Whistleblower 11332-13W v. Commissioner , 142 T.C. No. 21 ( 2014 )

142 T.C. No. 21UNITED STATES TAX COURT
WHISTLEBLOWER 11332-13W, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 11332-13W. Filed June 4, 2014.
Whistleblower W reported a tax fraud scheme, involving W’s
employer and related entities, to the Government. W provided the
Government with information regarding the tax fraud scheme from
June 2006 through the fall of 2009. W’s information formed the basis
of the Government’s action against the target taxpayers.
W filed a Form 211, Application for Award for Original
Information, in 2008 and submitted to R documentary evidence
related to W’s involvement in the Government’s investigation. W
resubmitted Form 211 in 2011 seeking an award under I.R.C. sec.
7623(b). Shortly thereafter, the Government settled with one of the
target taxpayers and recovered more than $30 million dollars in taxes,
penalties and interest. R granted W a discretionary award
determination under I.R.C. sec. 7623(a) and denied W’s request for
an award under I.R.C. sec. 7623(b).
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W filed the petition seeking review of R’s award determination.
R filed a motion to dismiss for lack of jurisdiction. R argues that this
Court lacks jurisdiction to review R’s award determination because R
proceeded against the target taxpayers using information W provided
before the effective date of I.R.C. sec. 7623(b), Dec. 20, 2006. W
opposes R’s motion on the grounds that W provided information to
the Government both before and after the effective date of I.R.C. sec.
7623(b).
Held: The Court has jurisdiction to review R’s whistleblower
claim award determinations where W has alleged that W provided
information to R before and after the effective date of I.R.C. sec.
7623(b).
Held, further, W satisfied W’s pleading burden by alleging
facts that R proceeded with an action against the target taxpayers
using information brought to R’s attention by W both before and after
the effective date of I.R.C. sec. 7623(b), Dec. 20, 2006.
Held, further, R’s motion to dismiss will be denied.
Sealed, for petitioner.
Sealed, for respondent.
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OPINION
KROUPA, Judge: This case1 is before the Court on respondent’s motion to
dismiss for lack of jurisdiction. We decide for the first time whether the Court has
jurisdiction to review respondent’s whistleblower claim award determinations
where the whistleblower provided information both before and after the enactment
of the Tax Relief and Health Care Act of 2006 (TRHCA)2, Pub. L. No. 109-432,
div. A, sec. 406, 120 Stat. at 2958, effective December 20, 2006. We hold that we
do.3
Background
The following background is drawn from the petition and respondent’s
motion to dismiss for lack of subject matter jurisdiction and responses filed by
both parties. We note that the background is stated solely for purposes of ruling
on the pending motion to dismiss and is not a finding of facts.
1
This Court previously granted the whistleblower’s motion to seal the record
in this case and motion to proceed anonymously.
2
Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, div. A, sec.
406, 120 Stat. at 2958, codified at sec. 7623(b).
3
All section references are to the Internal Revenue Code in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure, unless otherwise indicated. All amounts are rounded to the nearest
dollar.
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Petitioner is a whistleblower that reported a tax fraud scheme to the
Government. During the whistleblower’s employment, the whistleblower learned
of a tax structure involving the whistleblower’s employer and several related
entities and subsidiary companies (targets). When the whistleblower raised
concerns over the tax structure to the whistleblower’s employer, the
whistleblower’s employer used physical force and armed men to intimidate the
whistleblower and prevent disclosure. The whistleblower was subsequently fired.
In 2005 the whistleblower attempted to report the tax scheme to the Government.
The whistleblower’s efforts were met with no response. The whistleblower
eventually reached Government officials interested in the whistleblower’s
information. In June 2006 the whistleblower met informally with Department of
Justice (DOJ) representatives in Washington, D.C. regarding the tax scheme. The
whistleblower provided the DOJ representatives with generic information
regarding the targets and the tax scheme at this first meeting. The whistleblower
met with Internal Revenue Service (IRS) and the DOJ representatives several more
times in the summer and fall of 2006. At each meeting the whistleblower provided
additional documents and details regarding the tax scheme.
The whistleblower continued to provide additional information regarding
the targets’ activities and was in regular contact with the IRS and the DOJ
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representatives after December 20, 2006. On multiple occasions, the IRS and the
DOJ representatives asked the whistleblower for information, after December
2006, related to particular areas of inquiry and details regarding transactions and
the targets. As the whistleblower learned additional information regarding the
targets’ actions, the whistleblower reported that information to the IRS and the
DOJ representatives. The whistleblower provided information to the IRS and the
DOJ representatives continually until the fall of 2009. Notably, the
whistleblower’s assistance in this investigation jeopardized the safety of the
whistleblower and the whistleblower’s family. As discussed in detail in
Whistleblower 11332-13W v. Commissioner, T.C. Memo. 2014-92, the
whistleblower received several threats of physical harm from the targets.
