Court Opinion

ID: 9377812
Source: CourtListenerOpinion
Date Created: 2023-03-08 20:01:07.461012+00
Date Added: 2024-06-11T17:17:17.063285
License: Public Domain

United States Tax Court

                           160 T.C. No. 5

                        THOMAS SHANDS,
                           Petitioner

                                 v.

          COMMISSIONER OF INTERNAL REVENUE,
                      Respondent

                             —————

Docket No. 13499-16W.                            Filed March 8, 2023.

                             —————

            P filed a claim with the Internal Revenue Service
     (IRS) Whistleblower Office (WBO) requesting an I.R.C.
     § 7623(b) nondiscretionary award of 30% of the revenue
     collected from the 2011 Offshore Voluntary Disclosure
     Initiative (OVDI), in which the IRS offered lenient
     treatment for U.S. taxpayers that disclosed and paid back
     taxes on foreign accounts. The claim asserted that P’s
     collaboration with federal agents in securing the highly
     publicized arrest and cooperation of Swiss banker Renzo
     Gadola led to widespread participation in OVDI.

            The WBO denied P’s claim, P appealed the denial in
     Tax Court, and the parties filed Cross Motions for
     Summary Judgment and Partial Summary Judgment as to
     whether the creation of OVDI or any taxpayer’s
     participation in OVDI were I.R.C. § 7623(b)(1) related
     actions that entitle P to an award. R then moved to dismiss
     the case on the ground that the IRS did not proceed with
     an I.R.C. § 7623(b)(1) administrative or judicial action
     based on information brought to its attention by P.

            Held: The Court lacks jurisdiction to review the
     WBO’s denial because the IRS did not proceed with an
     administrative or judicial action by creating OVDI or by
     virtue of any taxpayer’s participation in OVDI.

                         Served 03/08/23
                                            2

                                      —————

Alexander R. Olama, William M. Sharp, James P. Dawson, Robert F.
Katzberg, and Nicole M. Elliott, for petitioner.

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

                                       OPINION

       GREAVES, Judge: The Internal Revenue Service (IRS)
Whistleblower Office (WBO) denied petitioner’s claim of a section
7623(b) nondiscretionary award for his alleged contribution to the
success of the 2011 Offshore Voluntary Disclosure Initiative (OVDI), an
IRS program that encouraged taxpayers to come into compliance with
tax reporting obligations by voluntarily disclosing foreign accounts and
other assets. 1 Currently before us are respondent’s Motion to Dismiss
for Lack of Jurisdiction under Rules 40 and 53 and Motion for Summary
Judgment under Rule 121, as well as petitioner’s Cross Motion for
Partial Summary Judgment under Rule 121 and discovery Motions
under Rules 71(c), 72(b), and 104(b).

      This Court lacks jurisdiction over a whistleblower case unless the
IRS “proceeds with any administrative or judicial action . . . based on
information brought to the [IRS’s] attention” by the whistleblower. Li
v. Commissioner, 22 F.4th 1014, 1017 (D.C. Cir. 2022) (quoting section
7623(b)(1)). We disagree with petitioner that the IRS proceeded with an
administrative or judicial action by creating OVDI or by virtue of
taxpayers’ participation in OVDI.         Accordingly, we will grant
respondent’s Motion to Dismiss.

                                     Background

      The Court derives the following facts, other than the description
of IRS voluntary disclosure programs, from the pleadings and Motion
papers and from the administrative record, which respondent submitted

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

Revenue Code (Code), Title 26 U.S.C., in effect at all relevant times, all regulation
references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                          3

on January 26, 2018, as an Exhibit to his Motion in Limine. Petitioner
resided in Mississippi when he petitioned this Court.

       Petitioner filed Form 211, Application for Award for Original
Information, with the WBO on or about November 29, 2010, seeking a
whistleblower award for any amounts emanating from his cooperation
with the Department of Justice (DOJ) and the IRS Criminal
Investigation Division (CI) in their investigations of Swiss bankers
Martin Lack and Renzo Gadola. IRS agents arrested Mr. Gadola in
Miami, Florida, in November 2010, the day after he had a meeting with
petitioner in which petitioner wore a recording device provided by CI.
Mr. Gadola revealed to prosecutors how he and others helped U.S.
taxpayers open Swiss bank accounts to conceal income and assets from
the IRS. He eventually pleaded guilty to conspiring to defraud the
United States in violation of 18 U.S.C. § 371. The DOJ announced Mr.
Gadola’s guilty plea in a December 2010 press release, and the story
received media coverage in 2010 and 2011.

