Opinion
12649-16W
08-14-2024
JOHN R. DEE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Diana L. Leyden, Special Trial Judge
On May 27, 2016, petitioner timely filed a Petition with the Court for review pursuant to section 7623(b)(4) of an adverse determination of the Internal Revenue Service (IRS) Whistleblower Office (WBO) regarding his claim for an award under section 7623(b). His claim and Petition sought an award in connection with one taxpayer, Taxpayer. After substantial development of the case, the Court granted respondent's Motion to Complete the Administrative Record filed December 4, 2023, over the objection of petitioner. Respondent moved to seal the administrative record along with the Declaration and Certificate of Authenticity of Domestic Business Records, filed with his Motion to Complete the Administrative Record, which the Court granted.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times, regulation 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.
Respondent filed a Motion for Summary Judgment (motion) on February 20, 2024. The Court directed petitioner to respond and extended the time to file a response to May 31, 2024. Petitioner filed an Objection to Respondent's Motion for Summary Judgment on April 21, 2024. Upon review of petitioner's objection, the Court by Order served May 2, 2024, directed petitioner to file a supplement to his objection to address what appeared to the Court as an assertion by petitioner that the administrative record should be supplemented. Petitioner filed a supplement to petitioner's objection to motion for summary judgment on May 31, 2024. However, petitioner violated Rule 345(b) by including in both his objection and supplement Taxpayer's unredacted name. Accordingly, the Court on its own motion sealed both filings from public view by Order served May 31, 2024.
For reasons set forth below, the Court denies respondent's Motion for Summary Judgment and will order a remand.
Background
I. Petitioner's WBO Submission
Petitioner submitted a Form 211, Application for Award for Original Information, dated February 8, 2010, which included Supplemental Statements Supporting Form 211 (Form 211). On February 19, 2010, the Internal Revenue Service Whistleblower Office (WBO) received petitioner's Form 211 [Bates 000116- 000122]. Petitioner alleged in the Form 211 that a Taxpayer, a publicly traded company in which petitioner owned, directly or indirectly, shares (1) had failed to pay federal income taxes on gift card revenues [Bates 000118-000120], (2) had accounted for capital improvements "which fall outside industry norms," [Bates 000121] and that expenses incurred for remodeling, enhancements, and asset replacements should have been capitalized [Bates 000318] and (3) that "[there was a] potential exposure . . . for [Taxpayer] relating to its accounting for FICA Tip Credits." [Bates 000122]
The Bates numbers referenced are those reflected in the Administrative Record filed in this case at Index #68 and #69. These filings have been sealed.
Form 211 Question 15 states: "Describe how you learned about and/or obtained the information that supports this claim and describe your present or former relationship to the alleged noncompliant taxpayer(s)?" Petitioner stated in response: "Informant is employed by . . . a registered investment Advisor and owns, directly or indirectly, shares of [Taxpayer] and or has reviewed financial information relating to the company in the ordinary course of due diligence of client accounts. Certain abnormalities were discovered during such review. Informant is also a tax expert and 'industry insider' with specific industry experience and knowledge of tax matters relating to the [Taxpayer's] business."
Petitioner attached to the Form 211 (1) a purported footnote to the Taxpayer's financial statement, (2) Revenue Proc. 2004-34, (3) a blank IRS Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips, with instructions, and (4) information about Taxpayer [Bates 000125-000153].
Two employees of the WBO conducted a recorded telephone interview of petitioner on June 29, 2010, after the Form 211 was filed [Bates 000195]. After the interview one of the employees prepared a memorandum recommending that the case be forwarded to the field for further development [Bates 000195]. On August 3, 2010, an IRS Large and Mid-Size Business (LMSB) industry director decided that petitioner's claim should be further investigated and forwarded it to an IRS field audit team [Bates 000202-000205].
