United States Tax Court

United States Tax Court

160 T.C. No. 14

JEREMY BERENBLATT,

Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE,

Respondent

—————

Docket No. 7208-17W.

Filed May 24, 2023.

—————

P was one of over 100 people interviewed by the IRS

as part of an investigation that ultimately led to large

recoveries from various institutional and individual

taxpayers. His interview took place in November 2007.

During that interview, P explained to two special agents

and one revenue agent of the IRS his conclusion that a

particular transaction, involving digital foreign exchange

options, was fraudulent because it lacked economic

substance.

P did not have any further contact with the IRS

about the investigation until the summer of 2015, more

than seven years later, when he submitted Form 211,

Application for Award for Original Information, to the IRS

WBO alleging that the information he had provided in his

interview was instrumental to the IRS’s eventual

recoveries. (P alleged that the IRS began propounding the

economic substance theory—and thus began winning

lawsuits—only after P’s interview.) The WBO issued a

determination letter denying P’s claim for award. The

denial was based on representations from the primary IRS

special agent who interviewed P that the IRS had already

known the relevant information before P’s interview.

Served 05/24/23

2

P invoked this Court’s jurisdiction under I.R.C.

§ 7623(b)(4) to review the WBO’s determination. In the

course of discovery, P filed Motions to Compel R to produce

various documents and respond to various interrogatories

covering periods both before and after P’s interview with

the IRS.

Held: R’s designation of the administrative record in

a whistleblower case enjoys a presumption of correctness

absent clear evidence to the contrary. Discovery aimed at

completing the designated record shall be allowed only

upon a significant showing that there is material in the

IRS’s possession indicative of bad faith on the IRS’s part or

of an incomplete record.

Held, further, P has not made any significant

showing of bad faith or an incomplete record in connection

with his requests for document production. He has made a

limited showing of an incomplete record with respect to one

of his interrogatory requests. We will therefore compel R

to supplement his interrogatory response in that regard,

but we will deny the remaining components of P’s Motions

to Compel.

—————

Martin E. Karlinsky, for petitioner.

Elizabeth C. Mourges, Bartholomew Cirenza, and Nancy M. Gilmore, for

respondent.

OPINION

COPELAND, Judge: Petitioner, Jeremy Berenblatt, has brought

an action against the Commissioner (Respondent) of the Internal

Revenue Service (IRS) under section 7623(b)(4) 1 to appeal a denial by

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

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

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

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

Procedure.

3

the IRS’s Whistleblower Office (WBO) of his application for a

whistleblower award. Before the Court are three pending motions:

(1) Petitioner’s Motion to Compel Production of Documents,

(2) Petitioner’s Motion to Compel Responses to Interrogatories, and

(3) Respondent’s Motion for Summary Judgment. (We hereafter refer to

Petitioner’s two Motions together as the Motions to Compel.) We

previously granted Petitioner’s Motion to Stay Proceedings to address

these discovery disputes. Therefore, we will address only the Motions

to Compel at this time.

Background

The following facts are taken from the parties’ pleadings and

supporting documents. They are stated solely for the purpose of

disposing of Mr. Berenblatt’s Motions to Compel and not as findings of

fact.

On July 1, 2015, the WBO received from Mr. Berenblatt Form

211, Application for Award for Original Information, dated June 25,

2015. The substantive information in the Form 211 was contained in an

attached memorandum. Mr. Berenblatt sent the WBO a followup

memorandum in support of his Form 211, dated December 8, 2015. We

refer to the June 25 memorandum and the December 8 memorandum

collectively as the Form 211 memoranda.

I.

Form 211 Memoranda

The Form 211 memoranda set forth the facts alleged in this

paragraph and the paragraphs that follow. Mr. Berenblatt worked as a

stock trader in the late 1990s, with an expertise in foreign currency

exchange. He earned a significant amount of income during the year

2000, after which he was approached about investing in a digital foreign

exchange option transaction known as Short Options Strategies (SOS).

SOS was billed as an opportunity for legally minimizing taxes. A digital

option is a type of option where the payoff is either a fixed amount or

nothing at all, depending on whether the underlying asset passes a

stated strike price.

Mr. Berenblatt completed an SOS investor application and

funded a trading account. However, he ultimately determined that the

probability of the options’ yielding a nonzero payoff was negligible, such

that the transaction lacked a nontax business purpose and was

potentially fraudulent. In the words of the June 25 memorandum: “[Mr.

Berenblatt] concluded that it would be impossible to ever make money,

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as the lottery payout [i.e., the nonzero option payoff] would never

materialize. . . . The only conceivable benefit from the deal was the

extraordinary tax benefit that had nothing to do with any plausible

return on the investment.” Mr. Berenblatt did not move forward with

the investment.

In late 2007 a special agent (SA) in the IRS’s Criminal

Investigation Division (CID) called Mr. Berenblatt to request a meeting.

The agent mentioned that the U.S. Government would soon convene a

grand jury investigation into some of the SOS promoters. In or around

November 2007 Mr. Berenblatt met with Shawn Chandler, another CID

SA, at Mr. Chandler’s New York office. A third CID SA, Christine

Mazzella, and IRS Revenue Agent (RA) Arthur Mason also participated

in the meeting. During the meeting, Mr. Berenblatt related his analysis

of the SOS transaction to the agents. He explained that the probability

distribution for payoffs on the digital options was skewed by the fact

that the intermediary bank “controlled the trade and its pricing.”

Mr. Berenblatt claims that he was the first person to provide the

IRS with a successful litigation tactic for proving the fraudulence of the

SOS transaction. He claims that before his interview, the IRS’s primary

litigating position was that the SOS transactions fell afoul of the “step

transaction” doctrine—an argument that had failed in court. According

to Mr. Berenblatt, after his interview the IRS began winning cases

relating to SOS and similar tax shelters by using the reasoning he had

provided to the IRS first.

Mr. Berenblatt seeks an award related to the U.S. Government’s

recovery of at least $1.4 billion in restitution, forfeiture, and settlement

proceeds and at least $5.9 billion in unpaid taxes stemming from digital

options and similar shelters.

