Opinion
36014-21W
12-20-2024
MARIE CLAUDIA ESTORGE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Courtney D. Jones, Judge
In this whistleblower case pursuant to section 7623(b)(4), petitioner, Marie Claudia Estorge, seeks review of a final determination issued by the Internal Revenue Service (IRS) Whistleblower Office (WBO), denying her claim for a whistleblower award. Pending before the Court is respondent's Motion for Summary Judgment, filed November 22, 2024, wherein respondent asserts that there is no dispute that the $2 million threshold for a mandatory whistleblower award under section 7623(b)(5), which respondent set forth as an affirmative defense in the First Amendment to Answer, is not met. On November 25, 2024, Ms. Estorge filed an Objection to Motion for Summary Judgment. For the reasons set forth below, we will grant respondent's Motion.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, regulatory references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure. All monetary amounts are rounded to the nearest dollar.
Background
The following background information is drawn from the parties' pleadings, Motion papers and attached exhibits, and the Administrative Record of the whistleblower investigation pursuant to section 7623. See Rules 93, 121(c). This background is stated solely for the purpose of resolving the present Motion and not as findings of fact in this case. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994). Ms. Estorge resided in California when she filed the Petition.
I. Whistleblower Claims and Administrative Proceedings
Ms. Estorge filed a Form 211, Application for Award for Original Information, with attachments, dated January 28, 2018. Therein, Ms. Estorge alleged that she performed bookkeeping and accounting services for the target taxpayer. She further alleged that the target asked her to alter the financial statements for multiple entities to approximately triple the amount shown as invested in each entity, and to manufacture expenses to generate net losses for those entities. On February 23, 2018, the WBO mailed a letter acknowledging receipt of her claim, which was assigned whistleblower claim number 2018-005150. The letter acknowledging receipt of Ms. Estorge's claim was subsequently returned to the WBO on March 19, 2018.
The WBO conducted a whistleblower claim evaluation and subsequently prepared an award recommendation memorandum Upon review, the WBO determined to reject the whistleblower claim on the grounds that the allegations were "not specific, credible, or are speculative." The WBO further noted that the "[a]lleged amount in dispute is not greater than $2,000,000." On March 7, 2018, the WBO issued Ms. Estorge a Final Decision Under Section 7623(a), stating that her claim had been rejected "because the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws." The Final Decision Under Section 7623(a), dated March 7, 2018, was subsequently returned to the WBO as undeliverable.
If the whistleblower's information is too vague or speculative, the WBO issues a "rejection." See Li v. Commissioner, 22 F.4th 1014, 1016 (D.C. Cir. 2022) (citing Rogers v. Commissioner, 157 T.C. 20, 28 (2021)), cert denied, 143 S.Ct. 372 (Oct. 31, 2022). "[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." Rogers, 157 T.C. at 29; see also Treas. Reg. § 301.7623-3(c)(7) (defining "rejection"). In contrast, a "denial" is "a determination that relates to or implicates taxpayer information." Treas Reg. § 301.7623-3(c)(8). However, as to the issue of jurisdiction, the jurisdictional inquiry does not turn on whether the IRS labeled its determination a "rejection" or a "denial," see Shands v. Commissioner, 111 F.4th 1, 9 (D.C. Cir. 2024), aff'g 160 T.C. 388 (2023), but rather turns on whether the IRS proceeded with any administrative or judicial action, id. (citing Li v. Commissioner, 22 F.4th at 1017).
However, during the latter half of 2018 or the first half of 2019, the IRS subsequently initiated an examination of the target taxpayer. Ms. Estorge alleges that during the examination she spoke with the revenue agent and provided information that assisted the agent in the collection of proceeds. In early 2021, during the examination of the target taxpayer the IRS asserted preliminary adjustments of $267,768, comprising the deficiency, penalties, additions to tax, additional amounts, and interest, as reflected on Form 4549, Report of Income Tax Examination Changes. The IRS ultimately assessed and collected proceeds totaling $222,943.
The record is inconsistent about exactly when the IRS initiated the examination of the target taxpayer. In the First Amendment to Answer, respondent states that the IRS audited the target taxpayer around April 2019. However, during the Court's hearing on April 3, 2023, respondent stated that the IRS initiated the examination of the target taxpayer on June 19, 2018. Regardless of when the IRS initiated the examination of the target taxpayer, the record is clear that it occurred after Ms. Estorge filed her initial whistleblower claim. In any event, this discrepancy has no material impact on the resolution of this case.
