Lewis v. Commissioner
154 T.C. No. 8

On April 8, 2020, the Tax Court issued its opinion in Lewis v. Commissioner (154 T.C. No. 8). The issue presented in Lewis v. Commissioner was whether the IRS abused its discretion in the computation of his award by excluding reported, paid tax from the collected proceeds and by determining that there was no possibility of future proceeds relating to the deceased target taxpayer’s estate.

Background to Lewis v. Commissioner

The moral of the story in this case is simple. As my dad’s father was wont to say: “Pigs get fat. Hogs get slaughtered.” At least that’s what I’m told he said. He only spoke French, and even then, only in the same disapproving mutter, which very loosely translated (I say “loosely,” because it was Quebecois French, that’s the only way it makes any damn sense, if at all) apparently meant “That’s not right, that.”

The background to this case is fairly banal, but it does go to my Pepere’s sage advice (or so I am told). A snitch* from Wisconsin ratted out a couple, who owned a closely held corporation, for which the snitch** worked for four years until he was unceremoniously axed.

*Author’s Note: I have ZERO issue with whistleblowers. In fact, I think that individuals should absolutely report such violations. The fact that they are awarded for doing the right thing is great with me, too. The snitch/petitioner in this case, as you will read, just strikes me as a greedy little weasel, or more properly like Gollum from Tolkein, who will stop at nothing to recover his precious. In any other whistleblower case, (unless it’s another Gollum) will be respectfully referred to as sir, ma’am, or dear patriot.

**Author’s Note: I couldn’t help it. I am a sucker for word play.

Likely having stolen the selfsame axe that severed his employment relationship, the petitioner now had one to grind with the couple. He submitted a Form 211 (Application for Award for Original Information) to the IRS’s Whistleblower Office (WBO), the single most cacophonous department in the IRS (or so I imagine). Many of the petitioner’s allegations related to tax years for which assessment was barred under IRC § 6501(a) (statute of limitations on assessment); however, the petitioner also asserted that there was sufficient evidence of fraud, and the fraud exception to the three year statute of limitations contained in IRC § 6501(c) (fraud exception) applied.

Among the allegations made against the couple was that they paid “wages” to a son who had not worked for the company for years, and that the couple impermissibly deducted wages, employment benefits, and automobile expenses for said son. The IRS audited the couple’s company and discovered zero evidence of these allegations, though a number of the petitioner’s other allegations were found to be accurate. Ultimately, it was calculated that the petitioner would receive approximately $222,000. However, the American Tax Relief Act of 2012 (ATRA) required automatic reductions be made with respect to certain government payments. The 2017 Fiscal Year reduction was 6.9%, and therefore the WBO agreed to award the petitioner only $206,700.

Morally outraged (which seems to be a trend with this guy), the petitioner put on his tax expert hat, which he kept next to his well-honed axe, and challenged the WBO’s exclusion of certain amounts. Having consulted with IRS attorneys on the petitioner’s numerous suggestions, remonstrations, and demands, the WBO politely sent him a final decision letter in which the WBO told him that, while they appreciated what he had done, and while they appreciated his well-researched (read: Googled) tax knowledge, and while they wished they could do more, take the $206,700 and shove of, friend of the IRS.

Utterly beside himself and gluttonous with rage, the petitioner timely filed a petition with the Tax Court arguing that the WBO abused its discretion on two grounds: (1) the amount of proceeds collected (which was really a roundabout way of saying that the IRS should have been more aggressive and assessed more taxes/penalties/lashes against the taxpayers), and (2) the utter gall of the WBO to apply sequestration to his award. As Pepere used to say under his breath, “That’s not right, that,” and that is precisely what the Tax Court found.

Whistleblower Awards – Tax Court’s Authority to Review Mandatory Awards

IRC § 7623(a) authorizes the IRS to pay awards to whistleblowers for detecting underpayments of tax. Awards under IRC § 7623(a) are discretionary. The Tax Court does not have jurisdiction to review discretionary awards. IRC § 7623(b) makes whistleblower awards mandatory if certain requirements are met and, further, provides the Court with jurisdiction to review mandatory awards.