II.

WBO Review

In September 2015 the WBO assigned Senior Tax Analyst Laura

Meis to review Mr. Berenblatt’s whistleblower award application. After

reviewing the Form 211 and the June 25 memorandum, Ms. Meis

contacted Mr. Chandler, the primary CID SA who had interviewed Mr.

Berenblatt in November 2007. Ms. Meis corresponded by email and

phone with Mr. Chandler, who related that (1) “[Mr. Berenblatt’s] claim

as being the first person to provide pertinent and relevant information

is not accurate”; (2) Mr. Berenblatt “had not provided any documents for

the [SOS] investigation and . . . he was not called to testify [in any

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related trials]”; and (3) the SOS investigation had been ongoing for two

years before Mr. Berenblatt’s interview.

Mr. Chandler soon thereafter submitted to the WBO a Form

11369, Confidential Evaluation Report on Claim for Award. Mr.

Chandler checked the “No” box next to the following pertinent questions

in item 11:

A. Did the Service use the information the whistleblower

provided to develop specific document requests or other

inquiries to the [allegedly noncompliant] taxpayer?

B. Did the Service use the information provided by the

whistleblower to validate the completeness and accuracy of

the taxpayer’s response to information requests?

C. Did the whistleblower provide additional information

that would not have been obtained through general audit

or investigative techniques?

....

G. Did the whistleblower provide technical or legal

analysis of the taxpayer’s records or transactions that

would not otherwise have been done by the Service?

Mr. Chandler also included the following narrative with that

Form 11369:

The investigation of the [target] taxpayers was well under

way by the time the Whistleblower met with, and provided

information to, Internal Revenue Service–Criminal

Investigation in or around November 2007. (See attached

articles: one regarding the law firm of [Taxpayer F],[2]

former employer of . . . [Taxpayer P] and [Taxpayer U],

ordered to pay a $76 million fine to the IRS in March 2007

and the other article dated May 18, 2006, regarding

[Taxpayer H’s] involvement relative to the tax shelter

transactions discussed by the Whistleblower.)

The

2 Identifying information about the subjects of Mr. Berenblatt’s whistleblower

claims is being redacted in accordance with Rule 345(b) and this Court’s protective

order of August 7, 2017. The pseudonyms for the target taxpayers are taken from the

reference list of redacted information submitted by Mr. Berenblatt.

6

whistleblower was one of hundreds of individuals identified

as having had contact with the taxpayer(s) relative to the

tax shelter transactions at issue in the investigation. The

whistleblower did not provide any new information relative

to the investigation. The whistleblower was not considered

a viable potential witness in the investigation and did not

testify during the two criminal trials in this matter. In

addition, over 100 individuals had been interviewed in the

investigation at the point in time the Whistleblower met

with Internal Revenue Service–Criminal Investigation in

or around November 2007 and a vast number of financial

and tax related subpoenaed records had been analyzed as

well.

As indicated in the narrative, Mr. Chandler attached to the Form

11369 several print articles from major news sources. These articles

reported the following pertinent information: (1) a law firm identified by

Mr. Berenblatt avoided prosecution in March 2007 by admitting that it

developed and marketed tax shelters and paying a $76 million penalty

to the IRS and (2) a bank identified by Mr. Berenblatt was the subject

of a federal investigation into digital options tax shelters as early as May

2006. None of the articles discussed specific legal theories or litigation

strategies regarding the alleged tax shelters.

Sometime after her communication with Mr. Chandler, Ms. Meis

prepared a memorandum for the WBO recommending a preliminary full

denial of Mr. Berenblatt’s award application. In support of this

recommendation, Ms. Meis exclusively cited the claims, information,

and news articles relayed to her by Mr. Chandler. The WBO sent a

preliminary denial letter to Mr. Berenblatt dated January 4, 2017. Ms.

Meis then prepared a memorandum recommending a final full denial of

Mr. Berenblatt’s application.

This memorandum contained

substantially the same supporting information as Ms. Meis’s earlier

memorandum. The WBO adopted Ms. Meis’s recommendation and sent

Mr. Berenblatt a final denial letter, dated March 2, 2017, explaining

that “the IRS identified the issue(s) prior to receipt of your information

and your information did not substantially contribute to the actions

taken by the IRS.” Mr. Berenblatt timely submitted his Petition to this

Court on March 30, 2017, invoking our jurisdiction under section

7623(b)(4) to consider appeals of whistleblower award determinations

by the IRS.

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III.

Discovery Disputes

On May 14, 2019, Respondent filed with this Court the documents

that the IRS contends constitute the entire IRS administrative record of

Mr. Berenblatt’s whistleblower claim. Mr. Berenblatt believes that the

produced record is inadequate, and he attempted to obtain further

documents and responses from Respondent through informal discovery.

After Respondent rejected many of those requests, Mr. Berenblatt filed

the Motions to Compel asking us to require Respondent to produce the

following documents and to respond (or supplement his previous

responses) to the following interrogatories: 3

Request No. 2(a): All Documents [created or modified

between March 24, 2007, and March 24, 2008] containing

the objectives, strategies, and progress of the SOS Shelter

Investigation—such as, for example, when the IRS or [U.S.

Department of Justice (DOJ)] first identified [Taxpayer H]

and [Taxpayer T] as targets of the investigation, including

but not limited to Forms 6085, also known as the “30-Day

Workplan,” or its equivalent, prepared as part of routine

management and supervision of the SOS Shelter

Investigation.

Request No. 12: With respect to each witness retained as

an expert in an SOS Product litigation, provide a copy of

each written report prepared by such witness, and all

related communications and/or correspondence (including

emails) between IRS/DOJ personnel and such expert

witnesses.

Request No. 23: Documents concerning the “over 100

individuals [that] had been interviewed in the

investigation at the point in time the Whistleblower met

with the Internal Revenue Service” referenced by Shawn

Chandler.

