United States Tax Court
Agency decision
Ask Donna
What actually matters in this document.
Text
United States Tax Court
T.C. Memo. 2024-65
IAN D. SMITH,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 25605-15W.
Filed June 4, 2024.
—————
When P filed a claim for an award regarding T’s
unpaid taxes, R had already selected, for income tax
examination, the consolidated group of which T was a
member. However, the examination had not yet been
initiated. P’s claim asserted that T received gift certificates
from its customers in payment for T’s services. P’s claim
further asserted that T did not report the gift certificates
as income and that T transferred the gift certificates to its
employees as compensation without reporting the
compensation as wages or paying employment tax on the
compensation.
Once an income tax examination was initiated, the
exam team used P’s information.
The exam team
determined to disallow deductions for portions of amounts
that were recorded in five categories of T’s general ledger
accounts and deducted on the consolidated returns. The
exam team also disallowed deductions as part of five other
adjustments that were unrelated to P’s information.
A concurrent employment tax examination for T and
two related companies was conducted. The employment
tax examiner determined that employment taxes had not
been paid with respect to portions of amounts recorded in
the same five categories of general ledger accounts. The
Served 06/04/24
2
[*2]
employment tax examiner also determined that
employment taxes had not been paid on portions of
amounts recorded in a sixth general ledger account. This
last adjustment was unrelated to P’s information.
The IRS’s Whistleblower Office (WBO) concluded
that the amounts in dispute within the meaning of
I.R.C. § 7623(b)(5) include only amounts attributable to
whistleblower information.
Employing this legal
conclusion, the WBO determined that the amounts “in
dispute” with respect to P’s claim did not exceed $2 million.
Therefore, the WBO made an award to P under
I.R.C. § 7623(a) rather than I.R.C. § 7623(b).
P filed a Petition contesting this award. We issued
an Opinion holding that the amounts “in dispute” under
I.R.C. § 7623(b)(5)(B) are not limited to whistleblower
information and that the amounts in dispute with respect
to P’s claim exceeded $2 million. Smith v. Commissioner,
148 T.C. 449, 460, 462–63 (2017). We remanded the case
for the WBO to conduct an additional investigation and to
determine an award under I.R.C. § 7623(b).
On remand, the WBO determined to award P 15% of
the proceeds of the income tax and employment tax
examinations that were related to P’s information. In the
WBO’s view, the proceeds related to P’s information
included only the proceeds from the adjustments related to
the five general ledger accounts. R filed a Motion for
Summary Judgment.
Held: We will grant R’s Motion.
—————
Thomas C. Pliske, for petitioner.
Jadie T. Woods, Patricia P. Davis, and George E. Heuring, Jr., for
respondent.
3
CONTENTS
[*3]
MEMORANDUM OPINION ................................................................... 3
Background .............................................................................................. 6
I.
Petitioner’s claim submission .......................................................... 6
II.
Transmission of claim to LMSB Exam ............................................ 8
A.
Income tax examination ......................................................... 10
B.
Employment tax examination ................................................ 15
III. WBO’s original 2015 decision under section 7623(a) .................... 22
IV. Tax Court Opinion and remand ..................................................... 26
V.
WBO’s Supplemental Determination Under Section 7623(b) ...... 27
Discussion ............................................................................................... 31
I.
The WBO did not err in determining that the amount to be
multiplied by the award percentage was the sum of
$1,772,040.53 and $1,720,582.33. .................................................. 31
II.
The WBO did not err in determining that the appropriate
award percentage was 15%. ........................................................... 34
III. The WBO did not err in determining that petitioner’s
whistleblower award is subject to the sequestration
percentage in effect for the fiscal year that the award is
paid. ................................................................................................. 47
IV. Conclusion ....................................................................................... 48
MEMORANDUM OPINION
MORRISON, Judge: In 2008 petitioner submitted information to
the Internal Revenue Service (IRS) Whistleblower Office (WBO)
4
[*4] regarding TAXPAYER1. 1 The IRS used petitioner’s information in
part of an income tax examination of the consolidated group of which
TAXPAYER1 was a member. The IRS also used petitioner’s information
in part of an employment tax examination for TAXPAYER1 and related
entities, TAXPAYER2 and TAXPAYER3. The statutory provisions
governing payments of awards to whistleblowers are section 7623(a), 2
which gives the IRS discretionary authority to make awards, and section
7623(b), which requires the IRS to make awards if, among other things,
the “tax, penalties, interest, additions to tax, and additional amounts in
dispute exceed $2,000,000.” Tax Relief and Health Care Act of 2006,
Pub. L. No. 109-432, div. A, § 406(a)(1)(D), 120 Stat. 2922, 2958–59. The
income tax examination resulted in adjustments related to five general
ledger accounts (i.e., (1) Local Barter Usage, (2) Employee relations—
nonsales, (3) Employee relations—sales, (4) Sales meetings/rallies, and
(5) Rec Sales). The income tax examination also resulted in five other
adjustments (i.e., (1) stock-option expense, (2) interest expense,
(3) amortization of goodwill, (4) inventory capitalization, and (5) bonus
accruals). The increased liability resulting from the income tax
examination was $14,543,098, an amount that was calculated without
interest and penalties. 3 The increased liability resulting from the
income tax examination that was attributable to the five general ledger
accounts was $1,720,582.33. This amount included penalties and
interest. 4 The increased liability resulting from the employment tax
examination was $3,853,345.45, calculated as follows:
1 Words in all capital letters, the meaning of which is not otherwise specified
in this Opinion, are identifiers for redacted information. These identifiers, and the
items of redacted information to which they correspond, are found in reference lists
filed by the parties as document Nos. 3 and 98.
2 Unless otherwise indicated, statutory references are to the Internal Revenue
Code, Title 26 U.S.C. (I.R.C.), in effect at all relevant times, regulation references are
to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times,
and Rule references are to the Tax Court Rules of Practice and Procedure.
3 This amount is discussed in note 19.
4 This amount is discussed in note 30.
5
[*5]
Local
Barter
Usage
general
ledger
account
Four other
general ledger
accounts 5
Subtotal
Chairman’s
Club
Total
$496,095
$926,897.82
$1,422,992.82
$1,671,195.31
$3,094,188.13
Penalties
99,219
185,379.56
284,598.56
334,239.07
618,837.63
Subtotal
595,314
1,112,277.38 6
1,707,591.38
2,005,434.38
3,713,025.76
Interest
(A) 7
64,320.39
75,999.30
140,319.69
Interest
(B) 8
64,449.15
76,157.95
140,607.10
Total
(A) 9
1,771,911.77
2,081,433.68 10
3,853,345.45
Total
(B) 11
1,772,040.53
2,081,592.33
3,853,632.86
Tax
The WBO determined that, even though the amount resulting from the
income tax examination was $14,543,098 and even though the amount
resulting from the employment tax examination was $3,853,345.45, the
award due to petitioner was a discretionary award governed by section
7623(a) because the amounts “in dispute” include only amounts
attributable to whistleblower information.
The resulting award
5 These four general ledger accounts are: (1) Employee relations—non sales,
(2) Employee relations—sales, (3) Sales meetings/rallies, and (4) Rec Sales.
The administrative record states that this amount is $1,112,277.00, the
38-cent difference due to rounding.
6
7 This interest computation does not include additional interest for 1Q 2006 to
2Q 2007.
8
2Q 2007.
This interest computation includes additional interest for 1Q 2006 to
9 This total does not include additional interest for 1Q 2006 to 2Q 2007.
The administrative record states that this amount is $2,081,433.67, a
difference of one cent.
10
11 This total includes additional interest for 1Q 2006 to 2Q 2007.
6
[*6] determination (Final Decision Under Section 7623(a)), made on
September 4, 2015, was appealed to this Court by petitioner. We held
that the amounts in dispute in this case included proceeds that were
collected, whether or not attributable to petitioner’s information. Smith
v. Commissioner, 148 T.C. 449, 460 (2017). In 2020 we remanded the
case to the WBO for it to consider the award under the mandatory
provision of section 7623(b). On April 20, 2021, the WBO issued a
supplemental determination of the award due to petitioner
(Supplemental Determination Under Section 7623(b)). The WBO
determined that the amount collected on the basis of information
petitioner provided was $3,492,622.86, 12 that the award percentage
under section 7623(b) was 15%, and that the award was therefore
$523,893.43. The WBO also determined that the award would be
reduced by budgetary sequestration. On April 20, 2021, the WBO issued
petitioner its Supplemental Determination Under Section 7623(b). On
April 14, 2022, respondent filed a Motion for Summary Judgment asking
the Court to sustain the Supplemental Determination Under Section
7623(b). On April 18, 2022, petitioner filed a Motion for Summary
Judgment asking the Court to hold that the Supplemental
Determination Under Section 7623(b) was erroneous. We will grant
respondent’s Motion for Summary Judgment and sustain the
Supplemental Determination Under Section 7623(b).
Background
I.
Petitioner’s claim submission
Petitioner submitted Form 211, Application for Award for
Original Information, with signature dated July 16, 2008, and a cover
letter dated July 28, 2008. Petitioner’s Form 211 was stamped received
by the WBO on August 4, 2008.
According to his Form 211, petitioner began working with
TAXPAYER1 as a sales representative in YEAR. His Form 211 asserted
that (1) TAXPAYER1 had systematically engaged in bartering gift
certificates in exchange for SERVICE performed by TAXPAYER1;
(2) TAXPAYER1 failed to report the income from such bartering; and
(3) TAXPAYER1 provided these gift certificates to its employees as
compensation, without reporting such compensation to the employees or
12 The sum of $1,720,582.33 and $1,772,040.53.
7
[*7] paying the associated employment tax. 13 Petitioner’s Form 211 also
stated:
As a new employee, the whistleblower was given a gift
basket containing “gift certificates” as a welcoming
present. He later learned that it was normal practice in
his office, as well as other offices throughout the United
States, to sell [SERVICE] in exchange for gift certificates.
These types of transactions were not coded as barter
income and were purposely billed to the customer reflecting
no compensation for the [SERVICE].
Petitioner’s Form 211 related to “tax years 2004 through 2007.”
Petitioner’s Form 211 stated: “Not only does the taxpayer fail to report
the bartering income, but also these gift certificates are kept by
management and by employees without employment tax being paid on
such compensation.”
On September 4, 2008, the WBO issued an acknowledgment letter
to petitioner assigning claim No. 29-82712. The letter advised that
Whistleblower Analyst (WBO Analyst) Robert Gardner was initially
assigned to petitioner’s claim.
Claim No. 29-82712 was renumbered 2009-002721 when it
migrated to the WBO’s new Entellitrak (also known as “e-Trak”) claim
management system.
13 On the Form 211 petitioner made the following statement:
[PUBLICATION] (the “taxpayer”) . . . has systematically, and on an
annual basis, engaged in Bartering, thereby receiving Bartering
Income to the extent of millions of dollars per year. Many (Millions of
Dollars) of the [SERVICE] in the [word redacted by the Court] are paid
with by gift certificates by the customer. . . . Not only does the taxpayer
fail to report the bartering income, but also these gift certificates are
kept by management and by employees without employment tax being
paid on such compensation.
The particular page of the administrative record on which the quoted matter is found
is page SMI-R-000652.
We observe that the Form 211 stated that the entity that engaged in the
bartering transaction was PUBLICATION, not TAXPAYER1. Petitioner’s Response
to Motion for Summary Judgment does not dispute that the statement in question was
intended to refer to TAXPAYER1.
8
[*8] In November 2008 petitioner’s claim was re-assigned from WBO
Analyst Gardner to WBO Analyst Katherine Onken.
