148 T.C. No. 12
UNITED STATES TAX COURT
WHISTLEBLOWER 16158-14W, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 16158-14W. Filed April 17, 2017.
W provided information to the Internal Revenue Service (IRS)
regarding T’s alleged failure to withhold and pay over taxes for 2006
through 2008. W supplemented the submission to add years 2009
through 2014. The IRS expanded an ongoing examination for 2006
through 2008 to address the withholding issue that W raised, but that
examination did not result in collected proceeds. The IRS did not
conduct an examination relating to the withholding issue for
subsequent years. T updated its recordkeeping system after 2008. W
alleges that improvements to T’s recordkeeping resulted in collected
proceeds and that the Secretary must pay an award.
Held: Because there were no collected proceeds for 2006
through 2008, W is not entitled to an award for those years.
Held, further, there was no administrative or judicial action
with respect to years after 2008 because the IRS took no action with
respect to those years.
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Held, further, the Commissioner is not required to monitor a
taxpayer’s voluntary change in reporting for years for which there
was no action.
Sealed, for petitioner.
Sealed, for respondent.
OPINION
BUCH, Judge: The whistleblower timely petitioned upon receiving a
determination letter from the Internal Revenue Service (IRS) Whistleblower
Office (Whistleblower Office) denying an award. On April 24, 2015, the
Commissioner filed a motion for summary judgment arguing that he is entitled to
judgment as a matter of law because the information provided by the
whistleblower did not lead to the collection of any proceeds and therefore the
whistleblower is not entitled to an award. The whistleblower filed a response
primarily arguing that there is a genuine dispute of material fact because, the
whistleblower contends, the information provided caused the taxpayer to change
its reporting for years after the Commissioner’s examination and further arguing
that the change in reporting led the Commissioner to collect additional taxes that
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should be considered “collected proceeds” under section 7623(b)(1).1 We held a
hearing on the motion, and we ordered briefs. After reviewing the parties’
arguments, we will grant the Commissioner’s motion because, accepting the
whistleblower’s factual allegations as true, any revenue from the taxpayer’s
subsequent change in reporting does not meet the definition of collected proceeds
for the years that were the subject of the action by the Commissioner.
Background
In late January 2009 the whistleblower filed a Form 211, Application for
Award for Original Information, with the Commissioner. On the Form 211 the
whistleblower claimed to have information on a corporation (taxpayer) that had
failed to withhold taxes for 2006, 2007, and 2008 on payments of interest and
dividends that it had made to foreign persons. The whistleblower stated on the
Form 211 that the whistleblower knew the information because the whistleblower
was an employee of the taxpayer.
The Whistleblower Office reviewed the information provided on the Form
211 and provided the information to other business divisions within the IRS,
including the Criminal Investigation Division and the Large Business and
1
Unless otherwise indicated, all section references are to the Internal
Revenue Code in effect at all relevant times, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
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International Division (LB&I). Upon receiving this information LB&I expanded
an ongoing audit that was unrelated to the whistleblower’s allegations. At the end
of the audit LB&I issued a “no change” letter to the taxpayer, informing it that the
audit did not result in any adjustments.
Subsequently, the LB&I auditor and the Whistleblower Office filled out and
signed a Form 11369, Confidential Evaluation Report on Claim for Award. The
explanation attached to the Form 11369 stated that the whistleblower was correct
that the taxpayer had made errors but the cause of the errors was an “honest
mistake” made while updating its reporting systems. The explanation went on to
say that “[i]t appears the * * * [taxpayer] has been convinced by its close call to
become fully compliant with its withholding tax responsibilities and further
examination is not warranted.”
The whistleblower supplemented the whistleblower’s submissions between
2010 and 2014 relating to years after 2008. However, the Commissioner did not
examine any additional years on the basis of the whistleblower’s submissions.
On June 12, 2014, the Whistleblower Office sent a letter to the
whistleblower notifying the whistleblower that the whistleblower was not entitled
to an award because the information provided “did not result in the collection of
any proceeds.”
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The Commissioner filed a motion for summary judgment. He argues that
there were no collected proceeds for 2006 to 2008 nor any action for the later
years and therefore he is entitled to summary judgment.
Discussion
The purpose of summary judgment is to avoid unnecessary and expensive
trials. Fla. Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). However,
summary judgment is not a substitute for trial, and it should not be invoked in
proceedings where the parties disagree as to material facts. Shiosaki v.
