T.C. Memo. 2017-108
UNITED STATES TAX COURT
JAMES AWAD, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 3755-14W. Filed June 8, 2017.
P provided information to the IRS Whistleblower Office (WO)
regarding individuals TH and TW’s alleged failure to disclose their
ownership interests in foreign bank accounts. WO forwarded P’s
information to the Large Business & International Division (LB&I),
which declined to examine TH and TW’s returns. TH died while
LB&I was considering P’s information. Thereafter TW and her adult
children filed voluntary disclosures with the Criminal Investigation
Division (CID) in which they reported income from a previously
undisclosed account at the same foreign bank P had identified.
CID accepted the voluntary disclosures and forwarded them to
the Small Business/Self Employed Division (SB/SE) for examination.
The SB/SE examination resulted in the assessment of over $2 million
in income tax, accuracy-related penalties, and interest against TH and
TW, in addition to a title 26 miscellaneous penalty. Although WO
forwarded P’s information to SB/SE, the revenue agent who
conducted the examination denied using it.
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[*2] WO also forwarded P’s information to SB/SE’s Estate and Gift
Tax Group (E&G), which had selected TH’s estate’s estate tax return
for examination. The revenue agent who was conducting the
examination asserted that P’s information was not relevant to his
investigation. Thereafter, WO issued a determination denying P’s
claim for a whistleblower award.
Held: We need not decide the standard of review in this case
because we would sustain R’s determination under either a de novo or
an abuse of discretion standard of review.
Held, further, because the administrative action taken by the
IRS against the taxpayers was not based on his information, P is not
entitled to a whistleblower award.
Howard W. Gordon, Leticia Vega, and Alyssa L. Razook Wan, for
petitioner.
Marianna Lvovsky, Patricia P. Davis, and John T. Arthur, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
VASQUEZ, Judge: Pursuant to section 7623(b)(4), petitioner has appealed
the Internal Revenue Service’s (IRS) denial of his claim for a nondiscretionary
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[*3] whistleblower award.1 The issue for decision is whether petitioner is entitled
to an award under section 7623(b)(1).
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of
facts and the attached exhibits are incorporated by this reference. Petitioner
resided in New York when he filed his petition.
Petitioner’s Whistleblower Claim
On November 18, 2008, petitioner filed Form 211, Application for Award
for Original Information, with the IRS Whistleblower Office (Whistleblower
Office). In the Form 211 petitioner implicated taxpayer husband, taxpayer wife,
and their three adult children (taxpayer children) (collectively, taxpayers) as
owners of undisclosed foreign bank accounts. Petitioner alleged that taxpayer
husband was likely transferring millions of untaxed dollars to these accounts.
While petitioner provided the name of the bank, he did not list any account
numbers or give other identifying information about the alleged accounts. The
Whistleblower Office confirmed receipt of the Form 211 and informed petitioner
that his claim had been assigned to analyst Nancy Burcham.
1
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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[*4] Referral of Whistleblower Information to LB&I
In February 2009 Ms. Burcham forwarded petitioner’s information to the
IRS Large Business and International Division (LB&I). The matter was assigned
to LB&I examiner Alan Hymes.
Mr. Hymes reviewed petitioner’s information and, in June 2009, decided to
accept the taxpayers’ returns as filed. In a written statement to the Whistleblower
Office Mr. Hymes wrote: “At this point there is not enough information to
determine that this is a good case for the field. * * * [Petitioner] did not provide
any documentation to show that the * * * account or accounts exist or that any
money was transferred”.
Inexplicably, LB&I allowed several months to pass before returning the
case to the Whistleblower Office.2 The administrative record indicates that Ms.
Burcham may not have received Mr. Hymes’ written statement until July 2010,
over a year after LB&I had made its decision.
The Taxpayers’ Voluntary Disclosure
Meanwhile, taxpayer husband died in August 2009. In January 2010 the
surviving taxpayers filed voluntary disclosures pertaining to a previously
2
In an internal memorandum Ms. Burcham stated: “The entire casefile
[sic] was received in the * * * [Whistleblower Office] a considerable time after the
signing of * * * [Mr. Hymes’ written statement].”
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[*5] undisclosed account at the same foreign bank petitioner had identified to the
Whistleblower Office.3 The taxpayers’ voluntary disclosures included account
information and amended returns reporting previously undisclosed income for tax
years 2003 through 2008. CID accepted the taxpayers’ voluntary disclosures and
forwarded their case file to the IRS Small Business/Self-Employed Division
(SB/SE) for examination. The matter was assigned to SB/SE revenue agent (RA)
Thomas George. RA George’s examination of the taxpayers’ voluntary disclosure
submission began in July 2010.
