United States Tax Court

United States Tax Court

160 T.C. No. 5

THOMAS SHANDS,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 13499-16W.

Filed March 8, 2023.

—————

P filed a claim with the Internal Revenue Service

(IRS) Whistleblower Office (WBO) requesting an I.R.C.

§ 7623(b) nondiscretionary award of 30% of the revenue

collected from the 2011 Offshore Voluntary Disclosure

Initiative (OVDI), in which the IRS offered lenient

treatment for U.S. taxpayers that disclosed and paid back

taxes on foreign accounts. The claim asserted that P’s

collaboration with federal agents in securing the highly

publicized arrest and cooperation of Swiss banker Renzo

Gadola led to widespread participation in OVDI.

The WBO denied P’s claim, P appealed the denial in

Tax Court, and the parties filed Cross Motions for

Summary Judgment and Partial Summary Judgment as to

whether the creation of OVDI or any taxpayer’s

participation in OVDI were I.R.C. § 7623(b)(1) related

actions that entitle P to an award. R then moved to dismiss

the case on the ground that the IRS did not proceed with

an I.R.C. § 7623(b)(1) administrative or judicial action

based on information brought to its attention by P.

Held: The Court lacks jurisdiction to review the

WBO’s denial because the IRS did not proceed with an

administrative or judicial action by creating OVDI or by

virtue of any taxpayer’s participation in OVDI.

Served 03/08/23

2

—————

Alexander R. Olama, William M. Sharp, James P. Dawson, Robert F.

Katzberg, and Nicole M. Elliott, for petitioner.

Rachel G. Borden, Cathy Fung, and Anna L. Boning, for respondent.

OPINION

GREAVES, Judge: The Internal Revenue Service (IRS)

Whistleblower Office (WBO) denied petitioner’s claim of a section

7623(b) nondiscretionary award for his alleged contribution to the

success of the 2011 Offshore Voluntary Disclosure Initiative (OVDI), an

IRS program that encouraged taxpayers to come into compliance with

tax reporting obligations by voluntarily disclosing foreign accounts and

other assets. 1 Currently before us are respondent’s Motion to Dismiss

for Lack of Jurisdiction under Rules 40 and 53 and Motion for Summary

Judgment under Rule 121, as well as petitioner’s Cross Motion for

Partial Summary Judgment under Rule 121 and discovery Motions

under Rules 71(c), 72(b), and 104(b).

This Court lacks jurisdiction over a whistleblower case unless the

IRS “proceeds with any administrative or judicial action . . . based on

information brought to the [IRS’s] attention” by the whistleblower. Li

v. Commissioner, 22 F.4th 1014, 1017 (D.C. Cir. 2022) (quoting section

7623(b)(1)). We disagree with petitioner that the IRS proceeded with an

administrative or judicial action by creating OVDI or by virtue of

taxpayers’ participation in OVDI.

Accordingly, we will grant

respondent’s Motion to Dismiss.

Background

The Court derives the following facts, other than the description

of IRS voluntary disclosure programs, from the pleadings and Motion

papers and from the administrative record, which respondent submitted

1 Unless otherwise indicated, all statutory references are to the Internal

Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation

references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all

relevant times, and all Rule references are to the Tax Court Rules of Practice and

Procedure.

3

on January 26, 2018, as an Exhibit to his Motion in Limine. Petitioner

resided in Mississippi when he petitioned this Court.

Petitioner filed Form 211, Application for Award for Original

Information, with the WBO on or about November 29, 2010, seeking a

whistleblower award for any amounts emanating from his cooperation

with the Department of Justice (DOJ) and the IRS Criminal

Investigation Division (CI) in their investigations of Swiss bankers

Martin Lack and Renzo Gadola. IRS agents arrested Mr. Gadola in

Miami, Florida, in November 2010, the day after he had a meeting with

petitioner in which petitioner wore a recording device provided by CI.

Mr. Gadola revealed to prosecutors how he and others helped U.S.

taxpayers open Swiss bank accounts to conceal income and assets from

the IRS. He eventually pleaded guilty to conspiring to defraud the

United States in violation of 18 U.S.C. § 371. The DOJ announced Mr.

