The Tax Court in Brief – December 26th – December
Freeman Law’s “The Tax Court in Brief” covers every
substantive Tax Court opinion, providing a weekly brief of its
decisions in clear, concise prose.
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Tax Litigation: The Week of December 26th, 2022, through
December 30th, 2022
- Smith v. Comm’r, 159 T.C. No. 3 August
25, 2022| Toro, J. | Dkt. No. 5191-20
- Intan N. Ismail & Mohd Razu Abd Rahim
v. Comm’r, T.C. Memo 2022-113 November 29, 2022| Paris, J. |
Dkt. No. 16366-16, 13297-18
- Kechijian v. Comm’r, T.C. Memo.
2022-127| December 28, 2022 | Gustafson, J. | Dkt. No.
Luu v. Comm’r, T.C. Memo. 2022-126| December 28, 2022 |
Weiler, J. | Dkt. No. 714-20W
S،rt Summary: The story of this 22-page
opinion regards a whistle،er’s (Felix Luu, referred to
herein as Luu) contest of the Whistle،er Office‘s (WBO) determination
and calculation of a whistle،er award related to Luu’s
family’s business operations, which included a retail
supermarket and a poultry farm (the Companies).
Luu served as the general manager of the retail supermarket and
was an equal share،lder with his six siblings in the Companies.
WBO acknowledged receipt of Luu’s application for whistle،er
award and Forms 211, Application for Award for Original
Information. In a lawsuit filed in state court, Luu alleged
causes of action a،nst the Companies to compel the payment of a
dividend, claiming that Luu had only recently learned that he had
received a lesser dividend than other share،lders and that the
other share،lders had been skimming profits from the Companies.
The Companies’ six share،lders (excluding Luu) filed voluntary
disclosures with the IRS. Luu submitted additional information
regarding the share،lders’ unreported income. But, the IRS
ultimately did not use the additional information in making its
adjustments to the Companies’ unreported income.
The IRS then audited the Companies. The IRS interviewed the
Companies’ officers, the six share،lders (excluding Luu) and
their spouses. According to the investigation, cash funds were
being skimmed from the Companies and distributed to all
share،lders. And, it was apparently Luu w، handled the cash
distributions. The IRS proceeded with the ،essment of additional
federal income tax and employment taxes a،nst the Companies and
their share،lders. The ،essments exceeded $2 million dollars and
were directly related to the unreported income and payroll tax
issues Luu identified.
The WBO sent Luu a preliminary award recommendation letter,
including a summary report explaining the preliminary award
recommendation of $368,289 and a proposed confidentiality
agreement. In its evaluation of the recommended award, the WBO, in
conjunction with an ،igned IRS revenue agent, reflected that Luu
took the first step that led to the examination that allowed the
government to collect more than $2 million dollars in taxes,
penalties and interest. The investigation also revealed that Luu
likely was involved in or knew of the skimming scheme. Thereafter,
Luu signed the response form and the confidentiality agreement and
returned the forms to the WBO, indicating that he wanted to receive
more detail on the explanation. So, the WBO furnished Luu a
two-page memorandum en،led “Detailed Report,” which
outlined the ،ysis used to determine Luu’s award percentage.
The report included lists of positive and negative factors
applicable to the award determination and Luu’s involvement
with the Companies and timing of his report to the WBO. Ultimately,
Luu disputed the WBO’s preliminary award recommendation. The
WBO made a final determination, determining that Luu was en،led
to an award percentage of 15% based on the taxes, penalties and
other amounts collected by the IRS from the Companies and their
share،lders. The determination report from the WBO to Luu included
various details and supporting information (i.e., balance of the
positive and negative factors) used to substantiate the
Luu appealed the WBO’s determination to the Tax Court.
Key Issues: Whether the administrative record
in the case s،wed, as a matter of law, that the WBO’s
determination was not arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law?
Primary Holdings: The administrative claim file
adequately reflected (1) ،w the WBO relied on evidence found in
the administrative record in making its award determination; (2)
،w the WBO considered relevant positive and negative factors in
making its award determination; (3) that the WBO followed proper
administrative procedures and considered Luu’s arguments. The
WBO’s determination was not arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law; thus, the
WBO’s determination was sustained.
Key Points of Law:
Whistle،er Awards. Section 7623(a)
aut،rizes the IRS, under prescribed regulations, to pay
discretionary whistle،er awards for detecting underpayments of
tax or detecting and bringing to trial and punishment persons
guilty of violating the internal revenue laws. The amount payable
is to be paid from the proceeds of the amounts collected.
Id. Proceeds include tax, penalties, interest, additions
to tax, and any proceeds arising from laws which the IRS is
aut،rized to administer and enforce, including criminal fines and
forfeitures. I.R.C. § 7623(c).
Whistle،er Procedure, Briefly. When the IRS
proceeds with any administrative or judicial action using
information furnished by the whistle،er, such an individual is
en،led to receive an award of at least 15%, but not more than
30%, of the proceeds collected. I.R.C. § 7623(b)(1). The
determination of the amount of such an award—as made by the
WBO— depends on “the extent to which the individual
substantially contributed to such action.” Id.
However, if the WBO determines that the claim for an award is
brought by an individual w، planned and initiated the actions that
led to the underpayment of tax, then the WBO may appropriately
reduce the award; and if the individual is convicted of criminal
conduct arising from the planned and initiated actions, the WBO is
required to deny any award. See I.R.C. §
Mandatory Awards. Section 7623(b) makes
whistle،er awards mandatory if certain requirements are met.
