Lissack v Commissioner is an important DC Circuit whistleblower opinion that clarifies the extent to which Whistleblower Office (WBO) decisions are subject to court review. Lissack also upholds under Chevron review the regulations’ approach to limiting awards to situations when the information provided is substantively connected to an eventual adjustment, even if the IRS would not have examined the taxpayer but for the informant identifying the targeted taxpayer.
In Lissack, which a guest post prior to this opinion discussed here, a whistleblower submitted information to the WBO about a condominium development group that allegedly evaded taxes due to its treatment of golf club membership deposits. The WBO investigated and found the claim credible, but the IRS found that the condo group’s income tax treatment of the deposits was correct. In examining the group, the IRS did discover an unrelated issue: it had taken an erroneous $60 million intercompany bad debt deduction.
About eight years after Lissack submitted his application for award, the WBO denied his claim, stating that the information that he submitted about the tax treatment of the deposits was not relevant for the bad debt deduction. While there was no dispute that the IRS’s investigation into the taxpayer was attributable to Lissack’s application to the WBO, the information was substantively unrelated to the IRS’s eventual bad debt adjustment and ultimate tax collection.
The Tax Court granted summary judgment to the IRS, holding that even though the IRS “did initiate an action” based on Lissack’s information he was ineligible for an award because “the IRS did not collect any proceeds as a result of…” an action or related action, as those terms are defined in the 7623 regs.
On appeal the government argued that the Tax Court did not have jurisdiction to review the IRS’s award denial. On appeal, the government also defended the validity of regulations that effectively denied awards when an informant’s information about an identified taxpayer is substantively unconnected to the issue that the IRS finds to be improper.
In Lissack, the DC Circuit Court of Appeals held that (1) the Tax Court had jurisdiction to consider the IRS’s denial of a whistleblower claim, (2) regulations under Section 7623 are valid under the still (for now) relevant Chevron two-step framework and (3) under those regulations it was proper for the IRS to deny Lissack any award.
The Tax Court Had Properly Exercised Jurisdiction
The government’s threshold argument was that its decision to deny the claim was unreviewable. In arguing that the WBO’s decision was not subject to review, the government relied on Li v Commissioner, where, as Keith discussed here, the DC Circuit held that a rejection of an application for a mandatory award on Form 211 was not a reviewable award determination.
In Li, the DC Circuit held that a “threshold rejection of a Form 211 by nature means the IRS is not proceeding with an action against the target taxpayer,” and that “[t]herefore, there is no award determination, negative or otherwise, and no jurisdiction for the Tax Court.”
Distinguishing Li, the DC Circuit in Lissack held that even though no award was given there was in fact a determination that triggered court review:
The fact that the IRS conducted an examination here suffices to distinguish Lissack’s case from Li. Li never claimed that the IRS proceeded with any administrative or judicial action against the target taxpayer based on her submission…Here, by contrast, there is no dispute that the Whistleblower Office referred Lissack’s submission to the IRS, and an IRS revenue agent initiated an examination of the membership-deposits issue that Lissack identified. That referral and examination count as the IRS “proceed[ing] with” an “administrative action” that was “based on” the information Lissack brought to the Secretary’s attention. I.R.C. § 7623(b)(1). And the “determination regarding an award” was the Whistleblower Office letter to Lissack informing him that the examination it initiated based on the information he provided did not result in the collection of any proceeds, so he was not entitled to an award.
In arguing that Li applied to this case, the government was effectively arguing that judicial review of a WBO action was predicated on its finding that a whistleblower had made a meritorious claim. In Lissack the DC Circuit has limited the reach of Li, and while under Li judicial review requires that the IRS proceed with a claim there is no jurisdictional requirement that the IRS have “collected proceeds” based on the whistleblower’s information.
The DC Circuit Upholds the Regs
After finding against the government on the question of reviewability, on the merits, the DC Circuit looked to the regulatory requirements. Lissack argued essentially that under the plain language of the statute he was entitled to an award because but for the information he supplied the IRS would not have proceeded with an examination against the condo group.