3 The identifying numbers for the requests correspond to Mr. Berenblatt’s

original—and lengthier—requests for documents and responses. We denied without

prejudice his motions to compel Respondent to take action on those earlier requests,

as those motions failed to specify the particular documents or interrogatories whose

production or response he sought to compel.

8

Request No. 24: Documents comprising the “financial and

tax related subpoenaed records” referenced by Shawn

Chandler.

Interrogatory No. 1(c): Describe SA Chandler’s role in the

SOS Shelter Investigation and position on the SOS Shelter

Investigation team including his role in interviews of

potential witnesses and other individuals in connection

with the SOS Shelter Investigation, including the selection

of individuals, the preparation for interviews, and the

materials saved from or prepared after interviews.

Interrogatory No. 3(e): Identify all Documents concerning

the Berenblatt Interview, including the preparation for,

scripts for, scheduling of, notes from, participation in, and

follow-up from that interview—including but not limited to

notes from [Revenue] Agent Arthur Mason who was

present and taking notes at the interview.

Interrogatory No. 5: Identify the “over 100” individuals

referred to in the Form 11369.

Interrogatory No. 6: Identify the “financial and tax related

subpoenaed records” referred to in the Form 11369.

Interrogatory No. 9: Identify all individuals who provided

information to SA Chandler and the SOS Shelter

Investigation from September 24, 2006, to September 24,

2008, concerning Taxpayer H’s and Taxpayer T’s

involvement in the SOS Shelter, including information

concerning the lack of business purpose and/or economic

substance of the SOS Shelter and information concerning

Taxpayer H’s role with respect to the design, management,

and execution of such investments, as well as all

Documents that refer, relate to, or contain such

information.

Interrogatory No. 10(a): Describe how SA Chandler and SA

Christine Mazzella searched for Documents related to

Berenblatt and his Petition following commencement of

this action, including but not limited to any searches of

computer hard drives, network drives, and emails for

records stored electronically, including specific search

terms used.

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Interrogatory No. 10(b): Describe how SA Chandler and SA

Christine Mazzella searched for Documents related to

Berenblatt and his Petition following commencement of

this action, including but not limited to any searches of

physical records in secure IRS storage facilities or

anywhere else the records are held, including how many

boxes or files were examined.

Interrogatory No. 10(d): Describe how SA Chandler and SA

Christine Mazzella searched for Documents related to

Berenblatt and his Petition following commencement of

this action, including but not limited to how SA Chandler

and SA Mazzella determined whether a Document was

responsive or unresponsive.

Respondent objected to the Motions to Compel on four primary

grounds: (1) some of the requests seek tax return information whose

disclosure is prohibited by section 6103; (2) some of the requests seek

secret grand jury information whose disclosure is prohibited by Rule 6(e)

of the Federal Rules of Criminal Procedure; (3) some of the requests seek

documents protected by the exception for attorney work product and/or

the deliberative process privilege for government agencies; and (4) all of

the requested documents are outside of the administrative record

concerning Mr. Berenblatt’s award claim and therefore are not relevant

to this litigation.

Discussion

I.

Overview

To date, this Court has not explicitly addressed the proper

standards for evaluating discovery requests in the specific context of

whistleblower appeals under section 7623. Thus, Mr. Berenblatt’s

Motions to Compel present questions of first impression. We first review

the relevant content of section 7623, assure ourselves of jurisdiction in

this case, and review the proper scope and standard of review for

whistleblower cases. We then announce our standard for discovery

requests in section 7623 cases (following relevant precedent from the

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U.S. Court of Appeals for the District of Columbia Circuit) 4 and apply

that standard to Mr. Berenblatt’s Motions to Compel.

II.

Section 7623 Background

Section 7623 provides for awards to individuals who provide the

IRS with information regarding third parties found to have underpaid

their taxes or otherwise violated the internal revenue laws. (Such action

is colloquially known as “blowing the whistle,” and thus these

individuals are commonly referred to as “whistleblowers.”)

See

Whistleblower 972-17W v. Commissioner, No. 972-17W, 159 T.C., slip op.

at 4 (July 13, 2022). Section 7623(a) authorizes discretionary awards,

and section 7623(b) mandates awards in certain cases. For example,

mandatory awards are available only when the proceeds in dispute

exceed $2 million. I.R.C. § 7623(b)(5); see also Van Bemmelen v.

Commissioner, 155 T.C. 64, 71 (2020). The mandatory award provisions

are at issue in this case, so we look more closely at section 7623(b)(1)

and (2), which provides in relevant part as follows:

(1) In general.—If the Secretary proceeds with any

administrative or judicial action [against a taxpayer who

has underpaid any tax or who has violated, or conspired to

violate, the tax laws] based on information brought to the

Secretary’s attention by an individual, such individual

shall . . . 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) or from any

settlement in response to such action . . . .

The

determination of the amount of such reward by the

Whistleblower Office shall depend upon the extent to which

the individual substantially contributed to such action.

(2) Award in case of less substantial contribution.

(A) In general.—In the event the action

described in paragraph (1) is one which the

Whistleblower Office determines to be based

principally on disclosures of specific allegations

(other than information provided by the individual

described in paragraph (1)) resulting from a judicial

4 In deciding whistleblower cases, we generally follow the precedent of the D.C.

Circuit, to which an appeal of our decision in such cases would lie (absent a contrary

stipulation by the parties). See I.R.C. § 7482(b) (flush language); Golsen v.

Commissioner, 54 T.C. 742, 757 (1970), aff’d, 445 F.2d 985 (10th Cir. 1971).

11

or administrative hearing, from a government

report, hearing, audit, or investigation, or from the

news media, the Whistleblower Office may award

such sums as it considers appropriate, but in no case

more than 10 percent of the proceeds collected as a

result of the action (including any related actions) or

from any settlement in response to such action

(determined without regard to whether such

proceeds are available to the Secretary), taking into

account the significance of the individual’s

information and the role of such individual and any

legal representative of such individual in

contributing to such action.

(Emphasis added.)

