SCOTUS Reports

Tag: Whistleblower Awards

  • 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.

  • 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.

  • 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.

  • 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.

  • Van Bemmelen v. Commissioner, 155 T.C. No. 4 (2020): Judicial Review of IRS Whistleblower Office Determinations

    Van Bemmelen v. Commissioner, 155 T. C. No. 4 (2020)

    In Van Bemmelen v. Commissioner, the U. S. Tax Court upheld the IRS Whistleblower Office’s (WBO) rejection of Michael Van Bemmelen’s claim for an award under I. R. C. sec. 7623(b). The court found the WBO’s decision to be supported by the administrative record and not an abuse of discretion. Van Bemmelen alleged tax evasion by a global insurance company but failed to provide specific, credible information. The ruling reinforces the IRS’s broad discretion in handling whistleblower claims and clarifies the scope of judicial review in such cases.

    Parties

    Michael Van Bemmelen, as the petitioner, sought review of the IRS Whistleblower Office’s determination to reject his claim for a whistleblower award. The respondent was the Commissioner of Internal Revenue. Throughout the litigation, Van Bemmelen represented himself pro se, while the Commissioner was represented by Nicole M. Connelly.

    Facts

    In March 2018, Michael Van Bemmelen, through his attorney Linda J. Stengle, submitted a Form 211 to the IRS Whistleblower Office (WBO), alleging tax violations by a global insurance company (the target). Van Bemmelen’s claim referenced an earlier submission from 2012, which related to the target and other taxpayers. The 2018 Form 211 included a narrative asserting the target’s involvement in a tax evasion scheme involving investments in life insurance policies and money laundering. Van Bemmelen alleged that the target improperly deducted interest on borrowed funds used to finance these investments, resulting in significant tax underpayments. The WBO forwarded the claim to a classifier in the Large Business & International Division (LB&I), who recommended rejection due to the speculative nature of the allegations and lack of specific, credible information. On September 11, 2018, the WBO issued a final determination rejecting Van Bemmelen’s claim under I. R. C. sec. 7623(a).

    Procedural History

    After the WBO’s rejection, Van Bemmelen timely petitioned the U. S. Tax Court for review. The Commissioner moved for summary judgment, supported by declarations from the LB&I classifier and an employee in the WBO’s Initial Claim Evaluation Unit. Van Bemmelen moved to supplement the administrative record with his 2012 submission and a 2019 document reflecting a presentation to IRS Criminal Investigation Division agents. The Tax Court granted the motion to supplement the record with the 2012 submission but denied it regarding the 2019 document. The court reviewed the case under the Administrative Procedure Act’s standard of review, focusing on whether the WBO’s action was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.

    Issue(s)

    Whether the IRS Whistleblower Office abused its discretion in rejecting Michael Van Bemmelen’s claim for a whistleblower award under I. R. C. sec. 7623(b) on the grounds that the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws?

    Rule(s) of Law

    The Tax Court’s review of the WBO’s determination is governed by the standard of review under section 706(2)(A) of the Administrative Procedure Act (APA), which requires the court to reverse agency action found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. ” I. R. C. sec. 7623(b) mandates whistleblower awards if certain statutory requirements are met, including that the proceeds in dispute exceed $2 million. The WBO may reject claims that fail to meet threshold criteria, such as containing specific, credible information about tax underpayments or violations of internal revenue laws. The WBO has sole discretion to request additional assistance from the whistleblower or their legal representative.

    Holding

    The Tax Court held that the IRS Whistleblower Office did not abuse its discretion in rejecting Michael Van Bemmelen’s claim for a whistleblower award. The court found that the WBO’s determination was supported by the administrative record and that the allegations in Van Bemmelen’s claim were speculative and lacked specific, credible information regarding tax underpayments or violations of internal revenue laws by the target.

