On October 8, 2020, the Tax Court issued a Memorandum Opinion in the case of Doyle v. Commissioner (T.C. Memo. 2020-139). The issue before the court in Doyle v. Commissionerwas whether the IRS’s Whistleblower Office abused its discretion in issuing a determination which denied the petitioners’ two whistleblower claims based on the ground that the IRS took no action based on the information that the petitioners provided, even though the Criminal Investigative Division was unclear whether or not it was working with the petitioners to investigate the target.
Background to Doyle v. Commissioner
The petitioners filed two Forms 211 (Application for Award for Original Information) alleging that the target failed to comply with the requirements of section 501(c)(3) for tax-exempt organizations; that the target accepted foreign funds transfers as a “foreign agent,” thereby vitiating charitable tax-exempt protection; and that the target made material misrepresentations to the IRS and to other governmental agencies concerning the target’s organization and operations.
The petitioners submitted approximately 100 exhibits in excess of 6,000 pages compiled from their three-plus year investigation. Those exhibits and evidence lay out the clear framework of the wrongdoings committed by the target organization. The IRS noted in its file that the petitioners had “submitted specific credible documentation.” The WBO referred the information to the IRS’s Tax Exempt and Government Entities (TEGE) Division, thereby confirming that the WBO continued to consider that the petitioners’ claims presented specific credible documentation. TEGE transferred the case to the Criminal Investigation (CI) Division.
In July 2018 CI reported its decision on a Form 11369 dated July 10, 2018, that it declined to investigate the target or any of the issues that petitioners raised in their Forms 211. The claims were declined by Criminal Investigation, because individual notated in the claim who had personal knowledge denied making those statements in an interview with federal agents. The WBO issued preliminary denial letters to petitioners on October 31, 2018, which stated, in part, that the claims have been recommended for denial because the IRS took no action based on the information that you provided. This, of course, was not exactly accurate.
The Petitioners Strong Opposition
In November 2018, the petitioners wrote a love letter to the IRS, in which they stated “with all due respect to those within the IRS involved in reviewing our submission and issuing the Preliminary Denial,” are you out of your freaking mind??? The letter continued, “there must be a significant error given that it is public knowledge that the IRS is clearly investigating the target and is an active participant in the joint law enforcement effort being run. It is also evident, based on information and communications referenced below, that many of the issues relating to tax fraud and 501(c)(3) violations raised in our report are very much a focus of the joint FBI/IRS investigation into the target. This investigation is ongoing.”
If It’s Good Enough for the FBI, It’s Good Enough for the IRS – Right?
The letter continues, “Communications we have had with specific law enforcement agents confirm these very facts.” Even the FBI was on board. “The FBI…has thanked us profusely and praised our report excessively. As one individual close to the investigation commented to me, “you and your colleagues have saved numerous federal agents thousands of hours of work.” Further… “For the next several months, two members of our team have been in regular contact with Special Agent X providing information on an ongoing basis given that our investigative efforts continue to this very day. We have shared all of the same materials submitted to the IRS Whistleblower Office with these offices and agents. We have received both confirmation and excessive compliments on the quantity and quality of our work and the case manner in which we presented it.”
Additionally, prior to and/or subsequent to making our formal IRS Whistleblower Submission, the petitioners engaged or communicated with both current and former law enforcement officials, tax professionals and others within a wide array of state and federal offices including the following: IRS, DOJ, FBI, US Postal Inspection Service, Treasury Inspector General Tax Administration, Counsel and Chief Counsel on the US House of Representatives Committee on the Judiciary, and officials within selected State Attorneys General, Secretaries of State, and/or Consumer Affairs offices. Well, looks like they covered their bases…
Finally, the petitioners noted that they “understand that the IRS/CID is engaged in as an active and full participant looking into the true nature of the target,” and “that this investigation is currently ongoing.” Furthermore, the claims are “central to this investigation; that it helped launch it; and the evidence of the violations set out in our submission are being actively investigated by the IRS and FBI. Thus, it is simply cannot be the case that the ‘IRS took no action in this matter.’” Cough. Horseshit. Cough.
Proof? You want Proof?
The petitioners actually included a photograph sent by the IRS to the petitioners which “depicts an IRS agent and an FBI agent participating in a search warrant in this investigation.”
The WBO then sent an email to CI asking that CI “please confirm” that “it is not working with these whistleblowers on any investigation” regarding the target. CI’s representative stated, succinctly, that “the claim was appropriately declined by CI.” The WBO chose not to follow up or to point out that CI didn’t, exactly, answer the question.
Second [Bullshit] Rejection
The WBO drafted an award recommendation memorandum that stated that it recommended the issuance of a final denial letter because the IRS took no action based on the information the whistleblowers provided. Based upon the one sentence email from CI, the WBO concluded that CI had not initiated an investigation, nor was it involved an investigation, nor was it the CI that was pictured with the FBI in the photograph sent by the IRS “depicting” CI and the FBI actively investigating the target, allegedly. Importantly, the final denial letter stated that “the IRS took no action based upon the information that [the whistleblowers] provided.” The final determination letters did not explicitly state lack of collected tax proceeds as a basis for denial of the claims.
The IRS’s Motion for Summary Judgment
The IRS filed a motion for summary judgment, contending that the “supporting documents from the administrative claim file fully support the Whistleblower Office’s determination that the IRS did not proceed with an administrative or judicial action against the [target] Entity and did not collect any proceeds based on petitioners’ claims.” Specifically, the IRS contended that “CI also reviewed petitioners’ claims and declined to pursue a criminal investigation.”
