On August 2, 2021, the Tax Court issued its opinion in Rogers v. Commissioner (157 T.C. No. 3). The primary issue presented in Rogers v. Commissioner was whether the IRS Whistleblower Office abused its discretion when it rejected/denied the petitioner’s claim.
Held: Oh yeah.
One of the attorneys for the IRS is named Bartholomew Cirenza. There’s a fair to middling chance that he has been given more swirlies, wedgies, and other sundry childhood punishments than he can (or cares to) remember.
Summary and Holding in Rogers v. Commissioner
IRC § 7623 provides for awards to individuals (commonly referred to as whistleblowers) who submit information to the Government about third parties who have underpaid their taxes or otherwise violated the internal revenue laws. The IRS Whistleblower Office (WBO) has been entrusted with the responsibility of reviewing claims under IRC § 7623 to determine whether a whistleblower is entitled to an award. The Department of the Treasury and the IRS have adopted regulations under IRC § 7623 that describe, among other things, actions that the WBO is empowered to take when making award determinations, including rejections and denials of whistleblower claims.
In this case, the TC considered the extent to which the WBO is constrained by the regulations when it communicates adverse decisions to whistleblowers. Specifically, petitioner, Bobby Lee Rogers, has appealed, pursuant to IRC § 7623(b)(4), a determination of the WBO that declines to grant him an award. The IRS has filed a motion for summary judgment under Rule 121, arguing that the WBO “rejected” Mr. Rogers’ claim and that this determination was consistent with the regulatory scheme and supported by the administrative record. But the letter that the WBO sent to Mr. Rogers purported to reject his claim based on a rationale that the regulations specifically associate with an alternative adverse determination, a denial.
Under long-established administrative law, the Tax Court can uphold the WBO’s determination only on the grounds it actually relied on when making its determination. See Kasper v. Commissioner, 150 T.C. 8, 23-24 (2018) (citing SEC v. Chenery Corp. (Chenery I), 318 U.S. 80, 93-95 (1943), and SEC v. Chenery Corp. (Chenery II), 332 U.S. 194, 196 (1947)). A review of the record in Mr. Rogers’ case, however, left the Tax Court unable to conclude that the determination reflected in the WBO’s letter was consistent with the regulations. Accordingly, the WBO’s determination was an abuse of its discretion, and the Tax Court denied the IRS’s motion for summary judgment.
Paranoia or Bad Human Beings?
In 2019, Mr. Rogers submitted nine Forms 211, Application for Award for Original Information, to the WBO, along with certain attachments. Mr. Rogers’ Forms 211 identified nine target taxpayers–all individuals and extended family members or personal acquaintances of Mr. Rogers–and alleged that they had conspired to commit “grand theft through conversion” of the assets of Mr. Rogers’ mother.
The forms further alleged that the target taxpayers knowingly engaged in a “planned offense,” through which property owned in part by Mr. Rogers’ mother was fraudulently shifted through a variety of business entities, with the result that she was “[divested] of her financial assets and property without her direct knowledge or control.” Mr. Rogers attached a number of supporting documents to his Forms 211, including various trust instruments, affidavits, corporate filings, and news articles. The documents were part of an “investigation report” that Mr. Rogers had prepared and submitted to law enforcement agencies at the Federal, State, and local levels in an attempt to regain ownership of his mother’s assets.
The “Declination” of the IRS Whistleblower Office
A few days after the SBSE classifier completed his review recommending rejection of the claim, a Tax Examining Technician for the WBO drafted an Award Recommendation Memorandum (the “ARM”). The ARM included a notation recommending that the WBO “reject” Mr. Rogers’ claim. The ARM further explained that the claim had been “recommended for rejection by classification.” In addition to this “Summary Recommendation,” the ARM recited the same bases for the recommendation that appeared in each of the SBSE classifier’s classification sheets.
The WBO issued Mr. Rogers a letter declining to grant him an award. The letter stated that “the Whistleblower Office has made a final decision to reject your claim for an award. The claim has been rejected because the IRS decided not to pursue the information you provided.”
