SCOTUS Reports

Tag: I.R.C. sec. 7623

  • Bobby Lee Rogers v. Commissioner of Internal Revenue, 157 T.C. No. 3 (2021): Whistleblower Award Determinations and Regulatory Compliance

    Bobby Lee Rogers v. Commissioner of Internal Revenue, 157 T. C. No. 3 (2021)

    In Bobby Lee Rogers v. Commissioner of Internal Revenue, the U. S. Tax Court ruled that the IRS Whistleblower Office (WBO) abused its discretion by rejecting a whistleblower’s claim using a rationale associated with a denial under the regulations. The court found that the WBO’s decision to reject the claim because the IRS chose not to pursue the information provided was inconsistent with regulatory requirements, thus entitling the whistleblower to further consideration and transparency in the decision-making process.

    Parties

    Bobby Lee Rogers, the petitioner, filed a claim for a whistleblower award against the Commissioner of Internal Revenue, the respondent, in the U. S. Tax Court under docket number 17985-19W.

    Facts

    Bobby Lee Rogers submitted nine claims to the IRS Whistleblower Office (WBO) asserting that certain individuals had conspired to commit “grand theft through conversion” of his mother’s assets. The claims were reviewed by a classifier from the IRS Small Business Self-Employed (SBSE) operating division, who recommended rejection because the claims failed to meet threshold criteria outlined in the regulations under I. R. C. sec. 7623. However, the WBO issued a letter purporting to reject the claims on the alternative ground that the IRS decided not to pursue the information provided.

    Procedural History

    Rogers timely appealed the WBO’s determination to the U. S. Tax Court under I. R. C. sec. 7623(b)(4). The Commissioner filed an answer that did not address the monetary thresholds required under I. R. C. sec. 7623(b)(5). Subsequently, the Commissioner filed a motion for summary judgment, arguing that the WBO’s determination should be classified as a rejection and did not represent an abuse of discretion. The Tax Court reviewed the case based on the administrative record and the arguments presented.

    Issue(s)

    Whether the IRS Whistleblower Office abused its discretion by rejecting the whistleblower’s claim using a rationale associated with a denial under the regulations?

    Whether the monetary thresholds under I. R. C. sec. 7623(b)(5) are jurisdictional requirements?

    Rule(s) of Law

    I. R. C. sec. 7623(b) governs whistleblower award determinations and provides for Tax Court review when certain monetary thresholds are met. The regulations under I. R. C. sec. 7623 distinguish between rejections and denials. A rejection relates to the whistleblower’s eligibility and the information provided, while a denial relates to or implicates taxpayer information. The monetary thresholds under I. R. C. sec. 7623(b)(5) are not jurisdictional but rather affirmative defenses that the Commissioner must plead and prove.

    Holding

    The Tax Court held that the WBO abused its discretion by rejecting Rogers’ claim using a rationale associated with a denial under the regulations. The court also held that the monetary thresholds under I. R. C. sec. 7623(b)(5) are not jurisdictional but rather affirmative defenses that the Commissioner must plead and prove.

    Reasoning

    The court’s reasoning was based on the regulatory framework for whistleblower award determinations. The WBO’s letter to Rogers purported to reject his claim but used a rationale associated with a denial under the regulations, specifically that the IRS decided not to pursue the information provided. The court found this to be inconsistent with the regulations, which require a rejection to be based on the whistleblower’s eligibility or the information provided, not on the IRS’s decision to pursue or not pursue the information. The court also considered the administrative record, which showed that the SBSE classifier and WBO technician recommended rejection based on the claim’s failure to meet threshold criteria, not on the IRS’s decision not to pursue. The court concluded that the WBO’s determination was an abuse of discretion because it did not follow the regulatory requirements for rejections and denials. The court also addressed the Commissioner’s arguments, rejecting the contention that the WBO’s determination was based solely on the face of the claim and that the involvement of an IRS operating division precluded judicial review. The court emphasized that the substance of the determination, not the identities of the actors involved, governed the analysis.

    Disposition

    The court denied the Commissioner’s motion for summary judgment and remanded the case to the WBO for further consideration.

    Significance/Impact

    This case is significant for its clarification of the regulatory framework governing whistleblower award determinations and the distinction between rejections and denials. It emphasizes the importance of the WBO’s compliance with the regulations and the whistleblower’s right to transparency and candor in the decision-making process. The case also reaffirms that the monetary thresholds under I. R. C. sec. 7623(b)(5) are not jurisdictional but rather affirmative defenses, which has implications for the Commissioner’s pleading and proof requirements in whistleblower cases. The decision may lead to more careful consideration by the WBO of the grounds for rejecting or denying claims and increased scrutiny of the WBO’s decision-making process by the Tax Court.

