Opinion
9011-13W
12-05-2023
ESTATE OF JOSEPH A. INSINGA, DECEASED, BY AMANDA GILMORE, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER AND DECISION
Joseph W. Nega, Judge.
Pursuant to section 7623(b)(4), on April 25, 2013, petitioner timely filed a Petition in the Tax Court for review of an adverse determination of respondent's Whistleblower Office (WBO) regarding his claims for an award. His claims and Petition sought awards in connection with eight target taxpayers and 94 additional transactions. After substantial development of the case by cross-motions for partial summary judgment and motions to compel discovery (described in our Orders issued July 27, 2016, and January 27, 2017), petitioner reported that he intended to pursue only his claims regarding two entities-X, Inc. and V, Inc.-and the parties have so stipulated.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.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.
Petitioner then filed an amended Petition in September 2017, asserting only the two remaining claims. On October 29, 2018, petitioner filed a Motion for Partial Summary Judgment concerning his claim regarding V, Inc. (petitioner's V, Inc. Motion). On April 28, 2019, petitioner filed a First Amended Motion for Partial Summary Judgment concerning his claim regarding X, Inc. (petitioner's X, Inc. Motion). On June 11, 2019, respondent filed a Motion for Summary Judgment (respondent's Motion) (collectively, with petitioner's V, Inc. Motion and petitioner's X, Inc. Motion, the parties' Motions).
For the reasons set forth below, we will deny petitioner's V, Inc. Motion; deny petitioner's X, Inc. Motion; and grant respondent's Motion.
Background
I. Petitioner's WBO Submissions
On April 5, 2007, petitioner submitted to the WBO a document titled "Joseph A. Insinga Tax Disclosure Statement filed pursuant to 26 U.S.C. § 7623" (initial submission).
The initial submission alleged that Dutch Bank entered into financial transactions with several domestic corporations, including V, Inc. and X, Inc., and that the domestic corporations' tax treatment of these transactions violated internal revenue laws.
On or about May 9, 2007, the WBO assigned petitioner's claim to then-program manager Robert G. Gardner (Program Manager Gardner).
Petitioner's initial submission was not accompanied by Form 211, Application for Reward for Original Information, and was not signed under penalty of perjury. Accordingly, on May 9, 2007, Program Manager Gardner notified petitioner's attorney that petitioner was required to submit Form 211, signed under penalty of perjury.
Petitioner submitted a signed Form 211 dated May 21, 2007, to the WBO that referenced petitioner's initial submission.
On May 29, 2007, petitioner submitted a document titled "Amended Tax Disclosure Statement of Joseph A. Insinga Provided Pursuant to 26 U.S.C. § 7623" (amended submission) (with Form 211 and the initial submission, collectively, petitioner's claim).
Among the exhibits to the amended submission were two documents: a copy of a Bank Credit Application between V, Inc. and the Dutch Bank dated October 22, 2002 (credit application) and a copy of a Dutch Bank internal audit report.
Program Manager Gardner transmitted petitioner's claim to Kyunghee Piraino (SME Piraino), a subject matter expert within respondent's Large & Mid-Sized Business Division (LMSB or LB).
The LMSB division was subsequently renamed and is currently known as the Large Business & International (LB&I) division.
Among the taxpayers identified by petitioner were V, Inc. and X, Inc. In his claim, petitioner described accounts receivable factoring transactions between V, Inc. and the Dutch Bank and between X, Inc. and the Dutch Bank.
On June 25, 2007, LMSB Revenue Agent Stuart Mann; counsel for respondent, Viviana Tarvena; and SME Piraino interviewed petitioner.
At the June 25, 2007 interview, petitioner provided additional documents, which were treated as supplements and included with the other information in petitioner's claim.
On June 29, 2007, SME Piraino forwarded petitioner's claim to the V, Inc. and X, Inc. examination teams. For the V, Inc. examination team, the Group Manager was Charlotte Willard (GM Willard), and the Team Coordinator was Revenue Agent Michael Rich (RA Rich). For the X, Inc. examination, the Group Manager was Daniel Callahan (GM Callahan), and the Team Manager was Robert Piatka (TM Piatka).
On October 10, 2007, Program Manager Gardner sent a package to ICE Classification, Ogden Campus, for numbering and control. The package included Form 211 with "Exhibits and Statement of Fact;" Form 2848, Power of Attorney; and Form 3949, Information Report Referral.
The documents were received by ICE Classification, Ogden Campus, on October 12, 2007. Petitioner's claim was initially assigned legacy claim no. 29-80054. Petitioner's claim was assigned claim no. 2009-004724 when it was migrated to the WBO's new e-trak claim system.
In tracking petitioner's claim, SME Piraino prepared a spreadsheet in which she detailed the teams to which she sent petitioner's claim, with contemporaneous notes reflecting the status of each (SME Spreadsheet).
II. X, Inc. Exam Activity
X, Inc. was a Coordinated Industry Case (CIC) taxpayer. CIC taxpayers were generally subject to continuous examination with an assigned team within respondent's LMSB division. Internal Revenue Manual (IRM) 4.4.5.10 (May 2005).