Referral of Whistleblower Information to SB/SE
After learning that LB&I would not be examining the taxpayers’ returns,
Ms. Burcham contemplated issuing a rejection letter to petitioner. Before doing
so, she performed additional research and discovered that SB/SE was examining
3
The IRS Criminal Investigation Division (CID) maintains a longstanding
practice of voluntary disclosure whereby taxpayers can generally avoid criminal
prosecution by disclosing their tax noncompliance to CID timely and completely.
See Offshore Voluntary Disclosure Program Frequently Asked Questions and
Answers 2014, Q&A-3. In March 2009 the IRS launched the offshore voluntary
disclosure program (OVDP), a “counterpart” to this practice under which
taxpayers who timely disclosed their ownership of unreported foreign bank
accounts were eligible for reduced monetary penalties. See id. The extended
deadline for participating in the 2009 OVDP was October 15, 2009. Id. A second
OVDP (called the “Offshore Voluntary Disclosure Initiative”) was initiated on
February 8, 2011, and ran until September 9, 2011. Id. A third, open-ended
OVDP began in 2012. Id. Q&A-1. There was no OVDP in effect during 2010.
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[*6] the taxpayers’ returns in connection with their voluntary disclosure.
Consequently, in September 2010, Ms. Burcham forwarded petitioner’s
information to SB/SE “to determine if any of * * * [petitioner’s] information was
used to assist in the exams being opened on the taxpayers.”
After receiving petitioner’s information, SB/SE subject matter expert Frank
Stamm contacted petitioner and arranged a telephone interview. During the
interview petitioner further explained the basis for his allegations against the
taxpayers. In an internal memorandum recounting the interview, Mr. Stamm
wrote: “While he could not provide account numbers he did provide lists of shares
owned in various * * * [foreign] corporations, and properties owned in the US and
abroad by the taxpayers.” Mr. Stamm recommended that petitioner’s submission
“be sent to the field for association with * * * [the taxpayers’] ongoing * * *
audits.”
Petitioner’s information was forwarded to RA George. Thereafter RA
George provided the Whistleblower Office with a written statement indicating that
the sole cause of the examination was the taxpayers’ voluntary disclosure. He
stated: “There has been no indication in the case files that * * * [petitioner’s]
information initiated the investigation or assisted to gather any offshore accounts.”
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[*7] In August 2011 taxpayer wife and an SB/SE group manager signed a Form
906, Closing Agreement on Final Determination Covering Specific Matters
(closing agreement). The closing agreement, to which taxpayer wife and the estate
of taxpayer husband were parties, referenced the 2009 OVDP4 and stated that the
taxpayers’ voluntary disclosure was made pursuant to that program. In accordance
therewith, taxpayer wife and taxpayer husband’s estate agreed to pay a title 26
miscellaneous penalty “in lieu of any other penalties that the * * * [IRS] may
impose with respect to the offshore financial arrangements that were the subject of
the voluntary disclosure”. Additionally, the IRS adjusted taxpayer husband and
taxpayer wife’s tax liabilities for 2003 through 2008, assessing taxes, penalties,
and interest in excess of $2 million. Having reached an agreement with taxpayer
wife and taxpayer husband’s estate, RA George did not make any adjustments to
the returns of the taxpayer children. The examination of the taxpayers’ returns
was officially closed in November 2011.
Meanwhile, petitioner’s whistleblower claim remained open. In 2012 or
2013 Ms. Burcham left the Whistleblower Office, and petitioner’s claim was
reassigned to analyst Kenneth Chatham. Mr. Chatham reviewed the claim file and
decided to email RA George for clarification regarding whether petitioner’s
4
See supra note 3.
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[*8] information had been used during the examination. In a subsequent telephone
call RA George stated that he had relied exclusively on information provided by
the taxpayers and that he had not used petitioner’s information.
Referral of Whistleblower Information to SB/SE Estate and Gift Tax
In August 2013 Mr. Chatham learned that SB/SE’s Estate and Gift Tax
Group (E&G) had selected taxpayer husband’s estate’s estate tax return for
examination. Mr. Chatham forwarded petitioner’s information to E&G.
E&G examiner James Truman did not find petitioner’s information to be
helpful. Mr. Truman provided the Whistleblower Office with a written statement
in which he explained: “The whistleblower claim has nothing to do with the estate
tax return, only income tax issues. This estate tax return should never have been
classified as a whistleblower case.”