Thus, there are two prerequisites governing an award under

section 7623(b): The IRS must (1) proceed with an administrative or

judicial action based on the whistleblower’s information (action

requirement) and (2) collect proceeds as a result of the action (collection

requirement). See Treas. Reg. § 301.7623-1(a) (“The awards provided

for by section 7623 and this paragraph must be paid from collected

proceeds . . . .”). 5

Treasury Regulation § 301.7623-2(b)(1) clarifies the action

requirement of section 7623(b)(1):

[T]he IRS proceeds based on information provided by a

whistleblower

when

the

information

provided

substantially contributes to an action against a person

5 The effective-date provision for Treasury Regulation §§ 301.7623-1, -2, and -3

reads as follows: “This rule is effective on August 12, 2014. This rule applies to

information submitted on or after August 12, 2014, and to claims for award under

sections 7623(a) and 7623(b) that are open as of August 12, 2014.” Treas. Reg.

§§ 301.7623-1(f), -2(f), and -3(f). Mr. Berenblatt initially provided information to the

IRS in 2007, but he did not file his claim for award until 2015. The first sentence of

the effective-date provision, standing alone, entails at a minimum that all claims

submitted on or after August 12, 2014 (like Mr. Berenblatt’s) are subject to the

regulations. The second sentence appears to then expand the class of claims to which

the first sentence would otherwise apply, rather than narrowing it. Mr. Berenblatt

submitted all the relevant information pertaining to his claim on July 1, 2015 (i.e.,

after August 12, 2014) when he filed his Form 211, notwithstanding that he had

submitted substantially the same information during his 2007 interview. Therefore,

we hold that these regulations apply to this case.

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identified by the whistleblower. For example, the IRS

proceeds based on the information provided when the IRS

initiates a new action, expands the scope of an ongoing

action, or continues to pursue an ongoing action, that the

IRS would not have initiated, expanded the scope of, or

continued to pursue, but for the information provided.

Treasury Regulation § 301.7623-2(d)(1) clarifies the collection

requirement of section 7623(b)(1):

[T]he terms proceeds of amounts collected and collected

proceeds (collectively, collected proceeds) include: Tax,

penalties, interest, additions to tax, and additional

amounts collected because of the information provided [by

the whistleblower] . . . .

Section 7623(b)(4) further provides that an award determination

by the WBO under section 7623(b) may be appealed to this Court.

III.

Jurisdiction

A.

General Principles

Like all federal courts, we are a court of limited jurisdiction.

Whistleblower 21276-13W v. Commissioner, 155 T.C. 21, 26 (2020). We

exercise jurisdiction only over matters that Congress expressly

authorizes us to consider. Id.; see also I.R.C. § 7442. Of course, we

always have jurisdiction to determine whether we have jurisdiction.

Whistleblower 21276-13W, 155 T.C. at 26. And we must assure

ourselves of our jurisdiction even when not asked to by the parties. Id.

The relevant jurisdictional provision in a whistleblower case is

section 7623(b)(4). It provides that “[a]ny determination regarding an

award under [section 7623(b)](1), (2), or (3) may . . . be appealed to the

Tax Court (and the Tax Court shall have jurisdiction with respect to

such matter).” Determinations under those provisions generally are

made by the WBO, which reviews whistleblower claims to determine

whether an award will be paid and, if so, decides the amount of the

award. See, e.g., I.R.C. § 7623(b)(1), (2)(A), (3).

B.

Tax Court Jurisdiction

In Li v. Commissioner, 22 F.4th 1014, 1017 (D.C. Cir. 2022), the

D.C. Circuit clarified that we do not have jurisdiction over an appeal of

13

a “threshold rejection” of a whistleblower award claim where the IRS

does not proceed with any relevant administrative or judicial action

against the target taxpayers. In so holding, the D.C. Circuit observed

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

‘proceeds with any administrative or judicial action described in

subsection (a) based on information brought to the Secretary’s attention

by [the whistleblower].’” Id. (quoting I.R.C. § 7623(b)(1)) (alteration in

original). After Li, in Whistleblower 972-17W, 159 T.C., slip op. at 7–10,

we held that if the IRS proceeded with an action against target

taxpayers identified by the whistleblower’s information and collected

proceeds from the target taxpayers, our Court has jurisdiction over the

appeal notwithstanding the WBO’s contention that the collection was

not based on the issues identified by the whistleblower.

We now likewise hold that we have jurisdiction over cases, like

this one, where the IRS proceeded with an administrative or judicial

action against the target taxpayers and, at some point after the

whistleblower provided information, collected proceeds in connection

with the issue or issues raised by the whistleblower. Our rationale is

essentially the same as in Whistleblower 972-17W: If the question of

whether the IRS prevailed in the various SOS shelter collection actions

“based on” Mr. Berenblatt’s information were jurisdictional, then we

could not determine whether we have jurisdiction until deciding

virtually the entire case on its merits. Moreover, it would be unclear

what scope and standard of review to apply in making that jurisdictional

determination. See id. at 9–10. Here, with an “action” commenced and

“collection” of proceeds, we conclude that we have jurisdiction to review

Mr. Berenblatt’s appeal of the denial of his claim for an award.

IV.

Standard and Scope of Review in Whistleblower Cases

In reviewing an award determination of the WBO, we employ the

standard of review of section 706(2)(A) of the Administrative Procedure

Act, which generally tells a reviewing court to reverse agency action that

it finds “arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law.” Kasper v. Commissioner, 150 T.C. 8, 21 (2018).

Our scope of review of WBO determinations is generally confined

to the administrative record (the so-called record rule). Id. at 20; cf.

James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1095 (D.C. Cir.

1996). “Ordinarily the record is comprised of those documents that were

before the administrative decisionmaker,” including “all the information

it considered directly or indirectly.” Cape Hatteras Access Pres. All. v.

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U.S. Dep’t of Interior, 667 F. Supp. 2d 111, 114 (D.D.C. 2009) (first citing

Citizens to Pres. Overton Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971);

and then citing Amfac Resorts, L.L.C. v. U.S. Dep’t of Interior, 143 F.