II. Taxpayer Exam Activity
Taxpayer filed a Form 3115, Application for Change of Accounting Method, and attachments signed by Taxpayer's vice president on September 9, 2010, under Revenue Procedure (Rev. Proc.) 2009-39 [Bates 000359]. Taxpayer checked the box in the Form 3115 titled "Depreciation or Amortization" as the reason for requesting a change in accounting method. In the attachments to the Form 3115, Taxpayer indicated that it was making a change in its method of accounting:
• "[F]or the taxable year [2008] to deduct bonus payments in the taxable year in which a fixed liability exists, the amount is determined with reasonable accuracy and economic performance has occurred." [Bates 000368]
• "[T]o deduct certain prepaid expenses under Treas. Reg. § 1.263(a)-4(f)" for taxable year 2010. [Bates 000368]
• "[F]or smallwares to the 'Smallwares Method' as described in Rev. Proc. 2002-12" for taxable year 2010. [Bates 000368]
• "[D]ue to the misclassification of certain depreciable assets resulting in less than the allowable amount of depreciation being claimed" for taxable years 2002 through 2008 [Bates 000368].
• For repairs and maintenance for taxable year 2010 [Bates 000385].
The Form 3115 and attachments did not reference capitalization of repairs. [Bates 000368-000436]
An examination team was assigned on October 21, 2010, to examine Taxpayer's 2008 and 2009 returns [Bates 000306] after petitioner's claim had been forwarded to LMSB and after Taxpayer had filed a change in accounting method [Bates 00238, 000319].
Throughout the examination the examiner issued 22 information document requests (IDRs), which included IDRs for Mandatory Tax Shelter, Form W-2s, Form 1099s, Cost Segregation Study, M-3 Stock Option, Employee Lawsuit, Repairs and Maintenance (and improper capitalization of related assets), and Smallwares [Bates 000320; Bates 000473-000488]. The examiner did not issue an IDR with respect to the gift cards and breakage and FICA Tip Credit issues raised by petitioner, but did inquire about those issues [Bates 000320]. As explained in the Supplemental Award Recommendation Memorandum, after the examiner conducted an initial interview with Taxpayer and considered the issue with respect to the gift card and breakage issue identified by petitioner, the examiner concluded that Taxpayer was substantially accounting for the issue and that did not propose any adjustment [Bates 000321].
With respect to the FICA Tip Credit issue identified by petitioner, the examiner also inquired of Taxpayer as to that issue. Taxpayer provided calculations for the 2008 tip credit and after reviewing such the examiner concluded that Taxpayer had followed the requirements for reporting the FICA Tip Credit and that the report was substantially correct [Bates 000321].
The examiner did not make any adjustments to Taxpayer's 2008 return. As a result of the examination of Taxpayer's 2009 return, however, the examiner made three adjustments: (1) an Involuntary Change in Accounting Method that was required as a result of Taxpayer's filing Form 3115 requesting a change in accounting method for the loss disposition of section 1250 assets [Bates 000322; Bates 000135- 000140]; (2) a section 481(a) adjustment to treat previously capitalized repair and maintenance expenses as deductible under for section 162 which was the result of the examiner's acceptance of a proposal for resolution submitted by the Taxpayer's representatives that $76,274 previously reported as deductible repairs instead should be capitalized; and (3) reduced deduction for repairs and maintenance expenses [Bates 000322-000325, 000500]. There is not anything in the record that identifies whether respondent considered these capitalized deductions and repairs to be "outside industry norms" as indicated in petitioner's Form 211 [Bates 000121]. Nor is there anything in the record that identifies whether the reduced deduction for repairs and maintenance expenses included items that should have been capitalized. And there is not any evidence whether Taxpayer's proposal was the result of or related to petitioner's claim. As a result of these adjustments petitioner's net operating loss for 2009 was reduced and the carryback of the net operating loss to prior years 2005 and 2006 were adjusted [Bates 000322]. After the carryback there was not any additional tax due for 2005, but there was additional tax of $132,204 due in 2006 [Bates 000009].