The whistleblower filed a Form 211, Application for Award for Original
Information in 2008 and submitted to the IRS Whistleblower Office
(Whistleblower Office) documentary evidence related to the targets’ actions that
the whistleblower had previously disclosed. Subsequently, the whistleblower
resubmitted Form 211 in 2011 seeking an award under section 7623(b). Shortly
thereafter, the Government entered into a Non-Prosecution Agreement with one of
the targets that led to the Government recovering more than $30 million in taxes,
penalties and interest. The Whistleblower Office granted the whistleblower a
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discretionary award determination under section 7623(a) and denied the
whistleblower’s request for an award under section 7623(b).
The whistleblower timely filed the petition seeking review of respondent’s
award determination. Respondent filed a motion to dismiss for lack of jurisdiction
on the ground that respondent’s award determination is not subject to judicial
review. Respondent argues that this Court lacks jurisdiction to review
respondent’s award determination because he proceeded against the targets using
information the whistleblower provided before the effective date of section
7623(b),4 December 20, 2006.5 The whistleblower objected to the motion,
asserting that the whistleblower is entitled to judicial review of respondent’s
award determination because the whistleblower provided information both before
and after the effective date of section 7623(b). We agree with the whistleblower.
We leave for another day whether the whistleblower is entitled to a larger award.
4
As discussed infra, sec. 7623(b)(4) for the first time granted this Court
jurisdiction to hear a whistleblower’s petition for review of the Commissioner’s
award determination.
5
The amendments enacting sec. 7623(b) apply to information provided on or
after December 20, 2006.
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Discussion
This case presents an issue of first impression. We decide for the first time
whether the Court has jurisdiction to review respondent’s whistleblower claim
award determination where the claim is based on information the whistleblower
provided both before and after the enactment of TRHCA sec. 406, 120 Stat. at
2958.6
I. Overview of the Court’s Jurisdiction and the Whistleblower Program
We begin with the Tax Court’s jurisdiction. The Tax Court is a court of
limited jurisdiction and may exercise jurisdiction only to the extent authorized by
Congress. Judge v. Commissioner, 88 T.C. 1175, 1180-1181 (1987); Naftel v.
Commissioner, 85 T.C. 527, 529 (1985). The Tax Court is without authority to
enlarge upon that statutory grant. See Phillips Petroleum Co. v. Commissioner, 92
T.C. 885, 888 (1989). We nevertheless have jurisdiction to determine whether we
have jurisdiction. Hambrick v. Commissioner, 118 T.C. 348 (2002); Pyo v.
Commissioner, 83 T.C. 626, 632 (1984); Kluger v. Commissioner, 83 T.C. 309,
314 (1984).
Our Rules are silent as to deciding a motion to dismiss for lack of subject
matter jurisdiction. Thus, we look to the Federal Rules of Civil Procedure. See
6
Codified, in part, at sec. 7623(b).
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Rule (1)(b); Estate of Miller v. Commissioner, T.C. Memo. 1994-25. When
deciding a motion to dismiss based on lack of subject matter jurisdiction, a court
must construe the undisputed allegations of the complaint in a manner favorable to
the plaintiff. See Dacosta v. United States, 82 Fed. Cl. 549, 552 (2008). Where
jurisdiction turns on contested facts, allegations in the petition are generally taken
as true for purposes of deciding a motion to dismiss for lack of jurisdiction. See,
e.g., O’Brien v. Commissioner, 40 B.T.A. 280 (1939). The issue is whether the
claimant is entitled to offer evidence to support the claims, not whether the
claimant will ultimately prevail on the merits. See Scheuer v. Rhodes, 416 U.S.
232, 236 (1974); see also Reynolds v. Army and Air Force Exch. Serv., 846 F.2d
746, 747 (Fed. Cir. 1988). We turn now to an overview of our jurisdiction
regarding whistleblower claims.