Gadola’s guilty plea in a December 2010 press release, and the story

received media coverage in 2010 and 2011.

In February 2011 the IRS announced OVDI, its second offshore

voluntary disclosure program and a counterpart to CI’s longstanding

practice of allowing taxpayers to avoid criminal prosecution by

disclosing noncompliance. See IRS Large Business & International

Division Memorandum, LB&I-1-09-1118-014, at 1 (Nov. 20, 2018);

Offshore Voluntary Disclosure Program Frequently Asked Questions

and Answers 2014, Q&A-3. 2 OVDI offered the same benefit, along with

reduced penalties, for eligible taxpayers that voluntarily disclosed

foreign accounts for tax years 2003–10. See 2011 OVDI Frequently

Asked Questions and Answers, Q&A-4, -7, -9 (hereinafter OVDI Q&A).

Taxpayers whose returns are under examination by the IRS or who are

under investigation by CI could not participate in OVDI. Id. Q&A-14.

Participating taxpayers had to provide information on offshore financial

accounts, institutions, and facilitators, and pay back taxes, penalties,

interest, and a “miscellaneous” penalty based on the highest aggregate

balance in the foreign accounts over a specified period. Id. Q&A-7, -24.3

2 The IRS offered the initial offshore voluntary disclosure program from March

to October 2009. See id. OVDI was the second offshore voluntary disclosure program,

and ran from February 8 to September 9, 2011. Id. A third offshore voluntary

disclosure program began in 2012 and closed in 2018. Id. Q&A-1; Closing the 2014

Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers.

3 In general, all U.S. citizens, wherever they reside, and all resident alien

individuals must pay federal income tax on worldwide taxable income. Treas. Reg.

§ 1.1-1(b). The same goes for domestic corporations, trusts, and estates. See Boris I.

4

The IRS reserved the right to conduct examinations with respect to

OVDI disclosures, and a taxpayer that considered the OVDI penalty

unacceptable could opt out of the program and have its case handled

under the standard audit process. Id. Q&A-27, -51.

In a letter to the WBO dated June 18, 2012 (OVDI claim letter),

petitioner claimed the IRS owed him a nondiscretionary whistleblower

award under section 7623(b) “on the monies collected as a result of the

February 2011 OVDI” (OVDI claim), which by that time totaled over $1

billion. Petitioner alleged that his undercover collaboration with federal

agents brought about Mr. Gadola’s arrest and cooperation, which in turn

led to the success of OVDI. The letter quotes the prosecution’s

supplemental sentencing memorandum in Mr. Gadola’s case, which

asserts that Mr. Gadola’s guilty plea and “the very public nature of his

cooperation” with prosecutors were of “great benefit to the IRS,” because

they “spurred U.S. taxpayers to enter into the voluntary disclosure

program.” As compensation for providing information on Mr. Gadola,

the same information referenced in his 2010 Form 211, petitioner sought

a whistleblower award of 30% of the OVDI proceeds. Neither the OVDI

claim letter nor petitioner’s Motion papers claim a share of collections

from associated enforcement actions, such as seizures of taxpayer assets

or follow-up audits of OVDI participants, taxpayers who opted out of

OVDI, or taxpayers not in compliance that the IRS discovered through

OVDI disclosures.

The WBO processed the OVDI claim separately from petitioner’s

Form 211. WBO analyst Kenneth J. Chatham prepared the initial draft

of an internal memorandum (Chatham memo) on June 6, 2013. 4 The

final version of the Chatham memo, which is undated, recommends

Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ¶ 65.3.1

(2022), Westlaw FTXIEG. Such taxpayers were required to report foreign-source

income on their federal income tax returns for the tax years in the OVDI disclosure

period. See, e.g., Instructions to Form 1040, U.S. Individual Income Tax Return 19

(2010). Taxpayers with foreign accounts of aggregate value greater than $10,000 were

also required to disclose such accounts on Form TD F 90-22.1, Report of Foreign Bank

and Financial Accounts (FBAR). 31 U.S.C. § 5314(a) (2000); 31 C.F.R. §§ 103.24,

103.27(c) (2010). Taxpayers not in compliance could face severe criminal and civil

penalties, including civil fraud penalties, accuracy-related penalties, failure-to-file

FBAR penalties, and failure-to-file and failure-to-pay additions to tax. See OVDI

Q&A-5, -6.