Subsequently, the target taxpayer relayed to Ms. Estorge that the case settled for approximately $225,000. Thereafter, Ms. Estorge sent several letters to the WBO inquiring when her award would be dispersed; these letters, which included attached copies of her original Form 211 as well as other attachments, are dated February 1, 2021, March 19, 2021, April 15, 2021, May 17, 2021, July 8, 2021, August 21, 2021, and September 20, 2021. One such letter, dated July 8, 2021, with attached copy of the original Form 211, was treated as a new whistleblower claim, and the August 21, 2021, letter was treated as correspondence relating thereto.
Accordingly, on September 23, 2021, the WBO mailed Ms. Estorge a letter acknowledging receipt of a new claim, which was assigned the new whistleblower claim number 2021-015332. The WBO conducted a whistleblower claim evaluation and subsequently prepared an award recommendation memorandum. Upon review, the WBO determined to deny the claim, reasoning that there was no actionable issue. On October 20, 2021, the WBO issued the final determination under section 7623 that constitutes the basis for the present action. Therein, the WBO stated that "an award may be paid only if the information provided results in the collection of tax, penalties, interest, additions to tax, or additional amounts based on the information provided. In this case, the information you provided did not result in the collection of any proceeds." Accordingly, the WBO concluded that Ms. Estorge was "not eligible for an award."
II. Tax Court Proceedings
On November 6, 2021, Ms. Estorge timely filed a Petition with this Court. Respondent filed a Motion to Dismiss for Lack of Jurisdiction (Motion to Dismiss) on March 13, 2023, as supplemented by respondent's First Supplement to Motion to Dismiss for Lack of Jurisdiction (Motion to Dismiss, as Supplemented), filed March 22, 2024. Respondent's Motion to Dismiss was based on his representation that the IRS did not take any action regarding the target taxpayer, and as such, did not collect any proceeds. On March 13, 2023, Ms. Estorge filed an Objection to Motion to Dismiss for Lack of Jurisdiction. Therein Ms. Estorge disputed respondent's representations and alleged that the IRS examined the target taxpayer and collected proceeds as a result of the exam.
On April 3, 2023, the Court held a hearing on respondent's Motion to Dismiss. At the hearing, each party appeared and was heard. Ms. Estorge testified under oath. Respondent's counsel acknowledged that the IRS examined the target taxpayer and collected proceeds of approximately $250,000 but represented to the Court that the proceeds were not related to the information provided by Ms. Estorge. According to respondent, IRS transcripts show that the IRS examined the taxpayer because of an internal IRS metric-the Discriminatory Index Function (DIF) score-related to the taxpayer's 2016 taxable year, and that the audit was subsequently expanded to include the 2017 taxable year. Ms. Estorge insists that the exam was prompted by the information she provided to the WBO.
In the Court's June 14, 2024, Order, we explained that because respondent admitted that the IRS proceeded with an administrative action against the target taxpayer and collected proceeds, it is clear that the WBO made a determination regarding an award under section 7623(b)(1) when it determined that Ms. Estorge was not entitled to one. Accordingly, the Court denied respondent's Motion to Dismiss for Lack of Jurisdiction, as Supplemented. Additionally, the Court further noted that although respondent asserts that the proceeds in dispute in this case do not meet the $2 million threshold for a mandatory award under section 7623(b)(5)(B), the $2 million threshold set out in section 7623(b)(5)(B) is not jurisdictional, but rather must be raised as an affirmative defense. See Lippolis v. Commissioner, 143 T.C. 393, 397-400 (2014); see also Rogers, 157 T.C. at 27.
Thereafter, respondent sought to amend the Answer, filed March 4, 2022, to raise as an affirmative defense the $2 million threshold under section 7623(b)(5)(B). On August 30, 2024, respondent filed a Motion for Leave to File Out of Time First Amendment to Answer (Motion for Leave), and lodged therewith his First Amendment to Answer. Ms. Estorge filed an Objection to First Amendment to Answer, dated August 30, 2024. By Order dated October 22, 2024, the Court granted respondent's Motion for Leave and respondent's First Amendment to Answer was filed. On November 22, 2024, respondent filed the instant Motion for Summary Judgment. On November 25, 2024, Ms. Estorge filed an Objection to Motion for Summary Judgment.
Discussion
III. Summary Judgment Standard
Summary judgment serves to "expedite litigation and avoid unnecessary and expensive trials." Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). We may grant summary judgment when there is no genuine dispute of material fact, and a decision may be rendered as a matter of law. See Rule 121(a)(2); Sundstrand Corp., 98 T.C. at 520. In deciding whether to grant summary judgment, we construe factual materials and inferences drawn from them in the light most favorable to the nonmoving party. Sundstrand Corp., 98 T.C. at 520. The nonmoving party may not rest upon mere allegations nor denials in their pleadings and must set forth specific facts showing that there is a genuine dispute for trial. Rule 121(d); see also Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986).