The Tax Court Proceedings
Mr. Rogers timely appealed to this Court seeking review of the WBO’s award determination under IRC § 7623(b)(4). The petition repeated the allegations from Mr. Rogers’ Forms 211 and asserted that the cash and property converted by the target taxpayers were not “taxed appropriately” at the Federal or the State level. Mr. Rogers also requested that the Commissioner produce certain records to facilitate Mr. Rogers’ investigation of the target taxpayers, including more than 50 years of tax returns and “Tax and Earnings Statements” for his mother.
Money and Jurisdiction
IRC § 7623 provides for awards to whistleblowers who submit information about third parties who have underpaid their taxes or otherwise violated the internal revenue laws. IRC § 7623(a) authorizes discretionary payments in certain circumstances, while IRC § 7623(b) provides for nondiscretionary (i.e., mandatory) awards. Before an award may be paid, the IRS generally must proceed with an “administrative or judicial action” and collect proceeds from the target taxpayer. See IRC § 7623(b)(1); Cohen v. Commissioner, 139 T.C. 299, 302 (2012), aff’d, 550 F.App’x 10 (D.C. Cir. 2014); see also IRC § 7623(a).
Under IRC § 7623(b), the WBO first determines whether a whistleblower is entitled to a mandatory award. If an award is due, then the WBO also determines the amount of the award. See IRC § 7623(b)(1), (2), and (3). The Tax Court has jurisdiction to review the WBO’s determinations under IRC § 7623(b), including determinations that no award is due. See IRC § 7623(b)(4); Lacey v. Commissioner, 153 T.C. 146, 169 (2019); see also Cooper v. Commissioner, 135 T.C. 70, 75-76 (2010). The Tax Court does not, however, have authority to order the IRS to commence an administrative or judicial action or to review its determination of the alleged tax liability to which a whistleblower’s claim pertains. See Lacey, 153 T.C. at 166; see also Cohen, 139 T.C. at 302 (citing Cooper v. Commissioner, 136 T.C. 597, 600 (2011)).
In addition, the Tax Court generally does not review award determinations that have been properly made under IRC § 7623(a) as opposed to IRC § 7623(b). IRC § 7623(a) applies if certain monetary thresholds under IRC § 7623(b) are not met. Those thresholds provide that IRC § 7623(b), rather than IRC § 7623(a), applies with respect to any action if the proceeds in dispute exceed $2 million, IRC § 7623(b)(5)(B), and, for an action against an individual, if the individual’s gross income exceeds $200,000 for any taxable year subject to the action, IRC § 7623(b)(5)(A); see Smith v. Commissioner, 148 T.C. 449, 461 (2017) (explaining that the $200,000 threshold applies to individuals and the $2 million threshold applies to all taxpayers).
The Tax Court has held, however, that the $2 million threshold set out in IRC § 7623(b)(5)(B) is not jurisdictional. Lippolis v. Commissioner, 143 T.C. 393, 397-398 (2014). Rather, that threshold constitutes an affirmative defense that the Commissioner must raise in his answer and with respect to which the Commissioner bears the burden of proof. See id. at 400. The Tax Court’s reasoning and conclusions in Lippolis apply with equal force to the $200,000 threshold. As such, the Tax Court held that IRC § 7623(b)(5)(A) likewise is not jurisdictional. Accordingly, if the IRS wishes to argue that the Tax Court is precluded from reviewing a determination based on either of the monetary thresholds under IRC § 7623(b)(5), it must so allege in its answer and must satisfy its burden of proof.