       In February 2011 the IRS announced OVDI, its second offshore
voluntary disclosure program and a counterpart to CI’s longstanding
practice of allowing taxpayers to avoid criminal prosecution by
disclosing noncompliance. See IRS Large Business & International
Division Memorandum, LB&I-1-09-1118-014, at 1 (Nov. 20, 2018);
Offshore Voluntary Disclosure Program Frequently Asked Questions
and Answers 2014, Q&A-3. 2 OVDI offered the same benefit, along with
reduced penalties, for eligible taxpayers that voluntarily disclosed
foreign accounts for tax years 2003–10. See 2011 OVDI Frequently
Asked Questions and Answers, Q&A-4, -7, -9 (hereinafter OVDI Q&A).
Taxpayers whose returns are under examination by the IRS or who are
under investigation by CI could not participate in OVDI. Id. Q&A-14.
Participating taxpayers had to provide information on offshore financial
accounts, institutions, and facilitators, and pay back taxes, penalties,
interest, and a “miscellaneous” penalty based on the highest aggregate
balance in the foreign accounts over a specified period. Id. Q&A-7, -24.3

       2 The IRS offered the initial offshore voluntary disclosure program from March
to October 2009. See id. OVDI was the second offshore voluntary disclosure program,
and ran from February 8 to September 9, 2011. Id. A third offshore voluntary
disclosure program began in 2012 and closed in 2018. Id. Q&A-1; Closing the 2014
Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers.
        3 In general, all U.S. citizens, wherever they reside, and all resident alien

individuals must pay federal income tax on worldwide taxable income. Treas. Reg.
§ 1.1-1(b). The same goes for domestic corporations, trusts, and estates. See Boris I.
                                          4

The IRS reserved the right to conduct examinations with respect to
OVDI disclosures, and a taxpayer that considered the OVDI penalty
unacceptable could opt out of the program and have its case handled
under the standard audit process. Id. Q&A-27, -51.

       In a letter to the WBO dated June 18, 2012 (OVDI claim letter),
petitioner claimed the IRS owed him a nondiscretionary whistleblower
award under section 7623(b) “on the monies collected as a result of the
February 2011 OVDI” (OVDI claim), which by that time totaled over $1
billion. Petitioner alleged that his undercover collaboration with federal
agents brought about Mr. Gadola’s arrest and cooperation, which in turn
led to the success of OVDI. The letter quotes the prosecution’s
supplemental sentencing memorandum in Mr. Gadola’s case, which
asserts that Mr. Gadola’s guilty plea and “the very public nature of his
cooperation” with prosecutors were of “great benefit to the IRS,” because
they “spurred U.S. taxpayers to enter into the voluntary disclosure
program.” As compensation for providing information on Mr. Gadola,
the same information referenced in his 2010 Form 211, petitioner sought
a whistleblower award of 30% of the OVDI proceeds. Neither the OVDI
claim letter nor petitioner’s Motion papers claim a share of collections
from associated enforcement actions, such as seizures of taxpayer assets
or follow-up audits of OVDI participants, taxpayers who opted out of
OVDI, or taxpayers not in compliance that the IRS discovered through
OVDI disclosures.