The CIC program was replaced by the Large Corporate Compliance program beginning with 2017 tax returns. IRM 4.50.3.1.1 (May 24, 2021).
Prior to the receipt of petitioner's claim, the X, Inc. examination team was already aware of the accounts receivable factoring transactions and had already begun examination of this issue for the 2005 tax year. The issue had already been identified as a Tier 1 Issue prior to October 27, 2006, well before petitioner's claim was forwarded to the exam team for investigation on June 29, 2007.
Tier 1 issues are tax issues of high strategic importance to LMSB which have significant impact on one or more industries and generally areas involving a large number of taxpayers, significant dollar risk, substantial compliance risk, or high visibility where there are either established legal positions or LMSB direction. IRM 4.51.1.3 (April 1, 2007).
In purported form, the X, Inc. transaction operated as follows: the Dutch Bank made an equity investment in Y SPV; X, Inc. sold its accounts receivables to Y SPV at a discount; Y SPV loaned money to X, Inc.; X, Inc. paid interest to Y SPV; and Y SPV paid a yield to the Dutch Bank. Later Y SPV redeemed the Dutch Bank's interest for a promissory note, pursuant to which Y SPV paid interest to the Dutch Bank. X, Inc. claimed tax deductions for the amount of the discount and for the interest paid to Y SPV.
Special Purpose Vehicle.
The X, Inc. examination team was at the forefront of the tax issue involved in the transaction between X, Inc. and the Dutch Bank.
For instance, the X, Inc. examination team presented to the V, Inc. examination team, issue management team, and national office subject matter experts on this exact transaction on March 20, 2007, more than two months before petitioner's claim was sent to the X, Inc. examination team for investigation.
Throughout the presentation, the transaction between X, Inc. and the Dutch Bank served as a case study to instruct other LMSB examination teams on the proper way to handle the issue.
The presentation described the facts of the transaction in detail and outlined several factors supporting the X, Inc. examination team's planned adjustments, including that "[Y SPV] provides security for [the Dutch Bank] through A/R" and "is a conduit for loan proceeds from [the Dutch Bank]" and that "the transaction and structure is a sham lacking economic substance."
The presentation discussed documents that the X, Inc. examination team already possessed, such as documents obtained from Arthur Andersen and transaction documents, including "some 81 documents detailing the duties[,] responsibilities and rights of [Y SPV] and the various parties participating in the transaction."
On June 29, 2007, SME Piraino sent petitioner's claim to the X, Inc. examination team. The X, Inc. examination team interviewed petitioner by telephone on or around August 20, 2007. The information petitioner provided confirmed the X, Inc. examination team's understanding of the transaction, but "nothing more."
Petitioner also claimed that X, Inc. paid premiums to the Dutch Bank and listed names of documents for respondent to summons from the Dutch Bank. However, this information was not helpful because, in the former instance, petitioner was unable to provide supporting evidence and, in the latter, the Dutch Bank denied the existence of the purported documents. In sum, the X, Inc. examination team did not make "any material changes to [its] audit plan or position based on the interview."
On September 19, 2007, the X, Inc. examination team served a summons on the Dutch Bank requesting, inter alia, various documents and reports relating to transactions between the Dutch Bank and X, Inc. involving special purpose vehicles (SPVs) during the 2000, 2004, 2005, and 2006 tax years.
Prior to receiving petitioner's claim, the X, Inc. examination team, through local counsel, requested chief counsel advice (CCA) regarding the various legal theories that the X, Inc. examination team had developed to disallow the tax deductions associated with the accounts receivable factoring transaction.
The final CCA discussed the September 23, 2005 credit application, which the X, Inc. examination team obtained first from petitioner and again as a result of the September 19, 2007 summons of the Dutch Bank.
The X, Inc. examination team's position taken prior to receiving petitioner's claim was the same as the position taken by the X, Inc. examination team after receiving the CCA, save one minor difference. Prior to obtaining the credit application, the X, Inc. examination team accepted X, Inc.'s characterization of the transaction as equity rather than debt; however, because this characterization was self-serving, the X, Inc. examination team afforded it no weight.
On the other hand, the CCA concluded that, at a minimum, the Dutch Bank understood the transaction to be debt. The X, Inc. examination team's ultimate conclusion-i.e., that the Dutch Bank's equity should be recharacterized as debt-did not change.
The X, Inc. examination team disallowed discount fee and interest deductions associated with the accounts receivable transaction for the 2001-2002 and 2003-2005 cycles on the basis that the transaction lacked economic substance.
On June 26, 2008, James Marn, a senior team coordinator on the X, Inc. examination team (RA Marn), completed Form 11369, Confidential Evaluation Report on Claim for Award (X, Inc. Form 11369), providing information from the X, Inc. examination team to the WBO.
In the X, Inc. Form 11369, RA Marn stated that, although petitioner's information "confirmed [the X, Inc. examination team's] understanding of the transaction," the transaction "was already under examination and had been for many months" prior to receiving this information. RA Marn explained that, because the "issue had been classified as a Tier One issue," it was "actively being managed" by respondent's Issue Management Team, and the issue had already been "substantially developed" before the receipt of petitioner's information.
