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Whistleblower 10084-16W v. Commissioner (T.C. Memo. 2021-73)

On June 9, 2021, the Tax Court issued a Memorandum Opinion in the case of Whistleblower 10084-16W v. Commissioner (T.C. Memo. 2021-73). The primary issue presented in Whistleblower 10084-16W was whether the IRS abused its discretion in denying petitioner’s claim for a whistleblower award.

Background

In June 2010, the petitioner provided whistleblower information about the target taxpayer (target) to an attorney with respondent’s Office of Chief Counsel and delivered the information by hand to an IRS special agent. The whistleblower information related to the target’s amortization of customer lists and deferral of tax on approximately $500 million of income earned on money market deposit accounts (MMDA).  Three days later, the petitioner submitted a Form 211 (Application for Award for Original Information) to the IRS’s Whistleblower Office (WBO), asserting the amortization and MMDA issues. Four days after that, the WBO sent a letter to the petitioner acknowledging receipt of the claim and assigning a claim number. A month later (July 2010), the analyst referred the case to a subject matter expert (SME) in the Large Business & International Division of the IRS.  The period of limitations for the target’s 2006 tax year was set to expire in September 2010 (and did, in fact, expire in September 2010). The period of limitations for the target’s 2008 tax year was set to expire on September 14, 2012, and an examination for that year had been closed.

The SME did not begin a review of the information until January 2011. On October 7, 2010, before the SME reviewed the petitioner’s claim, the IRS opened an examination for the target’s 2009 tax year. The 2010 tax year was later added to the examination. The SME indicated his intent to recommend an examination for 2009. In February 2011, the SME sent a memorandum to an examination team manager requesting that petitioner’s whistleblower information be forwarded for examination.

After the examination was completed, the IRS proposed adjustments for the target’s 2009 and 2010 tax years relating to depreciation of computer equipment, loss or gain on the disposal of the computer equipment, and an international issue. The proposed adjustments were not related to issues raised in petitioner’s whistleblower claim.

The WBO issued a preliminary award recommendation memorandum (ARM) to the petitioner, which stated that the IRS did not make any adjustments relating to the issues that the petitioner raised in the whistleblower claim. After a telephone discussion with the petitioner, the WBO prepared an ARM recommending issuance of a final denial letter and explaining the grounds for denial of a whistleblower award including that the examination team reviewed the two issues raised in the whistleblower claim but did not propose any adjustments with respect to these issues and that adjustments had been made for three other issues that are not attributable to the whistleblower’s information. The ARM also noted that the examination team received the whistleblower information in February 2011 after the audit had already commenced and both issues that the petitioner identified were under consideration by the examination team before it received the whistleblower information.

Whistleblower Jurisdiction

IRC § 7623(a) authorizes the IRS to pay awards to whistleblowers for detecting underpayments of tax. Awards under IRC § 7623(a) are discretionary, and the Tax Court does not have jurisdiction to review discretionary awards. IRC § 7623(b) makes whistleblower awards mandatory where the IRS institutes an administrative or judicial action on the basis of the whistleblower information and collects proceeds from such an action. See Cooper v. Commissioner, 136 T.C. 597, 600-601 (2011). IRC § 7623(b)(4) further provides the Tax Court with jurisdiction to review the WBO’s determinations (for abuse of discretion). Kasper v. Commissioner, 150 T.C. 8, 21-23 (2018).

An abuse of discretion occurs when a determination is arbitrary, capricious, or without sound basis in fact or law. Murphy v. Commissioner, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006). Under the abuse of discretion standard, the Tax Court limits its review to the administrative record. Kasper, 150 T.C. at 20. The Tax Court may supplement the administrative record in limited circumstances, none of which apply here. Van Bemmelen v. Commissioner, 155 T.C. No. 4, slip op. at 21-22 (Aug. 27, 2020).

The Whistleblower Claim’s Tortured Path

Consistent with the procedures outlined in the IRM, the administrative record shows that the WBO forwarded petitioner’s whistleblower information to the appropriate operating division. See IRM pt. 25.2.2.7(5). An SME in the LBI unit evaluated the information and referred it for further review by an examination team. Treas. Reg. § 301.7623-4(d)(2)(ii); IRM pt. 25.2.2.7(5), (8)(b). The SME decided to refer the whistleblower information for investigation and forwarded the whistleblower information to the examination team assigned to the target’s 2009 and 2010 tax years. See IRM pt. 25.2.2.7(8) (stating that the SME will make a decision whether to recommend the lead offered by the whistleblower).

Upon conclusion of the examination, petitioner’s claim was returned to the WBO with Form 11369. See IRM pt. 25.2.2.7(15) and (16). (stating procedures for the examiner for the conclusion of the audit). Form 11369 explained that the examination team did not use the whistleblower information to make the proposed adjustments and the whistleblower information did not contribute to the identification or development of any issues. See IRM pt. 25.2.2.7(16)(b) (stating the documentation from the examiner should contain a narrative to explain the contributions of the informant and the actions taken). Form 11369 states that respondent was in possession of the whistleblower information from disclosures on the target’s return. The WBO reviewed Form 11369 and requested additional information from the examination team. See IRM pt. 25.2.2.7(18). The WBO determined that the whistleblower information did not contribute to the proposed adjustments for 2009 and 2010. Accordingly, the WBO determined that petitioner was not entitled to a whistleblower award.

Holding

The administrative record establishes that the examination team did not use the whistleblower information to make any adjustments and the examination team had the relevant information in its possession from disclosures on the target’s return. The administrative record clearly establishes that the WBO followed the IRM procedures in the evaluation and denial of petitioner’s whistleblower claim. The WBO Analyst properly relied on the records and representations of the examination team that it did not use petitioner’s whistleblower information. The WBO determined that respondent did not collect proceeds from the target on the basis of petitioner’s whistleblower information. Accordingly, petitioner is not entitled to an award. The Tax Court, therefore, held that WBO did not abuse its discretion in denying a whistleblower award.

(T.C. Memo. 2021-73) Whistleblower 10084-16W v. Commissioner

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