       The WBO processed the OVDI claim separately from petitioner’s
Form 211. WBO analyst Kenneth J. Chatham prepared the initial draft
of an internal memorandum (Chatham memo) on June 6, 2013. 4 The
final version of the Chatham memo, which is undated, recommends

Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ¶ 65.3.1
(2022), Westlaw FTXIEG. Such taxpayers were required to report foreign-source
income on their federal income tax returns for the tax years in the OVDI disclosure
period. See, e.g., Instructions to Form 1040, U.S. Individual Income Tax Return 19
(2010). Taxpayers with foreign accounts of aggregate value greater than $10,000 were
also required to disclose such accounts on Form TD F 90-22.1, Report of Foreign Bank
and Financial Accounts (FBAR). 31 U.S.C. § 5314(a) (2000); 31 C.F.R. §§ 103.24,
103.27(c) (2010). Taxpayers not in compliance could face severe criminal and civil
penalties, including civil fraud penalties, accuracy-related penalties, failure-to-file
FBAR penalties, and failure-to-file and failure-to-pay additions to tax. See OVDI
Q&A-5, -6.
        4 Although the administrative record refers to a “claim rejection memo”

(emphasis added), the Chatham memo recommends that the WBO deny petitioner’s
claim, which it did. See infra Part II (discussing rejections and denials).
                                          5

denying petitioner’s claim for lack of a “related action” within the
meaning of Treasury Regulation § 301.7623-2(c)(1). 5

       The WBO denied the OVDI claim in a letter dated May 25, 2016
(denial letter), explaining that “the IRS took no action based on the
information [petitioner] provided with respect to [OVDI] or any of the
taxpayers who participated in it,” and that neither OVDI nor the
participating taxpayers are “valid related actions to [petitioner’s]
Whistleblower claim.” Petitioner appealed the denial in this Court on
June 9, 2016, and argues that the creation of OVDI and certain
taxpayers’ participation in OVDI are section 7623(b)(1) related actions
that entitle him to an award. Petitioner argues that we cannot resolve
this case without granting his discovery requests, which he says could
demonstrate that the IRS created OVDI because of increased demand
for voluntary disclosure following the Gadola case, or that the WBO
withheld the denial letter until the regulations under section 7623(b)
better supported a denial.

       On January 11, 2022, the U.S. Court of Appeals for the D.C.
Circuit held in Li v. Commissioner, 22 F.4th at 1017, that the Tax Court
lacks jurisdiction under section 7623(b) if the IRS has not proceeded
with an administrative or judicial action based on information the
whistleblower brought to its attention. 6 Respondent then moved to
dismiss, arguing that the IRS did not proceed with an administrative or
judicial action that would confer jurisdiction on this Court.

                                    Discussion

I.     Nondiscretionary Awards

       Section 7623 provides for both discretionary and mandatory
awards to individuals (i.e., whistleblowers) who submit information
about third parties that have underpaid their taxes or otherwise
violated the internal revenue laws.      Section 7623(a) authorizes
discretionary awards, which are not subject to Tax Court review. By

       5 The Chatham memo refers to “Prop. Reg. 301.7623-2(d)(1),” which suggests
the regulation may have remained in proposed form when Mr. Chatham completed the
memorandum.
        6 The D.C. Circuit is the appellate venue for this case absent a stipulation by

the parties. See § 7482(b)(1) (flush text); Kasper v. Commissioner, 150 T.C. 8, 11 n.1
(2018).
                                          6

contrast, section 7623(b) authorizes nondiscretionary awards, discussed
infra, which may be subject to our review.

       If the IRS “proceeds with any administrative or judicial action
described in subsection (a) based on information brought to [its]
attention” by a whistleblower, section 7623(b)(1) provides that the
whistleblower, subject to exceptions not relevant here, shall receive an
award of 15% to 30% of the “collected proceeds . . . resulting from the
action (including any related actions) or from any settlement in response
to such action.” 7 Although the Code does not define “related actions,”
Treasury Regulation § 301.7623-2(c)(1) describes “related actions” as
certain administrative or judicial actions against persons other than the
ones the whistleblower identified. The IRS must be able to identify the
target of the action using the information the whistleblower provided,
“without first having to use the information provided to identify any
other person or having to independently obtain additional information.”
Treas. Reg. § 301.7623-2(c)(1)(iii).