III. Initial Confidential Evaluation Report
A revenue agent, who was involved with the examination of Taxpayer, prepared, and on September 22, 2011, signed a Form 11369, Confidential Evaluation Report on Claim for Award, with respect to the Form 211 as to Taxpayer [Bates 000215, 000217]. On the Form 11369 box 11.A, "Did the Service use the information the Whistleblower provided to develop specific document requests or other inquiries to the taxpayer," was checked "yes." The revenue agent further indicated on the Form 11369 in response to a question to describe the whistleblower's contribution to the identification of issues to be examined or investigated: "The whistleblower identified a non-compliant taxpayer(s). The issues are common to this type of taxpayer(s), and were developed using a standard audit or investigation approach." [Bates 00215]. In an attachment to the Form 11369, the revenue agent wrote:
"[t]he results from an audit examination [of the Taxpayer] for tax years 2008 and 2009, did not provide an audit assessment for [the] same three issues [identified by petitioner]. . . . The [Taxpayer] will be issued an audit assessment for a Service imposed Change in Accounting Method for dispositions of 1250 property. The [Taxpayer] will also be issued an audit adjustment to their Section 481(a) deduction regarding the
Change in Accounting Method for their Capital to Repair issue." [Bates 000218]
IV. Final Determination
The WBO issued a Final Determination letter dated April 25, 2016, regarding petitioner's claim number 2010-003011 with respect to [Taxpayer]. This followed a Preliminary Denial Letter, dated March 16, 2016, [Bates 000264] in which the WBO indicated to petitioner its decision to deny his claim to which petitioner did not respond [Bates 000262].
In the Final Determination letter the WBO informed petitioner that the claim was being denied, stating:
The IRS reviewed the information you provided as part of an examination of the [Taxpayer]. However, that review did not result in the assessment of additional tax, penalties, interest or other amounts with respect to the issues you raised.
V. Remand to WBO
On July 10, 2020, respondent filed with the Court a Motion to Remand the case to the WBO for further consideration of whether the information that petitioner provided in his claim influenced the IRS's examination of the [Taxpayer] [Bates 000305]. The Court by Order dated November 16, 2020, remanded the case to the WBO for additional investigation, directed the WBO to issue its supplemental determination by May 17, 2021, and directed the parties to file by June 17, 2021, the supplemental determination with the Court along with the administrative record before the remand and documents added to the administrative record after the remand. The Court further ordered the WBO to certify that the administrative record so filed was the whole administrative file [Bates 000310].
An IRS attorney with the IRS Large Business & International (LB&I) Division wrote a memo to Lev Glikman, WBO Senior Tax Analyst, on January 20, 2021, regarding the remand ordered by the Court. Specifically when discussing the basis for the remand the attorney identified significant litigation hazards. The attorney prepared a memorandum that articulated the hazards as follows: [Bates 000305- 000309]
[I]n preparing this case for trial, we have uncovered significant litigation hazards. Specifically, there are inconsistencies and/or omissions within the administrative claim file that could cause the Court to deem the administrative record incomplete or unreliable. Counsel consulted with WO Analyst Glikman regarding these hazards, and he agreed that remand of the case to the WO for further consideration is appropriate. Counsel filed a Motion to Remand the case so that the WO may consider and address generally: 1) the extent to which the information supplied by petitioner framed the document requests issued by respondent; and
2) the facts and circumstances giving rise to the examination against the taxpayer vis-&-vis the timing of petitioner's claim.
The following are the inconsistencies in the existing administrative claim file that require further review and clarification by the WO:
• Timing of the start of the audit: The ARM and the Form 11369 are inconsistent regarding whether the taxpayer's audit was planned prior to receipt of the petitioner's claim.
Per the ARM, the audit had been planned but not started prior to the receipt of the claim because the taxpayer had filed a Form 3115 and because of very large net operating losses. The ARM, as well as the LMSB examination plan, indicate that the audit began in October 2010. The administrative claim file does not include a copy of the Form 3115.