III. X, Inc. Appeals Activity
X, Inc. sought review of the X, Inc. examination team's proposed adjustment to respondent's Office of Appeals (Appeals).
On July 1, 2019, the Office of Appeals was renamed the Independent Office of Appeals. See Taxpayer First Act, Pub. L. No. 116-25, § 1001, 133 Stat. 981, 983 (2019).
After review of the case, Appeals issued an Appeals Case Memorandum (ACM) on March 23, 2012. Appeals surveyed the parties' arguments and ultimately reached a conclusion as to the relative strengths of each.
Appeals determined that X, Inc. was not entitled to the deductions and found that strongest argument to deny the claimed deductions was economic substance, not whether the Dutch Bank's contributions constituted debt versus equity. Appeals did not adopt the debt versus equity theory previously proposed by the X, Inc. examination team as an alternative position.
Appeals concluded that a fair resolution of the case "would be in the range of 50-65% in favor of the Government." Pursuant to Appeals' determination, the parties settled on an amount equal to 57% in favor of the government's denial of the deductions.
IV. V, Inc. Exam Activity
Like X, Inc., V, Inc. was a CIC taxpayer.
Prior to the receipt of petitioner's claim, the V, Inc. exam team was already aware of the accounts receivable factoring transactions and had already begun examination of the issue for the 2005 tax year.
During the prior cycle examination of V, Inc.'s 2003 and 2004 tax returns, documents obtained via a summons to Arthur Andersen provided the V, Inc. examination team with substantial insight into the structure and purpose of the transactions.
In purported form, the V, Inc. transaction operated much like the X, Inc. transaction previously described herein: the Dutch Bank made an equity investment in W SPV; V, Inc. sold its accounts receivables to W SPV at a discount; W SPV loaned money to V, Inc.; V, Inc. paid interest to W SPV; and W SPV paid a yield to the Dutch Bank. Later, W SPV redeemed the Dutch Bank's interest for a promissory note, pursuant to which W SPV paid interest to the Dutch Bank. V, Inc. claimed tax deductions for the amount of the discount and for the interest paid to W SPV.
Although no Form 5701, Notice of Proposed Adjustment (NOPA), was ultimately issued during the 2003-04 cycle with respect to the transaction, the V, Inc. examination pursued the issue in the subsequent cycle.
An examination of V, Inc.'s 2005 tax year began in Fall 2006, and the transaction was featured in the examination plan. Because the accounts receivable factoring transaction was designated as a Tier 1 issue, it was coordinated with an Issue Management Team comprised of technical advisors, industry specialists, and National Office counsel.
As previously discussed, on March 20, 2007, the issue management team and the V, Inc. and X, Inc. examination teams held a meeting in which they discussed the various issues and legal theories at issue in the factoring transaction examinations.
At this meeting, TM Piatka gave a presentation, in which he discussed his development of the issues and theories related to the accounts receivable factoring transactions, including debt versus equity, Subpart F income, transfer pricing, economic substance, and imputed interest, using the X, Inc. transaction as a case study.
On June 29, 2007, SME Piraino sent petitioner's claim to the V, Inc. examination team.
In late December 2007, RA Rich contacted petitioner's counsel to set a call with petitioner concerning his allegations against V, Inc., which was ultimately held on May 27, 2008.
During the May 27, 2008 call, the parties discussed the accounts receivable factoring transaction involving V, Inc. and the Dutch Bank.
The V, Inc. examination team ultimately issued two NOPAs to V, Inc. concerning the accounts receivable factoring transaction. In preparing the NOPAs, the V, Inc. examination team relied heavily on the CCA requested by and prepared for the X, Inc. examination team.
On September 2, 2008, the V, Inc examination team issued NOPA #24A/15A, entitled "Other Deductions & Interest," reflecting the team's primary position with respect to V, Inc.'s 2005 and 2006 tax years (Economic Substance NOPA).
The Economic Substance NOPA disallowed V, Inc's deduction of the discount fees associated with the accounts receivable factoring transaction and the interest on the purported loan from W SPV to V, Inc., to the extent that it exceeded the interest charged by the Dutch Bank.
The Economic Substance NOPA contains proposed adjustments in the amounts of $74,321,887 and $82,313,210 for the 2005 and 2006 tax years, respectively. In support of this adjustment, the Economic Substance NOPA cites to section 269 and the economic substance doctrine as developed through case law.
The Economic Substance NOPA argues that the accounts receivable factoring transactions between V, Inc. and W SPW should be disregarded as lacking in economic reality, with the result that no deductible discount payment could have been made from V, Inc. to W SPV.
Although the Economic Substance NOPA briefly mentions that the "[c]redit applications, [c]redit memos and other internal documents obtained from [the Dutch Bank] show this transaction is treated as a loan by [Dutch Bank]," the bulk of the Economic Substance NOPA's argument focuses on cash movements, receivables processing, and the V, Inc. examination team's computation of the economic costs and tax benefits of the transaction.