  • Lewis v. Commissioner, 154 T.C. No. 8 (2020): Definition of Collected Proceeds and Application of Budget Sequestration in Whistleblower Awards

    Lewis v. Commissioner, 154 T. C. No. 8 (2020)

    In Lewis v. Commissioner, the U. S. Tax Court clarified the definition of “collected proceeds” for IRS whistleblower awards and upheld the application of budget sequestration to these awards. The court ruled that reported and paid tax does not count as collected proceeds, even if influenced by an ongoing audit, and that no future proceeds could be anticipated from an estate with no tax liability. Additionally, the court affirmed that whistleblower awards are subject to budget sequestration, rejecting claims that such reductions are inappropriate under the law.

    Parties

    Timothy J. Lewis, the petitioner, was represented by Shine Lin and Thomas C. Pliske. The respondent, the Commissioner of Internal Revenue, was represented by Joel D. McMahan and A. Gary Begun.

    Facts

    Timothy J. Lewis, a former financial manager of a closely held corporation, filed a whistleblower claim alleging tax underpayments by the corporation and its shareholders for the year 2010 and prior years. The allegations primarily concerned improper wage deductions for the shareholders’ sons and mischaracterized loans. Following Lewis’s submission, the IRS audited the corporation’s 2010 tax year and the shareholders’ 2010 and 2011 tax years, resulting in adjustments and the collection of additional taxes. The corporation changed its reporting for 2011, not deducting wages for one son, but no additional tax was collected from this change. The shareholders filed gift tax returns, using unified credits to offset gift taxes. Upon one shareholder’s death, his estate filed a return showing no tax liability. The IRS Whistleblower Office (WBO) determined Lewis’s award based on the collected proceeds from the audit, excluding the 2011 reported tax and the deceased’s unified credit, and applying budget sequestration to the award.

    Procedural History

    The WBO issued a preliminary award recommendation to Lewis, which he challenged. After revisions and further communications, the WBO issued a final decision letter, maintaining the award amount and applying sequestration. Lewis timely petitioned the U. S. Tax Court for review, contesting the exclusion of certain taxes from collected proceeds and the application of sequestration. The court reviewed the case under its jurisdiction to review mandatory whistleblower awards, as provided by I. R. C. sec. 7623(b)(4).

    Issue(s)

    Whether reported and paid tax from a year not originally audited but influenced by an ongoing audit constitutes “collected proceeds” under I. R. C. sec. 7623(c)?

    Whether the use of a unified credit by a deceased taxpayer, resulting in no estate tax liability, can be considered as potential future collected proceeds?

    Whether the WBO abused its discretion by applying budget sequestration to reduce the whistleblower award?

    Rule(s) of Law

    Under I. R. C. sec. 7623(b), a whistleblower is entitled to a mandatory award of 15% to 30% of the collected proceeds from an IRS action based on the whistleblower’s information. I. R. C. sec. 7623(c) defines “proceeds” to include penalties, interest, additions to tax, and other proceeds from laws the IRS is authorized to enforce. The Bipartisan Budget Act of 2018 amended this definition to include criminal fines and civil forfeitures. The Budget Control Act of 2011, as amended, mandates sequestration of certain government payments, including direct spending, unless specifically exempted.

    Holding

    The Tax Court held that reported and paid tax, even if influenced by an ongoing audit, does not constitute “collected proceeds” under I. R. C. sec. 7623(c). The court further held that there are no potential future proceeds from a deceased taxpayer’s estate when the estate tax return shows no tax liability. Finally, the court held that the WBO did not abuse its discretion in applying budget sequestration to the whistleblower award, as such awards are direct spending subject to sequestration under the Budget Control Act of 2011.

    Reasoning

    The court reasoned that reported and paid tax from a year not originally audited but influenced by an ongoing audit does not constitute “collected proceeds” based on prior case law, specifically Whistleblower 16158-14W v. Commissioner. The court noted that while the corporation’s change in reporting for 2011 might have been influenced by the whistleblower’s information, such tax was not “collected” by the IRS and thus not included in the award calculation. Regarding the unified credit, the court found no possibility of future proceeds from the deceased’s estate, as the estate tax return showed no tax liability, and the trust documents and applicable law indicated no future tax would be due upon the termination of the life estate. On the sequestration issue, the court rejected the argument that whistleblower awards are exempt from sequestration, finding that such awards are direct spending under the Budget Control Act, and the WBO’s application of sequestration was not an abuse of discretion. The court’s analysis included statutory interpretation, consideration of prior case law, and the application of sequestration rules as mandated by Congress.

    Disposition

    The Tax Court affirmed the WBO’s determinations regarding the calculation of collected proceeds and the application of budget sequestration to the whistleblower award. The case was resolved without further proceedings, and an appropriate order and decision were to be entered.

    Significance/Impact

    The decision in Lewis v. Commissioner provides critical guidance on the definition of “collected proceeds” for whistleblower awards, clarifying that reported and paid tax does not qualify even if influenced by an ongoing audit. This ruling impacts how whistleblower claims are evaluated and awarded, potentially affecting the financial incentives for reporting tax violations. Additionally, the court’s affirmation of the application of budget sequestration to whistleblower awards reinforces the fiscal policy measures enacted by Congress, ensuring that such awards are subject to the same budgetary constraints as other forms of direct spending. This decision may influence future cases and legislative considerations regarding the funding and payment of whistleblower awards.

