasoning hinged on the interpretation of I. R. C. § 7623(b) and the legislative intent behind the Tax Relief and Health Care Act of 2006. The court noted that the Act aimed to improve the whistleblower program by providing judicial review of award determinations, which was lacking under the discretionary regime of § 7623(a). The court analyzed the whistleblower’s continuous provision of information from June 2006 through the fall of 2009, emphasizing that post-enactment information was not merely confirmatory but formed the basis of the IRS’s action against the target taxpayers. The court referenced the Court of Federal Claims’ decision in Dacosta v. United States, which established that the Tax Court has exclusive jurisdiction over such claims. The court found that the whistleblower’s allegations were sufficient to establish jurisdiction, as they claimed the IRS used their post-enactment information to proceed against the targets. The court concluded that if these allegations were proven at trial, they would establish that the IRS acted on post-enactment information, thus warranting judicial review under § 7623(b).

    Disposition

    The U. S. Tax Court denied the Commissioner’s motion to dismiss for lack of jurisdiction, allowing the case to proceed to determine the merits of the whistleblower’s claim for an award under I. R. C. § 7623(b).

    Significance/Impact

    This decision is significant as it clarifies the Tax Court’s jurisdiction over whistleblower award claims involving information provided before and after the enactment of the 2006 Tax Relief and Health Care Act. It reinforces the judicial oversight of the IRS’s award determinations under § 7623(b), ensuring accountability and incentivizing whistleblower participation in detecting tax fraud. The ruling may lead to increased scrutiny and consistency in the handling of whistleblower claims, potentially encouraging more individuals to come forward with information about tax violations. Subsequent cases have cited this decision to support the Tax Court’s jurisdiction over similar claims, impacting the procedural landscape for whistleblower litigation.

  • Cohen v. Commissioner, 139 T.C. 299 (2012): Whistleblower Award Eligibility under I.R.C. § 7623(b)

    Cohen v. Commissioner, 139 T. C. 299 (2012)

    The U. S. Tax Court dismissed Raymond Cohen’s petition seeking to compel the IRS to reopen his whistleblower claim under I. R. C. § 7623(b). The court held that it lacked jurisdiction to order the IRS to pursue an action or collect proceeds based on Cohen’s information. This ruling clarifies that a whistleblower award is contingent upon the IRS taking action and collecting proceeds, emphasizing the limited judicial oversight of IRS whistleblower claim decisions.

    Parties

    Raymond Cohen, the petitioner, filed his claim pro se. The respondent, the Commissioner of Internal Revenue, was represented by Jonathan D. Tepper. The case was heard by Judge Kroupa of the United States Tax Court.

    Facts

    Raymond Cohen, a certified public accountant, submitted a whistleblower claim to the IRS based on information he obtained while his wife served as executrix for an estate. The estate held uncashed stock dividend checks from a public corporation. Cohen suspected the corporation retained unclaimed assets, including uncashed dividends and unredeemed bonds. He gathered information through a state Freedom of Information Law request and reviewed allegations from a civil lawsuit against the corporation, asserting that the corporation possessed unclaimed assets worth over $700 million. Cohen claimed these assets should have been turned over to the state and constituted unreported income for federal tax purposes. The IRS Whistleblower Office denied Cohen’s claim, stating that no proceeds were collected and the information was publicly available. Cohen requested reconsideration, which was also denied.

    Procedural History

    Cohen filed a petition and an amended petition in the United States Tax Court, requesting the court to order the IRS to reopen his claim. The Commissioner moved to dismiss the petition for failure to state a claim under Rule 40 of the Tax Court Rules of Practice and Procedure. Cohen opposed the motion and filed a motion for summary judgment under Rule 121. The Tax Court granted the Commissioner’s motion to dismiss and denied Cohen’s motion for summary judgment as moot.

    Issue(s)

    Whether the Tax Court has jurisdiction under I. R. C. § 7623(b) to order the IRS to reopen a whistleblower claim where no administrative or judicial action has been initiated and no proceeds have been collected.

    Rule(s) of Law

    Under I. R. C. § 7623(b), a whistleblower is entitled to an award only if the provided information leads the Commissioner to proceed with an administrative or judicial action and collect proceeds. The Tax Court’s jurisdiction is limited to reviewing the Commissioner’s award determination after these prerequisites are met.

    Holding

    The Tax Court held that it lacks jurisdiction to grant relief under I. R. C. § 7623(b) when the IRS has not initiated an administrative or judicial action or collected proceeds based on the whistleblower’s information. The court dismissed Cohen’s petition for failure to state a claim upon which relief can be granted.

    Reasoning

    The court’s reasoning focused on the statutory requirements of I. R. C. § 7623(b), which explicitly link a whistleblower award to the IRS’s action and collection of proceeds. The court emphasized that its jurisdiction is limited to reviewing the Commissioner’s award determination after these events occur. The court rejected Cohen’s arguments that the IRS should be compelled to act on his information or provide detailed explanations for its decision, citing the absence of such authority in the statute. The court also dismissed Cohen’s reliance on the Administrative Procedure Act and equitable grounds, noting that these do not expand the court’s jurisdiction or create new rights of action under I. R. C. § 7623(b). The court acknowledged Cohen’s frustration but stressed that Congress has assigned the responsibility of evaluating whistleblower claims to the IRS, without providing judicial remedies until the statutory prerequisites are satisfied.

    Disposition

    The Tax Court granted the Commissioner’s motion to dismiss the petition for failure to state a claim and denied Cohen’s motion for summary judgment as moot.

