On November 22, 2021, the Tax Court issued a Memorandum Opinion in the case of Marino v. Commissioner (T.C. Memo. 2021-130). The primary issue presented in Marino was whether the IRS Whistleblower Office abused its discretion in denying the petitioner an award for information on an alleged ne’er-do-well taxpayer…who, apparently, was dead.
The petitioner in Marino v. Commissioner filed a Form 211 (Application for Award for Original Information) in 2014, in which he claimed an award for information regarding alleged violations of income tax laws by a subchapter S corporation and its shareholders. Among other things, the petitioner claimed the S corporation had overstated its cost of goods sold and improperly deducted payments, ostensibly for marketing rights, made to “Taxpayer 3.” Taxpayer 3 was a minority shareholder of the S corporation who owned 15% of the corporation’s stock. Her father, “Taxpayer 1,” owned the remaining 85% of the stock.
The petitioner’s claim was referred for investigation. During the investigation, the petitioner was interviewed. Notes from the interview included the following quote:
Petitioner provided no evidence to support the fact that shareholders did or did not have adequate basis in the S-corporation.
Well, hell’s bells. Guess we should just pack up and go home?
Nope. We still have 17 pages of Judge Halpern’s opinion to slog through.
In fairness to Mr. Marino, the IRS did make a change to the 2012 return, which resulted in the need to reduce a NOL carry over to 2013. Unfortunately for Mr. Marino, this change to the NOL “still did not change the tax liability of the taxpayer.” Taxpayer 1’s return for 2013 reported a loss of $1,095,819. The reduction of the loss carryforward from 2012 reduced Taxpayer 1’s 2013 loss to $234,113.
The Award Recommendation Memorandum
Long story, very short: “There are no collected proceeds as a result of four audits conducted on the four reported taxpayers.”
Petitioner’s Supplemental Claim
In a supplemental claim, submitted after the completion of the audit of Taxpayer 3’s 2012 return, the petitioner named her as the target taxpayer, in her capacity as executor of her father’s estate. Petitioner’s supplemental claim alleges that Taxpayer 3 had received as a gift from her father (Taxpayer 1) the intellectual property in respect of which she received payments from the S corporation.
Long story, short again: “Contrary to his statement, the marketing rights [the petitioner] references do have a contract and agreement, which have been in effect for over 20 years, and have been accepted by the IRS since inception. Even if the arrangement has the appearance of being a gift, the fact remains that [Taxpayer 3] reports the full amount received and takes no deductions against the income.
No referral was made on the supplemental claim.
The Whistleblower Award Regime
IRC § 7623(b)(1) requires the payment of an award to a “whistleblower” who provides information concerning underpayments of tax if the IRS, on the basis of that information, “proceeds with any administrative or judicial action” that results in the collection of proceeds.
The underlined bit is important, as we’ll see in a moment.
IRC § 7623(b)(4) allows whistleblowers to appeal award determinations (including determinations not to grant an award) and gives the Tax Court jurisdiction over those appeals.
The Tax Court reviews WBO determinations under IRC § 7623(b)(4) for abuse of discretion, and that review is generally limited to the administrative record. As the Tax Court explained in Van Bemmelen v. Commissioner, 155 T.C. 64, 74 (2020): “Absent a substantial showing made with clear evidence to the contrary, an agency is presumed to have properly designated the administrative record.”
Nonetheless, the Tax Court will allow supplementation of the administrative record to “include evidence that should have been properly a part of the administrative record but was excluded by the agency.” In limited circumstances, the Tax Court will also consider “extrajudicial evidence that was not initially before the agency.” Considering extra-record evidence, however, “is the exception, not the rule.”
In Marino v. Commissioner, the Tax Court considered the IRS’s motion for summary judgment.
As a general rule, “[t]he party moving for summary judgment has the burden of demonstrating that no genuine issue as to material fact exists, and that he is entitled to judgment as a matter of law.” Under Tax Court Rule 121(d), a party opposing summary judgment “may not rest upon the mere allegations or denials” but must instead “set forth specific facts showing that there is a genuine dispute for trial.”
The usual summary judgment standards provided in Tax Court Rule 121 are “not generally apt where [the Tax Court] must confine [itself] to the administrative record to decide whether there has been an abuse of discretion.” “In such a case involving review of final agency action, summary judgment serves as a mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”
It’s a Damn Conspiracy!
The petitioner lodges numerous complaints about the adequacy of the investigation conducted in response to the information he provided in his initial claim. According to the petitioner:
Once the claim was referred out to the IRS examining agent Diana [sic] Beers, who abuse [sic] her discretion by ignoring the evidence submitted in the First Whistleblower Claim supporting these 3 issues and failing to have [a senior tax analyst in the WBO] obtain accurate information from the Petitioner supporting these 3 issues.
The petitioner next claims that
Ms. Beers did everything she could to limit the audit adjustment because she was functioning as not as [sic] an IRS examining agent but as an advocate for the non-compliant taxpayer.
He accuses Ms. Beers of
“smear[ing] the information [he] provided to justify her recommendation to deny an award.
According to the petitioner, Ms. Beers
“ignored th[e] evidence” he provided and accepted the S corporation’s word “as gospel”.
In particular, he alleges that
Ms. Beers inappropriately allowed the S corporation “to ‘estimate’ its cost of goods sold for 2012 based upon its historical deductions for cost of goods sold.”
He also claims that
Ms. Beers failed to investigate whether Taxpayer 1 had sufficient basis in his stock in the S corporation to deduct his share of the corporation’s 2012 loss.