II.
Transmission of claim to LMSB Exam
On December 4, 2008, WBO Analyst Onken sent petitioner’s
claim to the IRS Large & Mid-Sized Business Division (LMSB), via a
memorandum addressed to the LMSB Industry Director,
Communications, Technology and Media (CTM).
LMSB-CTM Subject Matter Expert (SME) Felipe Castellanoz
began to review petitioner’s claim to determine whether to send it to the
field for examination.
On February 12, 2009, SME Castellanoz spoke to petitioner’s
counsel to discuss some followup questions and request additional
information regarding petitioner’s claim.
On February 13, 2009, petitioner’s counsel sent a fax to SME
Castellanoz with further answers to some of the questions posed on
February 12, 2009.
On February 24, 2009, SME Castellanoz sent a memorandum to
Mary Faraldo, Team Manager of LMSB Examination Group 1647
(Examination Group 1647) referring petitioner’s claim for examination
by Examination Group 1647. The memorandum stated that “AIMS
[Account Information Management System] controls have been
established” for tax year ending (TYE) 3/31/07 and TYE 3/31/08.
On April 6, 2009, SME Castellanoz informed WBO Analyst
Onken that petitioner’s claim had been assigned to Examination Group
1647.
On October 1, 2010, LMSB was renamed Large Business &
International (LB&I).
On June 9, 2011, the WBO exchanged email correspondence with
LB&I SME Melvin Louie and learned that the Form 1120, U.S.
Corporation Income Tax Return, examination of TAXPAYER1 had been
9
[*9] expanded from TYE 3/31/07 and TYE 3/31/08 to include TYE
3/31/09 and TYE 3/31/10. 14
On September 26, 2011, petitioner submitted supplemental
information in correspondence to the WBO, stating that the claim issue
should be considered for years prior and subsequent to the years
The WBO reviewed
submitted in petitioner’s original claim. 15
16
petitioner’s September 26, 2011, correspondence.
14 As discussed infra part II.A, the examination of TAXPAYER1 was part of
the examination of the consolidated group of which TAXPAYER1 was a member.
15 The statement in the text was asserted in respondent’s Motion for Summary
Judgment. Petitioner’s Objection to Motion for Summary Judgment objected to the
assertion because it is misleading:
Respondent is attempting to mislead the court that the audit was
expanded by Respondent prior to being informed through a supplement
by Petitioner stating the claim issue should be considered in years
prior and subsequent to the years submitted in Petitioner’s original
claim. The reality is that Petitioner informed Respondent of this fact
in the original claim when he stated that the taxpayer “has
systematically and on an annual basis engaged in” this tax scheme.
The administrative record includes a letter of September 26, 2011, from
Thomas C. Pliske of the Tax Whistleblower Law Firm, LLC. The letter appears at
pages SMI-R-000217 to SMI-R-000221 of the administrative record. The letter stated
that its purpose was to “supplement and clarify the claim as stated within this letter.”
The letter stated: “The primary issue raised in the initial 211 Claim submission was
unreported barter income by the taxpayer and is an ongoing issue not only affecting
the years identified in the submission but years prior and subsequent to the years
submitted.” The letter also stated that the “Whistleblower is supplementing the
original claim to include all subsequent years” (i.e., subsequent to “taxable years 2004,
2005, 2006, and 2007”). The statement in the text is correct.
16 The statement in the text was asserted in respondent’s Motion for Summary
Judgment. Petitioner’s objection to Motion for Summary Judgment objected to the
assertion because it is misleading:
Respondent is attempting to mislead the court that the audit was
expanded by Respondent prior to being informed through a supplement
by Petitioner stating the claim issue should be considered in years
prior and subsequent to the years submitted in Petitioner’s original
claim. The reality is that Petitioner informed Respondent of this fact
in the original claim when he stated that the taxpayer “has
systematically and on an annual basis engaged in” this tax scheme.
In support of the Motion for Summary Judgment, respondent submitted a
Declaration of Whistleblower Analyst Teresa Homola (WBO Analyst Homola). The
declaration contained the statement: “The WO reviewed the petitioner’s September 26,
10
[*10] On September 29, 2011, WBO Analyst Onken forwarded
petitioner’s supplemental information to LB&I SME Louie by email,
requesting that he forward the information to Examination Group 1647
for association with petitioner’s claim.
A.
Income tax examination
When the WBO received petitioner’s claim on August 4, 2008,
PARENT’s consolidated Form 1120 had already been selected for
examination but had not yet been assigned (and the examination had
not yet been initiated). TAXPAYER1 was a member of the consolidated
group of which PARENT was the common parent corporation. Thus
TAXPAYER1’s return had been identified for examination before receipt
of petitioner’s claim by the WBO. 17
In April 2009, approximately two months after the February 24,
2009, date on which petitioner’s claim was referred to the field team, an
2011 correspondence.” Furthermore, petitioner stipulated that the “Whistleblower
Office’s administrative claim file with respect to Claim # 2009-002721 is comprised of
the documents Bates numbered SMI-R-000001-001473” and that pages SMI-R000001–001473 is “a complete copy of the administrative record in this case.” To
stipulate that the letter at pages SMI-R-000217 to SMI-R-000221 is part of the WBO’s
administrative claim file and that it is part of the administrative record suggests that
the letter was considered by the WBO. The statement in the text is correct.
17 The statement in the text was asserted in respondent’s Motion for Summary
Judgment. Petitioner’s Objection to Motion for Summary Judgment objected to the
assertion on the following grounds: “Respondent’s statement ‘taxpayer has been
identified for examination prior to receipt of Petitioner’s claim’ appears to contradict
what the whistleblower office concluded in the original determination in which the
whistleblower office determined that the whistleblower’s ‘information caused the
investigation.’ (Exhibit A, SMI-R-000012).” Petitioner’s Form 211 was received by the
WBO on August 4, 2008. An August 12, 2013, memorandum from WBO Analyst Mitzel
to WBO Acting Program Manager Dawn Applebaum, SMI-R-000056 to SMI-R-000058,
includes the following statement: “The 200703 tax return was in Status 08 (selected
for exam but not assigned) when the WB allegation was received in the WBO.”
Furthermore, the Homola declaration states: “The Taxpayer [TAXPAYER1] had been
identified for examination prior to receipt of petitioner’s claim.” The original
determination of September 4, 2015, determined that petitioner’s information was
eligible for a 10% award corresponding to “information that caused the investigation
or in cases already under audit, caused an investigation of an issue or issues.” Thus,
the original determination did not necessarily conclude that TAXPAYER1 was not
already under audit when petitioner filed the whistleblower claim. And in the
Supplemental Award Recommendation Memorandum, dated March 9, 2021, Homola
stated: “[T]he return had been selected for examination prior to receipt of the
Whistleblower information . . . .” The statement in the text is correct.
11
[*11] income tax examination of the consolidated Form 1120 returns for
PARENT was initiated.
The assigned income tax examiner was initially Nora Marino.
Sonia Pearl took over the case from Marino after the case had already
been resolved.
The WBO consulted with both Marino and Pearl regarding the
income tax examination. Marino prepared a narrative for the WBO
relating to the income tax examination, while Pearl handled the final
closing and signed the Form 11369, Confidential Evaluation Report on
Claim for Award, which incorporated Marino’s narrative. The Form
11369 was signed by Pearl on July 17, 2013, and approved by her
manager Salvatore Fristachi on July 17, 2013.
Question 11.A. on Form 11369 (“Did the Service use the
information the whistleblower provided to develop specific document
requests or other inquiries to the taxpayer?”) was answered “yes.”
The narrative attached to the income tax examiner Form 11369
detailed the examination results and the relationship of petitioner’s
claim information to each of the adjustments as follows:
As indicated on the Form 4549-A RAR, [t]he initial year
assigned to the income tax examiner was FY 200703. The
information provided by the whistleblower was used to
identify barter as an audit issue for both the income and
employment tax examiners. For purposes of the corporate
income tax examination, the documentation included with
Form 211 was verified and relied upon by the examiner to
determine the types of revenue or expenses which may be
adjusted in calculating taxable income.
Samples of
contracts, customer invoices and gift certificates included
in the file were used to test barter income recognition.
While no underreporting of barter income was identified,
the information provided on and with Form 211 assisted
the corporate income tax examiner in the selection of
accounts for analysis, i.e. barter usage. No contact was
made with the whistleblower by the examiners.
The whistleblower’s allegation that employees and
managers received gift certificates which were not included
in their compensation is correct. When he was employed
by the Taxpayer [i.e., TAXPAYER1], the whistleblower was
12
[*12] the recipient of a “gift basket containing numerous ‘gift
certificates’ as a welcoming present” as indicated on Form
211.
The corporate income and employment tax
examinations revealed that nothing was included in any
employees compensation, including the whistleblower’s, for
the value of bartered goods and services as well as gift
cards and other incentives purchased directly by the
Taxpayer. It is unlikely that any employee, including the
whistleblower, included the value of these “gifts” in taxable
income since they were not included in wages or otherwise
reported to them.
The whistleblower’s allegation that the Barter Income is
unreported is incorrect. The taxpayer maintains detailed
reports of Hotel Barter and Local Barter Usage for those
items received in exchange for its [SERVICE] services.
Hotels and lodging received as barter are often utilized by
employees for business related travel. There were no
errors noted in the hotel barter usage for the test sample
period so no adjustment was proposed to corporate taxable
income.
Local Barter assets received by [TAXPAYER1] in exchange
for its [SERVICE] services consist of items such as gift
certificates and vouchers for janitorial services, restaurant
meals, day cruises, rounds of golf, moving services, spas,
catering facilities and limousine services. The Taxpayer
does not maintain records of barter usage by each
individual employee. Analysis of a test sample of barter
use indicated that 11.86% constituted additional
compensation to employees, and 18% was found to be
undocumented and therefore disallowed as deductible
expenses in calculating taxable income.
As stated in the Form 11369, the income tax examination found,
contrary to petitioner’s whistleblower claim, that TAXPAYER1 had
properly reported bartering income for the items received in exchange
for its SERVICE services.
No adjustment was proposed to
TAXPAYER1’s bartering income.
TAXPAYER1 maintained a general ledger account called “Local
Barter Usage” where it recorded business usage of the gift certificates
and vouchers received in exchange for its SERVICE services. PARENT
13
[*13] claimed “Other Deductions” for Local Barter Usage on the Forms
1120.
As stated in the income tax examiner Form 11369, petitioner’s
whistleblower information assisted the income tax examiner in the
selection of the “Local Barter Usage” account for analysis.
The income tax examiner found that PARENT did not maintain
adequate records, as required under section 274, to substantiate some
of its Local Barter Usage deductions. Using a sampling analysis, the
income tax examiner determined that “18% was found to be
undocumented and therefore disallowed as deductible [corporate]
expenses in calculating taxable income.”
Including the Local Barter Usage account, the income tax
examiner selected seven general ledger accounts for examination. These
accounts had the following attributes: (1) PARENT claimed “Other
Deductions” for the amounts reflected in the accounts and (2) the
accounts either (a) related to meals, travel, and entertainment or
(b) appeared to include awards, incentives, or prizes provided to
employees. These are the seven general ledger accounts selected for
examination:
Employee relations—nonsales
036450
Adjusted
Employee relations—sales
026450
Adjusted
Sales Meetings/Rallies
026650
Adjusted
Local Barter Usage
026955
Adjusted
Hotel Barter Usage
026960
Not adjusted
Chairman’s Club
026575
Not adjusted
Rec Sales
026025
Adjusted
The income tax examiner made adjustments related to five of the seven
general ledger accounts, as indicated in the table above. For the
accounts for which adjustments were made, the income tax examiner
made a sampling analysis, inferred an error rate regarding income tax
14
[*14] deductions, and made the adjustment by extrapolating from the
error rate. 18
As a result, the income tax examiner proposed adjustments to
disallow a portion of PARENT’s deductions for the five general ledger
accounts as follows: $1,153,327 for TYE 3/31/07; $1,263,600 for
TYE 3/31/08; $1,130,468 for TYE 3/31/09; and $1,004,102 for
TYE 3/31/10. Applying a 35% tax rate to these adjustments resulted in
an additional tax due of $1,593,024. PARENT agreed to these
adjustments.