But we have recognized in other whistleblower cases that the usual standard for summary judgment "is not generally apt" when reviewing whistleblower award determinations because, in such cases, there is no trial on the merits. Van Bemmelen v. Commissioner, 155 T.C. 64, 78 (2020). Rather, in a whistleblower case, where we review agency action under the Administrative Procedure Act, we generally "confine ourselves to the administrative record to decide whether there has been an abuse of discretion." Id. at 78.
Our Rules recognize this distinction, clarifying that in cases in which judicial review is based solely on the administrative record, Rule 121(a)(2) does not apply, and the parties must provide "statement[s] of facts with references to the administrative record." Rule 121(j). In this context, summary judgment serves as a mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record or whether the WBO's determination was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." Van Bemmelen, 155 T.C. at 72 (quoting Kasper v. Commissioner, 150 T.C. 8, 21 (2018)). In conducting this analysis, we do not substitute our judgment for that of the agency, but instead confine ourselves to ensuring that its determination was "within the bounds of reasoned decisionmaking." Id. (quoting Dep't of Com. v. New York, 139 S.Ct. 2551, 2569 (2019)). With respect to factual matters, this includes accepting the agency's determinations as long as they are not clearly erroneous. See Kasper, 150 T.C. at 23 (citing Fargo v. Commissioner, 447 F.3d 706, 709 (9th Cir. 2006), aff'g T.C. Memo. 2004-13).
The Commissioner argues that in determining whether the monetary threshold of section 7623(b)(5)(B) is met, we should apply the ordinary summary judgment standard rather than the standard we articulated in Van Bemmelen. However, because the outcome of the instant case would be the same under either standard, we need not address the Commissioner's argument. See McCrory v. Commissioner, T.C. Memo. 2024-61, at *5.
Although respondent asserts that the ordinary summary judgment standard remains apt, respondent also recognizes that the Court need not address this question to resolve the merits of the instant Motion for Summary Judgment.
IV. Jurisdiction
The Tax Court is a Court of limited jurisdiction and may exercise jurisdiction only to the extent authorized by Congress. See § 7442; see also, e.g., McCrory v. Commissioner, 156 T.C. 90, 93 (2021). In Li v. Commissioner, 22 F.4th at 1017, the U.S. Court of Appeals for the District of Columbia Circuit explained that the Court has jurisdiction under section 7623(b)(4) with respect to a "determination regarding an award." Pursuant to section 7623(b)(1), "an award determination by the IRS arises only when the IRS 'proceeds with any administrative or judicial action.'" Li v. Commissioner, 22 F.4th at 1017 (emphasis in original). Thereafter, in Whistleblower 972-17W v. Commissioner, 159 T.C. 1, 6-9 (2022), this Court held that the WBO has made an award determination regarding an award under section 7623(b)(1) when the WBO determines that a whistleblower is not entitled to an award even though the government proceeded with actions against the target taxpayer and collected proceeds.
Appeals of our decision in whistleblower cases ordinarily lie in the D.C. Circuit. See § 7482(b) (flush language). Therefore, in this case we generally follow all on-point precedents of the D.C. Circuit. See, e.g., Golsen v. Commissioner, 54 T.C. 742, 757 (1970), aff'd, 445 F.2d 985 (10th Cir. 1971).
Similarly, in Lissack v. Commissioner, 68 F.4th 1312, 1321 (D.C. Cir. 2023), aff'g 157 T.C 63 (2021), vacated and remanded on other grounds, 144 S.Ct. 2707 (July 2, 2024), the D.C. Circuit explained that this Court has jurisdiction over a whistleblower case if the IRS proceeds with an action related to the whistleblower's information, even if the WBO ultimately determines that the whistleblower is not entitled to an award. Further, in Villa-Arce v. Commissioner, 68 F.4th 1328 (D.C. Cir. 2023), the D.C. Circuit stated that this Court has jurisdiction over an appeal of "'[a]ny determination regarding an award under' section 7623(b)(1), (2), or (3)," including when the IRS collected proceeds even though it was not based on the information submitted by the whistleblower, id. at 1332 (citing § 7623(b)(4)).