Finally, the petitioner asserts that
there is nothing in the Administrative Record to indicate that either Ms. Beers or [the senior technical advisor] knew of the concept of tax basis or addressed it.
Admissibility of Evidence of Advisor’s Declaration
It never bodes well for a litigant when the court begins a paragraph of its opinion with the phrase “we can readily dismiss [the litigant’s] claim…” Unfortunately for the petitioner, that is precisely what the Tax Court said with respect to the petitioner’s claim that portions of the administrative record the IRS submitted are inadmissible hearsay.
Rule 802 of the Federal Rules of Evidence generally prohibits the admission of hearsay. But those rules “apply [only] to proceedings in United States courts.” Thus, in determining the petitioner’s eligibility for an award, the WBO was not barred from considering hearsay evidence.
Further, in determining whether the administrative record supports the WBO’s denial of an award, the Tax Court must consider the contents of that record without regard to whether it might include evidence that would be inadmissible as hearsay in a trial de novo. A court reviewing agency action for abuse of discretion must uphold the agency’s factual findings if they are “supported by substantial evidence.”
In Consol. Edison Co. of N.Y., Inc. v. NLRB, 305 U.S. 197, 230 (1938), the Supreme Court suggested that “[m]ere uncorroborated hearsay or rumor does not constitute substantial evidence.” More recently, however, in Richardson v. Perales, 402 U.S. 389, 407-408 (1971), the Court warned that Consol. Edison should not be read to have effected “a blanket rejection of administrative reliance on hearsay irrespective of reliability and probative value.”
Thus, the D.C. Circuit accepts that “administrative agencies are not barred from reliance on hearsay evidence.” Indeed, hearsay evidence “can constitute substantial evidence if reliable and trustworthy.” Therefore, if an agency relies on hearsay evidence in support of its factual findings, a court considering the determination the agency made on the basis of those findings can—indeed, must—consider the hearsay evidence as well in conducting its review for abuse of discretion.
Thus, even if the Tax Court were to conclude that some portions of the administrative record the IRS submitted would be hearsay under Rule 802 of the Federal Rules of Evidence and not covered by one of the exceptions provided in Rule 803 or 804, that conclusion would not justify the Tax Court’s refusal to consider the evidence. Instead, under the substantial evidence standard, the Tax Court should consider the evidence if and when it finds such evidence reliable and trustworthy.
The petitioner does not question the reliability or trustworthiness of the Forms 11369 or any other documents included in the administrative record. Instead, he inappropriately relies on Rule 121(d) for what might be described as a “blanket rejection” of hearsay. Accepting the petitioner’s argument would be contrary to applicable precedent established by the Supreme Court and the Court of Appeals for the D.C. Circuit.
The “Nonsensical” Interpretation of IRC § 7623(b)(1)
The Tax Court spends quite a bit of time going through the 2018 amendment of IRC § 7623(b)(1). Bottom line, however, the petitioner’s interpretation of IRC § 7623(b)(1), as amended in 2018, is “nonsensical.”
If a whistleblower’s entitlement to an award no longer depends on the collection of proceeds, how would the amount of the required award be determined? As a percentage of the proceeds that would have been collected had the IRS conducted an audit satisfactory to the whistleblower? This, the petitioner never explains.
In sum, a whistleblower’s entitlement to an award under IRC § 7623(b)(1) depends on both the initiation of an administrative or judicial action and the collection of proceeds.
Therefore, the petitioner is not entitled to an award under IRC § 7623(b)(1) unless the actions undertaken on the basis of the information he provided resulted in the collection of proceeds.
Hint: They did not.
Thus, not awarding an award was wholly appropriate.
No Remand on Basis of Futility
In concluding it’s opinion, the Tax Court observes that it has “no doubt that, were [the Tax Court] to remand the case, the WBO would add the supplemental documentation to the administrative record and, on the basis of that expanded record, would again deny petitioner an award. In other words, remand would be an idle and useless formality.”
Accordingly, the Tax Court found that it “need not decide whether the WBO abused its discretion when it denied the petitioner an award on the basis of an administrative record that does not fully support the premise on which the WBO made its determination.”
Instead, the Tax Court granted the IRS’s motion for summary judgment, as supplemented, that the Tax Court lacks the authority to oversee or direct the adequacy of the WBO’s actions or its decision not to seek investigation of the petitioner’s claims.
(T.C. Memo. 2021-130) Marino v. Commissioner
- Kasper v. Commissioner, 150 T.C. 8, 14-23 (2018). ↑
- Id. at 73. ↑
- Id. ↑
- Id. at 76 (quoting Theodore Roosevelt Conservation P’ship v. Salazar, 616 F.3d 497, 514 (D.C. Cir. 2010)). ↑
- Casanova Co. v. Commissioner, 87 T.C. 214, 217 (1986). ↑
- Van Bemmelen, 155 T.C. at 78. ↑
- Id. at 79. ↑
- Fed. R. Evid. 101. ↑
- See, e.g., EchoStar Commc’ns Corp. v. FCC, 292 F.3d 749, 752 (D.C. Cir. 2002). ↑
- Crawford v. USDA, 50 F.3d 46, 49 (D.C. Cir. 1995). ↑
- Id. ↑
- Perales, 402 U.S. at 407-08. ↑
- NLRB v. Wyman-Gordon Co., 394 U.S. 759, 766 n.6 (1969). ↑
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