    Reasoning

    The court’s reasoning focused on the WBO’s discretion to reject claims that fail to meet statutory and regulatory criteria. The court analyzed the information provided by Van Bemmelen and found it to be speculative, particularly with respect to the target’s alleged involvement in money laundering and improper interest deductions. The court noted that the 2012 submission, which was added to the administrative record, did not contain specific allegations against the target that would have affected the WBO’s analysis. The court also considered the WBO’s discretion to limit the scope of investigations and its authority to reject claims without further investigation if they do not meet threshold requirements. The court rejected Van Bemmelen’s arguments about procedural irregularities and the WBO Director’s alleged improper redelegation of authority, finding no merit in these claims. The court emphasized that it could not compel the IRS to commence an audit or explain its decision not to do so, and that the WBO’s rejection of Van Bemmelen’s claim was not arbitrary, capricious, or an abuse of discretion.

    Disposition

    The Tax Court granted the Commissioner’s motion for summary judgment, affirming the WBO’s rejection of Van Bemmelen’s claim for a whistleblower award.

    Significance/Impact

    The Van Bemmelen decision reinforces the broad discretion afforded to the IRS Whistleblower Office in evaluating and rejecting whistleblower claims. It clarifies that the Tax Court’s review is limited to determining whether the WBO’s action was arbitrary, capricious, or an abuse of discretion, and that the court cannot compel the IRS to commence an audit or explain its decision not to do so. The case also highlights the importance of providing specific, credible information in whistleblower claims to meet the threshold criteria for further consideration. Subsequent courts have cited Van Bemmelen in upholding the WBO’s discretion and the limited scope of judicial review in whistleblower cases.

  • 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.

  • 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.

  • Smith v. Comm’r, 148 T.C. 21 (2017): Interpretation of ‘Amounts in Dispute’ Under IRC § 7623(b)

    Smith v. Commissioner of Internal Revenue, 148 T. C. 21, 2017 U. S. Tax Ct. LEXIS 23 (2017)

    In Smith v. Comm’r, the U. S. Tax Court clarified that ‘amounts in dispute’ under IRC § 7623(b)(5)(B) include the total liability proposed during an IRS examination initiated by a whistleblower’s information, not just the portion directly attributable to that information. This ruling significantly impacts the eligibility for nondiscretionary whistleblower awards, as it expands the threshold to encompass the entire tax dispute, potentially encouraging more whistleblower claims in large tax cases.

    Parties

    Ian D. Smith was the petitioner in this case, while the Commissioner of Internal Revenue served as the respondent. Smith filed his whistleblower claim at the trial level, and both parties proceeded to the U. S. Tax Court after the Commissioner’s determination of the award amount.

    Facts

    Ian D. Smith filed a whistleblower claim with the IRS, alleging that a business was improperly handling barter transactions and employee compensation through gift certificates. This information led the IRS to initiate both employment and income tax examinations of the business. The employment tax examination resulted in the assessment and collection of $3,094,188. 12 in taxes and $618,837. 64 in penalties for the years 2006 through 2009. The income tax examination led to adjustments and collections totaling $14,543,098, with $1,593,024 directly attributed to disallowed barter-related expenses. The IRS attributed $1,771,911. 77 of the total collected proceeds to Smith’s whistleblower information and awarded him $198,005. 52 under IRC § 7623(a), which allows for discretionary awards. Smith contested this determination, arguing that the total ‘amounts in dispute’ exceeded the $2 million threshold required for a nondiscretionary award under IRC § 7623(b).

    Procedural History

    Smith filed a petition with the U. S. Tax Court under IRC § 7623(b)(4), challenging the IRS’s determination to apply the discretionary award provisions of IRC § 7623(a) instead of the nondiscretionary provisions of IRC § 7623(b). Both parties moved for summary judgment, with the court applying the standard of review for legal questions since the facts were undisputed. The court granted Smith’s motion for summary judgment in part, holding that the IRS should have used IRC § 7623(b) to compute the award.

    Issue(s)

    Whether the phrase ‘amounts in dispute’ in IRC § 7623(b)(5)(B) includes the total amount of liability proposed by the IRS during an examination initiated by a whistleblower’s information, or whether it is limited to the portion of ‘collected proceeds’ directly attributable to that information?