In addition to the adjustments to the five general ledger accounts,
the income tax examiner proposed five other adjustments, which were
also agreed to by TAXPAYER1. The Form 4549–B, Income Tax
Examination Changes, for PARENT for TYE 3/31/07 through
TYE 3/31/10 reflects these five adjustments, which were for (1) stock
option expenses, (2) interest expense, (3) amortization of goodwill,
(4) inventory capitalization, and (5) bonus accruals.
The agreed-upon and collected deficiency for the income tax
adjustments was $14,543,098. 19
PARENT fully paid the $14,543,098 agreed income tax deficiency
as of September 9, 2013.
18 As stated in the income tax examiner Form 11369, the income tax examiner
also inferred an error rate for amounts recorded in the Local Barter Usage general
ledger account that constituted additional compensation to employees. This was
11.86%. The same type of error rate was inferred for the other four general ledger
accounts for which deduction adjustments were made, as shown in the administrative
record on pages SMI-R-000262 to SMI-R-000270 and on page SMI-R-000274.
19 Respondent’s Motion for Summary Judgment asserted that the $14,543,098
includes penalties and interest. Respondent cited page SMI-R-000443 in support of
the assertion. However, this page of the administrative record has zeroes for penalties
and interest. Respondent also cited page SMI-R-000449 in support of the assertion.
However, this page of the administrative record has no breakdown of penalties and
interest. Respondent cited paragraph 33 of the Homola declaration in support of the
assertion. That paragraph repeats the assertion. However, it refers only to the two
pages of the administrative record cited in respondent’s Motion for Summary
Judgment. We conclude that respondent has not shown that the $14,543,098 includes
penalties and interest. The conclusion does not affect the merits of respondent’s
Motion for Summary Judgment, as petitioner does not contend that the correctness of
the Supplemental Determination Under Section 7623(b) depends on whether the
$14,543,098 includes penalties and interest.
15
[*15] The income tax examination also resulted in proposed
adjustments related to the section 199 domestic production deduction
(DPD) for TYE 3/31/07, TYE 3/31/08, TYE 3/31/09, and TYE 3/31/10.
PARENT did not agree to the DPD adjustments, and they were sent to
the IRS Independent Office of Appeals (Appeals).
PARENT did not reach an agreement with Appeals regarding the
DPD adjustments. Appeals issued PARENT a statutory notice of
deficiency, which PARENT petitioned to the Tax Court. The Tax Court
litigation regarding the DPD issue was eventually resolved through
settlement.
Petitioner’s whistleblower claim did not contain any documents
or information that were used to develop the adjustments to stock option
expenses, interest expenses, amortization of goodwill, inventory
capitalization, bonus accruals, or the DPD.
In the income tax examiner’s Form 11369 dated July 17, 2013, the
examiner stated that no assessment was made for TYE 3/31/10 due to a
net operating loss carryback from TYE 3/31/12. The income tax
examiner further stated that the “barter expense” was not an issue for
TYE 3/31/11 because the taxpayer had instituted controls to correct the
accounting.
B.
Employment tax examination
In April 2010 an employment tax examination of TAXPAYER1
and related entities, TAXPAYER2 and TAXPAYER3, was initiated.
The assigned employment tax examiner was Laura Cordero.
The employment tax examination covered the Forms 941,
Employer’s Quarterly Federal Tax Return, filed by TAXPAYER1,
TAXPAYER2, and TAXPAYER3 for calendar years 2006 through 2009.
Although PARENT’s Form 1120 was reported on a fiscal year
basis (ending March 31), the employment tax returns for TAXPAYER1,
TAXPAYER2, and TAXPAYER3 were reported on a calendar year basis.
Thus, a 2010 employment tax examination would require information
from the Form 1120 for TYE 3/31/11. Because the corporate income tax
return for TYE 3/31/11 had not yet been filed at the conclusion of the
employment tax examination, the 2010 calendar year was not examined.
16
[*16] The employment tax examination was conducted to consider
petitioner’s allegation of gift certificates being provided to employees
without being included in income. The employment tax examiners
found that TAXPAYER1, TAXPAYER2, and TAXPAYER3 did not
properly report the gift certificates—which TAXPAYER1, TAXPAYER2,
and TAXPAYER3 received from customers through bartering and
provided to their employees—as part of the employees’ wages.
The employment tax examiner made the following statements
regarding how the information and documents petitioner provided were
used in the employment tax examination:
The information provided by the whistleblower was used to
identify barter as an audit issue for both the income and
employment tax examiners.
For purposes of the
employment tax examination, the documentation included
with Form 211 was not utilized. Samples of contracts,
customer invoices and gift certificates do not verify
whether or not these amounts were included in
compensation. The information provided on and with
Form 211 assisted the employment tax examiner in the
selection of accounts for analysis, i.e. barter usage, but it
was not useful for evidentiary purposes since it contained
estimates and was outside the audit periods.
Employment tax adjustments were made to the Forms 941 for
TAXPAYER1 for calendar years 2006 through 2009.
The employment tax examiner used the same Local Barter Usage
sampling results used by the income tax examiner, which found that
11.86% of Local Barter Usage constituted additional compensation to
employees.
The Local Barter Usage adjustments resulted in additional
payroll tax for the 2006, 2007, 2008, and 2009 calendar years of
$154,929, $135,746, $120,116, and $85,304, respectively. A 20%
accuracy-related penalty relating to the Local Barter Usage
adjustments was also assessed. Thus, a total of $595,314 in additional
payroll tax and penalties resulted from the Local Barter Usage
adjustment.
In addition to the Local Barter Usage adjustment, the
employment tax examiner also proposed compensation adjustments
related to the following four general ledger accounts: (1) Employee
17
[*17] relations—non sales; (2) Employee relations—sales; (3) Sales
meetings/rallies; and (4) Rec Sales. The total additional employment
tax and penalties resulting from adjustments to these four categories
totaled $1,112,277 for the 2006, 2007, 2008, and 2009 years. 20
With respect to the adjustments for (1) Employee relations—non
sales, (2) Employee relations—sales, and (3) Sales meetings/rallies, the
Form 886–A, Explanations of Items, stated:
Expenses reclassified as . . . additional salary represented
expenditures (primarily through American Express
purchases) of gift certificates, group meals and tickets for
entertainment events. In reviewing the detail, the auditors
noted that the expenses claimed either lacked appropriate
substantiation as business events or represented gift
certificates or entertainment outings that were given
directly to the salespersons as incentives.
With respect to the adjustment for Rec Sales, the Form 886–A stated:
“[I]t was found that gift certificates were purchased by territory
managers and distributed to salespersons based upon the manager’s
discretion as incentive for performance.” As to all four general ledger
account expense categories, the WBO stated: “The 886A does not
breakout the portion of each category adjustment related to gift cards.
Without such a breakdown the entire category will be attributed to
collected proceeds.”
The adjustments to the five expense categories involving gift
certificates (Local Barter Usage, Employee relations—non sales,
Employee relations—sales, Sales meetings/rallies, and Rec Sales)
resulted in total additional payroll tax, penalties, and interest for the
taxable years 2006, 2007, 2008, and 2009 of $588,290, $616,620,
20 The statement in the text was asserted in Respondent’s Motion for Summary
Judgment. Petitioner’s Objection to Motion for Summary Judgment objected to the
assertion without stating that it is incorrect. Respondent cited page SMI-R-001434 in
support of the assertion. However, page SMI-R-001434 does not reflect the asserted
amounts. The assertion was stated in the declaration of Homola that respondent
submitted in support of the Motion for Summary Judgment. Homola’s declaration
refers only to page SMI-R-001434, the same page cited in respondent’s Motion for
Summary Judgment. However, we observe that the statement in the text is supported
by other portions of the administrative record. The $1,112,277 amount is equal to
$1,772,040.53 (an amount appearing on page SMI-R-001135) minus $64,449.15 (an
amount appearing on page SMI-R-001135) minus $595,314 (an amount that can be
calculated from page SMI-R-000255).
18
[*18] $341,046, and $226,084, respectively. 21
Thus, a total of
$1,772,040.53 in additional employment tax, penalties, and interest
resulted from adjustments to these five expense categories.
The employment tax examiner also proposed an adjustment to a
sixth general ledger expense category called the “Chairman’s Club.” The
Chairman’s Club adjustment was described as disallowing travel
expenses for administrators, executives and other high-earning
salespersons to attend yearly events, sponsored by TAXPAYER1,
TAXPAYER2, and TAXPAYER3 at resorts in the Bahamas and Cancun.
The Chairman’s Club adjustment did not involve bartering or gift
certificates, and petitioner’s claim did not contain any documents or
information that related to the Chairman’s Club adjustments.
The Chairman’s Club adjustments resulted in additional payroll
tax, penalties and interest for the taxable years 2006, 2007, 2008, and
2009 of $861,546, $522,958, $247,781, and $449,307, respectively. 22
Thus, a total of $2,081,592 was collected as a result of the Chairman’s
Club adjustments.
Although the employment tax examination encompassed three
entities which filed separate payroll tax returns, the total payroll tax
examination results for the PARENT consolidated group were combined
on Form 2504, Agreement to Assessment and Collection and Acceptance
of Overassessment (Excise or Employment Tax), and the employment
tax deficiency was assessed against only one entity, TAXPAYER1.
The total employment tax deficiency, including interest, was
$3,853,633 (the sum of $1,772,040.53 and $2,081,592). 23 TAXPAYER1,
21 The statement in the text was asserted in Respondent’s Motion for Summary
Judgment. Petitioner’s Objection to Motion for Summary Judgment objected to the
assertion without stating that it is incorrect. Respondent cited pages SMI-R-000251
to SMI-R-000273 in support of the assertion. However, these pages do not reflect the
asserted amounts. The assertion was stated in the declaration of Homola. Homola’s
declaration also refers to pages SMI-R-000251 to SMI-R-000273. However, we observe
that the asserted amounts are reflected on page SMI-R-001135.
22 The statement in the text was asserted in respondent’s Motion for Summary
Judgment. Petitioner’s Objection to Motion for Summary Judgment objected to the
assertion without stating that it is incorrect. The assertion is supported by page SMIR-001135, which is among the pages respondent cited.
23 The statement in the text was asserted in respondent’s Motion for Summary
Judgment. Respondent did not cite any pages of the administrative record in support
19
[*19] TAXPAYER2, and TAXPAYER3 agreed to these adjustments and
paid the employment tax deficiency in full as of May 29, 2012. The WBO
noted that the refund statute expiration date for the employment tax
payment was May 29, 2014.
At the conclusion of the employment tax examination, the
employment tax examiner prepared and submitted Form 11369 to the
WBO that documented her findings and was signed on January 23,
2012.
The employment tax examiner marked “yes” on line 11.A. of Form
11369 in response to the question “[d]id the Service use the information
the whistleblower provided to develop specific document requests or
other inquiries to the taxpayer?”