The V, Inc. examination team also made a conforming adjustment to W SPV's Subpart F income, consistent with its primary position disallowing V, Inc's discount fees and interest deductions, as set forth in the Economic Substance NOPA (Subpart F Adjustment). The Subpart F Adjustment reduced that amount of Subpart F income that V, Inc. was required to report from W SPV due to the elimination of W SPV's purported discount fees and interest income from the transaction.
On or about September 4, 2008, the V, Inc. issued NOPA #24/15, entitled "[W SPV] Transaction-Debt versus Equity," regarding V, Inc.'s 2005 and 2006 tax years (Debt vs. Equity NOPA).
The Debt vs. Equity NOPA does not contain an adjustment amount.
In an attachment to the Debt vs. Equity NOPA, the V, Inc. examination team explained that, "[t]his Notice of Proposed Adjustment does not directly result in an adjustment;" rather, "[t]he adjustments proposed by the Government are discussed in [the Economic Substance NOPA.]"
The debt vs. equity position was treated by the V, Inc. examination team, Appeals, and V, Inc. as an alternative position, with the primary position being economic substance.
In the Debt vs. Equity NOPA, the V., Inc. examination team sought to recharacterize W SPV's Class A (Dutch Bank) securities as debt and treat the Class B (V, Inc.) securities, therefore treating the Dutch Bank as a creditor of W SPV and V, Inc. as its sole shareholder.
The V, Inc. examination team also proposed a confirming adjustment consistent with its debt vs. equity position.
As a result of its treatment of V, Inc. as the sole shareholder of W SPV, the V, Inc. examination team recomputed W SPV's earnings and profits and recast a distribution from W SPV to V, Inc. as a fully taxable dividend (Dividend Adjustment). The proposed Dividend Adjustment increased the amount of V, Inc's dividend income.
On December 3, 2008. RA Rich completed and signed Form 11369, Confidential Evaluation Report on Claim for Award (V, Inc. Form 11369). Also on December 3, 2008, GM Willard signed the V, Inc. Form 11369.
On December 8, 2008, the WBO received from RA Rich the V, Inc. Form 11369, with attachments, including petitioner's information, the V, Inc. NOPAs, and RA Rich's notes from the May 27, 2008 phone call.
The attachment to the V, Inc. Form 11369 provided the following explanation for item 10:
During the examination of the [V, Inc.]'s 2003 and 200412 tax returns, information regarding a structured financial transaction involving [V, Inc.] and [the Dutch Bank] was obtained from a government summons of Arthur Anderson [sic]. The transaction was examined but no changes were proposed for that cycle. In the fall of 2006, an examination of the 2005 year was begun and this issue was featured in the exam plan. The issue was classified as a tier 1 issue, relating to whether the $450 million put up by [the Dutch Bank] was an equity investment in a foreign factoring subsidiary engaged in the business of factoring accounts receivables or simply a loan to [V, Inc.]. The issue TA is Deborah Childers.
The whistleblower submitted a "credit application" dated October 22, [2002], prepared by a New York Branch of [the Dutch Bank], regarding a second proposed structured transaction involving [V, Inc.] and [the Dutch Bank]. This transaction was never completed. Also, included in the back of this "credit application" (beginning on page 80 was some information relating to a $450 million structured transaction which did occur in September 2001. This document provided some interesting information on the transaction from the perspective of [the Dutch Bank]. This document strongly indicates that [the Dutch Bank] viewed this transaction as a loan to [V, Inc.] as opposed to an equity investment in a foreign factoring subsidiary.
This "credit application" led to issuing an information document request to the company and subsequently, a summons to the New York branch of [the Dutch Bank]. This summons resulted in receiving other information, some of which was cited in the RAR.
Thus, the issue was already under examination and a significant proposed adjustment was anticipated when the information was received from the whistleblower. However, the information received from the whistleblower and the subsequent summons, was helpful.
The information provided did not impact the examination plan as it was not received until after the exam plans for both years was [sic] completed.
The attachment explained item 11A as follows:
The copy of the credit application from October of 2002 did result in an IDR requesting similar information from [V, Inc.] and subsequently, a summons to [the Dutch Bank].
It further explained item 11C:
The summons issued to [the Dutch Bank]'s New York branch yielded some helpful information and the summons, would likely not have been issued without the information provided by the whistleblower. Although, it should be noted that we were planning on proposing the adjustment prior to receipt of the information.V. V, Inc. Appeals Activity V, Inc. sought review of the V, Inc. examination team's proposed adjustments to Appeals.
Appeals considered each of the three adjustments proposed by the V, Inc. examination team related to the accounts receivable factoring transaction: (1) "Other Deductions & Interest" (Economic Substance NOPA) in the amount of $156,635,088; (2) "[W SPV] Dividend Income" in the amount of $32,350,270; and (3) [W SPV] Subpart F Income" in the amount of ($28,595,126).
In September 2010, Appeals issued an ACM reflecting the terms of its settlement with V, Inc. and the reasons therefor.
The ACM cites to the summonsed Dutch Bank documents under "Issue 1. Other Deductions & Interest."
