153 T.C. No. 8
Tax Ct.2019Background
- Petitioner Richard E. Lacey, II (a former BP employee and author) submitted a Form 211 (May 2015) alleging BP spent $12.89 billion on a cover-up of the Deepwater Horizon spill and that related cleanup deductions should be disallowed for tax purposes.
- The IRS Whistleblower Office (WBO) rejected the first submission (Nov. 4, 2015) as speculative and lacking specific/credible tax information; Lacey conceded the first submission alone was inadequate.
- Lacey (through counsel) filed a substantially expanded second submission (Mar. 2016) including a 21‑page brief: background on his BP experience, listed sources, proposed expert witnesses, factual detail, and legal theory invoking section 162(f).
- The WBO sent an April 6, 2016 rejection letter identical in boilerplate language to an earlier letter and did not assign a new claim number; the administrative record is incomplete as to what consideration (if any) the WBO actually gave the second submission.
- The IRS did not initiate any administrative or judicial action nor collect proceeds based on Lacey’s information; Lacey petitioned the Tax Court under 26 U.S.C. § 7623(b)(4) seeking review and a remand to the WBO.
- The Tax Court denied the Commissioner’s summary judgment motion, held it has jurisdiction to review WBO rejections for abuse of discretion, found a genuine factual dispute whether the WBO considered the second submission, and declined to remand pending a complete administrative record.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Tax Court has jurisdiction to review a WBO threshold "rejection" though no IRS action or proceeds exist | Lacey: §7623(b)(4) permits review of any WBO determination regarding an award, including rejections | Commissioner: Without an administrative/judicial action and proceeds, there can be no award and no reviewable determination | Court: Has jurisdiction to review WBO rejections for abuse of discretion; absence of action/proceeds does not preclude review of a WBO threshold rejection |
| Whether WBO abused its discretion in rejecting Lacey’s second submission | Lacey: Second submission cured earlier defects and presented specific factual and legal allegations requiring WBO consideration and referral | Commissioner: Second submission remained speculative and lacked specific/credible tax info; rejection was proper | Court: Denied summary judgment for Commissioner because genuine dispute exists whether WBO actually considered the second submission and the rejection letter lacks sufficient stated grounds for review |
| Whether the case should be remanded to the WBO for further consideration | Lacey: Request remand to require WBO to analyze/process the second submission | Commissioner: Opposes remand; summary judgment should be granted | Court: Denied remand at this stage pending production of the complete administrative record; ordered parties to propose further proceedings |
Key Cases Cited
- Tank Truck Rentals, Inc. v. Commissioner, 356 U.S. 30 (1958) (public‑policy limits on deductibility)
- Commissioner v. Tellier, 383 U.S. 687 (1966) (deductibility of legal expenses distinguished)
- Jerry Rossman Corp. v. Commissioner, 175 F.2d 711 (2d Cir. 1949) (analysis of penalty payments and deductibility)
- SEC v. Chenery Corp., 332 U.S. 194 (1947) (agency decisions must stand or fall on the reasons the agency actually gives)
- Kasper v. Commissioner, 150 T.C. 8 (2018) (Tax Court reviews WBO decisions for abuse of discretion)
- Cooper v. Commissioner, 136 T.C. 597 (2011) (limits on Tax Court authority to compel IRS action)
- Cohen v. Commissioner, 139 T.C. 299 (2012) (Tax Court cannot order the IRS to commence audits; review limited to award determinations)
- Motor Vehicle Mfrs. Ass’n v. State Farm, 463 U.S. 29 (1983) (arbitrary and capricious standard for agency action)
- Vermont Yankee Nuclear Power Corp. v. NRDC, 435 U.S. 519 (1978) (agencies have discretion in procedure and rulemaking)