However, the Form 11369 prepared by [the revenue agent] indicates that there was no audit or investigation of the taxpayer planned but not started for either of the years identified by petitioner or other tax years.
• Year of Adjustments: The Form 4549, Report of Income Tax Examination Changes, and Form 886-A, Explanation of Items, indicate that the adjustments were made to the 2009 tax year, but the ARM discusses adjustments being made to the 2010 tax year.
• Whistleblower Issues Incorporated into Audit: The ARM states that "some of the [whistleblower] issues have been incorporated into the audit." However, the ARM does not identify which whistleblower issues were incorporated into the audit nor the disposition of those issues.
• Depth of Contribution by Petitioner: In this case, the WO denied an award because the adjustments were not attributable to petitioner's information, meaning that the IRS did not proceed based on the petitioner's information. However, the administrative claim file indicates that the petitioner's information was used by the LMSB examination team. The Form 11369 prepared by Revenue Agent Ronald Schoenbaum indicates that there was no audit or investigation planned for other tax years prior to the receipt of the petitioner's claim. It also indicates that the petitioner identified a non-compliant taxpayer (but that the issues were common to this type of taxpayer and were developed using a standard audit or investigation approach). Most importantly, the Form 11369 indicates that the LMSB examination team used the information provided by petitioner to develop specific Information Document Requests ("IDRs") or other inquiries to the taxpayer. However, WO Analyst Glikman did not review copies of the IDRs to see how the
information was used. Further factual development is needed to support a determination as to whether the IRS proceeded based on the petitioner's information. See Treas. Reg. § 301.7623-2(b)(1). This would include analysis as to whether petitioner's information substantially contributed to an IRS action. Id.; see also 79 FR 7246, 47251, 2014-36 I.R.B. 486 ("if a whistleblower's information contributes to the IRS's use of these techniques and tools, for example, the issuance of a summons or IDR, and these intermediate steps result in an administrative action, as defined in the regulations, then the IRS will determine whether it proceeded with that resulting administrative action based on the information.")
• Alternative Argument Problem: As an alternative to the primary reason for denial of the claim (that the IRS did not proceed based on the petitioner's information), the ARM also stated that "Treasury Regulations and [Internal Revenue Manual] prior to August 2015 did not provide for attribution to a [whistleblower's] information." The WO issued its determination on April 25, 2016. At that time, Treas. Reg. § 301.7623-2(d)(5)(ii) required the WO to monitor the relevant taxpayer account until the IRS receives collected proceeds as a result of a reduction in the tax attribute or the taxpayer's ability to apply the tax attribute expires unused. This regulation was applicable to petitioner's claim, which was open as of August 12, 2014. Treas. Reg. § 301.7623-2(f).
VII. Supplemental Award Recommendation Memorandum and Supplemental Denial Letters
The WBO in its Supplemental Award Recommendation Memorandum corrected the dates stated in the initial Award Recommendation Memorandum regarding the examination of Taxpayer. In the Supplemental Award Recommendation Memorandum the WBO states that the examination of Taxpayer's 2008 return was selected for audit on October 8, 2009, and the examination of Taxpayer's 2009 return was selected for examination on September 23, 2010, because the returns were identified as "involved with a tax shelter and any returns related to the filing [by Taxpayer] of a Form 3115." [Bates 000320] Further, it states that petitioner's claim was sent to the examination field office on August 3, 2010. Other years were not chosen for examination [Bates 000014, 000320].
After the remand of the case to the WBO it issued to petitioner a Supplemental Preliminary Denial Letter dated June 2, 2021. The letter informed petitioner that the WBO had reviewed the information petitioner provided and initiated an examination of Taxpayer, and the review determined that the additional tax, penalties, and interest that was assessed based on the examination was not due to petitioner's information and not relevant to the issues that generated the assessment [Bates 000329]. This letter, however, was returned to the WBO as undeliverable. The WBO sent the same letter but dated June 29, 2021, to petitioner at another address [Bates 000337]. Petitioner responded to this copy of the letter in writing by a letter dated August 19, 2021, and stated he objected to the Supplemental Preliminary Denial Letter for reasons set forth in his letter.