Supp. 2d 7, 12 (D.D.C. 2001)). As articulated by the D.C. Circuit, a court

generally should have before it neither more nor less information than

the agency (here, the WBO) had when it made its determination. Hill

Dermaceuticals, Inc. v. FDA, 709 F.3d 44, 47 (D.C. Cir. 2013).

Because our standard of review for WBO award determinations

is abuse of discretion and our scope of review is limited to the

administrative record, we must be cautious in granting motions to

compel discovery.

V.

Discovery in Whistleblower Cases

In general, the propriety of a discovery request hinges on the

underlying substantive dispute and how this Court may resolve that

dispute. See Rule 70. In particular, Rule 70(b)(1) provides, in relevant

part: “Discovery may concern any matter not privileged that is relevant

to the subject matter involved in the pending case.”

However, in the context of record-rule cases, the D.C. Circuit has

held that “[d]iscovery typically is not available,” given the presumption

that the agency has properly designated the record. Air Transp. Ass’n

of Am. v. Nat’l Mediation Bd., 663 F.3d 476, 487 (D.C. Cir. 2011) (citing

Air Transp. Ass’n of Am., No. 10-0804, 2010 U.S. Dist. LEXIS 144089,

at *5 (D.D.C. June 4, 2010)). According to that court, there are two

narrow exceptions to this general rule: “[I]f a party makes a significant

showing—variously described as a strong, substantial, or prima facie

showing—that it will find material in the agency’s possession indicative

of bad faith or an incomplete record, it should be granted limited

discovery.” Id. at 487–88 (citing Air Transp. Ass’n of Am., 2010 U.S.

Dist. LEXIS 144089, at *5). In its reference to the applicable standard

(“variously described as strong, substantial, or prima facie”), the D.C.

Circuit summarized several strands of previous caselaw. Cf. Air Transp.

Ass’n of Am., 2010 U.S. Dist. LEXIS 144089, at *5 (collecting cases).

Therefore, whistleblowers may be granted limited discovery if

they make a significant showing that there is material in the IRS’s

possession indicative of bad faith on the IRS’s part in connection with

the case or of an incomplete administrative record compiled by the IRS.

In evaluating the adequacy of the whistleblower’s showing, we will bear

in mind that (as noted by the U.S. District Court for the District of

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Columbia) “a party must provide good reason to believe that discovery

will uncover evidence relevant to the Court’s decision to look beyond the

[designated] record.” Amfac Resorts, L.L.C., 143 F. Supp. 2d at 12.

Condoning discovery beyond these conditions would belie this Court’s

limited scope of review in whistleblower cases. In this case, Mr.

Berenblatt has not alleged bad faith; therefore, we focus on whether the

record was incomplete and briefly address the rules for completing the

designated record.

VI.

Discovery Aimed at Completing the Administrative Record

In Air Transport Association of America, the D.C. Circuit

countenanced discovery aimed at remedying an “incomplete record.”

Since the D.C. Circuit did not explicitly define that phrase in Air

Transport Association of America (or subsequently), we now look to

other applicable law and precedents.

A.

Treasury Regulation § 301.7623-3(e)

Treasury Regulation § 301.7623-3(e) provides a general

statement regarding a whistleblower’s administrative record and a list

of materials that the IRS has determined will always be included in that

record, namely:

Treas. Reg. § 301.7623-3(e) Administrative record. (1) In

general.

The administrative record comprises all

information contained in the administrative claim file that

is relevant to the award determination and not protected

by one or more common law or statutory privileges.

(2) Administrative claim file.

The

administrative claim file will include the following

materials relating to the action(s) to which the

determination relates—

(i) The Form 211, ‘‘Application for

Award for Original Information,’’ filed by the

whistleblower and all information provided

by the whistleblower (whether provided with

the whistleblower’s original submission or

through a subsequent contact with the IRS).

(ii) Copies of all debriefing notes and

recorded

interviews

held

with

the

whistleblower (and the whistleblower’s legal

representative, if any).

16

(iii) Form(s) 11369, ‘‘Confidential

Evaluation Report on Claim for Award,’’

including narratives prepared by the relevant

IRS office(s), explaining the whistleblower’s

contributions to the actions and documenting

the actions taken by the IRS in the case(s).

The Form 11369 will refer to and incorporate

additional documents relating to the issues

raised by the claim, as appropriate, including,

for example, relevant portions of revenue

agent reports, copies of agreements entered

into with the taxpayer(s), tax returns, and

activity records.

(iv) Copies of all contracts entered into

among the IRS, the whistleblower, and the

whistleblower’s legal representative (if any),

and an explanation of the cooperation

provided by the whistleblower (or the

whistleblower’s legal representative, if any)

under the contract.

(v) Any information that reflects

actions by the whistleblower that may have

had a negative impact on the IRS’s ability to

examine the taxpayer(s).

(vi) All correspondence and documents

sent by the Whistleblower Office to the

whistleblower.

(vii) All notes, memoranda, and other

documents made by officers and employees of

the Whistleblower Office and considered by

the official making the award determination.

(viii)

All

correspondence

and

documents received by the Whistleblower

Office from the whistleblower (and the

whistleblower’s legal representative, if any)

in the course of the whistleblower

administrative proceeding.

(ix) All other information considered by

the official making the award determination.

For purposes of evaluating whether a whistleblower has made a

significant showing that there is material in the IRS’s possession

indicative of an incomplete record, we will deem all materials listed in

17

Treasury Regulation § 301.7623-3(e) to be necessary parts of the

complete record.

B.