Commissioner, 61 T.C. 861, 862 (1974). Summary judgment may be granted “if
the pleadings, answers to interrogatories, depositions, admissions, and any other
acceptable materials, together with the affidavits or declarations, if any, show that
there is no genuine dispute as to any material fact and that a decision may be
rendered as a matter of law.” Rule 121(b).
The party moving for summary judgment bears the burden of demonstrating
that a genuine dispute does not exist as to any material fact and that he is entitled
to judgment as a matter of law. Sundstrand Corp. v. Commissioner, 98 T.C. 518,
520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994). Because the moving party bears
this burden, any factual inferences will be treated in a manner that is most
favorable to the nonmoving party. Dahlstrom v. Commissioner, 85 T.C. 812, 821
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(1985). While the burden falls on the moving party, the nonmoving party “may
not rest upon the mere allegations or denials of such party’s pleading, but such
party’s response * * * must set forth specific facts showing that there is a genuine
dispute for trial.” Rule 121(d).
There are no material facts in dispute in this case, and a decision may be
rendered as a matter of law. The dispute centers around whether the amount of
collected proceeds as provided in section 7623(b) can include amounts collected
for years after examination years because of a taxpayer’s change in reporting.
Therefore, summary judgment is appropriate.
I. Section 7623 Requires Both an Action and Collected Proceeds.
Before 2006 section 7623 authorized the Secretary to “pay such sums as he
deems necessary for--(1) detecting underpayments of tax, and (2) detecting and
bringing to trial and punishment persons guilty of violating the internal revenue
laws or conniving at the same”. Congress amended the statute by the Tax Relief
and Health Care Act of 2006, Pub. L. No. 109-432, div. A, sec. 406(a), 120 Stat. at
2958-2959. Under the amendment, what had been section 7623 became section
7623(a), and Congress added new subsections. Id. Section 7623(b)(1) provides:
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
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to paragraph (2), receive as an award at least 15 percent but not more
than 30 percent of the collected proceeds (including penalties,
interest, additions to tax, and additional amounts) resulting from the
action (including any related actions) or from any settlement in
response to such action. * * *
We have described section 7623(b)(1) as “straightforward” and “written in
expansive terms”. Whistleblower 21276-13W v. Commissioner, 147 T.C. __ , __
(slip op. at 10-11) (Aug. 3, 2016).
The parties dispute whether the whistleblower is entitled to an award. The
Commissioner argues that the whistleblower is not because there was no action
taken for years after 2008. The whistleblower argues that the Commissioner
collected proceeds because the taxpayer began proper reporting and withholding
for the years after the examination years, which can be attributed back to the years
for which there was an action.
II. The Secretary Must Take an Administrative or Judicial Action.
An award under section 7623(b)(1) is predicated in part on the Secretary’s
proceeding with “any administrative or judicial action described in subsection
(a)”. In this case there is no dispute that the Commissioner took an administrative
action with respect to the taxpayer’s 2006 through 2008 years. The Commissioner
expanded an ongoing examination to include the withholding tax issue. This is
clearly a civil proceeding by the Commissioner that may result in collected
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proceeds. But the Commissioner took no administrative or judicial action with
respect to years after 2008, the years for which the whistleblower seeks an award.
The Whistleblower Office explained in the Form 11369 after completing the 2006
through 2008 examination that “any further examination is not warranted.” The
mere fact that the taxpayer filed an original return is not a civil proceeding by the
Commissioner. Thus, there is no administrative or judicial action from which an
award can be paid.
But this is not the end of our inquiry. The parties dispute whether amounts
collected for the years after the examination years can be taken into account when
determining collected proceeds for the actions taken with respect to 2006 through
2008. The Commissioner states that amounts collected for years after the
examination years are not collected proceeds because the Commissioner has not
taken an action. The whistleblower argues that the amounts collected for 2009
through 2012 are collected proceeds and should relate back to the examination for
the 2006 through 2008 years. Thus, we need to decide whether there were any
collected proceeds for the years after the examination years that should have been
taken into account for an award for the actions that occurred for the tax years 2006
through 2008.
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III. The Award Must Be Based on Collected Proceeds.
Section 7623(b)(1) provides that a whistleblower will “receive as an award
at least 15 percent but not more than 30 percent of the collected proceeds
(including penalties, interest, additions to tax, and additional amounts)”.