The WBO sent a Supplemental Final Denial letter, but the copy of the letter in the administrative file is not dated. It references receiving petitioner's objection to the Supplemental Preliminary Denial Letter. The Supplemental Final Denial stated as the reason for the denial of petitioner's claim that "[t]he information you provided didn't result in the collection of any proceeds," and "[w]e reviewed the information you provided and initiated an examination of the [Taxpayer]. However, our review didn't result in an assessment with respect to the issues you raised." [Bates 000343]
VIII. Timeline of Events
| Event | Date |
| Examination of Taxpayer's 2008 return selected for audit | 10/08/2009 |
| Petitioner submitted Form 211 | 02/08/2010 |
| IRS received petitioner's Form 211 | 02/19/2010 |
| WBO phone interview with petitioner | 06/29/2010 |
| WBO forwarded petitioner's claim to LMSB | Undated letter |
| LMSB industry director forwarded petitioner's claim to IRS field audit team | 08/03/2010 |
| Taxpayer filed a Form 3115, Change in Accounting Method (for TYs 2002-2008, and 2010) | 09/09/2010 |
| Taxpayer's 2009 return selected for examination | 09/23/2010 |
| An examination team was assigned to examine Taxpayer's 2008 and 2009 returns | 10/21/2010 |
| IDRs sent to Taxpayer | 11/02/2010 through 08/04/2011 |
| Form 11369, Confidential Evaluation Report on Claim for Award | 09/22/2011 |
| Forms 5701, Notices of Proposed Adjustment | 09/30/2011, 10/19/2011 and 10/28/2011 |
| Preliminary Denial Letter | 03/08/2016 |
| Final Determination letter | 04/25/2016 |
| Case remanded to WBO | 11/17/2020 |
| Memo from IRS LB&I attorney re supplemental determination | 01/20/2021 |
| Supplemental Preliminary Denial Letter | 06/29/2021 |
| Supplemental Final Denial letter and Supplemental Award Recommendation Memorandum | 11/03/2021 |
Discussion
I. Summary Judgment Standard
The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Fla. Peach Corp. v Commissioner, 90 T.C. 678, 681 (1988). The Court may grant summary judgment when there is not any genuine dispute as to any material fact and a decision may be rendered as a matter of law. Rule 121(a)(2); Sundstrand Corp. v. Commissioner, 98 T.C. 518,520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
The summary judgment standard provided in Rule 121 has a slightly different application when reviewing whistleblower award determinations because "we must confine ourselves to the administrative record to decide whether there has been an abuse of discretion." Van Bemmelen v. Commissioner, 155 T.C. 64,78 (2020); see also Rule 121(j). Rather, in a so-called record rule whistleblower case, "summary judgment serves as a mechanism for deciding, as a matter of law, whether the [WBO's] action is supported by the administrative record and is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." Van Bemmelen, 155 T.C. at 79.
II. Supplementation of the Administrative Record
In a whistleblower case our review is generally confined to the administrative record. However, a party may move to supplement the administrative record in one of two ways: "either by (1) including evidence that should have been properly a part of the administrative record but was excluded by the agency"-so-called omitted evidence-"or (2) adding extrajudicial evidence that was not before the agency but the party believes should nonetheless be included in the administrative record." Van Bemmelen v. Commissioner, 155 T.C. 64, 73 (2020) (quoting Animal Legal Def. Fund v. Vilsack, 110 F.Supp.3d 157, 160 (D.D.C. 2015)).