There are two prerequisites for a mandatory award: the IRS must (1) proceed with an administrative or judicial action on the basis of the whistleblower’s information and (2) collect proceeds as a result of the action. See Cooper v. Commissioner (Cooper II), 136 T.C. 597, 600-601 (2011). In addition, IRC § 7623(b)(5) provides two monetary thresholds for a mandatory award: (1) in the case of an individual taxpayer, the target taxpayer’s gross income must exceed $200,000 for any taxable year subject to the action, and (2) the proceeds in dispute must exceed $2 million. The $2 million threshold is not jurisdictional; rather, it is an affirmative defense to be pleaded by IRS. See Lippolis v. Commissioner, 143 T.C. 393 (2014).

Parameters for Determining Mandatory Whistleblower Award

IRC § 7623(b)(1) provides parameters for determining the amount of the mandatory whistleblower award. If the IRS proceeds with any administrative or judicial action based on information brought to the Secretary’s attention by an individual, such individual shall receive as an award at least 15 percent but not more than 30 percent of the proceeds collected as a result of the action. The determination of the amount of such award by the Whistleblower Office shall depend upon the extent to which the individual substantially contributed to such action.

“Proceeds” are further defined as (1) penalties, interest, additions to tax, and additional amounts provided under the internal revenue laws, and (2) any proceeds arising from laws for which the Internal Revenue Service is authorized to administer, enforce, or investigate, including criminal fines and civil forfeitures, and violations of reporting requirements. See IRC § 7623(c)(1)-(2). Criminal fines and civil forfeitures were added to the definition of proceeds only in 2018. See Bipartisan Budget Act of 2018 (2018 Budget Act), Pub. L. No. 115-123, § 41108(a), 132 Stat. at 158.

Finality of Determination of Whistleblower Awards

The whistleblower regulations indicate that a final determination for a whistleblower award does not occur until the WBO’s award determination may no longer be properly challenged in this Court or elsewhere. See Treas. Reg. § 301.7623-4(d)(1) and (2). The regulations further provide for an administrative proceeding for the whistleblower to challenge the WBO’s award determination before a determination letter is issued. The WBO sends a preliminary award recommendation letter to the whistleblower who has 30 days from the date the letter is sent to respond. See Treas. Reg. § 301-7623-3(c)(1)-(3). The preliminary award recommendation is not a determination letter appealable to the Tax Court. See Treas. Reg. § 301-7623-3(c)(1). If the whistleblower waives his right to appeal the award, no determination letter is necessary, and the WBO pays the award as promptly as circumstances permit. See Treas. Reg. § 301-7623-3(c)(6). Under the regulations the WBO’s determination letter is not “a final determination for an award” because the determination letter can be appealed to the Tax Court.

Bright Line Rule – Reductions in Whistleblower Reward Based on Discretionary Decisions to Audit or Seek Collection are not Reviewable by Tax Court

Although it is true that IRC § 7623(b)(4) grants the Tax Court jurisdiction with respect to the WBO’s determinations relating to the award and the jurisdiction to review the WBO’s award determination or denial thereof (Smith v. Commissioner, 148 T.C. 449, 454 (2017)), however, IRC § 7623(b)(4) does not grant the Tax Court jurisdiction over discretionary decisions by the IRS in its conduct of audits or collection activities.

The Tax Court does not have authority under IRC § 7623(b)(4) to review the IRS’s determination of the target’s tax liability. Cohen v. Commissioner, 139 T.C. 299, 302 (2012), aff’d per curiam, 550 F. App’x 10 (D.C. Cir. 2014). Nor does the Tax Court have authority to direct how the IRS should proceed with an administrative or judicial action. Cooper II, 136 T.C. at 600. Furthermore, the Tax Court does not review the IRS’s decisions whether to audit a target in response to a whistleblower’s claim, and the Tax Court has no authority to require the IRS to explain a decision not to audit or to pursue additional or fewer claims that the whistleblower has made against the target. See Lacey v. Commissioner, 153 T.C. No. 8, *30 (Nov. 25, 2019).

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

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