Award Determination and Appeal
On January 28, 2014, the Whistleblower Office issued a determination letter
to petitioner denying his claim for an award. Petitioner timely filed a petition
appealing the Whistleblower Office’s determination. Petitioner asserts that he is
entitled to 15% to 30% of the total amounts collected from: (1) the assessment of
additional income tax, accuracy-related penalties, and interest for 2003 through
2008 against taxpayer husband and taxpayer wife; (2) “FBAR penalties” against
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[*9] taxpayer husband and taxpayer wife; and (3) additional estate tax for which
taxpayer wife’s estate is liable on account of the inclusion of the foreign bank
account in her gross estate.5
A trial was held in Miami, Florida. Thereafter both parties filed opening
and answering briefs.
OPINION
We decide whether petitioner, a whistleblower, is entitled to a section
7623(b) award after a trial on the merits. Because petitioner failed to prove that
the IRS proceeded with administrative or judicial action against the taxpayers on
the basis of his information, we hold that he is not.
I. Statutory Framework
The IRS has long had authority to pay discretionary awards to persons, now
called “whistleblowers”, who provide information leading to the recovery of
unpaid taxes. See sec. 7623 (1954). In response to concerns about the
management of the discretionary award regime, Congress enacted legislation in
2006 to address perceived problems with the whistleblower program. Tax Relief
and Health Care Act of 2006, Pub. L. No. 109-432, div. A, sec. 406, 120 Stat. at
2958 (effective Dec. 20, 2006). The 2006 legislation added to section 7623 a new
5
Taxpayer wife died in July 2014.
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[*10] subsection (b), which requires the payment of nondiscretionary
whistleblower awards in specified circumstances and provides this Court
jurisdiction to review IRS determinations regarding such awards. See Cooper v.
Commissioner, 135 T.C. 70, 73 (2010).
Section 7623(b)(1) requires payment of an award if the IRS “proceeds with
any administrative or judicial action” to collect taxes “based on information
brought to the Secretary’s attention by an individual”. The award amount must be
at least 15% and not more than 30% of “the collected proceeds (including
penalties, interest, additions to tax, and additional amounts) resulting from the
action” or settlement thereof. Id. The determination of the amount of the award
“shall depend upon the extent to which the individual substantially contributed to
such action.”6 Id.
Section 7623(b)(5) defines the scope of claims that are subject to the
nondiscretionary award program established in subsection (b). The IRS must pay
claims on a nondiscretionary basis only with respect to actions against a taxpayer
6
The IRS may determine a lower percentage award if the whistleblower’s
information is derived from publicly disclosed allegations (unless such
information “was originally provided by” the whistleblower) or if the
whistleblower planned and initiated the activities leading to the underpayment of
tax. Sec. 7623(b)(2) and (3). The IRS is directed to deny an award altogether if
the whistleblower is convicted criminally for planning and initiating such
activities. See sec. 7623(b)(3).
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[*11] whose “gross income exceeds $200,000 for any taxable year subject to such
action” and only “if the tax, penalties, interest, additions to tax, and additional
amounts in dispute exceed $2,000,000.” Sec. 7623(b)(5)(A) and (B). The IRS
must raise a failure to satisfy these monetary thresholds as an affirmative defense.
See Lippolis v. Commissioner, 143 T.C. 393, 400 (2014).
II. Jurisdiction and Standard of Review
Section 7623(b)(4), captioned “Appeal of award determination”, governs
our jurisdiction over whistleblower claims. It provides: “Any determination
regarding an award under paragraph (1), (2), or (3) may, within 30 days of such
determination, be appealed to the Tax Court (and the Tax Court shall have
jurisdiction with respect to such matter).” A “determination regarding an award”
means a determination as to the amount of an award or a determination to deny an
award. Cooper v. Commissioner, 135 T.C. at 75. Thus, this Court has jurisdiction
under section 7623(b)(4) where, as here, (1) the IRS makes a determination
denying a claim for award under section 7623(b); and (2) a petition invoking our
jurisdiction over that matter is timely filed. See Kasper v. Commissioner, 137
T.C. 37, 41 (2011).
Neither the text nor the legislative history of section 7623(b)(4) specifies
the standard of review that the Court is to apply in reviewing IRS determinations.
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[*12] Petitioner contends that de novo review is appropriate, while respondent
argues for an abuse of discretion standard. We need not resolve this question
today since we would sustain respondent’s determination under either standard of
review.7 See Golub v. Commissioner, T.C. Memo. 2013-196, at *7.
