D.C. Circuit Reverses Two Tax Court Rulings on Jurisdiction in Whistleblower Cases

(Parker Tax Publishing January 2022)

The D.C. Circuit held that the Tax Court does not have jurisdiction to hear appeals from decisions by the IRS Whistleblower Office that reject a request for a whistleblower award because Code Sec. 7623(b)(4) confers jurisdiction on the Tax Court only over "award determinations" and such a denial is not an award determination. The D.C. Circuit also concluded that two Tax Court decisions, Cooper v. Comm'r, 135 T.C. 70 (2010), and Lacey v. Comm'r, 153 T.C. 146 (2019), which held that an initial rejection of a whistleblower award is an award determination under Code Sec. 7623(b)(4), were wrongly decided. Li v. Comm'r, 2022 PTC 8 (D.C. Cir. 2022).

Background

In 2018, Mandy Li filed a Form 211, Application for Award for Original Information, with the IRS Whistleblower Office (WBO) alleging four tax violations by a third party (the "target taxpayer"). A Form 211 is an application to receive a monetary whistleblower award for supplying the IRS with actionable tax violation information, pursuant to Code Sec. 7623(b). A WBO classifier reviewed Li's Form 211, as well as the target taxpayer's 2016 and 2017 tax returns, and concluded that Li's allegations were "speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws," making Li ineligible for an award. Therefore, the WBO did not forward Li's Form 211 to an

IRS examiner for any potential action against the target taxpayer.

The WBO communicated its decision by letter to Li and informed her that she could appeal to the Tax Court if she thought the WBO had erred. Li did so by filing a Tax Court petition in March of 2019. Neither party identified a jurisdictional issue with the Tax Court's review of the case. The IRS subsequently filed a motion for summary judgment, which the Tax Court granted. The Tax Court found that the WBO adequately performed its evaluative function in reviewing Li's application and did not abuse its discretion by rejecting it for an award. Li then filed a motion for reconsideration. After the Tax Court denied the motion, Li appealed to the D.C. Circuit.

Under Code Sec. 7623(a) the IRS may grant monetary awards to persons helping to detect underpayments of tax, or detect and bring to trial and punishment persons guilty of violating the internal revenue laws. Code Sec. 7623(b)(1) requires the IRS to give awards to whistleblowers if (1) the IRS proceeds with any administrative or judicial action based on information brought to the IRS's attention by an individual, and (2) certain monetary conditions are met under Code Sec. 7623(b)(5). The remainder of Code Sec. 7623(b) provides the parameters for such awards, including a floor and ceiling award amount (i.e., the (b)(1) amount), a reduction in award amount for information based on public data (i.e., the (b)(2) amount), and a reduction or denial of award amount in which the whistleblower participated in the tax violations (i.e., the (b)(3) amount). Code Sec. 7623(b)(4) gives the Tax Court exclusive jurisdiction over an appeal of any determination regarding an award under Code Sec. 7623(b)(1), (2), or (3).

When a whistleblower makes a Form 211 filing, the WBO follows several steps. First, it reviews the form, and any related information, to determine whether the provided information may lead to the discovery of a tax violation. If the information is too vague or speculative, the WBO issues a rejection. If the whistleblower's information signals a potential tax violation, the IRS may initiate a proceeding against the target taxpayer. If the proceeding then yields payments to the IRS, the whistleblower receives an award, subject to Code Sec. 7623(b)(1)-(3). Any appeal of an award determination under Code Sec. 7623(b)(1)-(3) is then directed to the Tax Court under Code Sec. 7623(b)(4).

In Cooper v. Comm'r, 135 T.C. 70 (2010), the Tax Court held that an initial rejection of a whistleblower award is an award determination under Code Sec. 7623(b)(4). The Tax Court rejected the argument that there can be a determination for jurisdictional purposes only if the WBO undertakes an administrative or judicial action and thereafter "determines" to make an award. Instead, the Tax Court held that it had jurisdiction over threshold rejections of whistleblower awards, interpreting the statute to expressly permit an individual to seek judicial review in the Tax Court "of the amount or denial of an award determination." This position was echoed in the Tax Court's decision in Lacey v. Comm'r, 153 T.C. 146 (2019), where the Tax Court found jurisdiction on the grounds that a denial or rejection is a "negative determination" regarding an award.

Analysis

The D.C. Circuit held that the Tax Court did not have jurisdiction to hear Li's appeal from the WBO. In doing so, the D.C. Circuit also concluded that Cooper and Lacey were wrongly decided. Although neither party identified a problem with the Tax Court's jurisdiction, the D.C. Circuit said that it has a continuing duty to examine its jurisdiction, regardless of whether the parties raise the issue.

Code Sec. 7623(b)(4), the D.C. Circuit noted, gives the Tax Court exclusive jurisdiction over only a "determination regarding an award" under Code Sec. 7623(b)(1)-(3). The D.C. Circuit disagreed with the Tax Court's holding in Cooper and Lacey that a threshold rejection of a whistleblower award request constituted such an award determination because the rejection of an award was a so-called "negative" award determination. In the view of the D.C. Circuit, a threshold rejection of a whistleblower's Form 211 for vague and speculative information is not a negative award determination, as there is no determination as to an award under Code Sec. 7623(b)(1)-(3) whatsoever. Instead, the court found that under Code Sec. 7623(b)(1), an award determination by the IRS arises only when the IRS proceeds with any administrative or judicial action described Code Sec. 7623(a) based on information brought to the IRS's attention by the whistleblower. A threshold rejection of a Form 211, the court reasoned, by nature means the IRS is not proceeding with an action against the target taxpayer. Therefore, there is no award determination, negative or otherwise, and no jurisdiction for the Tax Court.

The court noted that the WBO rejected Li's Form 211 for providing vague and speculative information it could not corroborate, even after examining supplemental material Li herself did not provide. The WBO did not forward Li's Form 211 to an IRS examiner for further action, and the IRS did not take any action against the target taxpayer. According to the court, there was no proceeding and thus no "award determination" by the IRS for Li's whistleblower information. Therefore, the court concluded that the Tax Court had no jurisdiction to review the WBO's threshold rejection of Li's Form 211.

Finally, the D.C. Circuit considered a statement in its decision in Myers v. Comm'r, 2019 PTC 255 (D.C. Cir. 2019), that "written notice informing a claimant that the IRS has considered information that he submitted and has decided whether the information qualifies the claimant for an award suffices to constitute a determination for the purpose of Code Sec. 7623(b)(4)," and found that this statement was not a holding concerning the issue in the present case. The court explained that this statement was made in response to the taxpayer's argument that the WBO denial letter in his case did not contain enough information to qualify as a "determination" under the statute. The court responded that it would not "craft requirements out of whole cloth" regarding what information a WBO denial letter must contain. The question in this case, according to the court, was whether Code Sec. 7623(b)(4) confers jurisdiction only when there is both an IRS action based on whistleblower information and proceeds collected from that action. The court concluded that, as this issue was not squarely before the court in Myers, the above statement from Myers did not bind its decision in this case.

For a discussion of the rules for appealing a whistleblower determination, see Parker Tax ¶262,330.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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