Doesn’t Help a Whistleblower

Michael Lissack, 157 T. C. 5, filed 8/17/21, turned IRS onto a $60 million adjustment, except not quite. Mr L. claimed the target failed to report income on certain membership fees. The Ogden Sunseteers took Mr L. seriously, and the RA to whom they bucked Mr L.’s claim checked it out. The RA, though, declared the fees to be non-taxable deposits, so the target was OK.

Except.

The RA kept looking, and found some sketchy deductions, whence came the $60 million hit.

Mr L. claims he gave IRS a piece of the action, wherefore he wants a piece of the action. Ogden says no, IRS says no, and Judge Albert G (“Scholar Al) Lauber says no.

The case goes off on Reg. Section sec. 301.7623-2. To begin with Section 7623(b)(1) requires that IRS collect “as the result of the action,” that is, following what the blower told them. But Mr L. told them about deposits, not deductions.

“Among the terms defined by the regulations is the verb phrase ‘proceeds based on.’ Id. para. (b). The IRS ‘proceeds based on’ the whistleblower’s information when his information ‘substantially contributes to an [administrative or judicial] action against a person identified by the whistleblower.’ Id. para. (b)(1). That is true when 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.’ Ibid. On the other hand the IRS does not ‘proceed based on’ the whistleblower’s information when it merely ‘analyzes the information provided or investigates a matter raised by the information provided.’ Ibid.” 157 T. C. 5, at p. 9.

“In short, the regulation concludes that the portion of the examination that is unrelated to the facts and issue identified by the whistleblower is a separate ‘administrative action.’ See id. para. (a)(2) (defining ‘administrative action’ as ‘all or a portion’ of an IRS examination).” 157 T. C. 5, at p. 10.

So Mr L. attacks the regulation, which means a Chevron pitstop.

IRS says since Congress didn’t define the term “action” in Section 7623(b)(1), it left a gap for the Reg definition. Mr L. says the statute is unambiguous, that “any action” means “any action.”

Judge Scholar Al once again proves my assertion that any lawyer who can’t find an ambiguity should find another way to make a living.

“We disagree with petitioner’s submission that the statute is unambiguous. Subsection (b)(1) refers to any administrative or judicial action ‘described in subsection (a).’ Sec. 7623(b)(1). But subsection (a) does not describe or define an ‘administrative or judicial action.’ Subsection (a) does not even refer to that term. It speaks only of paying an award ‘from the proceeds of amounts collected by reason of the information provided.’ Sec. 7623(a) (flush language).

“Subsection (b) thus refers to a description in subsection (a) that does not exist.” 157 T. C. 5, at p. 15.

That’s Congress for ya.

But it’s necessary that the blower furnish more than the name of the target. If not actually lead IRS to the skullduggery, the blower must tell the IRS where to find the scene of the crime and where to find the smoking cliché.

And the Reg is rational. An IRS examination may include more than one action. And the blower must have substantially contributed to the specific action that yielded the happy result.

“Paragraphs (a)(2) and (b)(1), coupled with Example 2, [in the Regs] work together to ensure that a whistleblower is rewarded only for providing information that substantially contributes to a distinct ‘administrative action.’ Otherwise whistleblowers would be incentivized to file innumerable claims as mere fishing expeditions, hoping that the IRS will find something wrong with those taxpayers’ returns (related to the information they supplied or not). There is no evidence that Congress wished to encourage this sort of behavior.” 157 T. C. 5, at p. 21.

And Mr L.’s action isn’t “related” to the sketchy deductions. His claim had nothing to do with deductions.

Mr L. wants discovery, but Van Bemmelen and the record rule sink that one.

“The administrative record that is before us may not contain exhaustive information about ‘how and when’ the RA identified the bad debt issue, e.g., which line entries on which returns caught his attention, or the date(s) on which he gleaned these insights. But the record provides more than enough evidence to confirm that petitioner is not eligible for a mandatory award. The record contains all of petitioner’s submissions to the Office: None of these submissions includes any information about Target’s intercompany debt, Target’s reporting of a bad debt deduction, or the facts that would be relevant in assessing the propriety of such a deduction. In response to Ms. [OS]’s specific question whether the ‘whistleblower submission contribute[d] to any of the adjusted issues,’ the RA replied (with emphasis) that petitioner had not ‘provided any information for the adjusted issues.’ Because petitioner did not supply any information about the bad debt issue (or about the other issue that generated an adjustment), he is not entitled to an award under section 7623(b). No amount of discovery will change this fact.” 157 T. C. 5, at p. 25.

IRS wins.

Disclosure: I represented Mr. Lissack once, many years ago, in an entirely unrelated matter.

Comment: Of course I can’t link to Judge Scholar Al’s opinion, as the Genius Baristas have blocked the whole docket. But as soon as the online services pick this up, I’ll link to them. If I’m late or forget, just google 157 T. C. 5, and it’ll pop. So much for these Stealth Geniuses.

Edited to add, 8/25/21: See link at the head hereof. The Stealth Genius Baristas are once again shown up.