The employment tax examiner also marked “yes” on line 13.A. of
Form 11369 in response to the question “[d]id the whistleblower
participate in the actions that led to the underpayment of tax, or to the
violation of the internal revenue laws?”
On February 3, 2012, after reviewing the Form 11369 from the
employment tax examiner, WBO Analyst Onken emailed LB&I SME
Louie with some additional followup questions for the field team. WBO
Analyst Onken requested additional explanation of how petitioner’s
information was used during the examination, to expand upon the
employment tax examiner’s answer to Form 11369, line 11.A. WBO
Analyst Onken also requested additional explanation of how the
whistleblower participated in the tax noncompliance, to expand upon
the employment tax examiner’s answer to Form 11369, line 13.A.
LB&I SME Louie forwarded WBO Analyst Onken’s February 3,
2012, email to the employment tax examiner.
On February 7, 2012, the employment tax examiner modified the
Form 11369 narrative attachment in response to WBO Analyst Onken’s
request for additional information and emailed the revised Form 11369
narrative attachment to LB&I SME Louie, with a copy to WBO Analyst
Onken.
of the assertion. However, we observe that the assertion is supported by page SMI-R001300.
20
[*20] The narrative attachment to the employment tax examiner’s
Form 11369 stated:
The Taxpayer’s revenue is primarily generated by the sale
of [SERVICE] . . . . As an incentive to their sales staff, gift
certificates were given as prizes and gifts during sales
meetings and rallies.
Other gift certificates were
distributed to employees as they approached their
expiration dates. Payroll tax adjustments were proposed
for those assets which had been provided to or used by
employees. The test sample error rate of 11.86% was
extrapolated to the entire Local Barter Usage account in
each year. The adjustment for additional wages was
$555,301 in 2006, $486,544 in 2007, $430,524 in 2008 and
$336,339 in 2009. This resulted in additional payroll tax
of $154,929 in 2006, $135,746 in 2007, $120,116 in 2008
and $85,304 in 2009 directly attributable to the
whistleblower’s information. An accuracy penalty of 20%
was assessed on the total payroll tax deficiency. The
Alternative Argument provided in the legal memorandum,
a payment made to an employee is a taxable wage subject
to employment taxes and Federal Income Tax Withholding
was utilized to support the payroll tax adjustment related
to the distribution of gift certificates to employees. No
contact was made with the whistleblower by the
examiners.
All remaining payroll tax adjustments result from
unrelated issues developed by the examiners. It is unlikely
that an employment tax referral would have been
submitted or an employment tax specialist assigned to this
case without the whistleblower’s information.
The
employment tax examiner did not prepare an examination
plan.
After reviewing the revisions, WBO Analyst Onken found that the
“narrative provides additional information and is accepted as adequate.”
After receiving the revised Form 11369, WBO Analyst Onken
emailed the employment tax examiner for further clarification
regarding subsequent year examinations for 2010 and 2011. The
employment tax examiner responded that she would not be conducting
examinations for 2010 and 2011, because the TYE 3/31/10 corporate
21
[*21] return had not yet been filed at the time the 2006 through 2009
payroll tax adjustments were proposed.
WBO Analyst Onken also followed up to ask the employment tax
examiner: “Will you be recommending that this issue be examined in
next cycle? Or do you think the taxpayer will correct the unaudited
periods.” The employment tax examiner responded in a February 7,
2012, email:
I think the taxpayer will either adjust the 2011 payroll
records, with a significant increase in the last quarter’s
wages from the third quarter or an M-1/M-3 expense
disallowance adjustment will be made on the corporate
return. As far as the 2010 year, due to the significant
number of affected employees, I do not think that the T/P
will issue corrected W-2’s (or amend the payroll tax
returns) and would recommend that this issue continue to
be examined in the next cycle. IDRS should be checked to
see if the taxpayer made any corrections prior to assigning
an examiner.
On October 25, 2012, WBO Analyst Onken checked the
Examination Returns Control System and AIMS and found that the
Forms 1120 for TYE 3/31/07 to 3/31/11 were in “Status 12,” which means
the examination is in process. She also checked to see whether the
employment tax examination had been expanded into 2010 or beyond.
On October 25, 2012, WBO Analyst Onken sent an email to LB&I
SME Louie to learn the status of the TYE 3/31/11 income tax
examination, and to confirm whether there would be an employment tax
examination conducted to investigate petitioner’s claim for 2010 and
forward.
On November 20, 2012, LB&I SME Louie sent an email to Pearl
asking: “[P]lease let me know whether or not: 1) You are (or will be)
examining the 201103 [i.e., TYE 3/31/11] Form 1120 for issues raised by
the whistleblower; 2) Employment Tax is (or will be) examining 2010 or
subsequent periods.”
On November 20, 2012, Pearl responded in an email to LB&I
SME Louie:
1) I will not be examining [TYE 3/31/11] F. 1120 issues
raised by the whistleblower based on the advice of the prior
22
[*22] RA. The [TYE 3/31/11] was filed after the audit was
underway and the errors which led to prior period
adjustments were corrected.
2) Similarly Employment Tax made the determination not
to examine [the first quarter of 2010] or any subsequent
periods as the TP corrected its accounting for the items
adjusted in earlier years.
LB&I SME Louie forwarded the email to WBO Analyst Onken.
III.
WBO’s original 2015 decision under section 7623(a)
In approximately February 2013 petitioner’s claim was
reassigned from WBO Analyst Onken to WBO Analyst Steve Mitzel.
After reviewing the Forms 11369 and supporting documents
received from the income tax and employment tax examiners, the WBO
waited for the two-year refund period of limitations to expire with
respect to TAXPAYER1’s income and employment tax payments.
In April 2015 WBO Analyst Mitzel prepared an Award
Recommendation Memorandum.
In the Form 11369 submitted by the employment tax examiner,
the examiner had expressed the opinion that $595,314 of the
$3,853,345.45 collected in the employment tax examination was
“directly attributable to petitioner’s information.” 24
24 The statement in the text was asserted in respondent’s Motion for Summary
Judgment. Petitioner’s Objection to Motion for Summary Judgment objected to the
assertion without stating that it is incorrect. Respondent cited page SMI-R-000255 in
support of the assertion. Page SMI-R-000255 states that the employment tax
deficiencies directly attributable to petitioner’s information were $154,929 for 2006,
$135,746 for 2007, $120,116 for 2008, and $85,304 for 2009. The same page also states
that a 20% penalty was assessed on these deficiencies. The sum of these deficiencies
is $496,095, which when added to 20% of this sum, is $595,314. Page SMI-R-000255
includes enough information to calculate that $595,314 is the sum of taxes and
penalties collected that relate to the adjustments as to the Local Barter Usage
adjustment. However, the $595,314 amount does not include interest, unlike the
$3,853,345.45 amount, which includes interest. Page SMI-R-000255 does not reflect
the $3,853,345.45 amount. The assertion in the text was stated in the declaration of
Homola. Homola’s declaration refers only to page SMI-R-000255, the same page cited
in respondent’s Motion for Summary Judgment. However, we observe that the
23
[*23] However, WBO Analyst Mitzel found that a larger portion of the
proceeds collected pursuant to the employment tax examination—
$1,771,911.77 out of the total $3,853,345.45—was attributable to
petitioner’s information. 25 WBO Analyst Mitzel determined that even
though the issues were not specifically related to bartering, these
additional adjustments were related to the provision of gift certificates
to employees without including them in the employees’ income, and thus
related to petitioner’s whistleblower information.
The remaining $2,081,433.68 of adjustments related to “The
Chairman’s Club”—travel packages to events, sponsored by
TAXPAYER1, at offshore resorts which TAXPAYER1 provided to
certain employees—which the IRS found to constitute compensation not
included in the employees’ income. 26 WBO Analyst Mitzel determined
that the Chairman’s Club adjustments did not relate to the information
petitioner provided.
The Form 886–A attached to the employment tax Form 11369 did
not break out the portion of each category of adjustment related to gift
$3,853,345.45 amount is found on page SMI-R-000050. The reason this amount is less
than the $3,853,633 amount discussed supra Part II.B is that this amount does not
include additional interest for 1Q 2006 through 2Q 2007.
25 In respondent’s Motion for Summary Judgment, respondent asserted the
following: “However, WO Analyst Mitzel found that a larger portion of the proceeds
collected pursuant to the employment tax examination—$1,771,991.77 out of a total
$3,853,345.45—was attributable to petitioner’s information.” Petitioner’s Objection
to Motion for Summary Judgment objected to the assertion without stating that it is
incorrect. Respondent cited only Homola’s declaration in support of the assertion. The
assertion was stated in the declaration of Homola. Homola’s declaration does not refer
to a page of the administrative record. And we are unable to find the $1,771,991.77
amount in the administrative record. However, we observe that SMI-R-000050 reflects
that WBO Analyst Mitzel found that the portion of the proceeds collected pursuant to
the employment tax examination—$1,771,911.77 out of a total of $3,853,345.45—was
attributable to petitioner’s information. The reason why this amount is less than the
$1,772,040.53 amount discussed supra Part II.B is that this amount does not include
additional interest for 1Q 2006 through 2Q 2007.
26 The statement in the text was asserted in respondent’s Motion for Summary
Judgment. Petitioner’s Objection to Motion for Summary Judgment objected to the
assertion without stating that it is incorrect. Respondent cited only Homola’s
declaration in support of the assertion. Homola’s declaration does not refer to a page
of the administrative record. However, we observe that the asserted amount can be
calculated from the amounts reflected in SMI-R-000050. Specifically, $2,081,433.68 is
the difference between $3,853,345.45 and $1,771,911.77. The reason why this amount
is less than the $2,081,592 amount discussed supra Part II.B is that this amount does
not include additional interest for 1Q 2006 through 2Q 2007.
24
[*24] certificates. Therefore, WBO Analyst Mitzel attributed all of the
compensation adjustments to petitioner’s information, with one
exception: He determined that the Chairman’s Club expense category
was not attributable to petitioner’s allegations regarding barter income
or compensation related to gift certificates.
With respect to the income tax examination, the income tax
examiner’s Form 11369 opined that $1,593,024 of the $14,543,098
collected in the income tax examination was attributable to petitioner’s
information. 27 The income tax examiner stated that the information
petitioner provided was used to identify barter as an audit issue for the
income tax examination as well as the employment tax examination.
While no underreporting of bartering income was identified in the
examination, the income tax examination resulted in the disallowance
of certain deductions for the use of barter assets that were not properly
documented. However, WBO Analyst Mitzel disagreed with the
examiner’s reasoning in attributing the barter expense disallowance to
petitioner’s information and concluded that none of the adjustments in
the income tax examination was attributable to petitioner’s information.
The WBO computed the amount in dispute as $1,771,911.77. 28
Because this amount was less than $2 million, the WBO processed
petitioner’s claim as a discretionary award under section 7623(a) rather
than a mandatory award under section 7623(b).
The Internal Revenue Manual (IRM) procedures for section
7623(a) claims in effect during the 2015 whistleblower administrative
proceeding for this case stated that
[f]or specific and responsible information that caused the
investigation or, in claim files already under audit,
materially assisted in the development or identification of
an issue or issues and resulted in the recovery, or was a
27 Neither amount included penalties or interest.
28 Respondent’s Motion for Summary Judgment asserted that a slightly
different amount was computed: “The WO computed the ‘amount in dispute’ as
$1,771,991.77.” Petitioner’s Objection to Motion for Summary Judgment objected to
the assertion without stating that it is incorrect. Respondent cited Homola’s
declaration in support of the assertion. Homola’s declaration includes the assertion in
respondent’s Motion for Summary Judgment. Homola’s declaration does not refer to a
page of the administrative record. However, we observe that page SMI-R-000053
includes the following statement by WBO Analyst Mitzel: “My determination of the
amount in dispute for employment tax related issues totals $1,771,911.77.”