The documents were used in a limited fashion, supporting the intent factor in the debt versus equity analysis, as explained in the ACM:
According to the exam team, credit applications, credit memos and other internal documents obtained from [the Dutch Bank] show this transaction is treated as a loan by [the Dutch Bank]. The documents repeatedly show that [V, Inc.] is the ultimate borrower of $450 million from [the Dutch Bank] and that [the Dutch Bank] expects little from this transaction except a favorable rate of interest. In addition, [the Dutch Bank] shows the A/R as simply collateral on the loan.
Appeals did not sustain the V, Inc. examination team's primary position in full. On the dual prongs of the economic substance doctrine, Appeals concluded that V, Inc's position was stronger on subjective business purpose, and the V., Inc. examination team's position was stronger on economic substance.
Accordingly, Appeals and V, Inc. agreed to a 50/50 settlement of Issue 1 (Other Deductions & Interest) and Issue 3 (Subpart F Income) in the light of the "litigating hazards." Under the settlement, V, Inc. agreed to an increase to taxable income equal to 50% of discount fees and interest paid to W SPV, offset by a decrease to taxable income equal to 50% of the Subpart F adjustment.
As part of the settlement, Appeals conceded the debt versus equity issue. Appeals also conceded the conforming Issue 2 (Dividend Income) in full because this issue was itself based on the debt versus equity issue.
VI. WBO Activity
On October 15, 2007, SME Piraino sent to Program Manager Gardner the SME Spreadsheet, at his request. The SME Spreadsheet indicated that petitioner's claim information had been sent to the X, Inc. and V, Inc. examination teams. With respect to X, Inc., the SME Spreadsheet stated: "June 29[,] 2007 sent to team. The team has been aware of the transactions and has been actively examining it. They had most of the information that the informant provided. The team would like me to interview the informant. The team will get back to me in a couple of days to arrange a conference call." With respect to V, Inc., the SME Spreadsheet stated: "June 29[,] 2007 sent to team. They are working on this case. [T]he information is currently being evaluated."
On December 12, 2011, Program Manager Gardner recommended that petitioner's claim be denied. In a memorandum, dated December 12, 2011, addressed to WBO Director Steve Whitlock (Director Whitlock) Program Manager Gardner explained the basis for his recommendation with respect to X, Inc.:
The team indicated that issue raised by the whistleblower was being controlled as a Tier I issue [a]nd the team was being assisted by a technical advisor. The issue and the facts surrounding the issue had already been identified and the facts obtained from the taxpayer prior to receipt of the whistleblower submission. The team indicated that the submission confirmed that facts that they had already gathered and that no new information was brought to the attention of the team to assist in the development of the issue. The whistleblower was debriefed by the team by telephone but could not provide any specifics in regards to the transactions not [sic] could provide any additional documents to substantiate the allegation.
Program Manager Gardner also explained the basis for his recommendation with respect to V, Inc.:
The issues raised by the whistleblower had been identified and included in the audit plan [f]or the 200512 cycle as these issues had been raised in the prior cycle and no-changed but were of such significance that they were rolled over to the 200512 examination cycle. The [F]orm 11369 indicates that both the issue had been identified prior to receipt of the whistleblower information and that the issue had been substantially developed prior to receipt of the submission. The team indicated that
some additional knowledge of the issue was brought to their attention but was not of any significance and was not utilized in the final unagreed write-up of the issue.
Director Whitlock responded on December 12, 2011, and requested that Program Manager Gardner obtain additional information to evaluate and quantify the statements in the V, Inc. Form 11369.
By this time, RA Rich and the other members of the 2005-06 V, Inc. examination team were no longer employed by respondent.
On December 13, 2011, Program Manager Gardner contacted then-Team Coordinator for the V, Inc. examination team, Glinda Singletary (RA Singletary) in an effort to "more clearly quantify" the statements in the V, Inc. Form 11369. Program Manager Gardner explained:
I am attempting to determine to what extent did the summons to [the Dutch Bank] contribute to the development of the issue. Not sure exactly what the issue was and in paragraph four it states the whistleblower information was helpful. Again is there any manner they [sic] we can more clearly identify what transpired from this summons. I have requested ACM from Appeals.
Program Manager Gardner further noted that he checked IDRS, which indicated that the 2005-06 cycle was settled in Appeals.
Handwritten notes on a copy of the December 13, 2011 email contained in the administrative record indicate that Program Manager Gardner spoke with RA Singletary and discovered that the V, Inc. examination team was "not working case due to NOLs" and that there was "no one left who knows anything about case."
On or about June 27, 2012, petitioner's claim was reassigned from Program Manager Gardner to then-WBO Analyst Steven Mitzel (Analyst Mitzel).
On July 13, 2012, Analyst Mitzel recorded a Memo to File concerning a telephone call held with TM Piatka concerning the X, Inc. Form 11369. Analyst Mitzel noted that TM Piatka already "had an understanding of the issue" when petitioner's claim was received and that petitioner confirmed the X, Inc. examination team's understanding of the issue.
TM Piatka informed Analyst Mitzel that the issue was already in the examination plan, and the team was receiving assistance from the LMSB issue management team due to the issue being classified as Tier 1 prior to receiving petitioner's claim. When petitioner's claim was received, the X, Inc. examination team was merely "tying up loose ends."
