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Tax Court: Discovery in Whistleblower Cases Requires Showing of Bad Faith by IRS

(Parker Tax Publishing June 2023)

The Tax Court held in a case of first impression involving a whistleblower's appeal of a denial of an award, that the IRS's designation of the administrative record enjoys a presumption of correctness absent clear evidence to the contrary, and discovery aimed at completing the record is allowed only upon a significant showing that there is material in the IRS's possession indicative of bad faith on the IRS's part or of an incomplete record. The court found that the whistleblower made a limited showing of an incomplete record with respect to one of his interrogatory requests and the court therefore compelled the IRS to supplement its interrogatory response in that regard but denied the remaining components of his motions to compel. Berenblatt v. Comm'r, 160 T.C. No. 14 (2023).


Jeremy Berenblatt is a successful stock trader with an expertise in foreign currency exchange. He earned a significant amount of income during the year 2000, after which he was approached about investing in a digital foreign exchange option transaction known as Short Options Strategies (SOS). SOS was billed as an opportunity for legally minimizing taxes. A digital option is a type of option where the payoff is either a fixed amount or nothing at all, depending on whether the underlying asset passes a stated strike price. Berenblatt completed an SOS investor application and funded a trading account. However, he ultimately determined that the probability of the options' yielding a nonzero payoff was negligible, such that the transaction lacked a nontax business purpose and was potentially fraudulent. Berenblatt did not move forward with the investment.

In 2007, Berenblatt met with two IRS agents: Shawn Chandler, a special agent of the IRS's Criminal Investigation Division, and Arthur Mason, a revenue agent. During the meeting, Berenblatt related his analysis of the SOS transaction to the agents. He explained that the probability distribution for payoffs on the digital options was skewed by the fact that the intermediary bank "controlled the trade and its pricing."

In 2015, Berenblatt filed a Form 211, Application for Award for Original Information, to the IRS Whistleblower Office (WBO). He claimed that he was the first person to provide the IRS with a successful litigation tactic for proving the fraudulence of the SOS transaction. According to Berenblatt, the IRS's primary litigating position before his interview was that the SOS transactions fell afoul of the "step transaction" doctrine - an argument that had failed in court. Berenblatt said that after his interview, the IRS began winning cases relating to SOS and similar tax shelters by using the reasoning he had provided to the IRS first.

The WBO contacted Chandler regarding Berenblatt's claim. Chandler sent the WBO a Form 11369, Confidential Evaluation Report on Claim for Award, and explained that the investigation of the target taxpayers was well underway by the time Berenblatt provided information to the IRS. Chandler also noted that Berenblatt was one of hundreds of individuals identified as having had contact with the taxpayers regarding the SOS transactions, and Berenblatt did not provide any new information relative to the investigation. Based on Chandler's representations, the WBO issued a determination letter denying Berenblatt's claim for award.

Berenblatt appealed the WBO's denial of an award in the Tax Court. In the course of discovery, he filed motions to compel the IRS to produce various documents and respond to various interrogatories covering periods both before and after his interview with the IRS. Berenblatt argued that the administrative record must include all documents available to Chandler at the time he completed the Form 11369 because they were considered at least indirectly in reaching a decision on Berenblatt's claim. Berenblatt asserted that any relevant documents available to the WBO when it ruled on his claim were discoverable, whether or not the WBO reviewed them.

The Tax Court's review of an award determination by the WBO is generally confined to the administrative record (the so-called record rule). Ordinarily, the record is comprised of the documents that were before the administrative decisionmaker, including all the information it considered directly or indirectly. As articulated by the D.C. Circuit in Hill Dermaceuticals, Inc. v. FDA, 709 F.3d 44 (D.C. Cir. 2013), a court generally should have before it neither more nor less information than the agency had when it made its determination. In the context of record-rule cases, the D.C. Circuit held in Air Transp. Ass'n of Am. v. Nat'l Mediation Bd., 663 F.3d 476 (D.C. Cir. 2011), that discovery is typically not available, given the presumption that the agency has properly designated the record. According to the D.C. Circuit, there are two narrow exceptions to this rule: if a party makes a significant showing that it will find material in the agency's possession indicative of bad faith or an incomplete record, it should be granted limited discovery. The D.C. Circuit did not explicitly define the phrase "incomplete record."


The Tax Court held that the IRS's designation of the administrative record in a whistleblower case enjoys a strong presumption of correctness absent clear evidence to the contrary. Discovery aimed at completing the designated record is allowed only upon a significant showing that there is material in the IRS's possession indicative of bad faith on the IRS's part or of an incomplete record. The court further held that Berenblatt did not make any significant showing of bad faith or an incomplete record in connect with his requests for document production.

The court noted that Reg. Sec. 301.7623-3(e) provides a general statement regarding a whistleblower's administrative record and a list of materials that the IRS has determined will always be included in that record. The court said that for purposes of evaluating whether a whistleblower has made a significant showing that there is material in the IRS's possession indicative of an incomplete record, the court will deem all materials listed in Reg. Sec. 301.7623-3(e) to be necessary parts of the complete record.

In the court's view, Berenblatt asked the court to compel discovery seeking information and documents that the WBO never considered. Most of his discovery requests, the court found, clearly went beyond the administrative record. Further, the court found that Berenblatt did not try to show bad faith in the IRS's designation of the administrative record or handling of his claim, and the court saw no such evidence.

However, the court found that he made a limited showing of an incomplete record with respect to one of his interrogatory requests, in which he asked for all documents concerning his interview with the IRS, including the interviewing agent's notes. Because Reg. Sec. 01.7623-3(e)(2)(ii) refers to "copies of debriefing notes and recorded interviews held with the whistleblower," the court determined that nay notes taken by Mason at Berenblatt's interview were part of the complete record. Therefore, the court compelled the IRS to supplement its response to that request while denying the remaining components of Berenblatt's motions.

For a discussion of appealing a whistleblower determination in the Tax Court, see Parker Tax ¶262,340.

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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