25
[*25] direct factor in the recovery, the award shall be 15 percent
of the amounts recovered.
IRM 25.2.2.9.1(2)(a) (June 18, 2010). The IRM further stated that “[f]or
information that caused the investigation or, in claim files already under
audit, caused an investigation of an issue or issues, and was of value in
the determination of tax liabilities although not specific, the award shall
be 10 percent of the amount recovered.” IRM 25.2.2.9.1(2)(b). The IRM
further provided that “[f]or information that causes the investigation or
investigation of an issue, but had no direct relationship to the
determination of tax liabilities, the award shall be 1 percent of the
amounts recovered.” IRM 25.2.2.9.1(2)(c).
Accordingly, the WBO proposed an award of 10% of the proceeds
collected that were attributed to petitioner’s information, and 1% of the
proceeds collected that were not attributed to petitioner’s information.
On July 27, 2015, the WBO issued a Preliminary Award
Recommendation Under § 7623(a) of $183,551.11.
On August 10, 2015, petitioner submitted comments regarding
the Preliminary Award Recommendation Under Section 7623(a),
arguing that the amount in dispute should include “the total of
$18,396,443.44 [that] resulted from the action(s) with which the IRS
proceeded based on the information provided by the whistleblower . . .
even though the whistleblower substantially contributed to only
$1,771,911.77.” (Alteration in original.)
On September 4, 2015, after considering petitioner’s comments,
the WBO issued to petitioner a Final Decision Under Section 7623(a).
On October 2, 2015, petitioner filed his Petition, asking this Court
to find that the WBO abused its discretion in (1) determining that
petitioner was entitled to an award under section 7623(a) and not
section 7623(b); (2) determining that petitioner was entitled to an award
of 10% of certain proceeds and 1% of other proceeds, and not the
threshold percentage of 15% of all the collected proceeds; and
(3) reducing petitioner’s award by 7.3% for sequestration. Petitioner
asked the Court to compel respondent to “pay [p]etitioner the threshold
percentage of 15% to 30% of all collected proceeds” and pay the amount
respondent withheld due to sequestration.
26
[*26] IV.
Tax Court Opinion and remand
On September 12, 2016, petitioner filed a Motion for Summary
Judgment requesting that the Court make several conclusions,
including that the “amounts in dispute” in this case exceeded $2 million,
and that therefore the WBO erred in making a determination under
section 7623(a).
On June 7, 2017, the Tax Court issued its Opinion granting
petitioner’s Motion for Summary Judgment with respect to the
“amounts in dispute” issue, holding that the amounts in dispute in this
case included proceeds that were collected, whether or not attributable
to petitioner’s information:
The section 7623(b)(5)(B) phrase “amounts in
dispute”[29] is not specifically limited to only those amounts
directly or indirectly attributable to the whistleblower
information. Once the monetary thresholds are met and
the Government recovers “collected proceeds” resulting
from the action, the mandatory provisions of subsection
(b)(1) or (2) apply.
Smith, 148 T.C. at 460. The Court further stated:
In the case before the Court, respondent proceeded using
petitioner’s information, and the examination resulted in
nearly $20 million of tax in dispute, of which almost $2
million was directly or indirectly attributable to
petitioner’s information. Those circumstances satisfy the
purely mathematical threshold of section 7623(b)(5).
Id. at 462–63.
The Court did not determine the amount of section 7623(b)
“collected proceeds” directly attributable to petitioner’s information in
29 After the Tax Court’s Opinion was issued in this case, section 7623 was
amended to add the definition of “proceeds” in subsection (c), and section 7623(b)(5)(B)
was amended to read “proceeds in dispute” rather than “amounts in dispute.”
Bipartisan Budget Act of 2018, Pub. L. No. 115-123, § 41108(a), (c), 132 Stat. 64, 158.
The amendment was effective for information provided for which a final determination
for an award had not been made before February 9, 2018. Id. § 41108(d), 132 Stat. at
158–59. A final determination of petitioner’s award was not made before February 9,
2018. See Lewis v. Commissioner, 154 T.C. 124, 133 (2020). Therefore, the award for
petitioner’s information is governed by the amended statute.
27
[*27] its Opinion but stated that once the section 7623(b)(5)(B)
threshold has been met, “[t]he next statutory step would be to determine
what portion of those collected proceeds resulted from the
whistleblower’s information or claim.” Smith, 148 T.C. at 461.
On August 21, 2017, petitioner filed a Motion to Shift the Burden
of Proof.
On August 31, 2017, respondent filed a Motion to Remand
requesting that the Court order this case remanded to the WBO for a
redetermination of petitioner’s award amount pursuant to section
7623(b).
On September 28, 2017, respondent filed a Response to Motion to
Shift Burden of Proof.
On October 6, 2017, petitioner filed a Response to Motion to
Remand.
On October 20, 2017, respondent filed a Reply to Response to
Motion to Remand.
On October 15, 2019, petitioner’s claim was re-assigned from
WBO Analyst Mitzel to WBO Analyst Homola, and she is currently
responsible for petitioner’s claim.
On April 22, 2020, the Court issued an order granting
respondent’s Motion to Remand and remanding this case to the WBO
for additional investigation and a Supplemental Determination Under
Section 7623(b).
V.
WBO’s Supplemental Determination Under Section 7623(b)
On remand, petitioner’s claim was assigned to WBO Analyst
Homola, who conducted a supplemental investigation of petitioner’s
claim.
WBO Analyst Homola determined that $1,772,040.53 of the
collected proceeds from the employment tax examination was
attributable to petitioner’s information. This amount differs from the
$1,771,911.77 of collected proceeds used in the 2015 section 7623(a)
award because it includes additional interest related to the employment
tax examination for the tax periods 1Q 2006 to 2Q 2007 that was omitted
from the prior section 7623(a) award calculation.
28
[*28] In addition, WBO Analyst Homola determined that $1,720,582.33
of the collected proceeds from the income tax examination was
attributable to petitioner’s information. On this point WBO Analyst
Homola’s determination differed from WBO Analyst Mitzel’s prior
determination, which attributed none of the income tax examination
proceeds to petitioner. The $1,720,582.33 amount represented the
collected proceeds from the adjustments related to the following five
general ledger accounts: Employee relations—non sales, Employee
relations—sales, Sales Meetings/Rallies, Rec Sales, and Local Barter
Usage. 30 The $1,720,582.33 amount consisted of tax, penalties, and
interest.
WBO Analyst Homola’s Supplemental Award Recommendation
Memorandum to WBO Acting Program Manager Applebaum explained
that “[w]hile no underreporting of bartering income was identified, the
information provided on and with the Form 211 assisted the corporate
income tax examiner in the selection of accounts for analysis, i.e. barter
usage.”
After reviewing the administrative claim file and considering the
positive and negative factors set forth in Treasury Regulation
§ 301.7623-4(b), WBO Analyst Homola recommended a 15% award.
WBO Analyst Homola therefore determined a recommended award of
$523,893.43 (before sequestration). The $523,893.43 amount is equal to
(15%)($1,772,040.53 + $1,720,582.33).
30 Paragraph 107 of respondent’s Motion for Summary Judgment states that
$1,720,582.33 was determined by WBO Analyst Homola to be the “collected proceeds
from the adjustments disallowing Local Barter Usage.” Petitioner’s Objection to
Motion for Summary Judgment does not disagree with this statement. Page SMI-R001438 of the Supplemental Award Recommendation Memorandum determined that
the following adjustments to “Other deductions/GL Account” were attributable to
petitioner’s information: $1,153,327 for TYE 3/31/07, $1,263,600 for TYE 3/31/08,
$1,130,468 for TYE 3/31/09, and $1,004,102 for TYE 3/31/10. The sum of the four
annual amounts is $4,551,497. WBO Analyst Mitzel’s August 12, 2013 memorandum
to WBO Acting Program Manager Applebaum stated that the “income tax examiner
proposed adjustments totaling $4,551,497.00 to other deductions.” The memorandum
further explained that the “income tax examiner identified adjustments to other
deductions in the following general ledger accounts.” The memorandum then named
five general ledger accounts: Employee Relations—non sales, Employee Relations—
sales, Local Barter Usage, Rec Sales, and Sales Meetings/Rallies. We conclude that
the $1,720,582.33 referred to in respondent’s Motion for Summary Judgment
represents the proceeds collected as a result of the disallowance of deductions related
to all five general ledger accounts, not just Local Barter Usage.
29
[*29] On September 24, 2020, the WBO issued a Supplemental
Preliminary Award Recommendation Letter (Supplemental PARL) to
petitioner.
The Supplemental PARL stated that the recommended award
amount ($523,893.43) would be reduced by a sequestration amount that
would reflect the sequestration percentage applicable for the fiscal year
the award would be paid. The Supplemental PARL stated that if the
award were paid in the fiscal year 2020, the applicable sequestration
percentage would be 5.9% and the postsequestration award would be
$523,893.43 × (1−.059) = $492,983.72.
On September 25, 2020, petitioner sent respondent’s counsel a
letter which contained comments on the Supplemental PARL.
Respondent’s counsel forwarded this correspondence to the WBO.
On November 9, 2020, petitioner submitted a Response to
Summary Report to the WBO, which requested a more detailed
explanation of the Supplemental PARL.
On January 13, 2021, the WBO issued its Detailed Report to
petitioner.
On January 19, 2021, petitioner returned the Detailed Report
Response Form to the WBO, in which petitioner disagreed with the
Supplemental PARL and elected to review information from the WBO’s
administrative claim file.
On January 22, 2021, the WBO’s administrative claim file was
delivered to petitioner for review.
The Detailed Report Response Form stated that petitioner’s
comments must be submitted within 30 days from the date of delivery
of WBO’s administrative claim file.
On February 5, 2021, petitioner submitted comments to the WBO,
and the WBO considered petitioner’s comments.
After consideration of petitioner’s February 5, 2021, comments,
WBO Analyst Homola concluded that no change to the award
determination was necessary and addressed petitioner’s comments in
her Supplemental Award Recommendation Memorandum, which was
dated March 9, 2021.
30
[*30] On March 29 and April 17, 2021, after the 30-day comment
window, petitioner submitted additional correspondence to the WBO
which was reviewed by the WBO. 31
On April 20, 2021, the WBO issued petitioner its Supplemental
Determination Under Section 7623(b), which stated that the amount
collected using information petitioner provided was $3,492,622.86, the
determined award percentage was 15%, and the presequestration award
was $523,893.43, equal to $3,492,622.86 × 15%. The Supplemental
Determination Under Section 7623(b) stated that the award would be
reduced by a sequestration amount that would reflect the sequestration
percentage applicable for the fiscal year the award would be paid. The
Supplemental Determination Under Section 7623(b) stated that if the
award were paid in the fiscal year 2021, the applicable sequestration
percentage would be 5.7% and the postsequestration award would be
$492,983.72.
The computation was erroneous.
The product of
$523,893.43 and (1–.057) is $494,031.50.
On August 13, 2021, the parties filed a First Stipulation of Facts.
As part of the First Stipulation of Facts, the parties agreed that
Exhibit A to the First Stipulation of Facts, which is Bates numbered
SMI-R-000001 through SMI-R-001473, was the entire administrative
record at the time respondent determined the award reflected in the
April 20, 2021, Supplemental Determination Under Section 7623(b).