4 Although the administrative record refers to a “claim rejection memo”

(emphasis added), the Chatham memo recommends that the WBO deny petitioner’s

claim, which it did. See infra Part II (discussing rejections and denials).

5

denying petitioner’s claim for lack of a “related action” within the

meaning of Treasury Regulation § 301.7623-2(c)(1). 5

The WBO denied the OVDI claim in a letter dated May 25, 2016

(denial letter), explaining that “the IRS took no action based on the

information [petitioner] provided with respect to [OVDI] or any of the

taxpayers who participated in it,” and that neither OVDI nor the

participating taxpayers are “valid related actions to [petitioner’s]

Whistleblower claim.” Petitioner appealed the denial in this Court on

June 9, 2016, and argues that the creation of OVDI and certain

taxpayers’ participation in OVDI are section 7623(b)(1) related actions

that entitle him to an award. Petitioner argues that we cannot resolve

this case without granting his discovery requests, which he says could

demonstrate that the IRS created OVDI because of increased demand

for voluntary disclosure following the Gadola case, or that the WBO

withheld the denial letter until the regulations under section 7623(b)

better supported a denial.

On January 11, 2022, the U.S. Court of Appeals for the D.C.

Circuit held in Li v. Commissioner, 22 F.4th at 1017, that the Tax Court

lacks jurisdiction under section 7623(b) if the IRS has not proceeded

with an administrative or judicial action based on information the

whistleblower brought to its attention. 6 Respondent then moved to

dismiss, arguing that the IRS did not proceed with an administrative or

judicial action that would confer jurisdiction on this Court.

Discussion

I.

Nondiscretionary Awards

Section 7623 provides for both discretionary and mandatory

awards to individuals (i.e., whistleblowers) who submit information

about third parties that have underpaid their taxes or otherwise

violated the internal revenue laws.

Section 7623(a) authorizes

discretionary awards, which are not subject to Tax Court review. By

5 The Chatham memo refers to “Prop. Reg. 301.7623-2(d)(1),” which suggests

the regulation may have remained in proposed form when Mr. Chatham completed the

memorandum.

6 The D.C. Circuit is the appellate venue for this case absent a stipulation by

the parties. See § 7482(b)(1) (flush text); Kasper v. Commissioner, 150 T.C. 8, 11 n.1

(2018).

6

contrast, section 7623(b) authorizes nondiscretionary awards, discussed

infra, which may be subject to our review.

If the IRS “proceeds with any administrative or judicial action

described in subsection (a) based on information brought to [its]

attention” by a whistleblower, section 7623(b)(1) provides that the

whistleblower, subject to exceptions not relevant here, shall receive an

award of 15% to 30% of the “collected proceeds . . . resulting from the

action (including any related actions) or from any settlement in response

to such action.” 7 Although the Code does not define “related actions,”

Treasury Regulation § 301.7623-2(c)(1) describes “related actions” as

certain administrative or judicial actions against persons other than the

ones the whistleblower identified. The IRS must be able to identify the

target of the action using the information the whistleblower provided,

“without first having to use the information provided to identify any

other person or having to independently obtain additional information.”

Treas. Reg. § 301.7623-2(c)(1)(iii).

II.

Rejections and Denials

The statutory provisions governing whistleblower awards are

succinct, and the Department of the Treasury and the IRS have adopted

regulations supplementing the statutory scheme.

Rogers v.