    Rule(s) of Law

    The controlling legal principle is found in IRC § 7623(b)(5)(B), which states that the nondiscretionary award regime applies if ‘the tax, penalties, interest, additions to tax, and additional amounts in dispute exceed $2,000,000. ‘ The applicable regulation, 26 C. F. R. § 301. 7623-2(e)(2)(i), defines ‘amount in dispute’ as ‘the greater of the maximum total of tax, penalties, interest, additions to tax, and additional amounts that resulted from the action(s) with which the IRS proceeded based on the information provided, or the maximum total of such amounts that were stated in formal positions taken by the IRS in the action(s). ‘

    Holding

    The U. S. Tax Court held that ‘amounts in dispute’ under IRC § 7623(b)(5)(B) include the total amount of liability proposed by the IRS during an examination initiated by a whistleblower’s information, not just the portion directly attributable to that information. Therefore, the $2 million threshold was met in Smith’s case, and the IRS erred in applying the discretionary provisions of IRC § 7623(a) instead of the nondiscretionary provisions of IRC § 7623(b).

    Reasoning

    The court’s reasoning focused on the plain language of IRC § 7623(b)(5)(B) and the purpose of the statute. The court noted that the phrase ‘amounts in dispute’ is not specifically limited to only those amounts directly or indirectly attributable to the whistleblower’s information. The court rejected the IRS’s argument that the term ‘action’ in IRC § 7623(b)(1) and (2) should be used to limit the ‘amounts in dispute’ under IRC § 7623(b)(5)(B), as the term ‘action’ is used differently in each subsection. The court also considered the legislative history and purpose of IRC § 7623(b), which was enacted to encourage whistleblowers to come forward in large tax cases. The court found that the IRS’s interpretation would lead to anomalous results, as it would exclude significant tax collections from the nondiscretionary award regime. The court’s interpretation aligns with the regulation at 26 C. F. R. § 301. 7623-2(e)(2)(i), which supports a broader definition of ‘amount in dispute. ‘

    Disposition

    The court granted Smith’s motion for summary judgment in part, holding that the IRS should have used IRC § 7623(b) to compute the whistleblower award. The court did not decide the specific award amount, as that issue was rendered moot by the holding that IRC § 7623(b) applies.

    Significance/Impact

    The Smith decision significantly expands the scope of ‘amounts in dispute’ under IRC § 7623(b)(5)(B), potentially increasing the number of cases eligible for nondiscretionary whistleblower awards. This ruling clarifies that the threshold is based on the total liability proposed during an IRS examination, rather than the portion directly attributable to the whistleblower’s information. The decision may encourage more whistleblower claims, particularly in large tax cases, as it increases the potential for higher awards under the nondiscretionary regime. The ruling also underscores the importance of the statutory language and purpose in interpreting the whistleblower provisions, and it may influence future cases involving the interpretation of IRC § 7623.

  • Myers v. Comm’r, 148 T.C. No. 20 (2017): Timeliness of Whistleblower Award Appeals

    Myers v. Commissioner, 148 T. C. No. 20 (2017)

    In Myers v. Commissioner, the U. S. Tax Court dismissed a whistleblower’s appeal for lack of jurisdiction due to untimely filing. David T. Myers, denied a whistleblower award by the IRS, failed to file his petition within 30 days of receiving actual notice of the denial. The court ruled that each IRS communication denying the claim constituted an appealable determination, and Myers’ delay in filing, despite receiving the notices, rendered his petition untimely. This case underscores the strict 30-day filing requirement for whistleblower award appeals under I. R. C. sec. 7623(b)(4).

    Parties

    David T. Myers, the petitioner, filed pro se in the U. S. Tax Court against the Commissioner of Internal Revenue, the respondent. The case was designated as Docket No. 2181-15W.

    Facts

    David T. Myers filed a Form 211 with the IRS Whistleblower Office on August 17, 2009, alleging tax violations by his former employer due to misclassification of employees as independent contractors. After frequent communication with the Whistleblower Office, his claim was denied by a letter dated March 13, 2013, stating that no additional tax proceeds resulted from his information, making him ineligible for an award. Despite ongoing correspondence throughout 2013 and 2014, subsequent letters from the Whistleblower Office reiterated the denial. Myers continued to submit additional material but did not appeal until January 26, 2015, after receiving the final denial letter on March 6, 2014.