On April 14, 2022, respondent filed a Motion for Summary
Judgment.
On April 18, 2022, petitioner filed a Motion for Summary
Judgment.
On June 21, 2022, petitioner filed a Response to respondent’s
April 14, 2022, Motion for Summary Judgment.
On June 21, 2022, respondent filed a Response to petitioner’s
April 18, 2022, Motion for Summary Judgment.
31 An additional letter dated March 2, 2021 and referenced in petitioner’s April
17, 2021, letter was not received by WBO Analyst Homola before the issuance of the
final award determination and is not included in the administrative record.
31
[*31]
Discussion
The purpose of summary judgment is to expedite litigation and
avoid unnecessary trials. Fla. Peach Corp. v. Commissioner, 90 T.C.
678, 681 (1988). Ordinarily, under Rule 121(a)(2), the Court may grant
summary judgment when there is no genuine dispute as to any material
fact and a decision may be rendered as a matter of law. Sundstrand
Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th
Cir. 1994). However, the ordinary summary judgment standard is not
generally apt in a case like this one, where we must confine ourselves to
the administrative record to decide whether there has been an abuse of
discretion. See Van Bemmelen v. Commissioner, 155 T.C. 64, 78 (2020).
In such a case, generally there will be no trial on the merits. Id. at 79.
Our review of the final agency action is governed by the Administrative
Procedure Act, 5 U.S.C. §§ 551–559, 701–706. Therefore, summary
judgment serves as a mechanism for deciding, as a matter of law,
whether the agency action is supported by the administrative record and
is not arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law. Van Bemmelen v. Commissioner, 155 T.C. at 79.
Petitioner contends that respondent bears the burden of proof
regarding the propriety of the Supplemental Determination Under
Section 7623(b). Our resolution of the parties’ Motions for Summary
Judgment does not depend on which party bears the burden of proof.
Accordingly we deny as moot petitioner’s Motion to Shift the Burden of
Proof.
I.
The WBO did not err in determining that the amount to be
multiplied by the award percentage was the sum of $1,772,040.53
and $1,720,582.33.
In its Supplemental Determination Under Section 7623(b), the
WBO determined the dollar amount to multiply by the section 7623(b)
award percentage. It determined that this dollar amount was the sum
of $1,772,040.53 and $1,720,582.33.
The $1,772,040.53 amount was the portion of the proceeds
collected from the employment tax examination that related to the
transfer of gift certificates to employees. The transfers fell into the
following five expense categories, which correspond to general ledger
accounts: (1) Local Barter Usage, (2) Employee relations—nonsales,
(3) Employee relations—sales, (4) Sales Meetings/Rallies, and (5) Rec
Sales. The employment tax examination also resulted in the collection
32
[*32] of $2,081,592 in proceeds related to the disallowance of deductions
for the Chairman’s Club. These Chairman’s Club deductions did not
relate to the transfer of gift certificates to employees.
The $1,720,582.33 amount was the portion of the proceeds
collected from the income tax examination that related to the transfer
of gift certificates to employees. The transfers fell into the following five
expense categories, which correspond to general ledger accounts:
(1) Local Barter Usage, (2) Employee relations—nonsales, (3) Employee
relations—sales, (4) Sales Meetings/Rallies, and (5) Rec Sales. The
income tax examination also resulted in the collection of proceeds
related to the disallowance of five categories of deductions other than
the five expense categories: (1) stock option expenses, (2) interest
expense, (3) amortization of goodwill, (4) inventory capitalization, and
(5) bonus accruals. These five other categories of deductions did not
relate to the transfer of gift certificates to employees.
Section 7623(a) authorizes the Secretary of the Treasury to pay
such sums as he deems necessary for (1) detecting underpayments of tax
or (2) detecting and bringing to trial and punishment persons guilty of
violating the internal revenue laws or conniving at the same. Section
7623(b)(1) provides that “[i]f the Secretary proceeds with any
administrative or judicial action described in [section 7623(a)] based on
information brought to the Secretary’s attention by an individual, such
individual shall, subject to [section 7623(b)(2)], receive as an award at
least 15 percent but not more than 30 percent of the proceeds collected
as a result of the action (including any related actions).” Section
7623(b)(1) further provides: “The determination of the amount of such
award by the Whistleblower Office shall depend upon the extent to
which the individual substantially contributed to such action.”
Treasury Regulation § 301.7623-2(a)(2) defines “administrative
action” to mean “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.”
Treasury Regulation § 301.7623-2(b)(1) provides that “the IRS
proceeds based on information provided by a whistleblower when the
information provided substantially contributes to an [administrative or
judicial] action against a person identified by the whistleblower.” This
is true when the IRS “initiates a new action, expands the scope of an
ongoing action, or continues to pursue an ongoing action, that the IRS
33
[*33] would not have initiated, expanded the scope of, or continued to
pursue, but for the information provided.” Id. On the other hand, the
IRS does not “proceed based on” the whistleblower’s information when
it merely “analyzes the information provided or investigates a matter
raised by the information provided.”
Id.
Treasury Regulation
§ 301.7623-2(b)(2) (example 2) provides:
Information provided to the IRS by a whistleblower, under
§ 7623 and § 301.7623-1, identifies a taxpayer, describes
and documents specific facts relating to the taxpayer’s
activities, and, based on those facts, alleges that the
taxpayer owed additional taxes in Year 1. The IRS
proceeds with an examination of the taxpayer for Year 1
based on the information provided by the whistleblower.
The IRS discovers that the taxpayer engaged in the same
activities in Year 2 and expands the examination to Year 2.
In the course of the examination, the IRS obtains, through
the issuance of Information Document Requests (IDRs)
and summonses, additional facts that are unrelated to the
activities described in the information provided by the
whistleblower. Based on these additional facts, the IRS
expands the scope of the examination of the taxpayer for
both Year 1 and Year 2. For purposes of § 7623 and
§§ 301.7623-1 through 301.7623-4, the portion of the IRS’s
examination relating to the activities described and
documented in the information provided is an
administrative action with which the IRS proceeds based
on information provided by the whistleblower because the
information provided substantially contributed to the
action by causing the expansion of the IRS’s examination
of Year 1 and Year 2. The portions of the IRS’s examination
of the taxpayer in both Year 1 and Year 2 relating to the
additional facts obtained through the issuance of IDRs and
summonses are not actions with which the IRS proceeds
based on the information provided by the whistleblower
because the information provided did not substantially
contribute to the action.
Section 7623(c) defines the term “proceeds” to include
“(1) penalties, interest, additions to tax, and additional amounts
provided under the internal revenue laws, and (2) any proceeds arising
from laws for which the [IRS] is authorized to administer, enforce, or
investigate.”
34
[*34] In Lissack v. Commissioner, 157 T.C. 63, 69–70 (2021), aff’d, 68
F.4th 1312, 1324, 1327 (D.C. Cir. 2023), we held that under the
regulations discussed in the paragraphs above (Treasury Regulation
§ 301.7623-2(a)(2) (defining “administrative action”), Treasury
Regulation § 301.7623-2(b)(1) (defining when the IRS proceeds with an
action), and Treasury Regulation § 301.7623-2(b)(2) (example 2)) the
portion of an examination that is unrelated to the fact and issue
identified by the whistleblower is a separate administrative action.
Petitioner contends that his information caused the employment
tax examination and the income tax examination and that he is
therefore entitled to a percentage of the proceeds of these examinations.
Under petitioner’s calculations, the proceeds from these examinations
are $19,768,384 (income tax examination) plus $3,853,345.45
(employment tax examination).
We focus first on the employment tax examination. Only a
portion of the employment tax examination was an action with which
the IRS proceeded based on the information provided by petitioner. This
was the portion of the employment tax examination related to the
transfer of gift certificates to employees. See Treas. Reg. § 301.76232(b)(2) (example 2). The IRS collected $1,772,040.53 as a result of this
action.
We next discuss the income tax examination. Only a portion of
the income tax examination was an action with which the IRS proceeded
on the basis of information petitioner provided. This was the portion of
the income tax examination related to the transfer of gift certificates to
employees. See Treas. Reg. § 301.7623-2(b)(2) (example 2). The IRS
collected $1,720,582.33 as a result of this action.
The WBO did not abuse its discretion in determining the amount
of the proceeds to be multiplied by the award percentage.
II.
The WBO did not err in determining that the appropriate award
percentage was 15%.
Treasury Regulation § 301.7623-4(c) sets forth rules for the WBO
to use to select the award percentage from within the range of 15%
to 30%. The regulation directs the WBO to start the analysis at 15%.
Id. subpara. (1)(ii). The WBO is then to “analyze the administrative
claim file using the factors listed in [Treasury Regulation § 301.76234(b)(1)] to determine whether the whistleblower merits an increased
35
[*35] award percentage of 22 percent or 30 percent . . . based on the
presence and significance of positive factors.” Id.
The WBO is then to “analyze the contents of the administrative
claim file using the factors listed in [Treasury Regulation § 301.76234(b)(2)] to determine whether the whistleblower merits a decreased
award percentage of 15 percent, 18 percent, 22 percent, or 26 percent . . .
based on the presence and significance of negative factors.” Id.
The regulations provide that, even though the factors listed in
Treasury Regulation § 301.7623-4(b)(1) and (2) are described as positive
and negative factors, the evaluation of the positive and negative factors
cannot be “reduced to a mathematical equation.” Id. para. (c)(1)(ii). The
factors are “not weighted.” Id. In a particular case, “one factor may
override several others.” Id.
One of the positive factors, listed in Treasury Regulation
§ 301.7623-4(b)(1), is whether the “information provided identified
connections between transactions, or parties to transactions, that
enabled the IRS to understand tax implications that might not
otherwise have been understood by the IRS.” The WBO found this
positive factor to be present. However, petitioner contends that the
WBO erred in its consideration of this factor because the WBO also
observed that the particular documents petitioner supplied were not
used in the employment tax examination. Tracing the origins of this
observation is helpful in evaluating the merits of petitioner’s contention
that making the observation was an error.
The Form 11369 prepared by the employment tax examiner
stated that the information provided by petitioner was of limited value:
The information provided by the whistleblower was used to
identify barter as an audit issue for both the income and
employment tax examiners.
For purposes of the
employment tax examination, the documentation included
with Form 211 was not utilized. Samples of contracts,
customer invoices and gift certificates do not verify
whether or not these amounts were included in
compensation. The information provided on and with
Form 211 assisted the employment tax examiner in the
selection of accounts for analysis, i.e. barter usage, but it
was not useful for evidentiary purposes since it contained
estimates and was outside the audit periods.
36
[*36] WBO Analyst Mitzel wrote a memorandum to WBO manager
Lynne Heinrich stating that petitioner’s information was not “specific
and responsible information” that “materially assisted in the
development or identification of an issue” but was “information that . . .
was of value in the determination of tax liabilities.” Mitzel gave the
following reasons:
The whistleblower information caused the investigation.
The documentation provided by the whistleblower
supported the allegation that bartering income was not
reported. The documentation did not materially contribute
to the employment tax examinations. The employment tax
examiner noted that the documentation was not utilized as
it did not verify that the items received by [name redacted
by Court] were provided to employees or whether the
amounts were included in the employees compensation.
The Employment tax examiner did use the documentation
to identify general ledger accounts for review. The
employment tax examiner used the alternative legal
position provided by the Whistleblower that payments
made to employees are taxable. The Whistleblower did not
provide an in depth legal analysis he simply provided the
applicable codes sections and his assertion that penalties
should be applied.