The D.C. Circuit's opinion in Lissack has two parts relevant to this discussion. First, similar to the question presented in this case, the Court considered the issue of jurisdiction. See Lissack v. Commissioner, 68 F.4th at 1320-21. Second, the Court considered a challenge to the validity of a regulation proffered under section 7623 using the framework of Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). See Lissack v. Commissioner, 68 F.4th 1321-26. Following an unfavorable decision, the petitioner in that case filed a Petition for Writ of Certiorari with the Supreme Court. See Petition for Writ of Certiorari, Lissack v. Commissioner, 2023 WL 6940231 (No. 23-413). While the Petition for Writ of Certiorari in Lissack was pending, the Supreme Court issued an opinion in Loper Bright Enterprises v. Raimondo, 144 S.Ct. 2244 (2024), which overruled the Chevron framework the D.C. Circuit relied upon when considering the challenge to the validity of the subject regulation. Thereafter, the Supreme Court granted the Petition for Writ of Certiorari in Lissack, vacated the judgment of the D.C. Circuit, and remanded the case for further consideration in light of its opinion in Loper Bright Enterprises, 144 S.Ct. 2244. See Lissack v. Commissioner, 144 S.Ct. 2707, 2024 WL 3259664 (July 2, 2024) (Mem.). The law of the D.C. Circuit provides that "[w]hen the Supreme Court vacates a judgment of [the D.C. Circuit] without addressing the merits of a particular holding in the panel opinion, that holding 'continue[s] to have precedential weight, and in the absence of contrary authority, we do not disturb' it." United States v. Adewani, 467 F.3d 1340, 1342 (D.C. Cir. 2006) (citing Action All. of Senior Citizens of Greater Philadelphia v. Sullivan, 930 F.2d 77, 83 (D.C. Cir. 1991)). As applicable to this case, the Supreme Court vacated the judgment of the D.C. Circuit in Lissack and remanded the case for further consideration because the Supreme Court's opinion in Loper Bright Enterprises, 138 S.Ct. 2244, overruled the Chevron framework the D.C. Circuit relied upon to resolve the regulatory challenge. However, because the D.C. Circuit's resolution of the jurisdictional question in Lissack did not rely on Chevron, see Lissack v. Commissioner, 68 F.4th 1320-21, in the absence of any contrary authority we proceed with the understanding that the jurisdictional analysis in the D.C. Circuit's opinion in Lissack remains good law.
Moreover, the D.C. Circuit found in Lissack that the fact that the IRS conducted an examination was sufficient to distinguish that case from Li. See Lissack v. Commissioner, 68 F.4th at 1320-21. As we indicated in our June 14, 2024, Order, that principle applies here.
As we explained in our June 14, 2024, Order, respondent acknowledged that the IRS initiated an examination against and collected proceeds from the target taxpayer. For purposes of section 7623(b)(4), it is clear that the WBO made a determination regarding an award under section 7623(b)(1) when it determined that Ms. Estorge was not entitled to one. See Whistleblower 972-17W, 159 T.C. at 5. As we stated in our June 14, 2024, Order, we have jurisdiction over an appeal of that determination.
As previously explained, supra p. 4, the parties dispute whether the IRS proceeded based on its own internal metrics or the information submitted in Ms. Estorge's whistleblower claim. Whether the IRS proceeded based on the information provided by Ms. Estorge is a question reserved for the merits, and it is one that we do not need to reach to dispose of the instant case. See Lissack v. Commissioner, 68 F.4th at 1321, vacated and remanded on other grounds, 144 S.Ct. 2707; Li v. Commissioner, 22 F.4th at 1017 n.2.
V. Analysis
A. Applicable Law
Section 7623 provides for awards to individuals who submit information to the government about third parties who have underpaid their taxes or otherwise violated the internal revenue laws. Section 7623(a) authorizes discretionary payments in certain circumstances, while section 7623(b) provides for nondiscretionary (i.e., mandatory) awards. This Court may review mandatory award determinations under section 7623(b), see § 7623(b)(4), but we may not review discretionary awards under section 7623(a), see McCrory, T.C. Memo. 2024-61, at *5 (citing § 7623(b)(4) and (5)).
In the Objection to Motion for Summary Judgment, Ms. Estorge asks the Court to consider various factors when determining whether an award is due under the discretionary award provisions of section 7623(a). But the Court cannot grant the relief Ms. Estorge seeks because we lack jurisdiction to review discretionary awards under section 7623(a). See, e.g., McCrory v. Commissioner, T.C. Memo. 2023-98, at *2.