Speaking to the former category, we observed that, "[a]bsent a substantial showing made with clear evidence to the contrary, [the WBO] is presumed to have properly designated the administrative record" and that a party seeking supplementation must put forth "concrete evidence that the documents [he] seeks to 'add' to the record were actually before the [WBO]." Van Bemmelen, 155 T.C. at 73- 75; see Animal Legal Def. Fund, 110 F.Supp.3d at 160 ("Plaintiffs must offer 'reasonable, non-speculative' grounds for their belief that the documents were directly or indirectly considered by the agency." (quoting Banner Health v. Sebelius, 945 F.Supp.2d 1, 17 (D.D.C. 2013)); see also Oceana Inc. v. Ross, 290 F.Supp.3d 73, 79-82 (2018) (explaining that the mere availability or mere mention of a document by the agency is insufficient, on its own, to show that the agency actually considered said document).
Regarding the latter category, we also indicated that, while consideration of extrarecord evidence may sometimes be appropriate, "this 'is the exception, not the rule.'" Van Bemmelen, 155 T.C. at 76 (quoting Theodore Roosevelt Conservation P'ship v. Salazar, 616 F.3d 497, 514 (D.C. Cir. 2010)). We clarified that such supplementation is limited to three narrow circumstances: (1) if the agency "deliberately or negligently excluded documents that may have been adverse to its decision," (2) if background information was needed "to determine whether the agency considered all the relevant factors," or (3) if the "agency failed to explain administrative action so as to frustrate judicial review[.]" Van Bemmelen, 155 T.C. at 76 (quoting City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 2008))
From what the Court can discern in petitioner's supplement to his response to respondent's motion for summary judgment petitioner is requesting that a portion of Taxpayer's 2011 Form 10-K filed with the Securities and Exchange Commission (SEC) be added as extrarecord evidence. Specifically, petitioner notes that in that form there is reference to the IRS commencing an employment tax audit of Taxpayer for 2009 and 2010." The Court agrees that such information is useful background information to assist the Court in determining whether the WBO considered all relevant factors with respect to whether petitioner's information regarding the FICA Tax Credit was used to open an examination of Taxpayer's employment tax return. The administrative file indicates that the IRS did not examine Taxpayer's income tax returns for 2009 as to petitioner's claim that Taxpayer overreported its FICA Tip Credit, but does not address if a related examination of Taxpayer's employment tax returns may have been conducted, and if so, whether that examination relied upon petitioner's claim. Therefore, the Court agrees that the administrative record should be supplemented to include the Taxpayer's 2011 Form 10-K filed with the SEC and to include documents that relate to the IRS' examination of Taxpayer's 2009 and 2010 employment tax audit.
III. Scope and Standard of Review
The Court is a court of limited jurisdiction and may exercise jurisdiction only to the extent authorized by Congress. Kasper v. Commissioner, 137 T.C. 37, 40 (2011); Judge v. Commissioner, 88 T.C. 1175, 1180-81 (1987); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). Section 7623(b)(4) confers on the Court jurisdiction over any appeal of a determination that a whistleblower is entitled to an award under section 7623(b)(1). Whistleblower 972-17W v. Commissioner, 159 T.C. 1, 5-6 (2022). In addition, "a determination that no award is warranted even though the IRS proceeded with an action and collected proceeds in that action is still a determination regarding an award." Id. at 8 (quoting I.R.C. § 7623(b)(4)).
Our scope of review of whistleblower award determinations is properly limited to the administrative record, and the applicable standard of review is for abuse of discretion. Kasper v. Commissioner, 150 T.C. 8,20,22 (2018); see Whistleblower 769-16W v. Commissioner, 152 T.C. 172, 177 (2019). Further, in reviewing whistleblower award determinations, we follow the Chenery doctrine so as to judge the propriety of the WBO's determination solely on the grounds it actually relied on in making its determination. See Kasper, 150 T.C. at 23-24; see also SEC v. Chenery Corp., 332 U.S. 194, 196 (1947); SEC v. Chenery Corp., 318 U.S. 80, 93-94 (1943).