Whistleblower Claims, Generally
A whistleblower will receive an award only if (1) the IRS “proceeds with an action” on the basis of his information and (2) the IRS collects proceeds as a result of that action. IRC § 7623(b). The WBO will deny the claim if it determines that “the IRS either did not proceed based on the information provided by the whistleblower or did not collect proceeds” as a result of proceeding against the taxpayer on the basis of the whistleblower’s information. Treas. Reg. § 301.7623-3(c)(8).
As the Tax Court held in Kasper v. Commissioner, 150 T.C. 8, 21-23 (2018), in a whistleblower case the Tax Court’s review is generally restricted to the administrative record, and under this “record rule” we review the WBO’s determinations not de novo but rather for abuse of discretion. An abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law. Id. at 21-22; Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).
Congress has not given to the Tax Court plenary oversight over the IRS but rather circumscribed jurisdiction to review certain actions in certain circumstances. In the award context, Congress has given the Tax Court jurisdiction to review the determinations of the WBO. Consequently, the Tax Court does not review the IRS’s decision whether to audit a target in response to a whistleblower’s claim, and it has no authority to require the IRS to explain a decision not to audit. Lacey v. Commissioner, 153 T.C. No. 8 (Nov. 25, 2019).
The Tax Court reviews a WBO determination by reference to the grounds that it states, not by reference to post hoc rationalizations.” Lacey, 153 T.C. No. 8 at 165 (citing SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)); see Kasper, 150 T.C. at 23-24. The Tax Court, therefore, looks to the final determination letter and generally consider only the grounds stated by the WBO therein, not other grounds advanced by the IRS’s counsel in the litigation.
The Tax Court’s Analysis
The Commissioner cites materials from the administrative record to make a showing that petitioners’ claims were referred to IRS personnel in two operating divisions–TEGE and CI–and that, in the words of IRC § 7623(b)(1), neither division decided to proceed with any administrative or judicial action based on information brought to the Secretary’s attention by the petitioners.
The IRS’s motion errs by stating, as a supposed second aspect of the WBO’s determination, that the IRS “did not collect any proceeds based on petitioners’ claims.” A lack of collected proceeds will indeed properly result in the denial of an award, because the only award to which a whistleblower may become entitled is a percentage “of the collected proceeds resulting from the [administrative or judicial] action” that is “based on information brought to the Secretary’s attention by” the whistleblower. IRC § 7623(b)(1). If there are no proceeds, there can be no award. However, there is ZERO evidence in the administrative record in this case establishing whether tax proceeds were collected.
More importantly, the final determination letters did not assert a lack of collected tax proceeds as a basis for denying the claims. As noted above the Tax Court reviews only the determination that the WBO made, not other determinations that it might have made but did not, actually, make.
Whether the IRS’s Audit Decisions Were Correct
The petitioners argue both (1) that their information—acknowledged by the WBO’s initial evaluators as “specific credible documentation”—demonstrated convincingly that the target was violating the Internal Revenue Code and (2) that the IRS’s consideration of their information must have been cursory, misguided, and undiscerning.
Here, Judge Gustafson is bound to deny the petitioners’ argument. His hands are tied, even though it results in a patently absurd result. But, at the very least, the Tax Court does note that it is “counter-intuitive” to not be able to grant such relief when the IRS is clearly (a) lying, (b) inept, or (c) lying. The petitioners object that the IRS “boldly contends that this Court has no authority to do much of anything and, therefore, seems to believe that it [the IRS] can act (or fail to act) as it wishes with little to no recourse.” “However counter-intuitive it may be,” the court observes, “[the Tax Court does not] review the IRS’s decision whether to audit a target in response to a whistleblower’s claim and [has] no authority to require the IRS to explain a decision not to audit.” Lacey, 153 T.C. at 164.
Whether CI Proceeded with any Action
If the record does not support the WBO’s conclusion that CI did not conduct an investigation of the target using the petitioners’ information, then the WBO abused its discretion when it determined that “the IRS took no action based on the information that [the petitioners] provided”; and that error may have resulted in a premature denial of an award that may eventually become due, depending on the results of that investigation.
Prompted by petitioners’ allegations–explicit and detailed, with names, dates, and locations–the WBO’s email put a single direct question to CI: “Can you please confirm that IRS CI is not working with these WBs on any investigation with these [target] entities?”
Here, at last, the Tax Court calls bullshit. “CI’s [one sentence, horseshit-laden] reply was a non-answer that looks like it may have been a deliberate evasion.”
But was CI “working with” petitioners or not? “CI did not say.” The silence, and the obvert lies, did not sit well with the Tax Court.
And it gave the Tax Court “no confidence in the WBO’s determination to note (as the administrative record shows) that in 2018 CI had to be asked three times to complete its Form 11369 for this case, giving “unacceptable” responses to the WBO and grousing that it’s “somebody else’s job.”
The Tax Court, therefore, held that the administrative record, containing petitioners’ detailed allegations and CI’s non-response, fails to support the WBO’s conclusion that CI had not proceeded with any action based on petitioners’ information. Accordingly, the Tax Court denied the IRS’s motion for summary judgment on the grounds that the WBO abused its discretion in reaching its conclusion, because not all of its factual determinations underlying that conclusion are supported by that record.
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If Judge Gustafson had a ruler, he would have slapped CI across the knuckles and told it to think about what it has done. Jerks.