Therefore, an award is predicated on the collection of proceeds. “Collected
proceeds” is not defined in the statute. In Whistleblower 21276-13W v.
Commissioner, 147 T.C. at __ (slip op. at 11-12), we relied on the canons of
statutory construction to define collected proceeds. We defined it as “all proceeds
collected by the Government from the taxpayer”. Id. at __ (slip op. at 32). We
explained that “collected proceeds” is an “expansive and general term” a
“sweeping term”, id. at __ (slip op. at 14), and “not limited to amounts assessed
and collected under title 26”, id. at __ (slip op. at 23).
A. Collected Proceeds Do Not Include Amounts Collected for Years
After Examination Years Because of a Change in Reporting.
The parties dispute whether collected proceeds include amounts collected
for the years after examination years because of a taxpayer’s voluntarily changing
its reporting. The whistleblower observes that the whistleblower provided
information to the Commissioner which led to an expansion of an examination to
include information reporting. The whistleblower further argues that this
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expansion caused the taxpayer to change its reporting and begin properly reporting
and withholding after a decade of improper reporting. Thus, under the position
taken by the whistleblower, any initial action requires the Commissioner to track
changes in a taxpayer’s reporting on that issue because any change in reporting
may result in collected proceeds. The Commissioner argues that collected
proceeds do not include additional amounts collected as a result of the taxpayer’s
voluntary compliance.
The whistleblower argues that the Commissioner should not limit collected
proceeds to the year of the action and looks to final regulations, which the parties
agree do not apply in this case, for support. The whistleblower argues that section
301.7623-4(b), Proced. & Admin. Regs. (Aug. 12, 2014), demonstrates that
collected proceeds include additional amounts collected after an examination
because of a change in reporting. But that regulation does not define collected
proceeds; that regulation relates to the factors to be taken into account when
determining the award percentage. The regulation provides:
(b) Factors used to determine award percentage.--(1) Positive
factors.--The application of the following non-exclusive factors may
support increasing an award percentage under paragraphs (c)(1) or (2)
of this section--
* * * * * * *
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(viii) The information provided had an impact on the behavior
of the taxpayer, for example by causing the taxpayer to promptly
correct a previously-reported improper position.
In contrast, section 301.7623-2(d)(1), Proced. & Admin. Regs. (Aug. 12, 2014)
defines collected proceeds. That regulation provides that collected proceeds
include
Tax, penalties, interest, additions to tax, and additional amounts
collected because of the information provided; amounts collected
prior to receipt of the information if the information provided results
in the denial of a claim for refund that otherwise would have been
paid; and a reduction of an overpayment credit balance used to satisfy
a tax liability incurred because of the information provided. * * *
That regulation also includes a provision allowing for monitoring “post-
determination proceeds”. See id. subpara. (5)(ii). Specifically, that regulation
provides:
If, based on all information known with respect to the taxpayer’s
account as of the date of the computation described in paragraph
(d)(5)(i) of this section, there is a possibility that the IRS may collect
additional proceeds, then the Whistleblower Office will continue to
monitor the case. If the Whistleblower Office identifies additional
collected proceeds, then the IRS will compute and pay accordingly.
The preamble to the final regulation explained this rule in detail. In part, the
Department of the Treasury (Treasury) wrote: “These final regulations provide
that the Whistleblower Office will monitor the relevant taxpayer account or
accounts until the IRS receives collected proceeds as a result of a reduction in the
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tax attribute, or the taxpayer’s ability to apply the tax attribute expires unused.”
T.D. 9687, 2014-36 I.R.B. 486, 495. In other words, the IRS will look to a tax
attribute that has been adjusted for a year that was the subject of the action, and if
there is an effect for other years, the IRS will consider the ongoing effect of that
tax attribute in determining the amount of collected proceeds. Treasury even
cautioned:
The adoption of a monitoring approach in the final regulations,
however, is only intended to explicitly enable the IRS to make an
additional award payment when a tax attribute produces collected
proceeds after an award has been determined, as described in the
preceding paragraphs. * * * In other words, monitoring does not alter
the general rule that no award will be paid until there has been a final
determination of tax, as defined in the final regulations.
Id.
