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Cline v. Commissioner (T.C. Memo. 2020-35)

On March 16, 2020, the Tax Court issued a Memorandum Opinion in the case of Cline v. Commissioner (T.C. Memo. 2020-34). The issue presented in Cline was whether the IRS Whistleblower Office (WBO) abused its discretion when it denied the petitioners claims against a taxpayer because such claims failed to provide specific and credible information regarding tax underpayments or violations of internal revenue laws.

Background

The petitioner alleged that his former employer, which the Tax Court notes had been convicted of fraud multiple times, failed to report income, failed to disclose a stock sale, underreported income in other years, and maintained poor accounting practices. Unfortunately, the statute of limitations for assessment had run against the misfeasor, and the IRS Whistleblower Office (WBO) accordingly rejected the petitioner’s claims and did not forward the claim to Exam for possible further action. The WBO sent the petitioner a final determination letter, rejecting his claims.

Next, the petitioner filed another claim against another corporate taxpayer (another former employer), alleging that a related business entity had failed to file tax returns. Unfortunately, the petitioner had only “heard” these allegations secondhand, and though he was “pretty sure” that there was something fishy going on, he could not provide any concrete, firsthand evidence.

The WBO examiner determined that, although the allegations met the criteria of IRC § 7623(a), the claim was “speculative” and did not contain specific and credible information supporting non-compliance with a Federal tax issue. As before, the WBO rejected the claim, did not sent it to exam, and issued a final notice of determination to the petitioner.

Pursuant to IRC § 7623(b)(4), the petitioner appealed the two determinations of the WBO that declined to make awards to him. The IRS moved for summary judgment on the basis that the claims failed to provide specific and credible information regarding tax underpayments or violations of Code.

No Administrative or Judicial Action

Because the WBO summarily rejected the petitioner’s claims and did not forward them for consideration of a possible audit, the IRS did not proceed with an administrative or judicial action on the basis of information provided by the petitioner. Accordingly, the IRS also did not collect any proceeds as a result of an administrative or judicial action predicated on such information as required by IRC § 7623(b).

Threshold Evaluation and Summary Rejection

The WBO is charged with performing the initial evaluation of whistleblower claims to determine whether they meet the minimum standards for an award. IRC § 7623(b); Treas. Reg. § 301.7623-1(c)(4). The WBO performs its initial valuation and then decides if it meets the threshold criteria for potential eligibility, which include whether the information is specific and credible, whether the information that the whistleblower believes will lead to the collection of tax proceeds, whether the information reports failure to comply with the internal revenue laws, whether the information identifies the target(s), whether the information provides substantive information and available documentation, and whether the petitioner (most importantly for the present case) provides only speculative information. Lacey v. Commissioner, 153 T.C. No. 8, *24 (Nov. 25, 2019) (quoting Treas. Reg. § 301.7623-1(c)(1), (4)).

If a claim fails to meet those criteria, then the WBO may summarily “reject” the claim without further consideration. A rejection is a determination that relates solely to the whistleblower and the information on the face of the claim that pertains to the whistleblower. Treas. Reg. § 301.7623-3(c)(7). Such a threshold rejection by the WBO will necessarily preclude any subsequent administrative or judicial action against any taxpayer and any subsequent collection of proceeds from the taxpayer on the basis of the information provided. See Lacey, 153 T.C. No. 8 at *37.

Substantive Consideration and Denial

A denial relates to or implicates taxpayer information and is a determination made after the WBO engages in some substantive consideration of the claim. Treas. Reg. § 301.7623-3(c)(8); Lacey, 153 T.C. No. 8 at *26. A denial by the WBO is different from a rejection, though it is handled similarly, and compels the WBO to send written notice to the taxpayer stating that it has declined the taxpayer’s invitation to make an award and the basis for the determination. Treas. Reg. § 301.7623-3(c)(7); Treas. Reg. § 301.7623-3(c)(8); Treas. Reg. § 301.7623-3(b)(3).

Jurisdiction of Tax Court

A determination regarding an award may be appealed to the Tax Court, thereby vesting jurisdiction in the Tax Court. IRC § 7623(b)(4). In a whistleblower case the Tax Court reviews the administrative record for abuse of discretion, that is, whether the WBO’s determination was arbitrary, capricious, or without sound basis in fact or law. Kasper v. Commissioner, 150 T.C. 8, 21-23 (2018) (review); Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).

The Tax Court will not look behind the WBO’s decision to audit, nor will it require the WBO to provide an explanation as to why it chose not to audit. Lacey, 153 T.C. No. 8, *30; Epstein v. Commissioner, T.C. Memo. 2019-81, *7-*8. LIkewise, the Tax Court lacks the jurisdiction to require the WBO to forward a claim onto the IRS. IRC § 7632(b)(4); See Cohen v. Commissioner, 139 T.C. 299, 302 (2012), aff’d, 550 F. App’x 10 (D.C. Cir. 2014).

Original opinion: (T.C. Memo. 2020-35) Cline v. Commissioner

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