In her Supplemental Award Recommendation Memorandum,
WBO Analyst Homola relied on the Forms 11369 to conclude that the
proceeds attributable to petitioner’s information consisted of
$1,772,040.53 for the employment tax examination and $1,720,582.33
for the income tax examination. The memorandum then discussed the
appropriate percentage to be used in computing the award. The
memorandum stated that the identified-connections factor was present
because the “whistleblower included an alternative position which tied
the bartering activities to possible employment tax issues.” The
memorandum stated that the behavioral-impact factor was also present
but that the “positive factors do not rise to the level of increasing the
award above 15%.”
The Supplemental PARL stated that the recommended award
percentage was 15% and that the following factors “contributed to the
recommended award percentage:” (1) the identified-connections positive
factor, (2) the behavioral-impact positive factor, (3) the delay negative
37
[*37] factor, (4) the whistleblower-contribution negative factor, and
(5) the whistleblower-profit negative factor.
The Detailed Report relied on the Forms 11369 to conclude that
the proceeds attributable to petitioner’s information consisted of
$1,772,040.53 for the employment tax examination and $1,720,582.33
for the income tax examination. The Detailed Report stated that the
identified-connections and the behavioral-impact factors were present
but that they “did not rise to the level of increasing the award above
15%.” With respect to the identified-connections factor, the Detailed
Report stated:
The information provided identified connections between
transactions, or parties to transactions, that enable the
IRS to understand tax implications that might not
otherwise have been understood by the IRS.
The whistleblower included an alternate position which
tied bartering activities to possible employment tax issues.
However, the determination of tax was made through the
efforts of the employment tax examiner who made the
following statement:
Vol 2 of 4, Bates 000013—“The information provided by the
whistleblower was used to identify barter as an audit issue
for both the income and employment tax examiners. For
purposes of the employment tax examination, the
documentation included with Form 211 was not
utilized. Samples of contracts, customer invoices and gift
certificates do not verify whether or not these amounts
were included in compensation. The information provided
on and with Form 211 assisted the employment tax
examiner in the selection of accounts for analysis, i.e.
barter usage, but it was not useful for evidentiary
purposes since it contained estimates and was outside the
audit periods.”
On February 5, 2021, petitioner responded to the Detailed Report.
Petitioner contended that the behavioral-impact factor was so
significant that it justified an increase in the award percentage above
15%. In addition, the response contended that the Detailed Report erred
in failing to consider six positive factors in addition to the two positive
factors it said were present.
38
[*38] The Supplemental Award Recommendation Memorandum
contained the following discussion of the identified-connections factor:
Positive Factors
The first two factors listed below were determined by the
IRS Whistleblower Office to apply to this case.
Whistleblower Comment
1. The information provided identified connections between
transactions, or parties to transactions, that enabled
the IRS to understand tax implications that might not
otherwise have been understood by the IRS. Treas.
Reg. 301.7623-4(b)(1)(i)[(vii)].
Whistleblower Office Response
The Whistleblower provided an alternate position which
tied bartering activities to possible employment tax issues.
However, the employment tax examiner did not use the
information included with the Form 211. The examiner
stated “Samples of contracts, customer invoices and gift
certificates do not verify whether or not these amounts
were included in compensation. The information provided
on and with the Form 211 assisted the employment tax
examiner in the selection of accounts for analysis, i.e.
barter usage, but it was not useful for evidentiary purposes
since it contained estimates and was outside the audit
periods.”
In his response to Motion for Summary Judgment, petitioner
contends that the WBO erred in its consideration of the identifiedconnections factor:
Respondent recognizes that this positive factor is both
present and significant as reflected with the following
statement, “The whistleblower included an alternate
position which tied the bartering activities to possible
employment tax issues. However, the determination of tax
was made through the efforts of the employment tax
examiner.” Respondent further minimizes this positive
factor by quoting the examiner, “The information provided
on and with Form 211 assisted the employment tax
39
[*39] examiner in the selection of accounts for analysis, i.e.,
barter usage, but it was not useful for evidentiary
purposes.”
Respondent incorrectly states what he must in order to
minimize the award (i.e., award percentage).
The
whistleblower process is not a court of law.
The
whistleblower is not required to provide evidence . . . for
“evidentiary purposes.” This is unnecessary verbiage to
simply justify discounting the box checked by the examiner
on the Form 11369, giving Petitioner this factor. However,
what is clear is that if the whistleblower did not provide
information to help the IRS understand the tax
implications, nothing would have been collected.
Therefore, for the whistleblower office to minimize
Petitioner’s contribution by relying on the whistleblower
office own statement that “the determination of tax would
be made through the efforts of the employment tax
examiner,” is simply nonsensical. The whistleblower
cannot determine the tax, nor is he expected to do so.
Lastly, stating that the whistleblower’s information “was
not useful for evidentiary purposes” is again nonsense. An
examination is not a court of law, and the whistleblower is
not required to provide evidence, but only specific and
credible information causing the IRS to take an action. In
this case, Petitioner did just that, as well as assist
Respondent to understand the tax implications. It is
unlikely that any whistleblower provides “evidence” in a
whistleblower claim. Therefore, again Respondent simply
abused his discretion in the evaluation of this positive
factor for purposes of determining (minimizing) award
percentage based upon his erroneous assessment of the
facts. In the original determination of award, respondent
determined a 10% award percentage when the range was
between 1% and 15%.
We disagree that the WBO erred. The WBO relied on the
employment tax examiner Form 11369 to conclude the documents
petitioner supplied were of limited usefulness.
The case is
distinguishable from an example given in the regulations in which the
usefulness of the documents supplied by a whistleblower may justify
increasing the award percentage from 15% to 22%:
40
[*40]
Example (1). Facts. Whistleblower A, an employee
in Corporation's sales department, submitted to the IRS a
claim for award under section 7623 and information
indicating that Corporation improperly claimed a credit in
tax year 2006. Whistleblower A’s information consisted of
numerous non-privileged documents relevant to
Corporation’s eligibility for the credit. Whistleblower A’s
original submission also included an analysis of the
documents, as well as information about meetings in which
the claim for credit was discussed. When interviewed by
the IRS, Whistleblower A clarified ambiguities in the
original
submission,
answered
questions
about
Corporation’s business and accounting practices, and
identified potential sources to corroborate the information.
Some of the documents provided by Whistleblower A
were not included in Corporation’s general record-keeping
system and their existence may not have been easily
uncovered through normal IRS examination procedures.
Corporation initially denied the facts revealed in the
information provided by Whistleblower A, which were
essential to establishing the impropriety of the claim for
credit. IRS examination of Corporation’s return confirmed
that the credit was improperly claimed by Corporation in
tax year 2006, as alleged by Whistleblower A. Corporation
agreed to the ensuing assessments of tax and interest and
paid the liabilities in full.
Analysis. In this case, Whistleblower A provided
specific and credible information that formed the basis for
action by the IRS. Whistleblower A provided information
that was difficult to detect, provided useful assistance to
the IRS, and helped the IRS sustain the assessment. Based
on the presence and significance of these positive factors,
viewed against all the specific facts relevant to
Corporation’s 2006 tax year, the Whistleblower Office
could increase the award percentage to 22 percent of
collected proceeds. If, however, Whistleblower A’s claim
reflected negative factors, for example Whistleblower A
violated instructions provided by the IRS and the violation
caused the IRS to expend additional resources, then the
Whistleblower Office could, based on this negative factor,
reduce the award percentage to 18 or 15 percent (but not to
lower than 15 percent of collected proceeds).
41
[*41] Treas. Reg. § 301.7623-4(c)(1)(iii) (example 1).
We conclude that the WBO did not abuse its discretion in its
consideration of this positive factor.
Another positive factor in Treasury Regulation § 301.7623-4(b)(1)
is whether the “information provided had an impact on the behavior of
the taxpayer, for example by causing the taxpayer to promptly correct a
previously-reported improper position.” With respect to petitioner’s
whistleblower claim, the WBO found this positive factor to be present.
Specifically, the Supplemental Award Recommendation Memorandum
stated:
This information provided had an impact on the behavior
of the Taxpayer, for example by causing the Taxpayer to
promptly correct a previously reported improper position.
The income tax examiner reported that by TYE 3/31/11 the
Taxpayer had corrected the barter expense activities that
were the focus of the examination. The examiner did not
disclose if this was due to the Whistleblower, however, it is
more likely than not, this action was due to the
examination which was started because of information
provided by the Whistleblower.
Petitioner contends that the WBO erred in applying this positive
factor. Petitioner’s contention is as follows:
It is very significant that the taxpayer behavior ended
when the issue was identified and examined by
Respondent. However, rather than giving Petitioner
credit, Respondent’s whistleblower office simply states in
the administrative file, that it does not know why the
taxpayer changed its behavior, so as to minimize the
impact of this positive factor.
We disagree with petitioner’s contention that the WBO did not
give petitioner credit for TAXPAYER1’s correction to the barter expense
deductions. The WBO deemed this factor to be present, and it stated
that petitioner’s information caused TAXPAYER1 to correct the prior
position. We conclude that the WBO did not abuse its discretion in its
consideration of this positive factor.
In assigning error to the WBO’s Supplemental Determination
Under Section 7623(b), petitioner emphasizes that “Respondent
42
[*42] attributed to Petitioner two positive factors that Respondent
determined were both present and significant.” To the extent that
petitioner is arguing that the presence of the two positive factors
required the WBO to increase the award from 15% to 22%, we reject the
argument. The mere presence of positive factors does not require that
the award percentage be increased above 15%. Where positive factors
are present, the regulations do not require an increase of the award
percentage; but rather they provide that the WBO “may increase the
award percentage” to either “22 percent or 30 percent,” at its discretion.
Treas. Reg. § 301.7623-4(c)(1)(ii) (emphasis added); accord
Whistleblower 8391-18W v. Commissioner, No. 8391-18W, 161 T.C., slip
op. at 16 (Oct. 16, 2023) (“Thus, the WBO may increase or decrease the
award percentage on the basis of the presence and significance of any
positive or negative factors.” (citing Treas. Reg. § 301.7623-4(c)(1)(ii)));
Treas. Reg. § 301.7623-4(c)(1)(iii) (example 1) (providing that the WBO
“could increase the award percentage to 22 percent” after identifying
multiple positive factors (emphasis added)). In conclusion, the mere
presence of positive factors did not require the WBO to increase the
award percentage above 15%, and the WBO did not abuse its discretion
in declining to make such an increase.
A negative factor listed in Treasury Regulation § 301.7623-4(b)(2)
is whether the whistleblower “delayed informing the IRS after learning
the relevant facts, particularly if the delay adversely affected the IRS’s
ability to pursue an action or issue.” In its Detailed Report, the WBO
determined that petitioner delayed in informing respondent after
petitioner had learned the relevant facts:
The whistleblower began working for [TAXPAYER1] in
[YEAR] as a sales representative where as a new employee,
he received a gift basket containing “gift certificates” as a
welcoming present. The whistleblower states he later
learned that it was normal practice in his office, as well as
others, to sell [SERVICE] in the [PUBLICATION] in
exchange for gift certificates. The Whistleblower was
terminated by the Taxpayer on [DATE]. It was not until
after his termination that he reported [TAXPAYER1’s]
possible noncompliance. The delay did not affect the IRS’s
ability to pursue an action, however the delay allowed
[TAXPAYER1] to continue these activities for several years
longer than if the actions were immediately reported.
43
[*43] Petitioner contends that the WBO erroneously assumed that he
could have filed his whistleblower claim when he first started receiving
gift certificates. (He first received gift certificates in the form of a gift
basket, which he received at the beginning of his employment.)