The whistleblower misses this important distinction. The final regulations
allow the IRS to monitor a taxpayer’s reporting of tax attributes that arise for the
years that were the subject of the examination. See sec. 301.7623-2(d)(5)(ii),
Proced. & Admin. Regs.; see also T.D. 9687, 2014-36 I.R.B. at 495. On the basis
of the tax effect of those attributes, the IRS may adjust an award (upward or
downward). See T.D. 9687, 2014-36 I.R.B. at 495. One example is the reduction
of a net operating loss (NOL) carryforward because of the whistleblower’s
information; the whistleblower may receive a percentage of the collected proceeds
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resulting from the portion of the NOL deduction that is disallowed for the
carryforward years. See id. Similarly, if the whistleblower’s information led to
the disallowance of an expense deduction for a piece of equipment that should
have been capitalized and depreciated, the future allowance of depreciation
deductions could reduce the amount of collected proceeds that might have
otherwise arisen from the mere disallowance of the expense deduction, standing
alone. See id.
Neither of these examples (adapted from the preamble to the final
regulations, id.), suggests that the IRS would monitor for a change in reporting.
Both address situations in which adjustments to tax attributes made in the year of
the action have direct carryover consequences for other years.
Collected proceeds do not include self-reported amounts collected when a
taxpayer changes its reporting for years that are not part of the action. The
Commissioner argues, and we agree, that because of the significant costs and
heavy administrative burden, collected proceeds cannot include amounts collected
for years after examination years on account of a taxpayer’s changing its reporting.
Petitioner takes the definition of “collected proceeds” as “all proceeds collected by
the Government from the taxpayer”, Whistleblower 21276-13W v. Commissioner,
147 T.C. at __ (slip op. at 32), to an irrational extreme to argue that self-assessed
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amounts collected for future years are proceeds collected by the Government.
Indeed, many, if not all, of the Commissioner’s examinations will have some
influence on a taxpayer’s reporting. However, any determination of an award
based on additional amounts collected for years following examination years
would be based on speculation.
The whistleblower argues that the determination of amounts collected for
years after examination years on account of a change in reporting is not too
speculative in this case. The whistleblower contends that the Commissioner
would be able to determine with reasonable certainty2 that the 2006 to 2008
examination had caused the taxpayer to change its reporting after the examination
by simply comparing the taxpayer’s history of noncompliance with the period
when the taxpayer came into compliance. The whistleblower asks us to define
collected proceeds to include amounts collected after examination years if they are
“reasonably determinable”. The Commissioner counters that any attempt to
determine the amount of the award would require another action (e.g., an
2
The whistleblower’s argument incorporates the statement from the
preamble to the final regulations, which explains that collected proceeds do not
include amounts collected for subsequent years because “the IRS would have no
way to determine with any reasonable certainty what the taxpayer’s reporting
position would have been if not for the underlying action and whether the
taxpayer’s compliance was a direct result of the underlying action.” T.D. 9687,
2014-36 I.R.B. 486, 496.
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examination) by the Commissioner, and the Court cannot require the
Commissioner to take an action. We agree with the Commissioner. And as we
have previously held: “Congress did not authorize the Court to direct the
Secretary to proceed with an administrative or judicial action.” Cooper v.
Commissioner, 136 T.C. 597, 600 (2011); see also Cohen v. Commissioner, 139
T.C. 299, 302 (2012), aff’d, 550 F. App’x 10 (D.C. Cir. 2014).
B. The Whistleblower’s Additional Arguments Are Unconvincing.
The whistleblower advances various other arguments that are all tied
together using the common “change in behavior” thread.
1. Amounts Paid Through Voluntary Compliance for Subsequent
Years Are Not “Additional Amounts”.
The whistleblower argues that a genuine dispute of material fact remains as
to whether amounts paid for subsequent years are “additional amounts” as used in
section 7623(b)(1) and includable in collected proceeds. In Whistleblower 22716-
13W v. Commissioner, 146 T.C. 84, 95 (2016), we held that the term “additional
amounts” as used in section 7623(b)(5)(B), the threshold requirements for a
whistleblower award, has a technical meaning. We explained that “additional
amounts” when used in a series that includes the words “tax” and either “additions
to tax” or “additions to the tax” means civil penalties set forth in chapter 68,
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subchapter A, of the Internal Revenue Code. Id. at 93-94. Accordingly,
“additional amounts” as used in section 7623(b)(1) has a technical meaning, and
the whistleblower has not set forth any specific facts to show that the taxpayer
paid additional amounts for later years.