Consequently, in reviewing a whistleblower award determination for abuse of discretion, the Court does not substitute its judgment for the WBO's, but rather decide "whether the agency's decision was 'based on an erroneous view of the law or a clearly erroneous assessment of the facts.'" Kasper, 150 T.C. at 23 (quoting from Fargo v. Commissioner, 447 F.3d 706, 709 (9th Cir. 2006), aff'g T.C. Memo. 2004-13.
If the record before the agency does not support the agency action, if the agency has not considered all relevant factors, or if the reviewing court simply cannot evaluate the challenged agency action on the basis of the record before it, the proper course, except in rare circumstances, is to remand to the agency for additional investigation or explanation. Whistleblower 769-16W, 152 T.C. at 178 (quoting Fla. Power & Light Co. v. Lorion, 470 U.S. 728, 744 (1985)).
IV. Analysis
Section 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. Section 7623(a) authorizes discretionary payments in certain circumstances, while section 7623(b) provides for nondiscretionary (i.e., mandatory) awards.
A. Mandatory Awards
Under section 7623(b)(1), a whistleblower generally is entitled to a mandatory award if the Secretary of the Treasury proceeds with an administrative or judicial action based on information provided by the whistleblower and collects proceeds as a result of the action. The amount of the award generally is between 15% and 30% of the collected proceeds, depending on the extent to which the whistleblower substantially contributed to the action. I.R.C. § 7623(b)(1).
I.R.C. § 7623(b)(1). In general.-If the Secretary proceeds with any administrative or judicial action described in subsection (a) based on information brought to the Secretary's attention by an individual, such individual shall, subject to paragraph (2), receive as an award at least 15 percent but not more than 30 percent of the proceeds collected as a result of the action (including any related actions) or from any settlement in response to such action (determined without regard to whether such proceeds are available to the Secretary). The determination of the amount of such award by the Whistleblower Office shall depend upon the extent to which the individual substantially contributed to such action.
Regulations under section 7623 provide guidance in interpreting the statutory standard. As relevant here, the regulations define an "administrative action" as "all or a portion of an [IRS] civil or criminal proceeding against any person that may result in collected proceeds . . . including, for example, an examination, a collection proceeding, a status determination proceeding, or a criminal investigation." Treas. Reg. § 301.7623-2(a)(2) (emphasis added). Similarly, a "judicial action" means "all or a portion of a proceeding against any person in any court that may result in collected proceeds." Id. subpara. (3). The regulations further state that the IRS proceeds based on a whistleblower's information when the information provided substantially contributes to an action against a person identified by the whistleblower. For example, the IRS proceeds based on the information provided when the IRS initiates a new action, expands the scope of an ongoing action, or continues to pursue an ongoing action, that the IRS would not have initiated, expanded the scope of, or continued to pursue, but for the information provided. The IRS does not proceed based on information when the IRS analyzes the information provided or investigates a matter raised by the information provided. Id. para. (b)(1).
For a whistleblower to be entitled to an award, the whistleblower's information must substantially contribute to the portion of an examination that results in the collection of proceeds. See id.; see also Treas. Reg. § 301.7623-2(b)(2) (examples 2 and 3). Whistleblower 972-17W v. Commissioner, T.C. Memo. 2023-152, at *14.
In this case petitioner filed his claim prior to Taxpayer filing the change in accounting method and prior to the case being submitted to an IRS examination team. Further, some of the IDRs addressed issues that petitioner raised in his claim. The Supplemental Award Recommendation Memorandum and Supplemental Final Denial letter do not adequately address these facts or resolve the ambiguities identified by the IRS attorney during the initial remand. For example, the WBO's contention that the adjustments resulted solely from Taxpayer's filed change in accounting method stands in tension with the timing of petitioner's claim submission. Further, certain audit adjustments to Taxpayer's 2009 tax return were unrelated to the filed change in accounting method. Accordingly, the record does not suggest that the filed change in accounting method was the sole reason for all audit adjustments made with respect to Taxpayer's 2009 return.