Materials Directly or Indirectly Considered

In Van Bemmelen, 155 T.C. at 74 (quoting Cape Hatteras Access,

667 F. Supp. 2d at 114), we explained that a complete administrative

record must contain “all the information [the WBO] considered directly

or indirectly” in reaching its decision. Accordingly, we may allow limited

discovery if a whistleblower makes a significant showing that the IRS

has failed to include materials that the WBO considered, directly or

indirectly, in reaching its decision. However, in evaluating the strength

of the whistleblower’s showing, we will be mindful that “[a]bsent a

substantial showing made with clear evidence to the contrary, an agency

is presumed to have properly designated the administrative record.” Id.

at 74. Indeed, for a Court to order completion of the designated record,

“the [petitioner] must overcome this strong presumption of regularity by

putting forth concrete evidence that the documents it seeks to ‘add’ to

the record were actually before the decisionmakers.” Id. at 74–75

(quoting Cape Hatteras Access, 667 F. Supp. 2d at 114). 6

C.

Extra-Record Evidence

In Van Bemmelen, we explained that in exceptional

circumstances we may supplement the designated record with evidence

that the WBO neither directly nor indirectly considered (i.e., “extrarecord” evidence). The D.C. Circuit has “recognized a small class of cases

where district courts [or, as here, our Court] may consult extra-record

evidence when ‘the procedural validity of the [agency]’s action . . .

remains in serious question.’” Hill Dermaceuticals, Inc., 709 F.3d at 47

(second and third alterations in original) (quoting Esch v. Yeutter, 876

F.2d 976, 991 (D.C. Cir. 1989)). Specifically, the D.C. Circuit has

6 For clarity, we emphasize the distinction between a motion to compel

discovery and a motion to complete or supplement the record. The former motion seeks

to obtain material relevant to the case that was not included in the administrative

record. If a petitioner discovers such material, he or she may then proceed with the

latter motion and move the court to either “complete” the administrative record with

material that should have been included in the designated record but was excluded by

the agency or “supplement” the administrative record with material that was not

initially before the agency but that the petitioner believes should nonetheless be

considered in conjunction with the administrative record (i.e., extra-judicial or extrarecord evidence). Our standards for evaluating motions to complete and supplement

the record are set out in Van Bemmelen, 155 T.C. at 73–78.

18

identified three standards under which extra-record evidence may be

consulted:

(1) if the agency “deliberately or negligently excluded

documents [from consideration] that may have been

adverse to its decision,” (2) if background information was

needed “to determine whether the agency considered all

the relevant factors,” or (3) if the “agency failed to explain

administrative action so as to frustrate judicial review.”

City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 2010) (quoting

Am. Wildlands v. Kempthorne, 530 F.3d 991, 1002 (D.C. Cir. 2008)); see

also James Madison Ltd. by Hecht, 82 F.3d at 1095.

Importantly, City of Dania Beach discussed only supplementing

the administrative record and not “discovery.” Here, we note that our

disposition of Mr. Berenblatt’s Motions to Compel is not dependent on

City of Dania Beach’s three standards. Therefore, we leave for

consideration in a future case whether discovery is appropriate to

uncover extra-record evidence.

D.

Summary of Discovery Rules

On the basis of the foregoing, we hold that whistleblower

discovery requests are appropriate upon a significant showing that

(1) there is material in the IRS’s possession indicative of bad faith on the

IRS’s part in connection with the case or (2) there is material in the IRS’s

possession indicating that the designated record omits material the

WBO actually considered (directly or indirectly) or that otherwise falls

under a category listed in Treasury Regulation § 301.7623-3(e).

VII.

Analysis of Mr. Berenblatt’s Motions to Compel

Mr. Berenblatt’s discovery issues are thorny given the length of

time the SOS tax shelter investigation had been ongoing before his

involvement and the substantial records compiled by IRS CID before his

interview. Importantly, while we have allowed whistleblowers to add

material to the designated administrative record at times, we have not

allowed them to conduct fishing expeditions during discovery. With this

background in mind, we evaluate Mr. Berenblatt’s individual discovery

requests.

Mr. Berenblatt has not supported his Motions to Compel with any

evidence of bad faith on the IRS’s part, and he has specifically

19

disclaimed any such allegation. He does contend that the record

produced by the IRS excludes certain documents related (in some way)

to his claim for award, namely, the interview documents and

subpoenaed records referred to in Mr. Chandler’s Form 11369 narrative,

expert reports from the SOS litigation, and additional notes and memos

related to his interview with IRS CID.

Therefore, Mr. Berenblatt’s contentions center on his insistence

that the administrative record produced by the IRS is incomplete.

Respondent vehemently disagrees and, in connection with this

litigation, provided a 765-page administrative record, accompanied by a

declaration of Ms. Meis attesting to its completeness and accuracy.

Respondent contends that Mr. Berenblatt’s requests are outside the

scope of discovery and that he “did not contribute any information that

. . . respondent used in any way in [his] investigations of the subjects of

petitioner’s whistleblower claim.” Thus, we are left to sort through

whether Mr. Berenblatt has made a significant showing of an

incomplete record.

A.

Compelling Additional Document Production

1.

Mr. Berenblatt’s Contention of an Incomplete Record

Mr. Berenblatt’s document request Nos. 23 and 24 ask for any

documents relating to the “over 100 individuals [who] had been

interviewed in the [SOS] investigation” before the IRS’s interview with

Mr. Berenblatt, along with the “financial and tax related subpoenaed

records” referenced by Mr. Chandler in his Form 11369 narrative. Mr.

Berenblatt argues that the complete administrative record would

include all such documents because SA Chandler was the decision

maker for purposes of the record rule, insofar as he completed the Form

11369 on which Ms. Meis relied.

Thus, he contends that the

administrative record must include all documents available to SA

Chandler at the time he completed the Form 11369 because they were

considered at least indirectly in reaching a decision on Mr. Berenblatt’s

claim.

These contentions fail. First of all, Ms. Meis and her colleagues

in the WBO were the decision makers for Mr. Berenblatt’s award claim,

not Mr. Chandler. Moreover, Mr. Berenblatt has failed to show that the

WBO indirectly considered the interview documents and subpoenaed

records. Mr. Chandler’s Form 11369 narrative contains no description

whatsoever of the contents of the interview documents or subpoenaed

20

records (nor does the narrative clearly imply what those contents are).