II.    Rejections and Denials

        The statutory provisions governing whistleblower awards are
succinct, and the Department of the Treasury and the IRS have adopted
regulations supplementing the statutory scheme.                 Rogers v.
Commissioner, 157 T.C. 20, 27 (2021). The regulations establish two
distinct types of so-called determinations that by definition result in no
award: rejections and denials. The WBO issues a rejection to a
whistleblower whose claim fails to satisfy certain threshold
requirements as to who may file a claim or what information the claim
must include. See Treas. Reg. §§ 301.7623-1(b)(2), (c)(4), -3(c)(7); see also
Lacey v. Commissioner, 153 T.C. 146, 168 (2019) (“One of the WBO’s
options is indeed to ‘reject’ a claim without substantive consideration of
its information and allegations beyond the face of the claim . . . .”). For
example, Treasury Regulation § 301.7623-1(c)(1) requires the

       7 Section 7623(b)(1) refers to the “Secretary” rather than the IRS, and section
7701(a)(11)(B) defines “Secretary” as the Secretary of the Treasury or his delegate.
The Secretary of the Treasury has delegated to the Commissioner responsibility for
the administration and enforcement of the internal revenue laws. Treas. Order 150-
10 (Apr. 22, 1982).
        Congress amended the statutory text in the sentence accompanying this note,
effective for information provided for which a final determination for an award has not
been made before February 9, 2018. Bipartisan Budget Act of 2018, Pub. L. No. 115-
123, § 41108(a)(2), (d), 132 Stat. 64, 158–59. The amended text does not apply because
the WBO denied the OVDI claim on May 25, 2016.
                                             7

whistleblower to submit “specific and credible information that the
whistleblower believes will lead to collected proceeds from one or more
persons whom the whistleblower believes have failed to comply with the
internal revenue laws.” Failure to provide such information may result
in a rejection. See, e.g., Frantz v. Commissioner, T.C. Memo. 2020-64,
at *7–8 (explaining that the WBO rejected a claim that failed to identify
a tax issue).

        When an eligible whistleblower files a conforming claim, the
WBO issues a denial if “the IRS either did not proceed based on the
information provided by the whistleblower,” or “did not collect proceeds”
despite proceeding based on the information. Treas. Reg. § 301.7623-
3(c)(8). Accordingly, a denial is made after the WBO engages in some
substantive consideration beyond the face of a claim. Rogers, 157 T.C.
at 30. 8

III.    Jurisdiction

        The Tax Court may exercise jurisdiction only to the extent
authorized by Congress, Naftel v. Commissioner, 85 T.C. 527, 529 (1985)
(first citing section 7442; and then citing Commissioner v. Gooch Milling
& Elevator Co., 320 U.S. 418 (1943)), and a party invoking our
jurisdiction bears the burden of proving that we have jurisdiction over
the party’s case, see Fehrs v. Commissioner, 65 T.C. 346, 348 (1975). We
have jurisdiction to decide whether we have jurisdiction. Snow v.
Commissioner, 142 T.C. 413, 419 (2014).

        A.      “Administrative or Judicial Action” Prerequisite

       Section 7623(b)(4) grants the Tax Court jurisdiction to review any
“determination regarding an award under paragraph (1).” Like
Treasury Regulation § 301.7623-3(c), discussed supra Part II, the Tax
Court interpreted “determination” to include rejections and denials. See
Lacey, 153 T.C. at 163 n.19 (“[A] denial or rejection is a (negative)
‘determination regarding an award’, so the Tax Court has jurisdiction
where, pursuant to the WBO’s determination, the individual does not
receive an award.”).

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

WBO generally provides written notice to the whistleblower of the basis for its decision
and, in the case of a rejection, inviting the whistleblower to submit comments or to
perfect the claim. See Treas. Reg. §§ 301.7623-1(c)(4), -3(c)(7) and (8).
                                     8

      The D.C. Circuit disagreed, holding in Li that the Tax Court does
not have jurisdiction to review a rejection of a whistleblower claim. Li
reasoned that an award determination by the IRS arises only when the
IRS “proceeds with any administrative or judicial action” based on
information brought to the IRS’s attention by the whistleblower. Li v.
Commissioner, 22 F.4th at 1017 (quoting section 7623(b)(1)). A rejection
“by nature means the IRS is not proceeding with an action,” the Court
continued, meaning “there is no award determination, negative or
otherwise, and no jurisdiction for the Tax Court.” Id.