  • Whistleblower 11099-13W v. Commissioner of Internal Revenue, 147 T.C. 110 (2016): Discovery and Relevance in Whistleblower Award Cases

    Whistleblower 11099-13W v. Commissioner of Internal Revenue, 147 T. C. 110 (2016)

    In a significant ruling, the U. S. Tax Court granted a whistleblower’s motion to compel the IRS to produce documents related to an investigation prompted by the whistleblower’s tip. The case clarifies the scope of discovery in whistleblower award disputes under I. R. C. sec. 7623, emphasizing the importance of relevance in determining the discoverability of documents. This decision impacts how whistleblower claims are pursued, highlighting the court’s role in ensuring access to necessary information for claim adjudication.

    Parties

    Whistleblower 11099-13W, as Petitioner, filed a petition for review against the Commissioner of Internal Revenue, as Respondent, in the United States Tax Court. The case was initiated in the Tax Court under Docket No. 11099-13W.

    Facts

    In year 1, the Petitioner filed a whistleblower claim with the IRS, alleging a tax evasion scheme (TES) by a target corporation and its affiliates, which involved manipulating inventory purchasing to artificially inflate the cost of goods sold due to the use of a last-in, first-out (LIFO) accounting method. The Petitioner was employed by a corporation affiliated with the target, which was involved in the commodities trading integral to the TES. The IRS acknowledged that the Petitioner’s claim identified a previously unknown issue and conducted an investigation into the target’s use of the TES. However, the IRS asserted that no adjustments were made to the target’s tax returns based on the Petitioner’s information. The IRS did make other adjustments to the target’s returns for the years in question, which resulted in the collection of additional taxes. The Petitioner argued that the information provided led to changes in the target’s inventory practices and increased tax payments.

    Procedural History

    The Petitioner filed a motion to compel the production of documents by the IRS, which had previously been ordered by the court on September 16, 2015. The IRS objected to the motion, primarily on the grounds of relevance. The court had previously ruled that the Commissioner could not unilaterally decide what constitutes an administrative record, and thus, the scope of discovery was broader than the IRS’s position. The court, in this case, granted the Petitioner’s motion to compel, finding that the requested documents were relevant to the whistleblower’s claim.

    Issue(s)

    Whether the requested documents, specifically the 31 information document requests (IDRs) and responses, are relevant and discoverable under the Tax Court’s rules of discovery in the context of a whistleblower’s claim under I. R. C. sec. 7623?

    Rule(s) of Law

    Under I. R. C. sec. 7623(b)(1), a whistleblower is entitled to an award if the IRS proceeds with an action based on information provided by the whistleblower. The IRS is deemed to have proceeded based on the whistleblower’s information when it “substantially contributes to an action against a person identified by the whistleblower. ” (26 C. F. R. sec. 301. 7623-2(b)(1)). The scope of discovery is governed by Tax Court Rule 70(b), which allows for the discovery of any matter not privileged and relevant to the subject matter involved in the pending case.

    Holding

    The U. S. Tax Court held that the IRS’s claim of lack of relevance presented an unsettled question of law regarding when the IRS proceeds on the basis of information provided by a whistleblower. The court determined that it would not resolve this legal question in the context of a discovery dispute and that the IRS had failed to carry its burden of showing that the requested documents were not relevant or discoverable. The court granted the Petitioner’s motion to compel production of the requested documents.

    Reasoning

    The court’s reasoning focused on the relevance of the requested documents in the context of the whistleblower’s claim. The court emphasized that relevance in discovery is broader than at trial and includes matters that are reasonably calculated to lead to the discovery of admissible evidence. The court rejected the IRS’s argument that the requested documents were not material because they did not directly relate to adjustments made based on the whistleblower’s specific allegations. The court noted that the Petitioner’s theory that the IRS’s investigation prompted changes in the target’s behavior, leading to increased tax payments, was a plausible interpretation of I. R. C. sec. 7623(b)(1). The court also considered the IRS’s failure to fully develop its legal argument regarding the meaning of “proceeds based on” and suggested that a motion for summary judgment would be the appropriate vehicle for resolving such legal questions. The court concluded that the IRS had not met its burden to show that the requested documents were not relevant or discoverable.

    Disposition

    The U. S. Tax Court granted the Petitioner’s motion to compel production of the requested documents, subject to the protective order governing pretrial discovery in the case.

    Significance/Impact

    This case is significant for its clarification of the scope of discovery in whistleblower award disputes under I. R. C. sec. 7623. It underscores the court’s role in ensuring that whistleblowers have access to necessary information to pursue their claims effectively. The decision also highlights the importance of relevance in discovery and the burden on the opposing party to show that requested documents are not discoverable. The ruling may encourage more robust discovery in whistleblower cases, potentially leading to increased transparency and accountability in the IRS’s handling of whistleblower claims. Furthermore, the case leaves open the interpretation of “proceeds based on” under I. R. C. sec. 7623(b)(1), which may be addressed in future litigation or regulatory guidance.