In a significant decision, the D.C. Circuit Court of Appeals has reversed the United States Tax Court’s decision in Estate of Insinga v. Commissioner, No. 24-1048 (D.C. Cir. 8-8-2025), finding that when the deceased whistleblower Josesph Insinga submitted whistleblower materials in early 2007, specific to a tax-avoidance scheme understaken by two corporations and then sought an award for his contribution, the IRS Whistleblower Office applied the incorrect legal standard when denying his claim, as well as suppled a deficient administrative record. Because the Tax Court did not remand the case back to the IRS Whistleblower Office to apply the correct legal standard and instead “affirmed” the IRS WBO’s decision to deny the award using an “incomplete record,” the DC Court of Appeals has reversed the Tax Court, in a 2-1 decision (with Justice Katsas dissenting).
Notably, the DC Circuit Court of Appeals has found that the Tax Court committed a Chenery violation, SEC v. Chenery Corp., 332 U.S. 194, 196 (1947). Under Chenery, courts must judge the propriety of an agency’s action solely by the grounds invoked by that agency, citing to Calcutt v. Federal Deposit Ins. Corp., 598 U.S. 623, 624 (2023)(per curiam)(quoting Chenery, 332 U.S. at 196). Then, under the ordinary remand rule, INS v. Orlando Ventura, 537 U.S. 12, 18 (2002), the function of the reviewing court is said to end when an error of law is laid bare, and at that point, the matter once more goes to the agency for reconsideration. Federal Power Comm’n v. Idaho Power Co., 344 U.S. 17, 20 (1952). Viewing the IRS WBO as the “expert entity designated by Congress” to apply the relevant law–here the, substantial contribution test–and then to decide whether Mr. Insinga was entitled to an award, there is recognition given that by statute, “the IRS is required to give awards based on how much the individual “substantially contributed” to such action against a taxpayer. 26 U.S.C. Section 7623(b)(1); see Regs. Section 301.7623-2(b)(1).
The problem, as the DC Circuit Court of Appeals views it is that the IRS WBO never assessed whether Mr. Insinga advanced to a substantial degree the investigation of the two corporations that were under audit; rather, it determined only that his information did not cause the IRS to initiate the audit, expand its scope, or continue to pursue the investigation (which was a rejected test from proposed rule making as opposed to the substantial-contribution test under the statute. Important to the decision was that a second internal memorandum to Director Whitlock at the IRS WBO admitted that Mr. Insinga’s information had brought the IRS “additional knowledge” and used documents secured on the basis of Mr. Insinga’s information, such that even though his information was “helpful to the IRS in understanding the transaction” it did not need to issue an award because the IRS did not proceed “based on that information.” The Tax Court wrongly assumed for itself the job of the IRS WBO, which was legal error requiring reversal (absent application of an exception which states that remand is unnecessary when it would be pointless to do so, relying on Calcutt and FDA v. Wages & White Lion Invs., LLC, 145 S. Ct 898, 930 (2025). As the DC Cir Court of Appeals noted, the “evidence” that was overlooked creates significant uncertainty as to HOW the IRS WBO would assess Mr. Insinga’s contribution once freed from the proposed rulemaking test which it views as unduly restrictive, which as they view it, reinforces the appropriateness of remand.
The DC Circuit Court of Appeals also found that the Tax Court incorrectly rejected Mr. Insinga’s request to supplement the administrative record. On that point, they focused in on how an agency is not allowed to deliberately or negligently exclude from its record documents which may have been adverse to its determination, citing to City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 2010). Noting that just because an agency cannot be expected to find ALL documents does not mean the agency is excused from finding any documents that contradict its conclusion, citing to Kent County, Delaware Levy Court v. EPA 963 F.2d 391, 395-96 (D.C. Cir. 1992). “Such an exclusion lacks reason” they say, and here, the evidence that is missing from the administrative record compiled by the IRS WBO is material to Mr. Insinga’s award determination, was part of the IRS WBO’s history of decision-making or key stages of the IRS proceedings, and contradicts the IRS WBO’s conclusion. That evidence needed to be considered on review by the Tax Court and that court’s decision not to supplement the record with such relevant evidence was an abuse of discretion. Mr. Insinga’s strong showing that the internal audit plan from 2006 should have been included in the record to show that the IRS did not plan to issue the summons before Mr. Insinga came forward.
Notably, in challenging the dissenting opinion’s view of the documents (they didn’t matter because a 2007 presentation shows that the IRS knew and had liability theories about the targets prior to the whistleblowing by Mr. Insinga, the DC Circuit Court of Appeals notes how there is a big difference between knowing something and being able to prove it in court (or to obtain a favorable settlement). The dissenting opinion viewed it differently, claiming that there was “ample evidence” to indicate that before Mr. Insinga provided any information, the IRS had already designated the transactions as top priority, investigated them for many months, and developed the theory that ultimately supported the tax adjustments. As the dissenting opinion puts it, the WBO found that the IRS had developed the winning “economic substance theory” months before receiving Insinga’s submission, and it was harmless error to have omitted any documents. By comparison, on appeal, Mr. Insinga argues that his whistleblowing led to evidence that ensured the IRS would succeed if the companies challenged the assessment administratively or in court, such that the documents omitted by the IRS WBO actually disclose the doubts the IRS had about its ability to succeed prior to obtaining Mr. Insinga’s information, and for this reason, these documents were improperly excluded from the record. The DC Circuit Court of Appeals goes on to note that the Regulation 301.7623-3(e)(2) provides a “floor” not a ceiling, on the relevant components of a IRS WBO record (listing materials the file “will include”). Excluding relevant evidence violates the requirement that decisions be based on a “whole record.” As such, IRS WBO decisions about the content of the administrative record cannot thwart Congress’s mandate that awards “shall” be made to those who substantially contribute to an IRS proceeding, 26 USC Section 7623(b)(1) or judicial review to ensure agency compliance with that law. The DC Circuit Court of Appeals concludes with the following statement: “In sum, Congress created the Whistleblower Office because it wanted a centralized decisionmaker dedicated to gathering all relevant evidence needed to actually determine whistleblower awards. Tax investigations are complicated, and it is hard to assess how much any piece of evidence contributed to a particular tax adjustment. The difficulty of the Whistleblower Office’s task explains why it must create an accurate administrative record that allows a fair and reasonable assessment of a whistleblower’s contribution, or non-contribution, to a tax proceeding. The Whistleblower Office cannot fulfill its mandate by looking only at records most readily at hand or favorable to a denial while omitting other available and material information, including documents identified by regulation as important to the decision.” The DC Circuit Court of appeals declines to decide whether the denial of an award itself is arbitrary and capricious, because to do so would be to commit the same mistake as the Tax Court, and noted that nothing in the opinion should be viewed as controlling the IRS WBO’s decision on remand once it has properly compiled the record and applied the correct legal standard. 2025 U.S. App. LEXIS 20111(8/8/2025).