Commissioner, 157 T.C. 20, 27 (2021). The regulations establish two

distinct types of so-called determinations that by definition result in no

award: rejections and denials. The WBO issues a rejection to a

whistleblower whose claim fails to satisfy certain threshold

requirements as to who may file a claim or what information the claim

must include. See Treas. Reg. §§ 301.7623-1(b)(2), (c)(4), -3(c)(7); see also

Lacey v. Commissioner, 153 T.C. 146, 168 (2019) (“One of the WBO’s

options is indeed to ‘reject’ a claim without substantive consideration of

its information and allegations beyond the face of the claim . . . .”). For

example, Treasury Regulation § 301.7623-1(c)(1) requires the

7 Section 7623(b)(1) refers to the “Secretary” rather than the IRS, and section

7701(a)(11)(B) defines “Secretary” as the Secretary of the Treasury or his delegate.

The Secretary of the Treasury has delegated to the Commissioner responsibility for

the administration and enforcement of the internal revenue laws. Treas. Order 15010 (Apr. 22, 1982).

Congress amended the statutory text in the sentence accompanying this note,

effective for information provided for which a final determination for an award has not

been made before February 9, 2018. Bipartisan Budget Act of 2018, Pub. L. No. 115123, § 41108(a)(2), (d), 132 Stat. 64, 158–59. The amended text does not apply because

the WBO denied the OVDI claim on May 25, 2016.

7

whistleblower to submit “specific and credible information that the

whistleblower believes will lead to collected proceeds from one or more

persons whom the whistleblower believes have failed to comply with the

internal revenue laws.” Failure to provide such information may result

in a rejection. See, e.g., Frantz v. Commissioner, T.C. Memo. 2020-64,

at *7–8 (explaining that the WBO rejected a claim that failed to identify

a tax issue).

When an eligible whistleblower files a conforming claim, the

WBO issues a denial if “the IRS either did not proceed based on the

information provided by the whistleblower,” or “did not collect proceeds”

despite proceeding based on the information. Treas. Reg. § 301.76233(c)(8). Accordingly, a denial is made after the WBO engages in some

substantive consideration beyond the face of a claim. Rogers, 157 T.C.

at 30. 8

III.

Jurisdiction

The Tax Court may exercise jurisdiction only to the extent

authorized by Congress, Naftel v. Commissioner, 85 T.C. 527, 529 (1985)

(first citing section 7442; and then citing Commissioner v. Gooch Milling

& Elevator Co., 320 U.S. 418 (1943)), and a party invoking our

jurisdiction bears the burden of proving that we have jurisdiction over

the party’s case, see Fehrs v. Commissioner, 65 T.C. 346, 348 (1975). We

have jurisdiction to decide whether we have jurisdiction. Snow v.

Commissioner, 142 T.C. 413, 419 (2014).

A.

“Administrative or Judicial Action” Prerequisite

Section 7623(b)(4) grants the Tax Court jurisdiction to review any

“determination regarding an award under paragraph (1).” Like

Treasury Regulation § 301.7623-3(c), discussed supra Part II, the Tax

Court interpreted “determination” to include rejections and denials. See

Lacey, 153 T.C. at 163 n.19 (“[A] denial or rejection is a (negative)

‘determination regarding an award’, so the Tax Court has jurisdiction

where, pursuant to the WBO’s determination, the individual does not

receive an award.”).

8 In the case of a rejection or a denial of a claim filed under section 7623(b), the

WBO generally provides written notice to the whistleblower of the basis for its decision

and, in the case of a rejection, inviting the whistleblower to submit comments or to

perfect the claim. See Treas. Reg. §§ 301.7623-1(c)(4), -3(c)(7) and (8).

8

The D.C. Circuit disagreed, holding in Li that the Tax Court does

not have jurisdiction to review a rejection of a whistleblower claim. Li

reasoned that an award determination by the IRS arises only when the

IRS “proceeds with any administrative or judicial action” based on

information brought to the IRS’s attention by the whistleblower. Li v.

Commissioner, 22 F.4th at 1017 (quoting section 7623(b)(1)). A rejection

“by nature means the IRS is not proceeding with an action,” the Court

continued, meaning “there is no award determination, negative or

otherwise, and no jurisdiction for the Tax Court.” Id.

Although petitioner received a denial rather than a rejection, Part

II supra (second paragraph) explains that the IRS may issue a denial

where the IRS “did not proceed [with an administrative or judicial

action] based on the information provided by the whistleblower,” and the

denial letter explained that the WBO denied petitioner’s claim because

“the IRS took no action based on the information [petitioner] provided.”