The statutory provisions governing whistleblower awards are succinct, and regulations supplement the statutory scheme. The regulations provide for two distinct types of determinations that result in no award: rejections and denials
The regulations establish certain minimum criteria that apply to all whistleblower claims. In particular, Treas. Reg. § 301.7623-1(b), describes which individuals are eligible to file a claim (i.e., it addresses the “Who may file?” question), while Treas. Reg. § 301.7623-1(c), describes the information each claim should include (i.e., it addresses the “What information must be submitted?” question). Among other things, a claim generally must (1) include specific, credible, and nonspeculative information that the whistleblower believes will lead to collected proceeds, (2) report a failure to comply with the internal revenue laws and identify the person(s) believed to have failed to comply with the internal revenue laws, and (3) provide substantive information in support of the whistleblower’s allegations, including all available documentation. See Treas. Reg. § 301.7623-1(c)(1), (4); see also Lacey, 153 T.C. at 160. For these purposes, a claim is considered purely speculative if it lacks any basis or support for its allegations. See Lacey, 153 T.C. at 161.
Under the regulations, “[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); see also IRM pt. 22.214.171.124.3(7) (stating that a rejection is a determination that relates to the whistleblower’s eligibility to file a claim for award, or the submission of information and claims for award (i.e., the claim did not contain a tax issue, the information on the Form 211 was not specific/credible information, the claim was purely speculative in nature, or the Service was unable to identify the taxpayer based on the information provided by the whistleblower)). Accordingly, and as provided in the regulations, a rejection is appropriate when a whistleblower’s claim fails to comply with the threshold requirements as to who may submit a claim or what information the claim must include. See Treas. Reg. § 301.7623-1(b), (c)(4); see also Treas. Reg. § 301.7623-3(b)(3).
The WBO determines whether a claim should be rejected on its face or whether further consideration is warranted. If a claim fails to meet the threshold criteria, depending on the circumstances, the WBO may choose to notify the whistleblower of any deficiencies and give him an opportunity to perfect the claim before the WBO takes further action. See Treas. Reg. § 301.7623-1(c)(4).
Once the WBO determines that it will reject a claim, what happens next turns on whether the claim is subject to IRC § 7623(a) or IRC § 7623(b). If the claim is subject to IRC § 7623(a), the WBO provides written notice to the whistleblower stating the basis for the rejection without sending a preliminary rejection letter. Treas. Reg. § 301.7623-3(b)(3). If the WBO instead determines that it will reject a claim under IRC § 7623(b), it commences a “whistleblower administrative proceeding” by sending the whistleblower a preliminary rejection letter that states the basis for the rejection and invites the whistleblower to submit comments. Treas. Reg. § 301.7623-3(c)(7).
The WBO reviews all comments timely submitted by the whistleblower and, if it still believes that a rejection is appropriate, provides written notice of the rejection to the whistleblower, again with an explanation. Id. When a claim (whether under IRC § 7623(a) or IRC § 7623(b)) is rejected for failure to meet threshold criteria other than those relating to the eligibility of the whistleblower under Treas. Reg. § 301.7623-1(b), the regulations provide that the whistleblower has a post-rejection opportunity to “perfect and resubmit the claim.” See Treas. Reg. § 301.7623-1(c)(4); see also Lacey, 153 T.C. at 161-162.
A “denial” is fundamentally different from a “rejection.”
Under the regulations, “[a] denial is a determination that relates to or implicates taxpayer information.” Treas. Reg. § 301.7623-3(c)(8); see also IRM pt. 126.96.36.199.3(3) (stating that “a denial is a determination that is made for reasons beyond the information contained on the Form 211 (e.g., the Service did not proceed based on the information provided by the whistleblower, the case was surveyed or no changed by the operating division, the issue(s) alleged by the whistleblower were no change issues, the issues alleged by the whistleblower were below threshold, the statute has expired on the issues raised by the whistleblower, there are no collected proceeds)).
The WBO’s denial of a claim indicates 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); see also Treas. Reg. § 301.7623-3(b)(3); T.D. 9687 (stating that “a denial often relates to or implicates taxpayer information (e.g., because the IRS did not proceed based on the information provided or did not collect any proceeds)). Accordingly, a denial is a determination that is made after the WBO engages in some substantive consideration beyond the face of a claim. See Lacey, 153 T.C. at 161-162, 168.