Also on July 13, 2012, TM Piatka emailed Analyst Mitzel a copy of his March 20, 2007 presentation slides. On September 10, 2012, Analyst Mitzel emailed Program Manager Gardner and included the X, Inc. and V, Inc. Forms 11369 as attachments. On September 19, 2012, Analyst Gardner forwarded the email to Director Whitlock.
On September 20, 2012, Director Whitlock requested additional information with respect to V, Inc. but was satisfied with Analyst Mitzel's investigation with respect to X, Inc.
In responding to Director Whitlock's questions, the WBO performed a detailed review of the V, Inc. NOPAs and ACM in order to evaluate how petitioner's information was used in the V, Inc. examination and the role it played in the ultimate resolution of the issue in Appeals.
Also on September 20, 2012, Analyst Mitzel sent a copy of the V, Inc. ACM to Director Whitlock and Program Manager Gardner.
On September 21, 2012, a WBO representative recorded a note labeled "My Thoughts" regarding the analysis of the V, Inc. NOPAs:
5701 discusses 13 factors cited in AA opinion in support of TP treatment as equity. Credit Application and Credit Memo impact one of 13 factors: Expressed intent of parties. Exam team points to the documents to contradict [V, Inc.] stated intent of equity by showing [the Dutch Bank] treated internally as debt. Also cited by team as contradicting TP stated intent is their Financial statement treatment as debt.
5701 contains a discussion of the factors found in Notice 94-47 and the Castle Harbour case to analyze debt equity. In the Castle Harbour discussion, the 2nd Circuit stated that a lower court gave to[o] much weight to TP stated intent of equity without at [sic] giving as much weight to [the Dutch Bank] treatment as debt. This is only one of many factors and is not determinative. Castle Harbour and other cases focus more on how the instruments work and less on how they are characterized by the parties.
My conclusion is that the [Dutch Bank] treatment as debt is a minor factor in the determination far outweighed by the economic realities of the instruments themselves.
In response to Director Whitlock's concerns and the discussions described above, Analyst Mitzel revised Program Manager Gardner's prior draft conclusions as to V, Inc. In the revised memorandum, the WBO explained:
The issues raised by the whistleblower had been identified and included in the audit plan for the 200512 cycle. These issues had been raised in the prior cycle and no-changed, but were of such significance they were rolled over to the 200512 examination cycle. The Form 11369 indicates that the issue was already under examination and that a significant
proposed adjustment was anticipated prior to receipt of the whistleblower information. The team indicated that some additional knowledge of the issue was brought to their attention by the whistleblower.
The team manager and Team Coordinator for this case are no longer with the service. The case was resolved in Appeals. A copy of the Appeals Case Memorandum was secured and reviewed. The case was resolved based on the hazards of litigation with a 50% concession of the proposed adjustments. The Appeals memorandum states that the taxpayer had a stronger position on business purpose while the service had a stronger position on economic substance. The appeals case Memorandum mentions the credit applications, credit memos and other internal documents as being a part of the Exam Team's position. These documents may have been secured based on the whistleblower submission. The focus of the appeals discussion of the exam position is on the economic substance principles found in Coltec and Jade Trading court cases. The appeals discussion of these principles does not mention credit applications, memos, or other internal documents.
Without access to the team manager and team coordinator it is impossible to quantify how helpful the information provided by the whistleblower was. It is clear that the issue had been identified and that an economic substance adjustment would have been proposed without the whistleblower submission. The whistleblower information did not cause the Service to initiate the audit, expand the scope of the audit, or continue to pursue an issue that it otherwise would not have pursued. Thus, even if the information may have been considered helpful to the Service in understanding a different perspective on the transaction, the Service did not take any action based on that information. In addition, the effect of the adjustments made in this case (after the 50% concession) was to reduce a substantial net operating loss. There were no proceeds realized for the 200512 examination cycle, and subsequent year returns were accepted as filed (no audit conducted) due to the substantial losses reported.
On October 11, 2012, TM Piatka sent to Analyst Mitzel a copy of the CCA, as well as his comments on the value of petitioner's information and his recollection of the timeline.
On October 29, 2012, Analyst Mitzel asked TM Piatka for additional assistance, requesting documentation of the date that the CCA was requested and further details regarding the summons issued to the Dutch Bank.
On November 10, 2012, Program Manager Gardner emailed Analyst Mitzel, relaying Director Whitlock's request for the slide deck from the X, Inc. examination team's March 20, 2007 presentation.
On November 13, 2012, Analyst Mitzel provided Director Whitlock with the presentation's slide deck and the timing of the March 20, 2007 meeting, which included the V, Inc. examination team.
The WBO compared the X, Inc. examination team's presentation, prepared before petitioner's submission, with the CCA analysis and determined that the conclusion did not change. Specifically, the WBO concluded that in both the X, Inc. and V, Inc. cases, the credit application was relevant to only one factor in the debt versus equity analysis, which did not ultimately impact the conclusions reached.