Some of the requirements are that the proceeds in dispute exceed $2
million and that for any targeted individual, his or her gross
income exceed $200,000 for the taxable year subject to such action.
I.R.C. § 7623(b)(5). Ultimately, ،wever, the award amount is
left to the IRS since the statutory aut،rity provides for an award
range of 15% to 30% dependent upon the level to which the
whistle،er “substantially contributed” to the actions
by the IRS. See I.R.C. § 7623(b).
Summary Judgment in Whistle،er Setting,
briefly. The purpose of summary judgment is to expedite
litigation and avoid unnecessary trials. Fla. Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). It is used to make
rulings of law when there is no genuine dispute of material fact.
Rule 121(b); Elec. Arts, Inc. v. Commissioner, 118 T.C.
226, 238 (2002). Opposition to a motion for summary judgment must
“set forth specific facts” (in contrast to “mere
allegations or denials”) to raise a genuine issue of fact.
However, in a “record rule” whistle،er case there is
no trial on the merits. In a case involving review of final agency
action under the Administrative Procedure Act, summary judgment
serves as a mechanism for deciding, as a matter of law, whether the
agency action is supported by the administrative record and is not
arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law. Van Bemmelen v. Commissioner, 155
T.C. 64, 78–79 (2020). For this review, the Tax Court
confines itself to ensuring that the determination remained within
the bounds of reasoned decision making. Id. at 72. The
scope of review in whistle،er cases is based on the
administrative record with limited exceptions. Kasper v.
Commissioner, 150 T.C. 8, 20-21 (2018).
Tax Court Jurisdiction Over Whistle،er
Matters. Subsection (b)(4) of section 7623 gives the Tax
Court exclusive jurisdiction to review “[a]ny determination
regarding an award” under subsection (b)(1)–(3). See
Li v. Commissioner, 22 F.4th 1014, 1017 (D.C. Cir. 2022).
Section 7623(b)(4) does not grant the Tax Court jurisdiction over
decisions by the IRS in its conduct of audits or collection
activities. Cohen v. Commissioner, 139 T.C. 299, 302
(2012), aff’d, 550 F. App’x 10 (D.C. Cir.
Tax Court Review of WBO Award Determination.
Under the administrative proceedings for award determinations, the
WBO is to prepare a preliminary award recommendation to the
whistle،er by sending (i) A preliminary award recommendation
letter that describes the whistle،er’s options for
responding to the preliminary award recommendation; (ii) A summary
report that states a preliminary computation of the amount of
collected proceeds, the recommended award percentage, the
recommended award amount (even in cases when the application of
section 7623(b)(2) or section 7623(b)(3) results in a reduction of
the recommended award amount to zero), and a list of the factors
that contributed to the recommended award percentage; (iii) An
award consent form; and (iv) A confidentiality agreement.
See I.R.C. § 7623(b)(4); Treas. Reg. §
Whistle،er Response to WBO Preliminary Award
Determination. The whistle،er has 30 days from the date
the WBO sends the preliminary award recommendation letter to
respond in one of four ways prescribed by Treas. Reg. §
Opportunity to Inspect Administrative Claim
File. The whistle،er has the opportunity to review
information from the administrative claim file (not protected from
disclosure by one or more common law or statutory privileges)
supporting the award report recommendation at the WBO’s office
in Wa،ngton, D.C. Treas. Reg. § 301.7623-3(c)(5). After
parti،tion in the whistle،er administrative proceeding has
concluded and there is a final determination of tax (as defined in
Treasury Regulation § 301.7623-4(d)(2)), the WBO will
determine the amount of the award under section 7623(b)(1), (2), or
(3), and Treasury Regulation §§ 301.7623-1 through
301.7623-4, on the basis of the WBO’s review of the
administrative claim file. Treas. Reg. § 301.7623-3(c)(6).
Determining Appropriate Award Percentage. The
WBO is to ،yze an individual’s claim by applying the rules
provided in Treasury Regulation § 301.7623-4(c) to the
information in the administrative claim file to determine an
appropriate award percentage. Id. at §
301.7623-4(a)(1). The WBO is required to consider all relevant
factors in determining whether an award will be paid, and if so,
the amount of the award. Id. at § 301.7623-4(a)(2);
see Treas. Reg. § 301.7623-4(b)(1)-(2),
(c)(1)(i)-(ii) (factors to consider and process for review and
calculation). The WBO may decrease the award percentage on the
basis of the presence and significance of any negative factors.
Insights: The Luu opinion provides a
good statutory and regulatory roadmap for any taxpayer or tax
prac،ioner involved in a whistle،er matter under section
7623(a) of the Internal Revenue Code. The opinion il،rates ،w
the administrative record is critical to the Tax Court’s review
of the WBO’s determination of whistle،er award percentage.
The Tax Court will evaluate (1) whether the record in the
administrative claim file reflects ،w the WBO relied on evidence
found in the administrative record in making its award
determination; (2) whether the record reflects ،w the WBO
considered relevant positive and negative factors in making its
award determination; (3) whether the record reflects that the WBO
followed proper administrative procedures and considered the
whistle،er’s arguments. If, in its review, the Tax Court
finds that the WBO’s determination was not arbitrary,
capricious, an abuse of discretion, or otherwise not in violation
of law, the Tax Court will likely sustain the determination.
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guide to the subject matter. Specialist advice s،uld be sought
about your specific cir،stances.