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Worthington v. Commissioner (T.C. Memo. 2020-141)

On October 8, 2020, the Tax Court issued a Memorandum Opinion in the case of Worthington v. Commissioner (T.C. Memo. 2020-141). The issue before the court in Worthington was whether the IRS’s whistleblower office abused its discretion in denying or rejecting the petitioner’s claim.

Not a Propitious Beginning

In mid-November 2018, the petitioner filed a claim against John Worthington.  The trouble was, the petitioner was John Worthington.  Just like sitting in the corner sulking at the Buckner nuptials, John brought attention to himself under rather unflattering circumstances.  He forgot rule number six – draw attention to yourself, but on your own terms.

Correcting Course

The target is a bit amorphous, which is perhaps why the IRS had such trouble reviewing and passing along the petitioner’s claim.  The target is a “product of interlocal agreements” in which the “component entities” are county law enforcement agencies.  Whether the target is even a legal entity is an ongoing controversy, the Tax Court tells us.  Legal entity or not, the target allegedly collected millions of dollars in revenue between 2000 and 2018, which the petitioner claimed was illegally begotten.

The Classifier’s Recommendation

Although the classifier recommended the claim be forwarded to the criminal investigative division, it noted that the it was not in the purview of the IRS to determine whether the target was a legal entity.  Long story short, the IRS had about as much idea of whether the target was actually an entity as everyone else who had looked at it.  Nevertheless, the classifier sensed RICO implications and recommended that the claim be passed onto CI.

The higher ups in the WBO decided not to forward the claim to CI based, in part, because the classifier could not identify the entity (or lack thereof), and, as such, there was no certainty whether there was any unreported income.  On a second look, the classifier “decided” that the claim was speculative at best and recommended that the claim be rejected.

The Decision Letter

The rejection letter was copied and pasted by some grade three clerk (Felicia, likely), and it noted that the claim was rejected because the IRS “decided not to pursue the information” that the petitioner provided.

Rejection or Denial

The petitioner sought review by the Tax Court.  The IRS filed a motion for summary judgment in which it asked the Tax Court to hold that the WBO did not abuse its discretion in rejecting petitioner’s claim for award and also asserts that the WBO did not abuse its discretion in denying petitioner’s claim for award.

IRC § 7623(b) provides the circumstances in which the IRS shall give awards to whistleblowers and charges the WBO with performing the initial evaluation of whistleblower claims to determine whether they meet the minimum standards for an award. See Treas. Reg. § 301.7623-1(c)(4). The initial evaluation occurs before any other action is taken.  If a claim fails to meet certain criteria, then the WBO may summarily “reject” the claim without further consideration. 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). Such a threshold rejection by the WBO will necessarily preclude any subsequent administrative or judicial action against any taxpayer and any subsequent collection of proceeds from the taxpayer on the basis of the information provided. See Lacey v. Commissioner, 153 T.C. 146, 168-69 (2019).

A denial, on the other hand, is a determination that relates to or implicates taxpayer information. Treas. Reg. § 301.7623-3(c)(8). The WBO handles a denial of a claim similarly to a rejection, in that both determinations result in the WBO’s providing written notice to the taxpayer stating that it declines to make an award and giving the basis for its determination. Id. 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. Id. A denial is a determination that is made after the WBO engages in some substantive consideration of the claim. See Lacey v. Commissioner, 153 T.C. at 161-162.

Review by Tax Court

The Tax Court reviews the WBO’s summary rejection of a claim for abuse of discretion.  It reviews the WBO’s stated grounds that the claim failed to meet certain threshold requirements. In that circumstance it does not sustain the rejection on the unstated grounds that there has been no administrative or judicial action initiated by, nor proceeds collected by, the IRS as a result of the information that is the basis of the whistleblower’s claim. That is, the Tax Court reviews the determination that the WBO actually made, as reflected in its determination letter, and not a hypothetical determination that it did not actually make. Lacey, 153 T.C. at 169.

No Forcing WBO to Analyze

The petitioner asked the Tax Court to require the WBO to analyze his claims. To this, the Tax Court politely declined to acquiesce to his request.  Aware of the Tax Court’s holdings that it does not have power to order the IRS to perform an audit, see Lacey v. Commissioner, 153 T.C. at 164, the petitioner insisted that is not what he is attempting.  Instead, the petitioner argued that his appeal was “not about forcing an investigation,” but instead it was “about forcing the analytical requirements of the statutes and the IRS manuals themselves.”

To paraphrase, the petitioner was not asking the WBO to investigate, but instead to simply do their job…which is, as one might guess, to investigate…

The Tax Court sees through this clever ruse and denies the ordering and oversight of the investigation.

(T.C. Memo. 2020-141) Worthington v. Commissioner

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