2. Voluntary Compliance for Subsequent Years Is Not a “Related
Action”.
The whistleblower also argues that the whistleblower is entitled to an award
because the subsequent years were a “related action” and the Commissioner
collected additional taxes because of the taxpayer’s change in reporting. The
whistleblower relies on the Internal Revenue Manual (IRM) pt. 25.2.2.2 (June 18,
2010) for support. The IRM states that “[g]enerally a related action is [(i)]any
action involving the taxpayer from the original action and that is based on, either
directly or indirectly, the same information on which the original action is based”.
Id. pt. 25.2.2.2(8). The whistleblower summarizes the Commissioner’s position in
the IRM as “same fact pattern but different years” and argues that the taxpayer
continued to make the same errors for at least some of its subsequent years before
changing its reporting.
The whistleblower seeks to use the concept of a related action to merge the
years with respect to which the Commissioner took an action with the subsequent
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years. We have explained that “any related action” is also a “broad and sweeping
term[]”. Whistleblower 21276-13W v. Commissioner, 147 T.C. at __ (slip op. at
14). However, the whistleblower overlooks that a related action requires the
Secretary to take a subsequent action. Specifically, the IRM refers to “any action
involving the taxpayer from the original action”. IRM pt. 25.2.2.2(8). The
Commissioner clearly contemplated that there be two actions: an original action
and a subsequent action. And as explained above, the Commissioner did not take
an action for the later years. The Commissioner did not conduct a civil or criminal
proceeding that may result in collected proceeds, and there is no suggestion of any
judicial action. Although the Commissioner took an action with respect to the
taxpayer’s 2006 to 2008 years, he did not take a subsequent action. There simply
is no subsequent action.
3. The Whistleblower Offered No Evidence of an Implied
Settlement.
Finally, the whistleblower argues that a genuine issue of material fact
remains regarding whether the Commissioner collected proceeds pursuant to an
“implied settlement”. The whistleblower’s position is that the Commissioner’s
auditor’s statement in the explanation attached to the Form 11369 that “[i]t
appears the * * * [taxpayer] has been convinced by its close call to become fully
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compliant with its withholding tax responsibilities and further examination is not
warranted” implies an underlying agreement that the Commissioner will not
conduct an examination for subsequent years so long as the taxpayer changes its
reporting.
Section 7623(b)(1) allows for whistleblower awards resulting “from any
settlement in response to such action.” The term “settlement” is not defined in the
Internal Revenue Code. However, because a settlement is a contract, we look to
contract law principles to determine whether a settlement has been reached.
Dorchester Indus. Inc. v. Commissioner, 108 T.C. 320, 330 (1997), aff’d, 208 F.3d
205 (3d Cir. 2000). “A prerequisite to the formation of a contract is an objective
manifestation of mutual assent to its essential terms” and generally, mutual assent
“requires an offer and an acceptance.” Id. And a settlement agreement may be
reached even in the “absence of a writing.” Lamborn v. Commissioner, T.C.
Memo. 1994-515, 1994 Tax Ct. Memo LEXIS 523, at *14.
The whistleblower has not set forth any specific facts showing that the
taxpayer and the Commissioner entered into a settlement agreement or had any
intention to enter into such an agreement. There is nothing more than the
whistleblower’s speculation that the statement in the explanation attached to the
Form 11369 is something more than the auditor’s opinion. This alone does not
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rise to the level of mutual assent. Mere speculative suggestions and conclusory
assertions do not give rise to sufficient facts to deny a motion for summary
judgment. Daniels v. Commissioner, T.C. Memo. 1994-591, 1994 Tax Ct. Memo
LEXIS 599, at *47; see also Rule 121(d); Rauenhorst v. Commissioner, 119 T.C.
157, 175 (2002). Accordingly, we conclude that the whistleblower has not offered
any facts to indicate that a settlement existed. Further, even if a settlement had
existed, in keeping with our previous discussion, a change in reporting does not
give rise to “collected proceeds”.
IV. Conclusion
The whistleblower has not provided any evidence of a genuine dispute as to
any material fact. The whistleblower’s argument that the taxpayer’s change in
reporting could result in “collected proceeds” is not supported by the statute.
Accordingly, we will grant the Commissioner’s motion for summary judgment.
To reflect the foregoing,
An appropriate order and decision
will be entered.