III. Analysis
Respondent’s determinations are presumptively correct, and petitioner bears
the burden of proving that those determinations are erroneous. See Rule 142(a);
Welch v. Helvering, 290 U.S. 111, 115 (1933).
Section 7623(b) provides: “If the Secretary proceeds with any
administrative or judicial action * * * based on information brought to the
Secretary’s attention by an individual, such individual shall * * * receive as an
award at least 15 percent but not more than 30 percent of the collected proceeds
* * * resulting from the action (including any related actions) or from any
settlement in response to such action.” Section 301.7623-2, Proced. & Admin.
7
At trial we heard testimony from petitioner and Mr. Chatham. Neither
party argued that we could not consider this testimony because it was outside the
administrative record. Nor did the parties attempt to introduce other evidence
outside the administrative record. Accordingly, we need not decide whether our
scope of review is limited to the administrative record.
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[*13] Regs.,8 defines terms used in section 7623(b) and the regulations
interpreting it. The IRS “proceeds based on information provided by a
whistleblower” when, for example, “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.” Sec. 301.7623-2(b), Proced. & Admin. Regs.
In sum, petitioner’s entitlement to an award turns on two issues: first,
whether there was a collection of proceeds; and, second, whether that collection
was attributable to the IRS’ proceeding with administrative or judicial action on
the basis of petitioner’s information. See Whistleblower One 10683-13W v.
Commissioner, 145 T.C. 204, 206 (2015).
A. Collection of Proceeds
Whether there was a collection of proceeds from the taxpayers is not in
serious dispute. The parties stipulated that the IRS’ adjustment of taxpayer
husband and taxpayer wife’s tax liabilities for 2003 through 2008 resulted in the
8
Pursuant to sec. 301.7623-2(f), Proced. & Admin. Regs., the section is
effective on August 12, 2014, and applies to information submitted on or after that
date and to claims for awards that are open on that date. Respondent concedes that
the regulations are not controlling here because the petition was filed before the
effective date of the regulations. Nevertheless, we find the above-quoted wording
instructive. We express no opinion on the validity of other wording in sec.
301.7623-2(b), Proced. & Admin. Regs., or its applicability in other contexts.
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[*14] assessment of over $2 million in tax, penalties, and interest. Furthermore, in
their closing agreement, taxpayer wife and taxpayer husband’s estate agreed to
pay, and the IRS agreed to accept, a title 26 miscellaneous penalty for the 2007 tax
year “in lieu of any other penalties that the * * * [IRS] may impose with respect to
the offshore financial arrangements that were the subject of the voluntary
disclosure”. Respondent has not claimed that the taxpayers failed to pay these
sums. We therefore find that there was a collection of proceeds from the
taxpayers.
B. Administrative or Judicial Action
Next we must decide whether the collection of the above proceeds was
attributable to the IRS’ proceeding with administrative or judicial action on the
basis of petitioner’s information. Our inquiry here turns on whether petitioner’s
information had any effect on the IRS’ examination of the taxpayers’ returns.
The record shows that, on three separate occasions, the Whistleblower
Office forwarded petitioner’s information to other operating divisions of the IRS
for further investigation: first, to LB&I in February 2009; then, to SB/SE in
September 2010; and finally, to E&G in August 2013. We address each referral in
turn.
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[*15] 1. LB&I Referral (February 2009)
With respect to the LB&I referral, a representative of that division reviewed
petitioner’s information and decided not to examine the taxpayers’ returns.
Nothing in the record indicates that LB&I later changed course. Because LB&I
did not proceed with administrative or judicial action against the taxpayers,
petitioner is not entitled to an award on the basis of this referral. See Cooper v.
Commissioner (Cooper II), 136 T.C. 597, 601 (2011) (“[W]histleblower awards
are preconditioned on the Secretary’s proceeding with an administrative or judicial
action.”).
2. SB/SE Referral (September 2010)
Unlike LB&I, SB/SE opted to examine the taxpayers’ returns. The parties
disagree about whether petitioner’s information prompted and/or facilitated the
examination. Under respondent’s theory of the case, the taxpayers’ voluntary
disclosure was the sole cause of the examination and resulting adjustments.
Respondent contends that there is no evidence that RA George or anyone else at
SB/SE used petitioner’s information during the examination.
Conversely, petitioner argues that his information prompted the examination
of the taxpayers’ returns and the adjustments that followed. Under petitioner’s
theory of the case, the IRS had received his information about the taxpayers’
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[*16] undisclosed bank accounts before it accepted their voluntary disclosure. By
admitting the taxpayers into the OVDP when it was already on notice of the their
noncompliance, the IRS disregarded its own rules and procedures.9 Such
disregard, petitioner argues, is evidence that the IRS shepherded the taxpayers into
the OVDP in order to avoid paying him an award.10 Petitioner cites respondent’s
apparent refusal to provide him with documents concerning the taxpayers’
acceptance into the OVDP as evidence of this scheme.
