On January 10, 2025, the United States Court of Appeals for the District of Columbia Circuit issued its decision in Lissack v. Commissioner, on remand from the Supreme Court of the United States.
Lissack had sought Supreme Court review, via Petition for Writ of Certiorari, and after the Court decided Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024), overruling Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984), the Supreme Court vacated its judgment and remanded the case for further consideration. Noting that it had to exercise independent judgment in deciding whether or not the agency (IRS) had acted within its statutory authority, and reviewing the challenged regulations that allowed the IRS to treat investigations into unrelated tax issues of the same taxpayers as separate administrative actions (Regs. 301.7623-2(a)(2), (b)(2)(Example 2)), the DC Court of Appeals concluded that the IRS had correctly interpreted and applied what was referred to as the Whistleblower Definitions Rule, and affirmed again the Tax Court decision.
Lissack had challenged 3 parts of the regulation: (1) the definition of “administrative action”; (2) one of the examples illustrating what counts as the IRS proceeding with an administrative action “based on” whistleblower information; and (3) the definition of “related action.”
As the DC Court of Appeals viewed it, the “upshot” of the regulatory definitions of both “administrative action” and “proceeds based on” is that a whistleblower whose information may have “substantially contributed” to a fruitless action against a person is not entitled to share proceeds from a distinct action against that same person that did not draw on the whistleblower’s information. By this, the court noted that in cases involving multiple tax issues, treating each distinct tax issue as a separate “administrative action” enables the IRS to calibrate better whether and to what extent a recovery can be said to have been “based on” a whistleblower’s tip. In other words, by reference to just the discrete and relevant portions of the examination to which the information relates.
The DC Court of Appeals did further discuss and reject the IRS argument that the Tax Court lacked jurisdiction over the appeal, based on Li v. Commissioner, 22 F. 4th 1014 (D.C. Cir. 2022) and the view that threshold rejections of a Form 211 were not reviewable award determinations under subjection (b)(1)-(3). The court noted how it expressly reserved the question of jurisdiction in cases in which the IRS WBO wrongly denied a Form 211 application but the IRS, in fact, had proceeded against a target taxpayer based on the provided information. 22 F.4th at 1017 n.2. The court rejected the IRS view that the jurisdictional grant was coextensive with the merits of a whistleblower appeal and the fact the IRS conducted an examination triggered by the whistleblower’s information which was referred out by the WBO, causing an IRS revenue agent to initiate an examination (of the membership-deposits issue that Lissack had identified). As the DC Court of Appeals noted, that referral and examination triggered by the whistleblower’s information constitutes the “IRS proceeding with an administrative action that was based on the information Lissack brought to the Secretary’s attention under Section 7623(b)(1), such that it is then the “determination regarding an award” as made by the IRS WBO to inform him that the examination it initiated did not RESULT in the collection of any proceeds. As the Court of Appeals put it, “we need not delineate the precise line between an unreviewable threshold rejection and a reviewable determination to conclude that the decision here was a determination regarding an award under (b)(4) of the statute. Thus, the Court found that the plain terms and structure of the statute and the decision in Li led to reaffirmation that the Tax Court does have jurisdiction over the appeal.
Finding that Congress, with its 2006 changes to the whistleblower statute, directed the IRS to reward whistleblowers based on the extent of their substantial contributions to the recovery of unpaid taxes, had come up with its Whistleblower Definitions Rule as the means by which to measure contributions according to the degree to which the whistleblower’s specific facts aid the relevant portion of an examination. Thus, the regulatory approach was viewed as a valid exercise of the IRS’s authority under the whistleblower statute.
The Court further found that Lissack had not established that the IRS rule on “related action” misinterpreted the statute, and that he did not contend that the rule was otherwise contrary to the APA.
The Court felt that it did not need to decide whether or not the Tax Court must conduct a trial de novo on an appeal of a WBO determination, nor did it establish what the standard of review should be to a challenge to the scope of the record identified by the IRS and submitted to the Tax Court because Lissack made no request of the Tax Court to expand the administrative record or create a new one (in other words he failed to seek to compel production of documents to supplement the record). The Court further noted that Lissack did not show that he was deprived of any material evidence, failing to show how broader access to the IRS files would reveal that his own submission to the IRS contained information on what was ultimately used to adjust intercompany bad debt, and for this reason, cannot thus show that there was a material factual dispute to preclude the granting of summary judgment in favor of the IRS. Thus the Court reinstated its prior decision affirming the decision of the Tax Court.
NOTE: Prior to the issuance of the Lissack decision, successful whistleblower Thomas Shands filed a petition for writ of certiorari on December 31, 2024. 2024 U.S. S. Ct. BRIEFS Lexis 4647, seeking review of a denial of a portion of his claims for an award specific to payment of taxes made by US client taxpayers through the OVDI program. The questions presented were listed to be:
(1) whether the IRS can deprive the United States Tax Court of subject matter jurisdiction to review the IRS’s denial of a mandatory whistleblower award under 7623(b)(1) by claiming it took no action?
(2) whether the IRS can deny a mandatory whistleblower award under 7623(b)(1) by claiming it took no action, even when the undisputed facts demonstrate that the IRS did take action?
Mr. Shands argues that the IRS has exhibited hostility to the statutory mandate and the elimination of IRS discretion, viewing the IRS as remaining intransigent in its refusal to pay mandatory whistleblower awards. He argues that the IRS employs significant delays in its review of IRS WB claims, taking on average more than 10 years to take no action, making only 21 mandatory WB awards in 2023 and denying 72% because it alleges it took no action. As Mr. Shands argues, the IRS shields its “no action” denials from judicial review by asserting that the Tax Court lacks subject matter jurisdiction to review a denial based on the purported failure of the IRS to take action on the WB information.
Shands is a whistleblower who began providing information to the DOJ and criminal investigation division of the IRS in connection with an ongoing investigation of Swiss banks, bankers and investment advisors who enabled US taxpayers to conceal offshore financial assets. His assistance as an official cooperator, making and recording telephone calls that assisted in the arrest of one individual who then cooperated and subsequently pleaded guilty to conspiring to defraud the United States. Additional bankers were also charged, and a superseding indictment identified 35 taxpayer clients of the bankers, and eventually, a bank entered into a deferred prosecution agreement. As Shands argues, referring to guilty pleas and other public information, many US taxpayers were spurred into entering what is called the OVDI program. While some of Shands’ Form 211 claims resulted in an award, no proceeds were awarded as it related to the proceeds collected from any US client of the Swiss bankers or the bank. Shands is seeking review because the DC Circuit affirmed the Tax Court’s ruling that OVDI proceedings can never be administrative actions as that term is defined under 7623(b)(1), because the taxpayers there are engaged in an inherently voluntary participation in the OVDI, and such could not be viewed as related actions either. As Shands argues, the IRS allegedly conceded in its appeal briefs before the DC Circuit Court of Appeals that OVDI proceedings can constitute “administrative action,” which he views was a concession on appeal that eviscerates an earlier wholesale denial of the Form 211 claim. As Shands puts it, the Supreme Court should grant review, viewing the matter an an exceptionally important separation of powers issue. In other words, that the IRS has an unchecked power to deny, at will, mandatory WB awards under 7623(b)(1) by the simple expedient of claiming it took no action, even in cases where it admittedly did take action. As Shands argues, US clients were prompted to initiate OVDI proceedings, as part of the requirement in the deferred prosecution agreement to disclose the identity of and information related to US account holders and to conduct extensive outreach to former US customers in order to encourage their participation in the OVDI. 2024 U.S. S. Ct. BRIEFS Lexis 4647 at *30-36.
