Tax Court Denies WB Claim Made Contemporaneously With Target Taxpayer’s Voluntary Disclosure (2/23/24)

In Whistleblower 14376-16W v. Commissioner, T.C. Memo. 2024-22, GS here, the Court held that the Whistleblower (“WB”) was entitled to no relief from the Whistleblower Office’s denial of an award. The opinion establishes no new precedent, which is why it is a Memo opinion. The opinion does offer some interesting aspects, which I will discuss here.

1. The WB claim targeting several taxpayers was made a couple of months before some of the taxpayers made a request to CI to participate in an IRS voluntary disclosure program.  (It is not clear whether the request was under one of the offshore variants or was under the general voluntary disclosure program (see p. 3 n. 6); it makes no difference, however, for the point I discuss here, so I will just call it a VDP request.) The VDP request was made before any submissions (amended returns, etc.) required to complete voluntary disclosure; those submissions were delayed a substantial period. After the voluntary disclosure request, the WBO processed and sent to the field the WB claim after CI received the VDP request. The IRS subsequently undertook the work required to determine and collect substantial tax based on the taxpayers' submissions. The IRS says that, although its examination function received the WB information, it took no action based on the information. The record before the Court (essentially the record related to the WB claim and related items) supported the IRS’s claim that the proceeds generated from its activity did not rely on the WB claim and information in the WB claim.

2. The Court denied the WB’s sweeping and broadly written discovery requests designed to ferret out all documents and information that could test even tangentially the IRS’s narrative that no collected proceeds resulted from the WB information (including whether the record the IRS submitted to the Court was complete). In part, the WB requested documents and information in the voluntary disclosure package that, it claims, was “indirectly considered” in collecting the proceeds. (See pp. 33-37.) In part, the Court reasoned:

          Petitioner contends, however, that the WBO “indirectly considered” the VDP materials. As one court has aptly observed, “it is not entirely clear what it means to indirectly consider documents or materials.” Amgen Inc. v. Hargan, 285 F. Supp. 3d 397, 404 (D.D.C. 2017) (treating the “indirect consideration” concept as “captur[ing] materials that are necessary to understand the documents that the agency directly relied upon” and denying motion to supplement the administrative record with documents intended to test a decision by the Food and Drug Administration for consistency with previous decisions). The caselaw provides no general test.24 But it does suggest some guiding principles. One court has observed that if an agency's final decision was based “on the work and recommendations of subordinates, those materials should be included as well.” Amfac Resorts, L.L.C. v. U.S. Dep't. of Interior, 143 F. Supp. 2d 7, 12 (D.D.C. 2001) (collecting cases), aff'd in part, rev'd in part 282 F.3d 818 (D.C. Cir. 2002), vacated in part sub nom. Nat'l Park Hosp. Ass'n v. Dep't of Interior, 538 U.S. 803 (2003). On the other hand, it is not always necessary to include in the administrative record source information upon which agency staff relied in making their recommendations to the agency decisionmakers if other information in the record obviates the need to consider the source information independently. See, e.g., James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996) (affirming denial of discovery and record supplementation with respect to source documents that bank examiners had relied upon in making their bank-insolvency reports to the Comptroller of the Currency, where “detailed contemporaneous reports from the examiner-in-charge and members of her examination team explain[ed] how and why they reached their conclusions regarding the banks' reserves”); Cape Hatteras Access Pres. All., 667 F. Supp. 2d at 114 (denying motion to supplement the record with a biological report that the National Park Service had relied upon [*35] in developing an interim strategy that was before the Fish and Wildlife Service when it designated certain critical habitats, even though the biological report was referenced by several other documents in the administrative file).

          In Berenblatt, 160 T.C., slip op. at 19-21, this Court denied requested discovery of certain interview documents and subpoenaed financial records that the IRS had obtained before the whistleblower initially provided information to the IRS in an interview. The CI special agent who had interviewed the whistleblower referenced these documents in his Form 11369 narrative, but they were not included in the designated administrative record. This Court rejected an argument that because these documents had been available to the CI special agent when he completed the Form 11369, they had been indirectly considered in reaching a decision on the whistleblower's award claim. The Court reasoned that the decisionmakers for the whistleblower's claim were the relevant WBO personnel and not the CI special agent who prepared the Form 11369. Id. at 19. The Court observed: “If any potentially available document in the IRS's possession at the time the WBO made its decision were discoverable, that would render the record rule all but meaningless.” Id. at 20. The Court further stated that discovery of items available to the CI special agent were “limited to those relevant to [the whistleblower's] contribution to the ongoing investigation and generally does not extend to those created before his interview.” Id.

          In the instant case, CI received the target taxpayers' VDP application and forwarded it to SB/SE weeks before receiving petitioner's complete Form 211 package and forwarding it to a CI analyst for consideration. It was many months later that the WBO, upon learning that CI had ultimately declined to pursue the matter, forwarded petitioner's whistleblower information to SB/SE. Nothing in the record suggests that the VDP materials were “relevant to [the whistleblower's] contribution to the ongoing investigation.” Id. As the record makes clear, the only tax collections resulting from the investigation of the target taxpayers were attributable to the taxes that they reported on their delinquent and amended income tax returns and not to any information that petitioner provided.