    Procedural History

    Myers filed his petition with the U. S. Tax Court on January 26, 2015, following the Whistleblower Office’s final denial letter dated March 6, 2014. The Commissioner moved to dismiss the case for lack of jurisdiction, asserting that Myers failed to file his petition within the 30-day period mandated by I. R. C. sec. 7623(b)(4). The court heard the motion and, after consideration of the parties’ filings and testimony, took the matter under advisement.

    Issue(s)

    Whether each letter from the IRS Whistleblower Office constitutes an appealable determination under I. R. C. sec. 7623(b)(4)?

    Whether the receipt of actual notice of the IRS’s determinations by Myers, without prejudicial delay, starts the 30-day period for filing a petition under I. R. C. sec. 7623(b)(4)?

    Rule(s) of Law

    I. R. C. sec. 7623(b)(4) provides that an appeal to the Tax Court from a whistleblower award determination must be filed within 30 days of such determination. The court has jurisdiction over such appeals provided the IRS makes a determination under I. R. C. sec. 7623(b)(1), (2), or (3), and the appeal is timely filed. A determination is broadly defined and does not require formalities; a written notice that the IRS has considered the information and decided on the eligibility for an award is generally sufficient.

    Holding

    The court held that each of the five letters from the IRS Whistleblower Office to Myers constituted an appealable determination under I. R. C. sec. 7623(b)(4). Furthermore, the court found that Myers received actual notice of these determinations without prejudicial delay and had ample opportunity to file a timely petition. Since Myers failed to file his petition within 30 days of receiving any of the determinations, the court lacked jurisdiction and dismissed the case.

    Reasoning

    The court reasoned that the Whistleblower Office’s letters to Myers met the broad standard for a determination as established in previous case law. The court noted that despite the lack of formal requirements, a determination is appealable if it informs the claimant of the IRS’s decision on their claim’s eligibility for an award. The court applied principles from deficiency jurisprudence, which state that the 30-day period for filing an appeal starts upon receipt of actual notice. The court found direct evidence of Myers’ receipt of the letters and his subsequent actions, such as sending a facsimile and continuing to correspond with the IRS, indicating timely receipt. The court rejected Myers’ argument for equitable relief based on the Whistleblower Office’s failure to use certified mail, as the Internal Revenue Manual’s provisions are discretionary and do not create enforceable rights. The court also considered the lack of prejudice due to the IRS’s non-compliance with the manual’s mailing directive, as Myers had received and acknowledged the letters without delay.

    Disposition

    The U. S. Tax Court dismissed the case for lack of jurisdiction due to Myers’ failure to file his petition within the 30-day period following receipt of the IRS’s determinations.

    Significance/Impact

    The Myers decision reinforces the strict application of the 30-day filing rule under I. R. C. sec. 7623(b)(4) and clarifies that each communication from the IRS regarding a whistleblower claim can be considered an appealable determination. It emphasizes the importance of timely filing upon receipt of actual notice and highlights the discretionary nature of the Internal Revenue Manual’s provisions. This ruling may impact how whistleblowers approach their appeals, stressing the need for prompt action upon receiving any form of denial from the IRS. Subsequent cases have cited Myers to support the principle that the 30-day period commences upon actual notice, even without formal notification methods.

  • Whistleblower 16158-14W v. Commissioner of Internal Revenue, 148 T.C. No. 12 (2017): Interpretation of Collected Proceeds under Section 7623(b)(1)

    Whistleblower 16158-14W v. Commissioner of Internal Revenue, 148 T. C. No. 12, 2017 U. S. Tax Ct. LEXIS 13 (U. S. Tax Ct. 2017)

    In a significant ruling, the U. S. Tax Court clarified that whistleblower awards under Section 7623(b)(1) do not include proceeds from a taxpayer’s voluntary compliance for years not examined by the IRS. The court rejected the whistleblower’s claim that a corporation’s change in withholding tax reporting after an IRS examination should count as “collected proceeds,” affirming that only proceeds from direct IRS actions are eligible for awards. This decision underscores the narrow scope of whistleblower awards and emphasizes the importance of direct IRS action in determining eligibility.