To have jurisdiction over petitioner’s appeal, we must hold that the IRS

proceeded with an administrative or judicial action by creating OVDI or

by virtue of taxpayers’ participation in OVDI, the two administrative or

judicial actions petitioner posits.

B.

No Administrative or Judicial Action

Although section 7623(b)(1) refers to an “administrative or

judicial action described in subsection (a),” neither subsection (a) nor

subsection (b) defines an “administrative action” or a “judicial action.”

Treasury Regulation § 301.7623-2(a) defines both terms for claims open

as of August 12, 2014.

See Treas. Reg. § 301.7623-2(f).

An

“administrative action” is defined as “all or a portion of an [IRS] civil or

criminal proceeding against any person that may result in collected

proceeds, . . . including, for example, an examination, a collection

proceeding, a status determination proceeding, or a criminal

investigation.” Id. para. (a)(2). A “judicial action” is defined as “all or a

portion of a proceeding against any person in any court that may result

in collected proceeds.” Id. subpara. (3).

This Court found section 7623(b)(1) ambiguous for its failure to

define “administrative or judicial action,” and accepted the regulatory

definition of “administrative action” as within the Treasury’s “ample

scope” to define these terms. See Lissack v. Commissioner, 157 T.C. 63,

71–76 (2021) (citing Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc.,

467 U.S. 837, 842–44 (1984)). The same reasoning counsels deference

to the regulatory definition of “judicial action.” Furthermore, the Code

9

itself anticipates a definition of “action” similar to the regulation’s by

restricting nondiscretionary awards to proceeds of any action “against

any taxpayer.” See § 7623(b)(5)(A) (emphasis added); see also Hardin v.

City Title & Escrow Co., 797 F.2d 1037, 1040 (D.C. Cir. 1986)

(“Jurisdictional provisions in federal statutes are to be strictly

construed.”).

Neither of the purported administrative or judicial actions

petitioner identifies fits the definitions in Treasury Regulation

§ 301.7623-2(a). By creating OVDI, the IRS did not undertake a “civil

or criminal proceeding against any person” along the lines of the

examples provided in the regulation, let alone a court proceeding. The

program required voluntary disclosure of foreign accounts and assets,

and excluded participation by taxpayers already under examination or

investigation. We likewise reject petitioner’s argument that inherently

voluntary participation in OVDI by a taxpayer constitutes an

administrative or judicial action by the IRS. This Court has recognized

that a taxpayer’s voluntary compliance absent an examination entailed

no administrative action, even if IRS scrutiny prompted the taxpayer’s

compliance. See Whistleblower 16158-14W v. Commissioner, 148 T.C.

300, 304 (2017).

We therefore reject petitioner’s argument that the creation of, and

the participation by unidentified third-party taxpayers in, OVDI are

“related actions.” Assuming arguendo that the IRS proceeded with an

administrative or judicial action against Mr. Gadola based on

information petitioner brought to its attention, any related action the

IRS took against other taxpayers must itself be an administrative or

judicial action. See § 7623(b)(1) (granting an award of collected proceeds

“resulting from the action (including any related actions)”); Treas. Reg.

§ 301.7623-2(a)(1) (defining an “action” as an administrative or judicial

action); id. para. (c)(1) (“[T]he term related action means an action . . . .”

(emphasis added)). Because neither of petitioner’s proposed “actions” is

an administrative or judicial action, neither can be a related action.

C.

Applicability of the Regulations

Petitioner also challenges the process by which the WBO denied

his claim. He submitted the OVDI claim in 2012, and the WBO sent the

denial letter in 2016. He suggests that the “initial decision” to deny his

claim occurred on June 6, 2013, the date of the first draft of the Chatham

memo, and alleges that the WBO may have sought to shore up the legal

10

basis for its decision by withholding the denial letter until the

definitions in Treasury Regulation § 301.7623-2 took effect in 2014.