We disagree with petitioner that the WBO assumed that
petitioner should have reported the tax issue immediately when he first
began employment. Rather, the WBO explained that it based its
determination on the fact that petitioner did not report the tax
underpayments until after he was terminated. He was terminated years
after he began work at TAXPAYER1. We hold that the WBO did not
abuse its discretion in determining that this negative factor was present.
Another negative factor listed in Treasury Regulation § 301.76234(b)(2) is whether the whistleblower “directly or indirectly profited from
the underpayment of tax or tax noncompliance identified, but did not
plan and initiate the actions that led to the underpayment of tax.” In
its Supplemental Determination Under Section 7623(b) the WBO
concluded that this negative factor was present. In explaining this
conclusion,
WBO
Analyst
Homola’s
Supplemental
Award
Recommendation Memorandum quoted the following excerpt from the
employment tax examiner Form 11369:
The whistleblower’s allegation that employees and
managers received gift certificates which were not included
in their compensation is correct. When he was employed by
[TAXPAYER1], the whistleblower was the recipient of a
“gift basket containing numerous ‘gift certificates’ as a
welcoming present” as indicated on Form 211. The
corporate income and employment tax examinations
revealed that nothing was included in any employee’s
compensation, including the whistleblower’s, for the value
of bartered goods and services as well as gift cards and
other incentives purchased directly by [TAXPAYER1]. It
is unlikely that any employee, including the whistleblower,
included the value of these (gifts) in taxable income since
they were not included in wages or otherwise reported to
them.
The WBO’s conclusion about this factor was stated in the
Supplemental
Award
Recommendation
Memorandum:
“The
Whistleblower profited from the underpayment on both his reportable
income and his employment tax since he did not pay either tax.”
44
[*44] Petitioner’s argument that the WBO misapplied this negative
factor consists of two points. First, he says, he did not receive any gift
certificates. Second, he says, he reported the value of any gift
certificates he received on his federal income tax returns.
Part of petitioner’s argument is that he did not receive any gift
certificates. But petitioner submitted an affidavit to the WBO admitting
that he did use gift certificates.
Furthermore, the administrative record does not support
petitioner’s suggestion that he reported the value of the gift certificates
to the IRS and that he paid income tax on the value. Petitioner was
subject to the income tax. I.R.C. § 1. His wages were includible in his
income. I.R.C. § 61(a)(1) (providing that gross income includes
compensation for services). An employer is obligated to withhold income
tax from the employee’s wages, I.R.C. § 3402(a), and to report to the
employee the amount of his wages on Form W–2, Wage and Tax
Statement, I.R.C. § 6051; Treas. Reg. § 31.6051-1(a)(1)(i). For these
purposes wages include all remuneration for services performed by an
employee, including the cash value of all remuneration paid in a medium
other than cash. I.R.C. § 3401(a). Here petitioner contends that,
although his employer, TAXPAYER1, made no such withholding for gift
certificates and did not report the amount of the gift certificates on his
Forms W–2, he nonetheless reported the value of the gift certificates on
his own income tax return and paid income tax on the value. But he did
not explain this contention to the WBO or provide any information to
the WBO showing that the contention would be true. He did not disturb
the conclusion by the employment tax examiner that “[i]t is unlikely that
any employee, including the whistleblower, included the value of these
‘gifts’ in taxable income since they were not included in wages or
otherwise reported to them.” We hold that the WBO did not abuse its
discretion in concluding that petitioner did not report and pay tax on the
gift certificates he received.
Another negative factor listed in Treasury Regulation § 301.76234(b)(2) is whether the whistleblower “contributed to the underpayment
of tax or tax noncompliance identified.”
In its Supplemental
Determination Under Section 7623(b), the WBO concluded that this
negative factor was present. In support of this conclusion, the WBO
relied on the excerpt from the employment examiner Form 11369 we
quoted above. The WBO’s conclusion was stated in the Supplemental
Award Recommendation Memorandum: “[B]y not reporting the value of
the items as income he also contributed to the underpayment.”
45
[*45] Petitioner argues that the WBO improperly applied this negative
factor because he did not work in the tax-reporting function of
TAXPAYER1 and therefore did not “participate[] in the tax scheme.”
This argument misapprehends the determination made by the WBO.
The WBO determined that it was petitioner’s failure to report the value
of the gift certificates as part of his income tax liabilities that implicated
him in his employer’s underpayment of employment taxes. This
conclusion is not an abuse of discretion in the light of the relationship
between (1) the income tax liability of an employee and (2) the
employment tax obligations of employers. The income tax under
section 1 is imposed on an employee. But the employer is required—as
an employment tax obligation—to withhold the employee’s income tax
from wages paid to the employee. I.R.C. §§ 3402(a), 3403. The employee
receives a credit against income tax for any amounts of income tax
actually withheld from wages. I.R.C. § 31(a)(1). If the employer fails to
make the required withholding of income tax from wages, the employee
is still liable for the income tax. If the employee pays the income tax,
this relieves the employer of its liability for the amount of income tax it
should have withheld. I.R.C. § 3402(d). Thus, petitioner’s liability for
income tax on receiving the gift certificates from TAXPAYER1 was
related to TAXPAYER1’s liability for wage withholding regarding the
gift certificates given to petitioner. TAXPAYER1’s failure to withhold
the required amount meant that petitioner was on the hook for the
amount as part of petitioner’s income tax liability. Had petitioner paid
the relevant amount, TAXPAYER1 would not have been liable for the
amount it failed to withhold. Petitioner did not pay the relevant
amount, thus contributing to TAXPAYER1’s underpayment of income
tax withholding.
In conclusion, we hold that the WBO did not abuse its discretion
in its consideration of each of the negative factors that it discussed. And
even had the WBO erred in considering one of these negative factors to
be present when it should not have, this error would be harmless. After
considering the positive factors, and before considering the negative
factors, the WBO had determined that the appropriate award
percentage was 15%. The WBO did not rely on the negative factors to
reduce the award percentage because 15% was already the minimum
award percentage. Cf. Luu v. Commissioner, T.C. Memo. 2022-126,
at *19 (finding WBO relied on positive factors to increase the award from
15% to 22% and then relied on negative factors to reduce the award to
15%), aff’d per curiam, No. 23-1149, 2024 WL 959876 (D.C. Cir. Mar. 6,
2024). Thus, even if the WBO had determined that none of the negative
factors was present, this determination would not have resulted in an
46
[*46] award percentage higher than the 15% award percentage that it
ultimately determined.
Petitioner’s final challenge to the 15% award percentage is that
the percentage is inconsistent with the WBO’s original 2015 decision.
Recall that in the original 2015 decision, the WBO determined the
amount of the award under section 7623(a), not section 7623(b). The
IRM provided that a section 7623(a) award was to be determined by
multiplying the proceeds recovered by the following award percentages:
(1) 15% for “specific and responsible information that caused the
investigation or, in claim files already under audit, materially assisted
in the development or identification of an issue or issues and resulted in
the recovery, or was a direct factor in the recovery,” (2) 10% for
“information that caused the investigation or, in claim files already
under audit, caused an investigation of an issue or issues, and was of
value in the determination of tax liabilities although not specific,” and
(3) 1% for “information that causes the investigation or investigation of
an issue, but had no direct relationship to the determination of tax
liabilities.” IRM 25.2.2.9.1(2). The original 2015 decision applied the
10% rate to $1,771,911.77 of the proceeds of the employment tax
examination and the 1% rate to $2,081,433.67 of the proceeds of the
employment tax examination.
Petitioner contends that the original 2015 decision selected an
award percentage of 10% from a range of 1% to 15%. Petitioner explains
that a 10% award from the range of 1% to 15% is about two thirds above
the 1% minimum of the range. Petitioner explains that the award that
is about two thirds above the 15% minimum of the range 15-30% is 26%.
Petitioner concludes that an award of 26% would be appropriate to
maintain “parity” with the original 2015 decision.
We are unconvinced that the 15% percentage award selected by
the WBO in its Supplemental Determination Under Section 7623(b) is
inconsistent with the 1% and 10% percentage awards used in the
original decision of the WBO. The original decision made an award
under section 7623(a). The Supplemental Determination Under Section
7623(b) made an award under section 7623(b). The making of awards
under section 7623(a) is subject to different statutory and regulatory
provisions than the making of awards under section 7623(b).
The predecessor of section 7623(a) was section 7623. Section
7623, like current section 7623(a), gave the IRS discretion to determine
how much to pay whistleblowers. In 2006 Congress moved the text of
47
[*47] section 7623 to section 7623(a), and it enacted new section 7623(b).
Tax Relief and Health Care Act of 2006, § 406(a)(1), 120 Stat.
at 2958–59. Section 7623(b) mandates an award of 15% to 30% for
certain whistleblower information. For section 7623(a) awards, the IRS
initially chose to make awards of 1%, 10%, and 15% depending on the
circumstances. This choice was memorialized in the IRM provisions
quoted earlier. IRM 25.2.2.9.1(2) In 2014 Treasury adopted the
regulations that (1) provided that the award percentage should
generally be selected from the 15% to 30% range and (2) set forth criteria
for determining what award percentage should be selected from that
range. T.D. 9687, 2014-36 I.R.B. 486; Treas. Reg. § 301.7623-4(a)(1), (c).
The 2014 regulations govern awards under both section 7623(a) and (b).
T.D. 9687, 2014-36 I.R.B. at 501. The 2014 regulations apply “to
information submitted on or after August 12, 2014, and to claims for
awards under section 7623(b) that are open as of August 12, 2014.”
Treas. Reg. § 301.7623-4(e). Petitioner’s information was not “submitted
on or after August 12, 2014.” Furthermore the WBO initially
determined that petitioner’s award was to be evaluated only under
section 7623(a), which meant that it was not in the group of “claims for
awards under section 7623(b) that are open as of August 12, 2014.” As
a result, the original 2015 decision did not follow the 2014 regulations.
Our 2017 Opinion held that the WBO should have used section 7623(b).
Smith, 148 T.C. at 462–63.
As a result, the Supplemental
Determination Under Section 7623(b) on remand applied the 2014
regulations.
This effective-date provision explains why the Supplemental
Determination Under Section 7623(b) applied standards for
determining the award percentage different from those applied in the
original decision. That different standards were employed did not
evince the WBO’s abuse of discretion. Rather the WBO was simply
following the 2014 regulatory provisions, provisions that it did not apply
in its original decision because it treated the award as governed solely
by section 7623(a).
III.
The WBO did not err in determining that petitioner’s
whistleblower award is subject to the sequestration percentage in
effect for the fiscal year that the award is paid.
The Supplemental Determination Under Section 7623(b) stated
that the award of $523,893.43 would be reduced by a sequestration
amount that would reflect the sequestration percentage applicable for
the year the award would be paid. It is petitioner’s position that the
48
[*48] WBO erred in determining that the award is subject to the
sequestration percentage in effect for the fiscal year that the award is
paid. In Lewis, 154 T.C. at 141, we held that such a determination is
not arbitrary or capricious and has a sound basis in law. It is
respondent’s position that such a determination cannot be reviewed by
the Tax Court. But in Lewis, 154 T.C. at 136–38, we held we had
jurisdiction to review such a determination.
Consistent with Lewis, we hold that the WBO did not err in
determining that the award amount would be reduced by a
sequestration amount that would reflect the sequestration percentage
applicable for the year the award would be paid.
IV.
Conclusion
The determination of the WBO was not an abuse of discretion,
arbitrary or capricious, or otherwise not in accordance with the law.
To reflect the foregoing,
An appropriate order and decision will be entered.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.