The Secretary has long had the discretion to pay awards to persons
providing information that aids in (1) detecting underpayments of tax and (2)
detecting and bringing to trial and punishment persons guilty of violating the
internal revenue laws. Sec. 7623(a). The discretionary whistleblower awards
have been arbitrary and inconsistent, however, because of a lack of standardized
procedures and limited managerial oversight. See Treasury Inspector General for
Tax Administration Report 2006-30-092, The Informants’ Rewards Program
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Needs More Centralized Management Oversight (June 2006). It took an average
of seven years for a discretionary award to be paid and an average of six months
for a claim to be rejected. Id. at 8-9. Moreover, most rejected claims did not
provide the rationale for the reviewer’s decision because of concerns about
disclosing confidential return information to the whistleblower. Id. at 7.
Congress enacted TRHCA in 2006 to address perceived problems with the
discretionary award regime. TRHCA sec. 406(a), 120 Stat. at 2958, amended
section 7623 to require the Secretary to pay nondiscretionary whistleblower
awards under certain circumstances and to provide this Court with jurisdiction to
review such award determinations. A whistleblower is now entitled to a minimum
nondiscretionary award of 15% of the collected proceeds if the Commissioner
proceeds with administrative or judicial action using information provided in a
whistleblower claim.7 Sec. 7623(b)(1).
7
The award is reduced in certain circumstances. For example, the award is
reduced where the whistleblower planned or initiated the actions that led to the
underpayment of tax. Sec. 7623(b)(2) and (3). Furthermore, an award is available
only if the individual taxpayer had gross income exceeding $200,000 for any year
at issue and if the amount in dispute (including tax, penalties, additions to tax and
additional amounts) exceeds $2 million. TRHCA sec. 406(a)(1), 120 Stat. at 2958.
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TRHCA also directed the Secretary to issue guidance for the operation of a
Whistleblower Office administered by the IRS.8 TRHCA sec. 406(b)(1), 120 Stat.
at 2959. The Whistleblower Office is responsible for reviewing submitted
whistleblower claims or assigning them to the appropriate IRS office for review.
Id. sec. 406(b)(1)(B), 120 Stat. at 2960. The Whistleblower Office is authorized to
seek additional assistance from the whistleblower if necessary. Id. sec.
406(b)(1)(C), (2).
The Commissioner released guidance to taxpayers on filing
nondiscretionary whistleblower award claims in early 2008. See Notice 2008-4,
2008-1 C.B. 253. Whistleblowers seeking an award must fully complete and
submit a Form 211. Id. sec. 3.02, 2008-1 C.B. at 254. The Whistleblower Office
will acknowledge receipt of the claim in writing. Id. sec. 3.05, 2008-1 C.B. at 255.
The Whistleblower Office will send correspondence to the whistleblower once a
determination regarding the claim has been made. Id. sec. 3.11, 2008-1 C.B. at
256. Whistleblower Office determinations regarding awards may be appealed to
this Court within 30 days from the issuance of the nondiscretionary award
determination. Id.; see also sec. 7623(b)(4). Awards will not be paid, however,
8
The 2006 legislation also requires the Secretary to provide an annual report
to Congress on whistleblower claims filed and awards issued under sec. 7623.
TRHCA sec. 406(c), 120 Stat. at 2960.
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until there is a determination of the tax liability and the amounts owed are
collected. Notice 2008-4, sec. 3.08, 2008-1 C.B. at 255. The Commissioner also
issued procedural guidance on how whistleblower claims will be processed. See
Internal Revenue Manual (IRM) pt. 25.2.2 (Dec. 30, 2008).9 In general,
whistleblower claims will be denied where the information provided does not: (a)
identify a Federal tax issue upon which the IRS will act; (b) result in the detection
of an underpayment of taxes; or (c) result in the collection of proceeds. See id. pt.
25.2.2.12(2) (June 18, 2010). The whistleblower will be notified by the
Whistleblower Office once an award decision has been made. See id. pt.
25.2.2.5(13) (Dec. 30, 2008).
II. Analysis
We must now decide whether the Court has jurisdiction to review
respondent’s award determination. Respondent argues that this Court does not
have jurisdiction to review his award determination because the whistleblower
provided the information to the Whistleblower Office before the enactment of
section 7623(b). See Wolf v. Commissioner, T.C. Memo. 2007-133 (holding that
the Court lacked jurisdiction to review a determination regarding a whistleblower
9
Internal Revenue Manual pt. 25.2.2 (Dec. 30, 2008) was updated on June
18, 2010, to provide additional guidance for evaluating a whistleblower claim.
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award because the information was provided before December 20, 2006). Thus,
respondent argues that this Court lacks jurisdiction to review his award
determination because he proceeded against the targets using information the
whistleblower provided before December 20, 2006. The whistleblower argues that
this Court has jurisdiction to review respondent’s award determination because the
whistleblower alleged that respondent proceeded against the targets using
information the whistleblower provided both before and after December 20, 2006.