Invoking the Administrative Procedure Act, see 5 U.S.C. § 706(2)

(2018), petitioner asks us to “set aside” the denial as “arbitrary,

capricious, an abuse of discretion, or otherwise not in accordance with

law,” or “in excess of statutory jurisdiction, authority, or limitations, or

short of statutory right,” because the OVDI claim “must be evaluated

based on the law applicable as of the date of respondent’s initial decision

to deny petitioner’s claim.” Petitioner argues that we must evaluate his

claim by applying the plain meaning of the Code, and disregard

regulations that took effect after the initial draft of the Chatham memo.

The D.C. Circuit encountered a similar argument from Bergerco

Canada, a company that sought to collect a debt from an Iraqi entity on

the eve of the Gulf War. When Iraq invaded Kuwait in August 1990,

President Bush froze Iraqi property interests in the United States,

including funds on deposit with the U.S. bank from which Bergerco

would receive payment. Bergerco Can. v. U.S. Treas. Dep’t, Office of

Foreign Assets Control, 129 F.3d 189, 190–91 (D.C. Cir. 1997). On

August 15, 1990, the Office of Foreign Assets Control (OFAC) announced

regulatory criteria for the award of licenses for payment of blocked

funds, and Bergerco promptly applied for a license. Id. at 191. OFAC

then revised the regulation on October 18, adopting new criteria that

Bergerco did not meet, and denied Bergerco’s application on November

20 based on the new criteria. Id.

The D.C. Circuit rejected Bergerco’s argument that application of

the revised rule was impermissibly retroactive. Id. at 190. A regulation

has retroactive effect, the Court explained, when it impairs rights a

party had when it undertook some prior action. See id. at 193. 9 The key

action in Bergerco’s case was filing a license application, which did not

confer protection from any subsequent rule-made variation in licensing

standards. See id. at 194 (first citing DIRECTV v. FCC, 110 F.3d 816,

825–26 (D.C. Cir. 1997); and then citing Chadmoore Commc’ns, Inc. v.

FCC, 113 F.3d 235, 240–41 (D.C. Cir. 1997)). The D.C. Circuit sustained

9 The D.C. Circuit derived this principle from Bowen v. Georgetown University

Hospital, 488 U.S. 204 (1988), and Landgraf v. USI Film Products, 511 U.S. 244 (1994).

See Bergerco, 129 F.3d at 193. The Court appeared to derive the injunction against

retroactive regulations from 5 U.S.C. § 551(4) (1994), which defined a “rule” as “the

whole or a part of an agency statement of general or particular applicability and future

effect.” Bergerco, 129 F.3d at 192 n.2 (emphasis added) (citing Bowen, 488 U.S. at 216

(Scalia, J., concurring)).

11

OFAC’s use of the October 18 criteria, irrespective of the agency’s motive

in deferring action on Bergerco’s application until November 20, and

despite the fact that the August 15 regulation gave Bergerco “a very

good chance of securing the license.” Id. at 190.

The same reasoning permits us to apply the regulatory definition

of “administrative or judicial action” adopted while petitioner’s claim

was pending. Petitioner cites no authority requiring the WBO or the

Tax Court to ignore the regulation in reviewing claims filed before its

effective date, and he identifies no other action he took that would

entitle him to such review. We do not inquire into the IRS’s reasons for

issuing the regulation before the denial letter. Cf. Lissack, 157 T.C.

at 63–68, 71–76 (applying the regulatory definition where the WBO may

have had enough information to deny the claim nearly three years before

its effective date).

IV.

Conclusion

The Court lacks jurisdiction to review the WBO denial of the

OVDI claim because petitioner has the burden of proving jurisdiction,

which requires that the IRS proceeded with an administrative or judicial

action, and Treasury Regulation § 301.7623-2(a) does not encompass the

purported administrative or judicial actions petitioner identifies. This

holding moots petitioner’s argument that either the creation of OVDI or

taxpayers’ participation in OVDI is a related action, which section

7623(b)(1) and Treasury Regulation § 301.7623-2(c)(1) define as a type

of administrative or judicial action. Granting petitioner’s request to

discover why the IRS created OVDI would not change this result.

To reflect the foregoing,

An order and order of dismissal for lack of jurisdiction will be

entered.