For a whistleblower to receive an award under section 7623(b), at least two conditions must be satisfied. First, the IRS must "proceed[] with any administrative or judicial action" against a target taxpayer. § 7623(b)(1); see also Li v. Commissioner, 22 F.4th at 1016. Second, the monetary thresholds of section 7623(b)(5) must be met. 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). Respondent's Motion for Summary Judgment addresses the latter requirement and asserts that there is no dispute that the $2 million threshold set forth in section 7623(b)(5)(B) has not been met. As this Court observed in Lippolis, "[a]n affirmative defense [like section 7623(b)(5)(B)] is an 'assertion of facts and arguments that, if true, will defeat the . . . [cause of action], even if all the allegations in the complaint are true.'" Lippolis, 143 T.C. at 398 (quoting Affirmative Defense, Black's Law Dictionary (9th ed. 2009)). The Commissioner bears the burden of proof with respect to any defense raised in the Answer. See Rule 142(a)(1); Lippolis, 143 T.C. at 400.
For purposes of section 7623-including the monetary threshold of section 7623(b)(5)(B)-"proceeds" include:
(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-
(A) criminal fines and civil forfeitures, and
(B) violations of reporting requirements.See § 7623(c). Treasury Regulation § 301.7623-2(e)(2)(i) considers the amount in dispute as "the greater of the maximum total of tax, penalties, interest, additions to tax, and additional amounts that resulted from the action(s) with which the IRS proceeded based on the information provided, or the maximum total of such amounts that were stated in formal positions taken by the IRS in the action(s)." See also Smith, 148 T.C. at 461-62.
B. The Proceeds in Dispute
The record in this case clearly shows that the proceeds in dispute do not meet the $2 million threshold for a mandatory award under section 7623(b). On Form 211, Ms. Estorge alleged that the target taxpayer asked her to change the financial statements for multiple entities to approximately triple the amount shown as invested in each entity, and to manufacture expenses to generate net losses for those entities. During the examination of the target taxpayer, respondent prepared Form 4549 showing an amount in dispute (comprising the deficiency, penalties and additions, and interest) of $267,768 for taxable years 2016 and 2017. Respondent subsequently assessed and collected $222,943 from the target taxpayer for taxable years 2016 and 2017. During the audit the greatest amount that the IRS asserted against the target taxpayer was $267,768, as reflected on the Form 4549. Indeed, Ms. Estorge recognized this fact as true, stating in the Objection that "the amounts received from the taxpayer fall under the $2 million threshold for a mandatory award."
In her Petition, Ms. Estorge stated that the target "eventually settled with the IRS for approximately $225,000 in unpaid taxes, interest, and penalties."
Nonetheless, Ms. Estorge asserts in the Objection that her whistleblower claim "contained all available financial information showing that the [target taxpayer] . . . had defrauded the IRS in amounts greater than [the] $2 million threshold (including taxes, interest, penalties, and fees)." But the term "proceeds in dispute" does not refer simply to the amount the whistleblower alleges might have been underpaid (inclusive of penalties, interest, additions to tax and additional amounts). Rather, the proceeds must actually be disputed in the IRS action against a target taxpayer. See § 7623(b)(5) (providing that subsection (b) applies with respect to "any action ... against any taxpayer" in which, in relevant part, the proceeds in dispute exceed $2 million (emphasis added)); see also Smith, 148 T.C. at 461-63; McCrory, T.C. Memo. 2024-61, at *8. The allegations made by Ms. Estorge are not sufficient to meet the $2 million threshold.
The record establishes that the IRS proceeded against the target (in the greatest amount) for $267,768. See Treas. Reg. § 301.7623-2(e)(2)(i). Because the proceeds in dispute fall well short of the $2 million threshold, the requirement of section 7623(b)(5)(B) is not met.
VI. Conclusion
In summary, we conclude that the proceeds in dispute in this case do not meet the $2 million threshold under section 7623(b)(5)(B). Because this threshold requirement of section 7623(b)(5) is not met, the mandatory award provisions under section 7623(b) do not apply with respect to Ms. Estorge's claim. Accordingly, respondent is entitled to summary judgment as a matter of law, and we will grant respondent's Motion for Summary Judgment.
We have considered all arguments made by the parties and, to the extent they are not addressed herein, we find them to be moot, irrelevant, or without merit.
Upon due consideration, it is
ORDERED that respondent's Motion for Summary Judgment (Doc. 58), filed November 22, 2024, is granted. It is further
ORDERED that Ms. Estorge's Motion to Complete or Supplement the Administrative Record (Doc. 38), filed February 16, 2024, is denied as moot. It is further
ORDERED AND DECIDED that respondent's final award determination under section 7623(a), dated October 20, 2021, is sustained in that it is subject to no further review by this Court.