On or about January 3, 2013, Analyst Mitzel prepared a draft claim denial letter for Program Manager Gardner's signature and emailed it to Program Manager Gardner.
On April 2, 2013, Director Whitlock received the ACM reflecting the Appeals settlement of X, Inc.'s 2001-03 cycle as part of his review.
On April 15, 2013, the WBO issued its final determination letter with respect to petitioner's claim. The final determination letter states: "the information you provided did not result in the collection of any proceeds."
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 no 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. Scope and Standard of Review
The Tax 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 our 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 has proceeded with an action and collected proceeds in that action is still a 'determination regarding an award.'" Id. at 8 (quoting § 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, we do not substitute our 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 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. 729, 744 (1985)).
III. Exhibits to Petitioner's V, Inc. Motion and Petitioner's X, Inc. Motion
Subsequent to the filing of the parties' Motions in this case, we observed in Van Bemmelen v. Commissioner, 155 T.C. 64 (2020) (Van Bemmelen), that our review is generally confined to the administrative record and explained that a party may 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." See 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)) (emphasis added)); 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 extra-record 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)).
In the light of Van Bemmelen, by Order issued September 23, 2020, we set out a supplemental briefing schedule and directed the parties to address petitioner's exhibits that are outside of the administrative record as designated by respondent.
After extensive review of each of petitioner's proposed exhibits, the administrative record as designated by respondent, and the parties' supplemental briefs and responses thereto, we first find that a number of exhibits, provided to the WBO by petitioner, are already part of the administrative record as designated by respondent. As such, no supplementation is necessary with regard to these documents-namely, Exhibits N, O, P, Q, and R to petitioner's V, Inc. Motion and Exhibits O, S, T, U, V, AA, and BB to petitioner's X, Inc. Motion.
Second, respondent does not object to the inclusion of Exhibit HH to petitioner's X, Inc. Motion, which consists of debriefing notes, in the administrative record. We will therefore allow the record to be supplemented with Exhibit HH to petitioner's X, Inc. Motion.
Respondent also points to two different sets of debriefing notes-Exhibits H and NN to respondent's Motion-that respondent contends should be addressed in the same manner as Exhibit HH to petitioner's X, Inc. Motion. With no objection from petitioner, we will allow the record to be supplemented with Exhibits H and NN to respondent's Motion.
Finally, we find that petitioner has not demonstrated that the remaining exhibits were actually considered but omitted, or otherwise satisfy the unusual circumstances necessary to consider extra-record evidence, as required by Van Bemmelen. See Van Bemmelen, 155 T.C. at 74-75 (requiring a substantial showing to overcome the "strong presumption of regularity" that the WBO properly designated the administrative record (quoting Cape Hatteras Access Pres. All. v. United States Dep't of Interior, 667 F.Supp.2d 111, 114 (D.D.C. 2009))); see also Animal Legal Def. Fund, Inc. v. Purdue, 872 F.3d 602, 611 (D.C. Cir. 2017) (explaining that a party seeking supplementation with extra-record evidence must demonstrate "unusual circumstances" that justify departure from the general record rule (quoting Am. Wildlands v. Kempthorne, 530 F.3d 991, 1001 (D.C. Cir. 2008))). Accordingly, we find that petitioner has not sufficiently shown that the record should be supplemented with any of the remaining proposed exhibits.
IV. Analysis
Section 7623 provides for awards to individuals (commonly referred to as whistleblowers) who submit information to the Internal Revenue Service (IRS) 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. 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 whistleblower is entitled to receive an award of at least 15%, but not more than 30%, of the proceeds collected, depending on "the extent to which the individual substantially contributed to such action." § 7623(b)(1).
Treasury Regulation § 301.7623-2 defines the terms used in section 7623(b) and the regulations interpreting it. In pertinent part, the regulation provides:
Pursuant to Treas. Reg. 301.7623-2(f), the regulation is effective on August 12, 2014, and applies to information submitted on or after that date and to claims for award that are open on that date. The determination that petitioner appeals from is dated April 15, 2013. The Petition was filed on April 25, 2013. We assume for purposes of the following discussion that petitioner's claim is open so long as it is sub judice. Cf. Whistleblower 11099-13W v. Commissioner, 147 T.C. 110.
[T]he IRS proceeds based on information provided by a whistleblower 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 in the information provided.Treas. Reg. § 301.7623-2(b)(1).
Four examples follow that statement of the general rule. Example (3) provides an illustration of when a whistleblower's information does not substantially contribute to an IRS action:
Information provided to the IRS by a whistleblower, under section 7623 and § 301.7623-1, identifies a taxpayer, describes and documents specific facts relating to the taxpayer's activities, and, based on those facts, alleges that the taxpayer owed additional taxes in Year 1. The IRS receives the information after having already initiated an examination of the taxpayer for Year 1. During the examination, the information is provided to the Exam team and the Exam team uses the information provided to confirm the correctness of adjustments made based on other information. Although the whistleblower's information confirms the correctness of the IRS's adjustments, the IRS does not rely on the whistleblower's information when it makes the adjustments, nor does the information cause the IRS to expand the scope of its examination. The whistleblower's information merely supports information independently obtained by the IRS. For purposes of section 7623 and §§ 301.7623-1 through 301.7623-4, the IRS's examination is not an administrative action with which the IRS proceeds based on information provided by the whistleblower because the information did not substantially contribute to the action.Treas. Reg. § 301.7623-2(b), Example (3).