Regardless, Respondent has taken the position that Mr. Berenblatt did

not contribute to the investigation because the IRS investigation was

already well underway at the time of Mr. Berenblatt’s interview.

Respondent is in effect arguing that there was not a substantial

contribution (nor any contribution) under section 7623(b)(2).

Mr. Berenblatt counters that any relevant documents available to

the WBO when it ruled on his claim are discoverable whether or not the

WBO reviewed them. Mr. Berenblatt cites one of our previous opinions

for the proposition that “the administrative record [in a collection due

process case] includes not only material that the settlement officer

reviewed but also material that was available for his review.” Emery

Celli Cuti Brinckerhoff & Abady, P.C. v. Commissioner, T.C. Memo.

2018-55, at *21 (holding that an IRS settlement officer abused his

discretion in failing to consider information submitted by the taxpayer

after the due date for submissions but before issuance of the notice of

determination). However, the documents at issue in Emery had been

sent by the taxpayer directly to the settlement officer whose decision we

were reviewing for abuse of discretion. Likewise, in the two similar

cases we cited in Emery—Thompson v. U.S. Department of Labor, 885

F.2d 551, 553–56 (9th Cir. 1989), and West v. Commissioner, T.C. Memo.

2010-250, slip op. at 11 n.11—the litigating parties sent relevant

documents to the agency decision makers or otherwise brought those

documents to their attention.

We therefore find Emery inapposite here. 7 If any potentially

available document in the IRS’s possession at the time the WBO made

its decision were discoverable, that would render the record rule all but

meaningless. Here, there is no evidence or contention that Mr.

Berenblatt submitted the interview documents or subpoenaed records to

the WBO. Discovery of items available to Mr. Chandler or the WBO is

limited to those relevant to Mr. Berenblatt’s contribution to the ongoing

investigation and generally does not extend to those created before his

interview.

As clarified in Treasury Regulation § 301.7623-3(e)(2)(iii), the

administrative record includes any Form 11369 prepared with respect

to the whistleblower’s case (e.g., the Form prepared by Mr. Chandler,

7 This Court has noted before that “[w]histleblower cases are just different

[from collection due process cases such as Emery]”—in part because whistleblowers do

not come before us in their capacity as taxpayers. Kasper, 150 T.C. at 20.

21

which has already been included in the administrative record). The

regulation further notes that “[t]he Form 11369 will refer to and

incorporate additional documents relating to the issues raised by the

claim, as appropriate.” This regulation does not explicitly include all

such “additional documents” in the record. Even assuming that the

documents “incorporate[d]” into the Form 11369 are per se part of the

record, for the reasons stated above Mr. Chandler cannot be said to have

incorporated the interview records and subpoenaed documents into his

Form 11369. 8 There is no good evidence (let alone a significant showing)

that any of the documents at issue in request Nos. 23 and 24 are part of

the complete administrative record.

We therefore reject Mr.

Berenblatt’s argument that his administrative record is incomplete

because it did not include the interview documents and subpoenaed

records obtained before his interview.

2.

Mr. Berenblatt’s Contention of Negligence

Mr. Berenblatt suggests that even if the WBO neither directly nor

indirectly considered the interview documents and subpoenaed records,

it should have reviewed them and was negligent in failing to do so. If

this is true, Mr. Berenblatt might qualify for discovery by virtue of

showing that extra-record evidence can be consulted pursuant to the

first City of Dania Beach standard (viz, if the WBO deliberately or

negligently excluded from consideration documents that may have been

adverse to its decision). 9

However, Mr. Berenblatt’s own submissions to the WBO—in

particular, the December 8 memorandum—belie his theory of

negligence. In that memorandum Mr. Berenblatt cites Stobie Creek

Investments, LLC v. United States, 82 Fed. Cl. 636 (2008) (No. 05-748),

aff’d, 608 F.3d 1366 (Fed. Cir. 2010), apparently the first case in which

the Government prevailed against an SOS shelter. Mr. Berenblatt

contends that the Government’s expert witness, David F. DeRosa,

“echoed” the nontax business purpose (lack of economic substance)

argument that Mr. Berenblatt had conveyed to the IRS agents during

8 Meanwhile, we cannot accept (and the regulation does not indicate) that just

any external document that a Form 11369 “refer[s] to”—however glancingly—is per se

part of the record.

9 We reiterate that we are not here deciding whether extra-judicial or extrarecord evidence is discoverable in whistleblower cases. Therefore, we entertain Mr.

Berenblatt’s allegation of negligence only to show that it does not affect our disposition

of his Motions to Compel.

22

his November 2007 interview. However, we take judicial notice that Dr.

DeRosa’s Expert Report submitted in that case is dated September 14,

2007—before Mr. Berenblatt’s interview. 10 See United States’ Response

to Plaintiffs’ Motion in Limine to Exclude Reports and Testimony of Dr.

David F. DeRosa, Exhibit 1, Stobie Creek Invs., LLC. Dr. DeRosa’s

report opines on an SOS shelter transaction and includes the following

relevant statements (supported by ample fact-specific analysis):

I concluded that the Participants’ digital options had the

“appearance” of a sweet spot, but that the sweet spot could

never materialize because [the intermediary bank] would

prevent the sweet spot from being hit.

Id. at 25.

Given the inability to satisfy any of the business purposes

addressed above, I conclude that the Participants created

no meaningful advantage by contributing the offsetting

options to Stobie Creek Investments, LLC, and that

therefore Stobie Creek Investments, LLC had no business

purpose in the context of these transactions.

Id. at 93.

Given that Mr. Berenblatt referenced Dr. DeRosa’s testimony in

his December 8 memorandum to the WBO and, further, that Dr.

DeRosa’s expert report indicates the Government had already developed

the nontax business purpose argument before Mr. Berenblatt’s

interview, we conclude that the WBO was not negligent in failing to

review the interview documents and subpoenaed records at issue (or, at

worst, its failure was harmless error). The existence of Dr. DeRosa’s

report strongly suggests that such a review would have been

superfluous. 11

10 The report was filed in the Court of Federal Claims on March 19, 2008, but

is dated September 14, 2007.

