Kennedy v. Commissioner (T.C. Memo. 2021-3)

On January 12, 2021, the Tax Court issued a Memorandum Opinion in the case of Kennedy v. Commissioner (T.C. Memo. 2021-3). The issue presented in Kelley was whether the IRS’s whistleblower office abused its discretion in denying the petitioner’s claims.


The petitioner claimed that three subsidiaries of a taxpayer owed a middling $150m in unpaid excise taxes, penalties, and interest to Uncle Sam.  The IRS Whistleblower Office (WBO) reviewed the claim, and to everyone’s surprise did not laugh it off and put it in the vertical filing cabinet next to browning apple cores and soggy cups-of-noodles.  Instead, the WBO forwarded it onto the Large Business & International (LB&I) division.

The claim involved tax-exempt voluntary employees’ beneficiary association (VEBA) trusts, and that LB&I CTM did not have anyone who could evaluate excise tax claims involving a VEBA; thus, the claim was transferred to the Exempt Organizations (TEGE-EO) division.  However, because the claim involved Forms 1120, TEGE-EO panicked and punted.  The WBO agreed to separate the tax-exempt entities from the for-profit entity by assigning a different claim number to each entity.  TEGE-EO and LB&I played kick the can back and forth for a while, neither willing to venture outside of its respective administrative comfort zone.

To make matters worse, when the closing agreement (Form 11369) was executed, the IRS employee assigned to fill out the form—a rather ministerial task—had to answer the following question: “Was this claim surveyed or denied.”

Surveyed.  Denied.  Two choices.  She had two choices.  Hell, she could have circled one in red crayola marker.

Instead, the brainiac simply indicated “Yes.”

Dammit, Felicia!

Not to be outdone, the employee’s manager approved the form without change…which gives me so much faith in our Federal government’s checks and balances.

Ultimately, a letter indicating that the claims were denied was sent to the whistleblower/petitioner. The letter indicated that the claims have been recommended for denial because the IRS took no action based on the information the whistleblower provided. With respect to the third subsidiary, the letter stated that the claim had been recommended for denial because the information the whistleblower provided was reviewed as part of an examination, but the examination resulted in no change.

Scope of Review

In whistleblower cases the Tax Court’s scope of review is limited to the administrative record at hand with limited exceptions, which exceptions were not applicable in Kelley. Kasper v. Commissioner, 150 T.C. 8, 20-21 (2018). The Tax Court’s standard of review in whistleblower cases is abuse of discretion. Kasper, 150 T.C. at 21-23. This means that the Tax Court will not substitute its judgment for the WBO’s but will decide whether the agency’s decision was “based on an erroneous view of the law or a clearly erroneous assessment of the facts.” Id. at 23 (quoting Fargo v. Commissioner, 447 F.3d 706, 709 (9th Cir. 2006), aff’g T.C. Memo. 2004-13).

The Whistleblower Provision

IRC § 7623 allows the IRS to give an award for information that the IRS uses to collect tax or bring to trial persons guilty of violating internal revenue laws. The section provides for both discretionary and mandatory awards. Discretionary awards are paid under IRC § 7623(a).  Under this section, whether an award is paid and the amount of such an award is entirely within the WBO’s discretion. See Treas. Reg. § 301.7623-1(a). However, if the proceeds in dispute exceed $2 million; and, in the case of an individual taxpayer, gross income exceeds $200,000 for any taxable year, then an award between 15% and 30% of collected proceeds must be paid to the whistleblower. See IRC § 7623(b)(1); IRC § 7623(b)(5).  Judicial review is permitted only for claims that arise under IRC § 7623(b). See IRC § 7623(b)(4).

Critically, for a whistleblower to be eligible to receive an award under IRC § 7623(b), two basic requirements must be met: (1) the IRS, on the basis of information the whistleblower provided, must bring an administrative or judicial action, and (2) the IRS must collect proceeds as a result of the action. Cooper v. Commissioner, 136 T.C. 597, 600 (2011).

The Process of Judicial Review

First, under the plain text of IRC § 7623(b)(1) an award depends upon “both the initiation of an administrative or judicial action and collection of tax proceeds.” Cooper, 136 T.C. at 600. Second, the Tax Court does not review an operating division’s decision whether to audit a target taxpayer in response to a whistleblower claim. Third, the Tax Court does not have the authority to require an operating division to explain its decision not to audit. See id. at 600-601; see also Lacey v. Commissioner, 153 T.C. 146, 163-164 (2019).

Perhaps most importantly, the Tax Court does not have the authority to direct the IRS to commence or continue an audit. Therefore, if a petitioner asks the Tax Court to order an audit or to order collection, that petition will necessarily fail. See Lacey, 153 T.C. at 166.  Instead, IRC § 7623 confers on the Tax Court only the jurisdiction to review the WBO’s determinations. See id. at 163-164. As such, the question before the Tax Court was whether the WBO abused its discretion in denying the claims given the actions taken by LB&I and TEGE. The Tax Court concluded that it did not.


This is a much closer case than first meets the eye. Although the second and third subsidiaries were independently reviewed, it does not appear that either TEGE-EO or LB&I fully reviewed the claims regarding the first subsidiary.  Because the claims involved both tax-exempt issues and corporate issues, neither division wanted to touch it.  Not wanting to upset the delicate sensitivities of the IRS’s WBO divisions, the Tax Court found that because the other two subsidiaries were related entities and had been fully reviewed, it was not an abuse of discretion that the first subsidiary was not fully vetted.

(T.C. Memo. 2021-3) Kennedy v. Commissioner

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