See sec. 7623(b).
We hold that the whistleblower satisfied the whistleblower’s pleading
burden by alleging facts that respondent proceeded with an action against the
targets using information brought to respondent’s attention by the whistleblower
both before and after December 20, 2006. This is consistent with TRHCA’s intent
to provide whistleblowers with judicial review of award determinations. We now
turn to the governing law.
A whistleblower who satisfies the requirements of section 7623(b) is
entitled to receive at least 15% but no more than 30% of the collected proceeds or
from a settlement with the taxpayer. Additionally, the Commissioner must
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proceed10 with an administrative or judicial action based on information brought to
the Commissioner’s attention by the whistleblower. See sec. 7623(b)(1). The
IRM states that action by the IRS includes the modification of a pending or
planned examination or investigation as a result of information provided by the
whistleblower. IRM pt. 25.2.2 (June 18, 2010).
Additionally, the Tax Court has exclusive jurisdiction over appeals of award
determinations where a whistleblower provided information both before and after
the effective date of TRHCA. See, e.g., Dacosta, 82 Fed. Cl. at 554 (determining
that the Tax Court had exclusive jurisdiction over the whistleblower’s claim). The
Court of Federal Claims’ decision in Dacosta is directly on point. In Dacosta the
court dismissed the case because the court found that the Tax Court had exclusive
jurisdiction over the whistleblower claim and the court could not transfer the case
to the Tax Court. Id. at 557 (referencing 28 U.S.C. sec. 1631). Nevertheless, the
Dacosta court’s analysis and rationale are persuasive. In Dacosta, as here, the
claimants provided the Commissioner with information both before and after the
enactment of TRHCA. Id. at 551. The Government moved to dismiss for lack of
10
The Commissioner’s proposed regulations explain that the term
“proceeds” includes when “the IRS initiates a new action that it would not have
initiated, expands the scope of an ongoing action that it would not have expanded,
or continues to pursue an ongoing action that it would not have continued but for
the information provided.” 77 Fed. Reg. 74800 (Dec. 18, 2012).
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subject matter jurisdiction and argued that the information submitted by the
claimants in 2007 was identical to the information submitted in 2003. Id. at 553.
The Government further argued that, even if claimants provided new and different
information, the Commissioner did not proceed using the later application and
documents. Id. The court rejected the Government’s arguments and determined
that the claimants alleged sufficient facts to avail themselves of section 7623(b)(1)
for jurisdictional purposes. Id. at 554. The court concluded that the claimants’
alleged facts, if proven at trial, would establish that the Commissioner acted on
information provided by the claimants after the amendments to section 7623. Id.
The parties dispute whether respondent proceeded against the targets using
the whistleblower’s post-December 20, 2006, information. The whistleblower’s
allegations are sufficient to establish jurisdiction. The whistleblower alleged that
the whistleblower provided the IRS and the DOJ with information from at least
June 2006 through the fall of 2009. The post-December 2006 information was not
simply confirmatory details. Rather, the whistleblower provided the IRS and the
DOJ with the facts that formed the basis and gravamen of respondent’s action
against the targets. The whistleblower alleged that the whistleblower provided the
IRS and the DOJ with information related to particular areas of inquiry and details
regarding the transactions and the targets.
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Taking the contested factual allegations in the petition as true, they establish
that from June 2006 through the fall of 2009 the whistleblower was in constant
contact with the IRS and the DOJ and provided them with the basis of and details
on the targets’ tax avoidance scheme. Whether respondent used this information
to proceed against the targets is not a question for the present motion. The
whistleblower has alleged sufficient jurisdictional facts to avail the whistleblower
of section 7623(b)(1) for jurisdictional purposes and to overcome a motion to
dismiss for lack of jurisdiction. If the whistleblower’s alleged facts are proved at
trial, they would establish that respondent proceeded against the targets using
information the whistleblower provided after December 20, 2006. If these facts
are established, the whistleblower is entitled to judicial review of respondent’s
award determination.
We hold, consistent with the rationale of Dacosta, that this Court has
jurisdiction to review an award determination where a whistleblower has alleged
that the whistleblower provided information both before and after the enactment of
section 7623(b).
We have considered all remaining arguments the parties made and, to the
extent not addressed, we conclude they are irrelevant, moot or meritless.
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For the foregoing reasons, we shall deny respondent’s motion to dismiss.
An appropriate order will be issued.