    Significance/Impact

    Cohen v. Commissioner clarifies the scope of judicial review under I. R. C. § 7623(b), emphasizing that courts cannot compel the IRS to act on whistleblower information or reopen claims without an administrative or judicial action and collection of proceeds. This decision reinforces the IRS’s discretion in handling whistleblower claims and limits judicial intervention to post-action review of award determinations. It may influence future whistleblower cases by setting a clear threshold for judicial involvement, potentially affecting the strategies of whistleblowers and their expectations regarding IRS responses to their claims.

  • Cooper v. Commissioner, 136 T.C. 597 (2011): Whistleblower Award Jurisdiction and Threshold Requirements

    Cooper v. Commissioner, 136 T. C. 597 (U. S. Tax Ct. 2011)

    In Cooper v. Commissioner, the U. S. Tax Court clarified its jurisdiction in whistleblower cases, ruling that it does not extend to initiating tax liability investigations. The court upheld the IRS’s decision not to pursue action based on William Prentice Cooper’s whistleblower claims, denying him an award under I. R. C. § 7623(b) because no tax proceeds were collected. This decision underscores the limitations of judicial oversight in whistleblower disputes and the necessity for actual tax collection to trigger an award.

    Parties

    William Prentice Cooper, III, as the petitioner, filed two claims for whistleblower awards with the Commissioner of Internal Revenue, the respondent. The case progressed through the U. S. Tax Court, where Cooper sought review of the Commissioner’s denial of his claims.

    Facts

    William Prentice Cooper, III, an attorney from Nashville, Tennessee, submitted two whistleblower claims to the Internal Revenue Service (IRS) in 2008. The claims alleged substantial underpayments in federal estate and generation-skipping transfer taxes related to the estate of Dorothy Dillon Eweson, claiming an omission of a trust valued at over $102 million and the improper modification of trusts worth over $200 million. Cooper obtained this information while representing the guardian of a trust beneficiary and supported his claims with public records and client records. The IRS Whistleblower Office reviewed the claims and forwarded them to the appropriate IRS office, which concluded that no administrative or judicial action would be taken against the taxpayer involved. Consequently, the Whistleblower Office informed Cooper that no award determination could be made under I. R. C. § 7623(b) because his information did not lead to the detection of any tax underpayments.

    Procedural History

    Following the IRS’s denial of his whistleblower claims, Cooper filed two petitions in the U. S. Tax Court. The Commissioner moved to dismiss for lack of jurisdiction, arguing that no award determination notices were issued. The court denied this motion, ruling that the Whistleblower Office’s letters constituted determination notices (Cooper v. Commissioner, 135 T. C. 70 (2010)). The Commissioner then filed answers to the petitions, attaching a memorandum summarizing the rationale for denying the claims. Subsequently, the Commissioner moved for summary judgment, asserting that Cooper had not met the threshold requirements for a whistleblower award. Cooper objected, requesting a full re-evaluation of the facts and a new investigation into the tax liability.

    Issue(s)

    Whether the U. S. Tax Court has jurisdiction to direct the IRS to initiate an administrative or judicial action to determine tax liability in a whistleblower case under I. R. C. § 7623(b)?

    Whether the petitioner met the threshold requirements for a whistleblower award under I. R. C. § 7623(b)?

    Rule(s) of Law

    Under I. R. C. § 7623(b)(1), a whistleblower is entitled to an award equal to a percentage of the collected proceeds resulting from an administrative or judicial action initiated based on the whistleblower’s information. The Tax Court’s jurisdiction in whistleblower cases, as per I. R. C. § 7623(b), is limited to reviewing the Commissioner’s award determination, not the underlying tax liability (Cooper v. Commissioner, 135 T. C. 70 (2010)).

    Holding

    The U. S. Tax Court held that it does not have jurisdiction to direct the IRS to open an administrative or judicial action to predetermine tax liability in whistleblower cases. Furthermore, the court found that Cooper failed to meet the threshold requirements for a whistleblower award under I. R. C. § 7623(b) because no tax proceeds were collected as a result of his information.

    Reasoning

    The court reasoned that the statutory framework of I. R. C. § 7623(b) clearly delineates the Tax Court’s jurisdiction to review only the Commissioner’s award determination, not to delve into the merits of the underlying tax liability. This limitation was emphasized by the court’s earlier decision in Cooper v. Commissioner, 135 T. C. 70 (2010), which established that the court’s role in whistleblower disputes is strictly to review the Commissioner’s actions regarding awards. The court further noted that a whistleblower award is contingent upon the IRS’s decision to pursue an administrative or judicial action and the subsequent collection of tax proceeds. Since no such action was initiated based on Cooper’s claims, and no proceeds were collected, he was not entitled to an award. The court addressed Cooper’s objections by clarifying that while he might disagree with the IRS’s legal conclusions, the absence of an IRS action meant there could be no basis for a whistleblower award. The court’s cautious approach to granting summary judgment was also noted, ensuring that all procedural and substantive requirements were met before deciding in favor of the Commissioner.

    Disposition

    The U. S. Tax Court granted the Commissioner’s motions for summary judgment in both dockets, affirming the denial of whistleblower awards to Cooper.

    Significance/Impact

    Cooper v. Commissioner is significant for delineating the scope of the Tax Court’s jurisdiction in whistleblower cases, emphasizing that it does not extend to directing the IRS to investigate potential tax liabilities. This ruling clarifies the threshold requirements for whistleblower awards under I. R. C. § 7623(b), reinforcing that an award is contingent upon the IRS taking action and collecting proceeds. The decision has implications for future whistleblower litigation, underscoring the necessity of actual tax collection for an award and the limited judicial oversight in such disputes. It also highlights the procedural and substantive hurdles whistleblowers must overcome to successfully claim an award, potentially impacting the incentives and strategies of potential whistleblowers.