The opinion frames the challenge, starting with the relevant statutory hook:
He challenges the regulatory provisions that control the IRS’s determinations whether any proceeds were “collected as a result of” an IRS “administrative action” to which a whistleblower “substantially contributed.” I.R.C. § 7623(b)(1).
First, he challenges the provision of the Rule defining an “administrative action” that the IRS treats as “based on” a whistleblower submission under subsection (b)(1) to be “all or a portion of” a proceeding that may yield collected proceeds. 26 C.F.R. § 301.7623-2(a)(2).
Second, he challenges an example (Example Two) that illustrates how, when the IRS discovers “additional facts that are unrelated to the activities described in the information provided by the whistleblower” and accordingly expands the scope of the examination, the investigation into those unrelated facts “are not actions with which the IRS proceeds based on the information provided by the whistleblower.” 26 C.F.R. § 301.7623-2(b)(2) (Example 2).
The parties both agreed that Chevron applied, and identified two key Step 1 questions:
First, whether the tax whistleblower statute requires the IRS to consider the “whole action”—in this case, all its examination activity—regarding one taxpayer as a single administrative action….
[Second,] whether the statute mandates an award whenever the whistleblower’s information was the but-for cause to initiate an investigation of the taxpayer, even if the ultimate basis for the IRS’s collection of proceeds found no factual support in the information the whistleblower provided.
The opinion finds under Chevron Step 1 that the statute does not require the IRS to consider the whole action nor mandate a but for causation approach to determining whether there is a collection of proceeds.
In the absence of the statute speaking directly to those issues, the DC Circuit finds that the regulatory approach was reasonable:
The ordinary meaning of “administrative action”—activities by executive agencies— may in this context sensibly be limited to action on the discrete tax issue or issues the whistleblower’s information identifies.
Further buttressing its Step 2 conclusion, the opinion discounts Lissack’s policy-based argument that he “provided ‘valuable information’ by informing the IRS that the development group taxpayers ‘are the type of taxpayers to misstate their tax liability generally, and debt in particular’”:
[T]here is ample reason to doubt that Congress meant to entitle whistleblowers to substantial awards just for raising plausible but meritless concerns about taxpayers who, on investigation by the IRS, turn out to be noncompliant in some other, unrelated way. Such a regime likely would encourage whistleblowers to flyspeck major taxpayers, identifying any plausible underpayment in the hope of triggering an examination yielding some other, major adjustment. The IRS approach, in contrast, calibrates mandatory awards to the fruits of the particular IRS actions that the whistleblower’s information substantially assists.
Conclusion
While the opinion on the merits is a victory for the government, the threshold jurisdictional question is a victory for the whistleblower bar.
The opinion is also significant for what it declined to consider, including whether the Tax Court must conduct a trial de novo on an appeal of a WBO determination and the standard of review that applies to a challenge to the scope of the record the IRS submitted to the Tax Court.
In declining to entertain those issues, the DC Circuit noted that Lissack failed to request that the Tax Court “expand the administrative record or create a new one”, issues that spin off the Administrative Procedure Act and the Kasper decision that I discussed a few years ago here and more recently here.
While noting that Lissack effectively waived these issues by failing to act below, the DC Circuit acknowledged (as has the Tax Court) that some whistleblower cases will warrant discovery and exceptions to the record rule. By failing to see how the exceptions or the need for new evidence might have benefitted Lissack, the DC Circuit was able to sidestep those issues.
While those issues await another case, the proposed Whistleblower Program Improvement Act that Senators Grassley, Wyden, Wicker, and Cardin introduced earlier this year would provide for a de novo standard of review and “allow for new evidence to be admitted to the record based on the administrative record established at the time of the original determination and any additional newly discovered or previously unavailable evidence.” Readers of PT know that the “newly discovered” or “previously unavailable” framework are also part of the Taxpayer First Act amendments to innocent spouse cases. Let’s hope that if legislation progresses, Congressional staff take a hard look at this standard, and consider how those terms are far from self-defining.