11 We emphasize that we are not here deciding that Mr. Berenblatt’s Form 211

claim for award lacks merit. Rather, we determine only that the existence of Dr.

DeRosa’s report—and its label of September 14, 2007—defeats any significant showing

of WBO negligence in failing to exhaustively review interview documents and

subpoenaed records collected in connection with the SOS litigation.

23

3.

Remaining Document Requests

Mr. Berenblatt’s remaining document requests—Nos. 2(a) and

12—are for documents “containing the objectives, strategies, and

progress of the SOS Shelter Investigation” and for expert witness

reports prepared for the IRS during SOS litigation. Mr. Berenblatt does

not contend that the WBO directly or indirectly considered any of these

documents, nor are we aware of any evidence to that effect. Nor do any

of these records fall under one of the categories listed in Treasury

Regulation § 301.7623-3(e). Moreover, we find these requests to be

overly broad and unduly burdensome because they seek workplans and

routine work investigation documents regardless of whether those

records relate to information that Mr. Berenblatt provided to the IRS or

fall within the timeframe of Mr. Berenblatt’s disclosures. Accordingly,

these discovery requests amount to a fishing expedition. We also agree

with Respondent that much of the information requested (in particular,

most or all of the expert witness reports) is publicly available and thus

obtainable from another source. See Rule 70(c). Therefore, we cannot

uphold any of Mr. Berenblatt’s four document requests. 12

B.

Compelling Additional Answers to Interrogatories

Most of Mr. Berenblatt’s interrogatory response requests seek to

compel responses that Respondent has already provided or

identification of documents that Respondent asserts do not exist. Our

discovery rules do not allow duplicative requests, and we cannot compel

discovery of nonexistent information. Rule 70(c). Neither will we

compel Respondent to prove a negative. As with the document requests,

we will not sanction a fishing expedition nor compel responses related

to information outside the designated administrative record without a

significant showing of bad faith or an incomplete record. With that

background, we find that one of Respondent’s partial responses to Mr.

Berenblatt’s interrogatory response requests was sufficiently terse or

indirect as to call into question whether the WBO improperly failed to

include information in its possession that might be a proper part of Mr.

Berenblatt’s administrative record.

12 In supplemental filings with this Court, Mr. Berenblatt has proposed seeking

discovery of certain documents that the IRS identified as being in the possession of the

District Court for the Southern District of New York, which oversaw the grand jury

investigation of the SOS shelter promoters. Mr. Berenblatt cannot proceed with this

third-party discovery unless and until it becomes clear that some or all of these

documents are discoverable in his case under the standards set out here.

24

Interrogatory No. 3(e) asks Respondent to identify all documents

pertaining to Mr. Berenblatt’s November 2007 interview with the two

CID SAs and RA Mason, or more specifically to “[i]dentify all Documents

concerning the Berenblatt interview . . . including but not limited to

notes from [Revenue] Agent Arthur Mason who was present and taking

notes at the interview.”

The Internal Revenue Manual (IRM) instructs that handwritten

notes are to be kept in the investigative file; however, it does not require

agents to take notes during an interview. IRM 9.4.5.9.3 (Feb. 1, 2005).

It also allows agents to use their discretion on whether to prepare a

Memorandum of Interview: “A memorandum of interview is an informal

note or document containing information that the person desires to

memorialize.” IRM 9.4.5.7.4(1) (May 15, 2008).

Respondent has replied to interrogatory No. 3(e) stating that he

already disclosed the documents related to Mr. Berenblatt’s interview.

However, Respondent leaves unclear whether RA Mason took notes,

stating that “Special Agent Chandler does not believe RA Arthur Mason

took notes at the interview.” (Emphasis added.) By contrast, Mr.

Berenblatt has conveyed his recollection that RA Mason took notes

throughout the interview. We have no reason to doubt the sincerity or

accuracy of Mr. Berenblatt’s memory. And because Treasury Regulation

§ 301.7623-3(e)(2)(ii) refers to “[c]opies of all debriefing notes and

recorded interviews held with the whistleblower,” any notes that RA

Mason took at the interview are part of the complete record. Therefore,

we will compel Respondent to clarify whether RA Mason took notes

during Mr. Berenblatt’s interview and, if so, whether such notes still

exist, were lost, or were destroyed.

The remaining interrogatory response requests either were

adequately addressed or seek information from before Mr. Berenblatt’s

involvement with the SOS shelter investigation or beyond the scope of

inquiry in a whistleblower claim. For example, in interrogatory No.

10(a) Mr. Berenblatt asks Respondent to describe how the special agents

searched for information pertinent to his administrative record. It is

Mr. Berenblatt’s burden in the first instance to make a significant

showing that the administrative record is incomplete, not Respondent’s

obligation to defend how the administrative record was compiled.

25

VIII. Overall Observations Regarding the Motions to Compel

Because all of Mr. Berenblatt’s document requests and most of his

interrogatory response requests are unsupported by a significant

showing of bad faith or an incomplete record, we will deny his Motions

to Compel except as to interrogatory response request No. 3(e), as noted

above. Generally, we will allow only limited discovery targeted to Mr.

Berenblatt’s contact with the IRS and not the entirety of the SOS

investigation before his involvement.

IX.

Conclusion

Mr. Berenblatt asks this Court to compel discovery seeking

information and documents that the WBO never considered. Most of

Mr. Berenblatt’s discovery requests in his Motions to Compel clearly go

well beyond the administrative record. He has not tried to show bad

faith in Respondent’s designation of the administrative record or

handling of his claim, and we see no such evidence. Moreover,

Respondent adequately answered most of Mr. Berenblatt’s interrogatory

response requests, with the one exception noted above. Respondent’s

remaining objections (concerning section 6103, Rule 6(e) of the Federal

Rules of Criminal Procedure, the exception for attorney work product,

and the deliberative process privilege) do not apply to the specific

interrogatory response we are compelling.

To implement the foregoing,

An appropriate order will be issued.