With this background in mind, we turn to the question presently before us: did the WBO abuse its discretion in determining that petitioner was not entitled to receive a mandatory award? We find that it did not.
Petitioner contends that the IRS proceeded based on petitioner's information and collected proceeds and that the WBO abused its discretion in finding otherwise.However, the record in this case shows that the WBO conducted a thorough review of both the X, Inc. and V, Inc. examination and appeals teams activities and that its determination was reasonable in the light of that review.
P also contends that R abused its discretion by applying the wrong legal standard-namely, the 2012 proposed regulations-and that, had the WBO applied the correct standard, it would have come to a different result. However, nothing in the record indicates that the WBO relied on the proposed regulations in reaching its determination or that it would have reached a different conclusion had it reviewed petitioner's claim subsequent to the August 12, 2014 effective date.
With respect to X, Inc., the record shows that the WBO reviewed the Form 11369 completed by the X, Inc. examination team. In this case, the Form 11369 indicated that the transaction identified by petitioner (involving X, Inc., Y SPV, and the Dutch Bank) "was already under examination and had been for many months" prior to the receipt of petitioner's information. Further, the X, Inc. examination team had already "substantially developed" the issue by the time they received petitioner's information. Finally, once the X, Inc. examination team did receive petitioner's information (both through the claim and the subsequent phone interview), the X, Inc. examination team found that the information merely confirmed their understanding of the transaction.
The WBO also followed up with the X, Inc. examination team to clarify information contained in the X, Inc. Form 11369. Analyst Mitzel contacted TM Piatka, the X, Inc. team member in charge of the issue involving the transaction between X, Inc. and the Dutch Bank. During that call, TM Piatka explained that the issue had been identified in a prior cycle, although it was not pursued at that time. However, the issue had been a part of the examination plan for the next cycle prior to the receipt of petitioner's information. TM Piatka explained that petitioner's information merely confirmed the X, Inc. examination team's understanding of the issue and did not expand the examination's scope.
Finally, the WBO obtained the presentation slide deck regarding the transactions involving the Dutch Bank that the X, Inc. examination team presented to other LMSB teams, including the V, Inc. examination team, on March 20, 2007- well before petitioner submitted any information to the WBO. The presentation was detailed and provided a wealth of information regarding the X, Inc. examination team's knowledge of the transactions. The presentation serves as clear support of the X, Inc. examination team's position in the X, Inc. Form 11369 that the issue had been "substantially developed" prior to receiving petitioner's information.
With respect to V, Inc., the record reflects that the WBO performed a detailed analysis of the V, Inc. examination team's reports and proposed adjustments, as well as the Appeals ACM, which described Appeals' evaluation and disposition of the adjustments, in order to evaluate whether petitioner's claim led to any actions by the V, Inc. examination team that would give rise to a whistleblower award. After performing this evaluation, the WBO determined that petitioner's claim was used in support of one of many factors in the V, Inc. examination team's analysis and that it was a "minor factor in the determination far outweighed by the economic realities of the instruments themselves." Further, petitioner's claim supported only the V, Inc. examination team's debt-equity theory-an alternative theory for a previously planned adjustment, which was not the theory ultimately relied upon in the disposition of the case.
The administrative record in this case amply supports the WBO's ultimate findings that: (1) the issues identified in petitioner's claim were already known to the examination teams, (2) the examination teams made the same adjustments after petitioner's claim that they were planning to make before petitioner's claim; and (3) petitioner's claim information did not lead to any additional adjustments being made.
Put another way, the WBO found (and the record so supports) that the IRS did not proceed based on petitioner's information because petitioner's information did not substantially contribute to any IRS action. See Treas. Reg. § 301.7623-2(b)(2), Example 3; see also Awad v. Commissioner, T.C. Memo 2017-109, at *15-19 (finding that action was not taken based on information that did not prompt, facilitate or otherwise change course of examinations).
Our task is to review the WBO's determination and to uphold it unless we find the final determination to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. See Luu v. Commissioner, T.C. Memo. 2022-126, at *22. Here, we find that the WBO did not err in its denial of petitioner's claim. Thus, we will grant respondent's Motion; deny petitioner's V, Inc. Motion; and deny petitioner's X, Inc. Motion.
We have considered all remaining arguments the parties made, and, to the extent not addressed, we conclude they are irrelevant, moot, or meritless.
Accordingly, it is
ORDERED that petitioner's Motion for Partial Summary Judgment, filed October 29, 2018, is denied. It is further
ORDERED that petitioner's First Amended Motion for Partial Summary Judgment, filed April 28, 2019, is denied. It is further
ORDERED that respondent's Motion for Summary Judgment, filed June 11, 2019, is granted. It is further
ORDERED and DECIDED that respondent's determination, as set forth in the final determination letter, dated April 15, 2013, upon which this case is based, is sustained.