On the basis of the record before us, we disagree with petitioner. In a
written statement to the Whistleblower Office, RA George stated that there was no
evidence in his case file that petitioner’s information had prompted the
examination. RA George also confirmed to Mr. Chatham that he did not use
petitioner’s information during his examination of the taxpayers’ voluntary
disclosure submission. There is nothing in the record that shows or even suggests
otherwise. Also absent from the record is any evidence of a causal connection
9
Internal Revenue Manual (IRM) pt. 9.5.11.9(3) (Dec. 2, 2009) states that a
voluntary disclosure must be timely. A voluntary disclosure is timely if received
before the IRS “has received information from a third party (e.g., informant, other
governmental agency, or the media) alerting the IRS to the specific taxpayer’s
noncompliance.” Id. pt. 9.5.11.9(4)(b).
10
Petitioner also argues that the taxpayers were ineligible for the OVDP
because they submitted their voluntary disclosure after the extended deadline for
the 2009 OVDP and before the start of the 2011 OVDP.
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[*17] between petitioner’s whistleblower submission and the taxpayers’ decision
to come forward to the IRS.11
Furthermore, the IRS’ purported disregard of its own rules in accepting the
taxpayers’ voluntary disclosure does not support the inference that the IRS used
the OVDP as a cover for denying petitioner an award. For one, the rule petitioner
primarily relies on is found in the Internal Revenue Manual (IRM). See supra note
9. It is a well-settled principle that the IRM does not have the force of law and is
not binding on the IRS. McGaughy v. Commissioner, T.C. Memo. 2010-183, slip
op. at 17; see United States v. Caceres, 440 U.S. 741 (1979); Fargo v.
Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), aff’g T.C. Memo. 2004-13.
Second, Congress explicitly authorized the IRS to enter into closing agreements
like the one it reached with the taxpayers. See sec. 7121 (authorizing the IRS to
enter into a written closing agreement “with any person relating to the liability of
such person * * * in respect of any internal revenue tax for any taxable period”).
Such agreements “may be used for procedural economy, or to prevent a dispute
from arising.” United States v. Nat’l Steel Corp., 75 F.3d 1146, 1151 (7th Cir.
11
Accordingly, we need not decide whether the IRS “proceeds with
administrative or judicial action” based on a whistleblower’s information when:
(1) the IRS examines a taxpayer’s return in connection with a voluntary disclosure
and (2) the disclosure was prompted by the taxpayer’s discovery that an informant
had named him or her in a whistleblower submission.
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[*18] 1996). We cannot conclude that the exercise of this authority, absent proof
of any actual wrongdoing, is evidence of a scheme to deprive petitioner of an
award.
Nor can we conclude that respondent’s apparent refusal to provide
petitioner with certain documents evidences such a scheme. If a party is troubled
by another party’s response to a discovery request, Rule 72(b)(2) permits the
requesting party to file an appropriate motion with the Court. See Whistleblower
One 10683-13W v. Commissioner, 145 T.C. at 207 (granting a whistleblower’s
motion to compel the production of documents and responses to interrogatories).
Having proceeded to trial without taking this step, petitioner cannot cite the failure
to produce documents as grounds for requesting a negative inference against
respondent. Accordingly, petitioner is not entitled to an award on the basis of the
referral to SB/SE.
3. E&G Referral (August 2013)
In a written submission to the Whistleblower Office, an E&G examiner
stated that petitioner’s information “has nothing to do with * * * [taxpayer
husband’s estates’s] estate tax return, only income tax issues” and that “[t]his
estate tax return should never have been classified as a whistleblower case.”
There is no evidence that E&G later changed course. Because E&G did not
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[*19] initiate, expand the scope of, or continue to pursue its examination of
taxpayer husband’s estate’s estate tax return on account of petitioner’s
information, petitioner is not entitled to an award on the basis of this referral.
IV. Conclusion
Because the administrative action taken by the IRS against the taxpayers
was not based on his information, petitioner is not entitled to a whistleblower
award. Accordingly, we sustain respondent’s determination.
The Court has considered all of the arguments made by the parties, and to
the extent they are not addressed herein, they are considered irrelevant, moot, or
without merit.
To reflect the foregoing,
Decision will be entered for
respondent.