          Similarly, the references to the target taxpayers' VDP application as contained in SA Chatham's ARMs do not compel the conclusion that the VDP materials were before the WBO in making its decision. As the ARMs make clear, this information was obtained from the Forms 11369 that CI and SB/SE forwarded to the WBO. The mere reference to the [*36] VDP application in these documents does not necessarily make it part of the record. See Berenblatt, 160 T.C., slip op. at 21 n.8; Oceana, Inc. v. Ross, 290 F. Supp. 3d 73, 79 (D.D.C. 2018) (“[T]he mere mention of a document in the agency's decision or the record does not always mean, ipso facto, that the agency considered the document.” (citing Franks v. Salazar, 751 F. Supp. 2d 62, 69 (D.D.C. 2010))). There is a difference between an agency's citing a document for a substantive proposition, which may indicate that the agency actually considered the document in making its decision, and merely referencing a document's existence, which is insufficient, on its own, to show consideration. Oceana, 290 F. Supp. 3d at 80; see also Marcum v. Salazar, 751 F. Supp. 2d 74, 80 (D.D.C. 2010) (“[R]eferences to documents in the administrative record do not prove that that the documents were 'before' the deciding agency.”); WildEarth Guardians v. Salazar, 670 F. Supp. 2d 1, 6 (D.D.C. 2009) (“Although citation to a document may . . . indicate consideration of the contents of the document, the fact that a document is merely mentioned does not lead to the same conclusion.”); Cape Hatteras Access Pres. All., 667 F. Supp. 2d at 114 (stating that multiple references in the record to a biological report did “not prove that it was before the agency when it made its decision”).

          The decisionmakers for petitioner's award claim were STA Chatham and his colleagues in the WBO, not the IRS field personnel who considered the VDP request. See Berenblatt, 160 T.C., slip op. at 19; see also IRM 25.2.1.1.2(2) and (3) (Mar. 10, 2023) (“The authority to determine and approve awards under IRC 7623 . . . is delegated to the Director of the W[B]O. . . . The operating divisions do not have authority to determine or approve awards under IRC 7623.”). Nothing in the record suggests that the WBO actually considered the substantive contents of the target taxpayers' VDP application or of any other VDP materials in making its decision to deny petitioner's award claim. As stated in SA Chatham's supplemental ARM: “This decision to accept the taxpayer's VDP filing was totally outside the purview of the Whistleblower Office and had no direct effect on the outcome of the Whistleblower's claim for award.” In these circumstances the references to the target taxpayers' VDP application in the ARMs and Forms 11369 are insufficient to overcome the presumption that the WBO properly designated the record. See Cape Hatteras Access Pres. Alliance, 667 F. Supp. 2d at 114.

          Petitioner suggests that discovery of the VDP materials is necessary because respondent's actions are not adequately explained in the administrative record. Petitioner posits various “mysteries” [*37] involving the IRS's decision to honor the target taxpayers' VDP request — why the IRS accepted a VDP request that was allegedly incomplete, disclosed the existence of a whistleblower to the target taxpayers' representative, and ultimately honored the VDP request even though it was submitted after petitioner had submitted the Form 211. The relevant question in this whistleblower proceeding, however, is not whether the IRS properly processed or honored the target taxpayers' VDP request — again, a question outside the purview of the WBO — but whether the WBO abused its discretion in denying petitioner's award claim. That question is the crux of this case, and we address it below in evaluating the substantive merits of this case rather than as part of our consideration of petitioner's discovery motion. 

3. The Court also denied the WB’s request to include the VDP materials as “extrarecord evidence.” (See pp. 37-40.) After considering other claims, the Court concludes (p. 42-43):

          In conclusion, petitioner has failed to overcome the presumption that the WBO has properly compiled the administrative record. Petitioner has not made a significant showing that respondent exercised bad faith in compiling it, nor has petitioner made a significant showing that it omits material that the WBO actually considered, directly or indirectly, or material that otherwise falls under a category listed in Treasury Regulation §301.7623-3(e). Furthermore, petitioner has not demonstrated the applicability of any of the narrow exceptions to the [*43] record rule that would permit extrarecord evidence to be consulted in this case. Consequently, we will deny petitioner's Motion to Compel Production of Documents. 

4. The Court denied the WB’s claim that “a good majority” of the documents in the  record “constitute hearsay” reasoning (p. 43):

Respondent has submitted all these documents in support of his Motion for Summary Judgment, not to prove the truth of their contents but to show what documents STA Chatham relied on in deciding to deny petitioner's whistleblower claim. Accordingly, we overrule the hearsay objection. See id.; see also Marino v. Commissioner, T.C. Memo. 2021-130, at *21 (holding that this Court reviews the administrative record in a whistleblower case “without regard to whether it might include evidence that would be inadmissible as hearsay in a trial de novo”); Whistleblower 23711-15W v. Commissioner, T.C. Memo. 2018-34, at *18 n.9 (overruling hearsay objection with respect to contents of a Form 11369 attached to a declaration in support of a motion for summary judgment in a whistleblower case).

5. The Court found (p. 46) that “the administrative record indicates that RA Martin in SB/SE used petitioner's whistleblower information to issue IDRs and summonses but ultimately was unable to verify petitioner's information.” The information thus resulted in no collected proceeds which were based on the “taxpayers' delinquent and amended returns.”

6. Finally, the Court addressed IRS “missteps in the summer of 2012 when it revealed to the target taxpayers' representative, in communications about the target taxpayers' eligibility for the VDP program, the existence (but not the identity) of a whistleblower.”  (Pp. 46-47.) Basically, the Court held that that “misstep” did not affect the collected proceeds which is the base from which any award must be based.

This post was cross-posted to the Federal Tax Procedure Blog here.