113 T.C.M. 4077
Tax Ct.2017Background
- Petitioner filed Form 211 (Aug. 4, 2008) alleging a business omitted barter income and failed to report gift certificates as employee compensation.
- Using that tip, the IRS opened employment- and income-tax examinations that produced nearly $20 million in agreed assessments and collections (combined employment and income tax liabilities and penalties).
- IRS analysts attributed about $1.77 million of collected proceeds to the whistleblower for employment-tax adjustments; the income-tax portion produced $14,543,098 in deficiency (of which $1,593,024 related to barter accounts), but the analyst concluded the income-tax adjustments were not substantially contributed to by the whistleblower.
- The IRS issued a preliminary and then a final award under the discretionary statute, I.R.C. §7623(a), totaling about $183,551 after sequestration, treating the §7623(b)(5)(B) $2 million threshold as unmet.
- Petitioner challenged that decision in Tax Court, arguing the phrase “amounts in dispute” in §7623(b)(5)(B) should include the full nearly $20 million in dispute (making §7623(b) mandatory award rules applicable).
- The Tax Court granted summary judgment and held that “amounts in dispute” under §7623(b)(5)(B) means the total liability the IRS proposed in the examinations it commenced based on the whistleblower’s information, so the $2 million threshold was met and §7623(b) applies.
Issues
| Issue | Smith's Argument | Commissioner’s Argument | Held |
|---|---|---|---|
| Meaning of “amounts in dispute” in §7623(b)(5)(B) | It includes the total liability in dispute from the examinations initiated by the tip (~$19.99M). | It is limited to the portion of collected proceeds directly/indirectly attributable to the whistleblower (the amounts eligible for percentage awards). | Court: “Amounts in dispute” means the total tax/penalties/etc. the IRS proposed in actions it commenced based on the tip; the $2M threshold was met. |
| Whether §7623(b) mandatory-award regime applied | §7623(b) should apply because the threshold was satisfied by total amounts in dispute. | §7623(b) does not apply because less than $2M was attributable to the whistleblower. | Court: §7623(b) applies; IRS erred in using §7623(a). |
| Proper role of §301.7623-2 regulations (amount-in-dispute definition and examples) | Regs support using amounts resulting from actions the IRS proceeded on based on the tip. | Analyst relied on regs and examples to limit amounts to those attributable to the whistleblower. | Court: The regulation’s definition supports counting amounts resulting from the actions the IRS proceeded on based on the whistleblower; examples about “proceeds based on” govern allocation under §7623(b)(1)/(2), not the §7623(b)(5)(B) threshold. |
| Whether IRS may apply §7623(a) percentages/sequestration now | N/A for threshold; petitioner also contested percentages and sequestration reductions. | IRS applied discretionary §7623(a) and applied sequestration. | Court: Threshold issue resolved in petitioner’s favor; other issues (award percentage, sequestration) are moot until IRS computes award under §7623(b). |
Key Cases Cited
- Ron Pair Enters., Inc. v. United States, 489 U.S. 235 (statutory language controls interpretation)
- Cooper v. Commissioner, 135 T.C. 70 (20010) (scope of Tax Court review of whistleblower awards and background on §7623)
- Kasper v. Commissioner, 137 T.C. 37 (jurisdictional limits on review of whistleblower awards)
- Lippolis v. Commissioner, 143 T.C. 393 (construction and purpose of §7623(b) threshold discussion)
- Whistleblower 22716-13W v. Commissioner, 146 T.C. 84 (treatment of FBAR penalties in §7623(b)(5)(B) analysis)
- Whistleblower 21276-13W v. Commissioner, 147 T.C. 121 (construction of “collected proceeds" under §7623(b)(1))