    Parties

    The petitioner, Whistleblower 16158-14W, sought an award from the respondent, the Commissioner of Internal Revenue, for information provided regarding a taxpayer’s alleged failure to withhold and pay over taxes. The case was heard by the United States Tax Court.

    Facts

    In January 2009, the whistleblower submitted a Form 211 to the IRS, alleging that a corporation failed to withhold taxes on payments of interest and dividends to foreign persons for the years 2006 through 2008. The whistleblower, an employee of the corporation, later supplemented the submission to include the years 2009 through 2014. The IRS expanded an ongoing audit for 2006 through 2008 to address the whistleblower’s allegations but concluded the examination with a “no change” letter, indicating no adjustments were made. The IRS did not conduct an examination for the subsequent years, despite the whistleblower’s additional submissions. The corporation updated its recordkeeping system after 2008, which the whistleblower claimed led to collected proceeds. The IRS Whistleblower Office denied the whistleblower’s award claim, prompting the petition to the Tax Court.

    Procedural History

    The whistleblower timely petitioned the U. S. Tax Court upon receiving a determination letter from the IRS Whistleblower Office denying an award. The Commissioner filed a motion for summary judgment, arguing that the whistleblower was not entitled to an award due to the lack of collected proceeds. The whistleblower contended that the corporation’s change in reporting for years after the IRS examination should be considered “collected proceeds. ” The court held a hearing and ordered briefs, ultimately granting the Commissioner’s motion for summary judgment.

    Issue(s)

    Whether amounts collected by the IRS as a result of a taxpayer’s voluntary change in reporting for years not examined by the IRS constitute “collected proceeds” under Section 7623(b)(1) of the Internal Revenue Code?

    Rule(s) of Law

    Section 7623(b)(1) of the Internal Revenue Code provides that a whistleblower shall receive an award of 15% to 30% of the collected proceeds resulting from an administrative or judicial action based on information provided by the whistleblower. The term “collected proceeds” is not defined in the statute but has been interpreted by the court as “all proceeds collected by the Government from the taxpayer” resulting from such actions.

    Holding

    The court held that amounts collected by the IRS due to a taxpayer’s voluntary change in reporting for years not examined by the IRS do not constitute “collected proceeds” under Section 7623(b)(1). Therefore, the whistleblower was not entitled to an award for the years 2006 through 2008, as there were no collected proceeds from those years, nor for the subsequent years, as no administrative or judicial action was taken by the IRS for those years.

    Reasoning

    The court’s reasoning focused on the statutory requirement that an award under Section 7623(b)(1) must be based on collected proceeds resulting from an IRS action. The court noted that the IRS did not take any action for the years after 2008, and thus, any changes in the taxpayer’s reporting for those years were not attributable to an IRS action. The court emphasized that “collected proceeds” are limited to those resulting directly from IRS actions, not from a taxpayer’s voluntary compliance. The court also considered the administrative burden and speculative nature of attributing voluntary compliance to IRS actions, rejecting the whistleblower’s argument that the IRS should monitor changes in reporting post-examination. Furthermore, the court found no evidence of a “related action” or an “implied settlement” that would justify including the subsequent years’ proceeds as part of the award.

    Disposition

    The court granted the Commissioner’s motion for summary judgment, affirming that the whistleblower was not entitled to an award under Section 7623(b)(1) for the years in question.

    Significance/Impact

    This decision clarifies the scope of “collected proceeds” under Section 7623(b)(1), emphasizing that only proceeds resulting from direct IRS actions are eligible for whistleblower awards. The ruling may impact future whistleblower claims by limiting awards to proceeds directly resulting from IRS examinations, rather than from voluntary compliance or changes in taxpayer behavior post-examination. It also underscores the importance of the IRS taking specific actions in response to whistleblower information, as opposed to merely monitoring taxpayer behavior. This case may influence how whistleblowers and the IRS approach future claims and the interpretation of related regulations and Internal Revenue Manual provisions.