B. Petitioner's Claim Regarding Taxpayer's Accounting for FICA Tips
Because the Court has determined that extrarecord information regarding s subsequent employment tax audit by the IRS should be included in the administrative record, the Court remands the case to the WBO for a determination as to whether petitioner's information regarding Taxpayer's accounting for FICA tips substantially contributed to the subsequent audit of Taxpayer's employment tax returns and if so, whether proceeds were collected and in what amounts that were attributable to petitioner's information.
C. Capitalization of Repairs
Based on the administrative record as filed the Court concludes that the WBO has not determined whether petitioner's claim that Taxpayer had capitalized expenses incurred for remodeling, enhancements, and asset replacements substantially contribute to an adjustment to Taxpayer's 2009 tax return to reduce depreciation claimed for repairs.
The administrative record shows that the LMSB audit team agreed with a proposal by Taxpayer that resulted in a decrease in claimed deductions for repairs for 2009 in the amount of $76,274. This adjustment was proposed after audit team had reviewed and considered petitioner's claim that Taxpayer was overstating deductions for repairs. The Court recognizes that the other larger adjustments related to a change in accounting method do not appear to relate to deductions for repairs, but rather for items Taxpayer identified in a request for change of accounting method. The administrative record, however, does not explain how the decrease in claimed deductions for repairs were the result of Taxpayer's Form 3115 request for change in accounting method. That form, which is included in the administrative record, states that the reason stated in the Form 3115 to request a change in accounting method was because Taxpayer had misclassified certain depreciable assets in less than the allowable amount of depreciation for years 2002 through 2008. The Form 3115 does not reference a change in accounting method to change how repairs were accounted for.
Therefore, it does not follow that the change in accounting method, as opposed to petitioner's claim, was the reason for the acceptance of a proposal by Taxpayer with respect to $76,274 of previously claimed deductions for repairs. Further, the WBO has acknowledged that some of the IDRs issued with respect to the examination of Taxpayer's 2009 tax return were based on petitioner's claims. Accordingly, the WBO must explain in more detail whether petitioner's information and claim that certain remodel, enhancement, and asset replacements did not substantially contribute to this agreed to adjustment.
V. Conclusion
The Court will grant petitioner's request that the extrarecord evidence discussed above be added to the administrative record. Further, the Court will remand the case back to the WBO to (1) explain why petitioner's claim did not substantially contribute to the adjustment of $76,274, regarding the reduced deduction for certain repairs is not substantially; (2) whether Taxpayer's employment tax was examined for 2009 and 2010, if proceeds were collected with respect to any such examination, and if so, whether the examination and collection of proceeds were substantially based on petitioner's claim regarding Taxpayer's FICA Tip Credit; and (3) issue a second supplemental determination.
Upon due consideration and for cause, it is
ORDERED that respondent's Motion for Summary Judgment, filed February 20, 2024, is denied. It is further
ORDERED that petitioner's request that the extrarecord evidence be added to the administrative record discussed above and in his Second Supplement to Objection to Motion for Summary Judgment, filed May 31, 2024, is granted. It is further
ORDERED that, on the Court's own motion this case is remanded to the WBO for further consideration of petitioner's claim to (1) explain whether petitioner's claim substantially contributed to the adjustment of $76,274, regarding the reduced deduction for certain repairs; and (2) whether Taxpayer's employment tax was examined for 2009 and 2010, if proceeds were collected with respect to any such examination, and if so, whether petitioner's claim regarding Taxpayer's FICA Tip Credit substantially contributed to the examination and collection of proceeds. It is further
ORDERED that the WBO shall complete its further review of petitioner's claim on or before October 15, 2024, and issue a second supplemental determination, including therein a detailed explanation of its determination. It is further
ORDERED that the second supplemental determination shall be filed with the Court on or before December 16, 2024, along with a copy of the added extrarecord evidence, as discussed above.