In Whistleblower Case Tax Court Admonishes IRS For Failing to Follow Its Own Rules

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Rogers v Commissioner is a Tax Court opinion that explores the IRS process for whistleblower claims and the impact of administrative law principles when the IRS fails to follow its own guidance. The case involves a series of allegations against nine family members and acquaintances who Rogers claimed had “conspired to commit grand theft through conversion of the assets of Mr. Rogers’ mother.”  As the opinion recounts, Rogers claimed that the nine fraudulently shifted assets away from his mother causing her to be “[divested] of her financial assets and property without her direct knowledge or control.”

The opinion discusses the process the Whistleblower Office (WBO) employs to review claims. That has recently changed, with SBSE operating division classifiers reviewing the claim (it used to be done principally by WBO staff). In this case the classifier recommended that the Service reject the claim because the “allegations are not specific, credible, or are speculative.”

In response, the WBO sent a letter to Rogers stating that it rejected his claim because it “decided not to pursue the information you provided.” The letter did not identify the reason for rejecting as being tied to a credibility determination.

Rogers appealed to the Tax Court seeking review of the WBO’s award determination under Section 7623(b)(4). The IRS filed an answer and then filed a motion for summary judgment. The Tax Court rejected the IRS’s motion, and in so doing issued a precedential opinion that clarified a few prior important principles and also established some new ones. In this post I will highlight some of the major points in the opinion.

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As an initial matter the opinion notes that the monetary thresholds for mandatory awards under 7623(b) are not jurisdictional and are affirmative defenses that the government must plead and prove. There are two thresholds for mandatory awards; a $200,000 income test and $2 million dispute test. A prior opinion established that the $2 million test was not jurisdictional and Rogers extends that reasoning to the $200,000 test. As the government failed to raise that defense in its answer, the opinion proceeded to the merits of the motion.

As I discussed in Tax Court Decides Scope and Standard of Review in Whistleblower Cases WBO appeals are subject to the record rule, meaning that generally the Tax Court is bound to the record below (scope of review). The standard of review is abuse of discretion, meaning that the Tax Court will not sustain a decision when a determination is arbitrary, capricious, or without sound basis in fact or law.  

As part of that abuse standard review, administrative law precedent establishes that an agency that fails to follow its own regs has abused its discretion.  In addition, under the Chenery doctrine the Tax Court “can uphold the WBO’s determination only on the grounds it actually relied on when making its determination….This means that the WBO must clearly set forth the grounds on which it made its determination, so that we don’t have to guess.” 

These points are key in this case, as the opinion discusses how the WBO letter to Rogers purported to reject his claim but in fact was a denial. 

The regulations under 7623 distinguish between WBO office rejections and denials. Under the regulations, “[a] rejection is a determination that relates solely to the whistleblower and the information on the face of the claim that pertains to the whistleblower.” Sec. 301.7623-3(c)(7), Proced. & Admin. Regs.; see also Internal Revenue Manual (“IRM”) pt. 25.2.1.1.3(7) (Apr. 29, 2019).

As the opinion notes a denial “is fundamentally different from a “rejection.” Under the regulations, “[a] denial is a determination that relates to or implicates taxpayer information.” Sec. 301.7623-3(c)(8), Proced. & Admin. Regs.; see also IRM pt. 25.2.1.1.3(3) (“A denial is a determination that is made for reasons beyond the information contained on the Form 211. [sic] (e.g., the Service did not proceed based on the information provided by the whistleblower, the case was surveyed or no changed by the operating division, the issue(s) alleged by the whistleblower were no change issues, the issues alleged by the whistleblower were below threshold, the statute has expired on the issues raised by the whistleblower, there are no collected proceeds).”).

The distinction matters, as there are different process for denials as compared to rejections. And it matters even more for purposes of this case because the Tax Court is going to hold the IRS to the procedures it has established in the regs:

On its face, the Letter states that the WBO is rejecting Mr. Rogers’ claim. But the WBO Letter fails to include any rationale that would support a rejection under the regulations….

Rather than focusing on the whistleblower and explaining what he failed to [do it] switches its focus to the agency itself and what the agency chose to do. Thus, the Letter tells Mr. Rogers that “the IRS decided not to pursue the information you provided.” While this may be a plausible explanation for a denial, it does not explain the basis of a rejection.

The opinion continues with a reference to the late great Yogi Berra:

In short, the regulatory framework gave the WBO two distinct paths for action — rejection or denial. Having come to that “fork in the road,” the WBO Letter followed Yogi Berra’s advice and “took it.” The Yankee great’s suggestion was sound in context, as both prongs of the fork led to his home. But with respect to a whistleblower award, the two prongs of the regulations lead to very different places. By including the “decided not to pursue” rationale as the reason for its purported rejection, the WBO Letter in effect said to Mr. Rogers “we reject your claim because we are denying the claim.” This statement was self-contradictory — and therefore impermissible — under the regulations.

There is more to the opinion and I will highlight some of the main points below.

Under Chenery the Tax Court will look beyond the determination letter to see if there was other material in the record as a “determination letter that is silent or muddled with respect to a supportable rationale may still be sustained if other materials in the record clarify the agency’s reasoning.” 

After performing that inquiry the opinion concluded that the rest of the record contradicted the rationale it gave Rogers in the letter. I found this part of the opinion interesting, as it revealed the likely reason why the WBO used the language it did with Rogers. Rejections generate fewer opportunities to perfect a claim; thus WBO likely did not want to have Rogers resubmit his claim and take additional IRS resources in dealing with additional submissions. 

The opinion did not look favorably at this tactic, emphasizing that the “WBO is not free to take away with double speak rights that the regulations plainly provide.” 

And for good measure the opinion rebukes the WBO for failing to treat Rogers fairly:

As the Supreme Court recently observed: “If men must turn square corners when they deal with the government, it cannot be too much to expect the government to turn square corners when it deals with them.” Niz-Chavez v. Garland, 593 U.S. ___, ___, 141 S. Ct. 1474, 1486 (2021). We cannot countenance intentional obfuscation on the part of the WBO. And neither the WBO Letter alone nor the Letter coupled with the administrative record here provides a coherent account of the WBO’s determination that is consistent with the regulations. That, in turn, represents an abuse of discretion, and accordingly we must deny the Commissioner’s motion

Conclusion

The opinion also explores the implications of the shifting of some WBO functions to SBSE in light of a general reluctance of courts to interfere with agency enforcement decisions. 

But the main takeaway from Rogers is that the opinion explores how even limited abuse of discretion review such as that in WBO determinations can ensure that the IRS treat individuals transparently and in line with its own procedures.

As the opinion notes, “it may well be that Mr. Rogers’ claim is nothing more than a personal dispute that the IRS will decide not to pursue even if Mr. Rogers provides additional information. Nevertheless, the WBO must comply with the regulations, and Mr. Rogers is entitled to transparency and candor as to the reasons for its ultimate determination. We cannot countenance intentional obfuscation by the WBO, nor will we bless attempts to improperly shield cases from judicial review

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

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