The WBO handles a denial of a claim similarly to a rejection. In the case of a denial under IRC § 7623(a), the WBO provides written notice of the denial to the whistleblower, but it does not state the basis for the denial. See Treas. Reg. § 301.7623-3(b)(3). In the case of a denial under IRC § 7623(b), the WBO sends the whistleblower a preliminary denial letter that states the basis for the denial and invites the whistleblower to submit comments, which starts the whistleblower administrative proceeding to which the whistleblower is entitled (similar to that afforded in the case of a rejection under IRC § 7623(b)). Treas. Reg. § 301.7623-3(c)(8).
The WBO considers any timely response from the whistleblower and, if it still believes a denial is appropriate, provides written notice to the whistleblower so stating, including the basis for its determination. Because a denial is based on factors beyond deficiencies on the face of the whistleblower’s claim, the regulations do not provide the whistleblower an opportunity to perfect his claim after a denial. Compare Treas. Reg. § 301.7623-3(b)(3), (c)(8), with Treas. Reg. § 301.7623-1(c)(4).
The WBO Letter
Under Chenery I, 318 U.S. at 89, the Tax Court judges agency action by the standards which the agency itself invoked. See also Chenery II, 332 U.S. at 196. Accordingly, in reviewing the WBO’s action in this case, the Tax Court turned first to the WBO’s determination: the Letter mailed to Mr. Rogers.
On its face, the Letter states that the WBO is rejecting Mr. Rogers’ claim. But the WBO Letter fails to include any rationale that would support a rejection under the regulations. See Treas. Reg. § 301.7623-1(b)(2), (c)(4) (stating that a whistleblower claim may be rejected for violating specified minimum criteria); see also IRM pt. 188.8.131.52.3(7) (stating that a rejection is appropriate if a claim does not raise a tax issue or is purely speculative, the information on the Form 211 is not specific or credible, or the IRS is unable to identify the taxpayer based on the claim). The Letter identifies no deficiencies with respect to the “who” or “what” questions addressed in the regulations. See Treas. Reg. § 301.7623-1(b)(2), (c). Put another way, the WBO Letter does not say that Mr. Rogers is an impermissible whistleblower. Nor does the Letter say that the materials he submitted fell short of providing the information the regulations required.
The WBO Letter does not address any shortcomings on Mr. Rogers’ part, which is the focus of a rejection inquiry under the regulations. Treas. Reg. § 301.7623-3(c)(7) (stating that 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); see also IRM pt. 184.108.40.206.3(7) (stating that a rejection is a determination that relates to the whistleblower’s eligibility to file a claim for award, or the submission of information and claims for award). Rather than focusing on the whistleblower and explaining what he failed to do, as required by the rejection rules under the regulations, the WBO Letter switches its focus to the agency itself and what the agency chose to do. Thus, the Letter tells Mr. Rogers that “the IRS decided not to pursue the information you provided.” While this may be a plausible explanation for a denial, it does not explain the basis of a rejection.
In short, the regulatory framework gave the WBO two distinct paths for action–rejection or denial. Having come to that “fork in the road,” the WBO Letter followed Yogi Berra’s advice and “took it.” The Yankee great’s suggestion was sound in context, as both prongs of the fork led to his home. But with respect to a whistleblower award, the two prongs of the regulations lead to very different places. By including the “decided not to pursue” rationale as the reason for its purported rejection, the WBO Letter in effect said to Mr. Rogers “we reject your claim because we are denying the claim.” This statement was self-contradictory–and therefore impermissible–under the regulations.
Post-Script (September 19, 2021)
Briefly Taxing wants to thank the petitioner, Mr. Bobby Lee Rogers, for reaching out after having read this post. He was a great sport, and especially appreciated the swirlies comment with respect to Bartholomew Cirenza. Briefly Taxing wishes the best of luck to Mr. Rogers in pursuing his whistleblower claim.
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