       Although petitioner received a denial rather than a rejection, Part
II supra (second paragraph) explains that the IRS may issue a denial
where the IRS “did not proceed [with an administrative or judicial
action] based on the information provided by the whistleblower,” and the
denial letter explained that the WBO denied petitioner’s claim because
“the IRS took no action based on the information [petitioner] provided.”
To have jurisdiction over petitioner’s appeal, we must hold that the IRS
proceeded with an administrative or judicial action by creating OVDI or
by virtue of taxpayers’ participation in OVDI, the two administrative or
judicial actions petitioner posits.

      B.     No Administrative or Judicial Action

       Although section 7623(b)(1) refers to an “administrative or
judicial action described in subsection (a),” neither subsection (a) nor
subsection (b) defines an “administrative action” or a “judicial action.”
Treasury Regulation § 301.7623-2(a) defines both terms for claims open
as of August 12, 2014.         See Treas. Reg. § 301.7623-2(f).           An
“administrative action” is defined as “all or a portion of an [IRS] civil or
criminal proceeding against any person that may result in collected
proceeds, . . . including, for example, an examination, a collection
proceeding, a status determination proceeding, or a criminal
investigation.” Id. para. (a)(2). A “judicial action” is defined as “all or a
portion of a proceeding against any person in any court that may result
in collected proceeds.” Id. subpara. (3).

       This Court found section 7623(b)(1) ambiguous for its failure to
define “administrative or judicial action,” and accepted the regulatory
definition of “administrative action” as within the Treasury’s “ample
scope” to define these terms. See Lissack v. Commissioner, 157 T.C. 63,
71–76 (2021) (citing Chevron U.S.A., Inc. v. Nat. Res. Def. Council, Inc.,
467 U.S. 837, 842–44 (1984)). The same reasoning counsels deference
to the regulatory definition of “judicial action.” Furthermore, the Code
                                      9

itself anticipates a definition of “action” similar to the regulation’s by
restricting nondiscretionary awards to proceeds of any action “against
any taxpayer.” See § 7623(b)(5)(A) (emphasis added); see also Hardin v.
City Title & Escrow Co., 797 F.2d 1037, 1040 (D.C. Cir. 1986)
(“Jurisdictional provisions in federal statutes are to be strictly
construed.”).

       Neither of the purported administrative or judicial actions
petitioner identifies fits the definitions in Treasury Regulation
§ 301.7623-2(a). By creating OVDI, the IRS did not undertake a “civil
or criminal proceeding against any person” along the lines of the
examples provided in the regulation, let alone a court proceeding. The
program required voluntary disclosure of foreign accounts and assets,
and excluded participation by taxpayers already under examination or
investigation. We likewise reject petitioner’s argument that inherently
voluntary participation in OVDI by a taxpayer constitutes an
administrative or judicial action by the IRS. This Court has recognized
that a taxpayer’s voluntary compliance absent an examination entailed
no administrative action, even if IRS scrutiny prompted the taxpayer’s
compliance. See Whistleblower 16158-14W v. Commissioner, 148 T.C.
300, 304 (2017).

       We therefore reject petitioner’s argument that the creation of, and
the participation by unidentified third-party taxpayers in, OVDI are
“related actions.” Assuming arguendo that the IRS proceeded with an
administrative or judicial action against Mr. Gadola based on
information petitioner brought to its attention, any related action the
IRS took against other taxpayers must itself be an administrative or
judicial action. See § 7623(b)(1) (granting an award of collected proceeds
“resulting from the action (including any related actions)”); Treas. Reg.
§ 301.7623-2(a)(1) (defining an “action” as an administrative or judicial
action); id. para. (c)(1) (“[T]he term related action means an action . . . .”
(emphasis added)). Because neither of petitioner’s proposed “actions” is
an administrative or judicial action, neither can be a related action.

       C.     Applicability of the Regulations

       Petitioner also challenges the process by which the WBO denied
his claim. He submitted the OVDI claim in 2012, and the WBO sent the
denial letter in 2016. He suggests that the “initial decision” to deny his
claim occurred on June 6, 2013, the date of the first draft of the Chatham
memo, and alleges that the WBO may have sought to shore up the legal
                                          10

basis for its decision by withholding the denial letter until the
definitions in Treasury Regulation § 301.7623-2 took effect in 2014.

