In Uncategorized on 05/24/2023 at 20:18

For those who tuned in late, a Bialystok is a deal, named after the hero of The Producers, wherein the participants cannot possibly make money, but only suffer monumental unrealized but recognized losses, wherewith to offset realized economic gains.

Judge Elizabeth A. (“Tex”) Copeland leads us on a stroll down memory lane as she permits a wee bit of admin record enlargement to Jeremy Berenblatt, 160 T. C. 14, filed 5/24/23. JB’s trusty attorney moved for production of tons of documents and to compel responses to interrogatories, and trusty attorney does get one, but the rest founder for want of proof of bad faith, namely, the Ogden Sunseteers hiding stuff, or incomplete admin record.

JB claims he’s the dude who tipped IRS off how to unhorse the European digital options phony partnership dodge. He says he was a day trader approached by dodgefloggers selling these unrecognized gains but recognized losses phony partnerships, à la James (“Little Jim”) Haber; see, e.g., my blogpost “Haber-Dashery,”11/19/15. He blew off the floggers, and blew the whistle to IRS. But JB was one of a hundred people IRS interviewed. JB claims IRS lost on step transaction, but once he showed the Federales to play want of economic substance, they clobbered the dodgers.

The Ogden Sunseteers claim whatever JB told them, they already knew.

Apparently Tax Court was too busy blowing off wannabe blowers like Mandy Mobley Li in no-money cases to elucidate the standards for discovery in cases where they actually had jurisdiction. And Section 7482 Golsens ’em to USDCDC and DC Cir.

First, every whistleblower case post-Li requires the jurisdictional drilldown. Here, for once, there is jurisdiction. “If the question of whether the IRS prevailed in the various … shelter collection actions ‘based on’ Mr. Berenblatt’s information were jurisdictional, then we could not determine whether we have jurisdiction untildeciding virtually the entire case on its merits. Moreover, it would be unclear what scope and standard of review to apply in making that jurisdictional determination. Here, with an ‘action’ commenced and  ‘collection’ of proceeds, we conclude that we have jurisdiction to review Mr. Berenblatt’s appeal of the denial of his claim for an award.” 160 T. C. 14, at p. 13. (Citation omitted).

Next, standard and scope of review. This requires somber reasoning and copious citation of precedent, at which task Judge Tex Copeland is no slouch. See 160 T. C. 14, at pp. 13-14. And she concludes that Tax Court must review the administrative record only, so as, like Humpty Dumpty, to have before it “neither more nor less information than the agency (here, the WBO) had when it made its determination.” 160 T. C. 14, at p. 14.

Now in most record rule cases, there is no discovery. The admin record, like Johnny Keates’ Greek pot, is “all ye know on earth and all ye need to know.” But DC Cir has hewn out an exception or two. If petitioner can show what DC Cir “variously described as a strong, substantial, or prima facie showing” that the agency sandbagged by hiding stuff, or that the admin record proffered is incomplete, then the Ogden Sunseteers must pony up. But there’s a strong presumption that the admin record as presented is the real deal. Reg. Section 301.7623-3(e) sets forth what has to be there.

So distilling the foregoing and a lot more, here’s the skinny.

“…we hold that whistleblower discovery requests are appropriate upon a significant showing that (1) there is material in the IRS’s possession indicative of bad faith on the IRS’s part in connection with the case or (2) there is material in the IRS’s possession indicating that the designated record omits material the WBO actually considered (directly or indirectly) or that otherwise falls under a category listed in Treasury Regulation § 301.7623-3(e).” 160 T. C. 14, at p. 18.

JB’s trusty attorney folds bad faith. Only incompleteness is on the table. Anything related to what happened before JB came on the scene is excluded, so no previous interviews. And JB’s claim he was the first to show want of economic substance is belied by IRS’ expert’s report in Stobie Creek, which was dated before JB’s interview. But that doesn’t sink JB’s award claim, only his claim that IRS was negligent in ignoring economic substance. For the Stobie Creek story, see my blogpost “A Piece of the Action,” 1/9/11.

But before sinking all the rest of JB’s trusty attorney’s discovery requests, Judge Tex Copeland does allow one. JB claims that RA M took notes at his interview, and he wants to see them.

“…Respondent leaves unclear whether RA M took notes, stating that “Special Agent C does not believe RA M took notes at the interview.” (Emphasis added.) By contrast, Mr. Berenblatt has conveyed his recollection that RA M took notes throughout the interview. We have no reason to doubt the sincerity or accuracy of Mr. Berenblatt’s memory. And because Treasury Regulation §301.7623-3(e)(2)(ii) refers to ‘[c]opies of all debriefing notes and recorded interviews held with the whistleblower,” any notes that RA M took at the interview are part of the complete record. Therefore,  we will compel Respondent to clarify whether RA M took notes during Mr. Berenblatt’s interview and, if so, whether such notes still exist, were lost, or were destroyed.” 160 T. C. 14, at p. 24. (Named omitted; SA C ran the interview.).

At close of play, generally (love that word!) only the blower’s direct dealings with IRS and the Sunseteers are targets for discovery, unless bad faith can be strongly shown.

So Judge Patrick J (“Scholar Pat”) Urda’s upcoming discovery Zoom extravaganza will have very little to say about discovery in Section 7623 whistleblower cases.

Edited to add, 5/26/23: The Zoom discovery special will be moderated  by Judge Ronald L. (“Ingenuity”) Buch, not Judge Scholar Pat. But I can’t think there’ll be much about discovery in Section 7623 blower cases.


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