       Invoking the Administrative Procedure Act, see 5 U.S.C. § 706(2)
(2018), petitioner asks us to “set aside” the denial as “arbitrary,
capricious, an abuse of discretion, or otherwise not in accordance with
law,” or “in excess of statutory jurisdiction, authority, or limitations, or
short of statutory right,” because the OVDI claim “must be evaluated
based on the law applicable as of the date of respondent’s initial decision
to deny petitioner’s claim.” Petitioner argues that we must evaluate his
claim by applying the plain meaning of the Code, and disregard
regulations that took effect after the initial draft of the Chatham memo.

      The D.C. Circuit encountered a similar argument from Bergerco
Canada, a company that sought to collect a debt from an Iraqi entity on
the eve of the Gulf War. When Iraq invaded Kuwait in August 1990,
President Bush froze Iraqi property interests in the United States,
including funds on deposit with the U.S. bank from which Bergerco
would receive payment. Bergerco Can. v. U.S. Treas. Dep’t, Office of
Foreign Assets Control, 129 F.3d 189, 190–91 (D.C. Cir. 1997). On
August 15, 1990, the Office of Foreign Assets Control (OFAC) announced
regulatory criteria for the award of licenses for payment of blocked
funds, and Bergerco promptly applied for a license. Id. at 191. OFAC
then revised the regulation on October 18, adopting new criteria that
Bergerco did not meet, and denied Bergerco’s application on November
20 based on the new criteria. Id.

       The D.C. Circuit rejected Bergerco’s argument that application of
the revised rule was impermissibly retroactive. Id. at 190. A regulation
has retroactive effect, the Court explained, when it impairs rights a
party had when it undertook some prior action. See id. at 193. 9 The key
action in Bergerco’s case was filing a license application, which did not
confer protection from any subsequent rule-made variation in licensing
standards. See id. at 194 (first citing DIRECTV v. FCC, 110 F.3d 816,
825–26 (D.C. Cir. 1997); and then citing Chadmoore Commc’ns, Inc. v.
FCC, 113 F.3d 235, 240–41 (D.C. Cir. 1997)). The D.C. Circuit sustained

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

Hospital, 488 U.S. 204 (1988), and Landgraf v. USI Film Products, 511 U.S. 244 (1994).
See Bergerco, 129 F.3d at 193. The Court appeared to derive the injunction against
retroactive regulations from 5 U.S.C. § 551(4) (1994), which defined a “rule” as “the
whole or a part of an agency statement of general or particular applicability and future
effect.” Bergerco, 129 F.3d at 192 n.2 (emphasis added) (citing Bowen, 488 U.S. at 216
(Scalia, J., concurring)).
                                   11

OFAC’s use of the October 18 criteria, irrespective of the agency’s motive
in deferring action on Bergerco’s application until November 20, and
despite the fact that the August 15 regulation gave Bergerco “a very
good chance of securing the license.” Id. at 190.

        The same reasoning permits us to apply the regulatory definition
of “administrative or judicial action” adopted while petitioner’s claim
was pending. Petitioner cites no authority requiring the WBO or the
Tax Court to ignore the regulation in reviewing claims filed before its
effective date, and he identifies no other action he took that would
entitle him to such review. We do not inquire into the IRS’s reasons for
issuing the regulation before the denial letter. Cf. Lissack, 157 T.C.
at 63–68, 71–76 (applying the regulatory definition where the WBO may
have had enough information to deny the claim nearly three years before
its effective date).

IV.   Conclusion

       The Court lacks jurisdiction to review the WBO denial of the
OVDI claim because petitioner has the burden of proving jurisdiction,
which requires that the IRS proceeded with an administrative or judicial
action, and Treasury Regulation § 301.7623-2(a) does not encompass the
purported administrative or judicial actions petitioner identifies. This
holding moots petitioner’s argument that either the creation of OVDI or
taxpayers’ participation in OVDI is a related action, which section
7623(b)(1) and Treasury Regulation § 301.7623-2(c)(1) define as a type
of administrative or judicial action. Granting petitioner’s request to
discover why the IRS created OVDI would not change this result.

      To reflect the foregoing,

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