145 T.C. 204
Tax Ct.2015Background
- Petitioners (three whistleblowers) filed an IRS whistleblower claim in 2006 alleging a tax-evasion scheme (TES) by a named corporate target and provided information leading to IRS action.
- Petitioners contend their information caused the IRS to investigate the target, issue a general legal memorandum disallowing similar transactions, and initially disallow the TES as applied to the target.
- Petitioners allege the IRS later reversed course as to the target, allowing the TES as part of a broader compromise that produced over $50 million in asserted tax adjustments; petitioners also allege the IRS disallowed a separate $20+ million sham-debt loss deduction identified earlier.
- Petitioners moved to compel production of documents and interrogatory responses seeking who in the IRS reviewed their tip, materials about the TES investigation and memorandum, details on the sham-debt inquiry, and amounts collected.
- Respondent did not dispute the factual allegations that IRS actions followed petitioners’ information but refused discovery, arguing the court’s review is limited to the Whistleblower Office’s administrative record and the requested material lies outside that record.
- The Tax Court found the requested materials relevant to whether there were collected proceeds and whether those proceeds were attributable to petitioners’ information, and concluded respondent cannot unilaterally define the administrative record; the court granted the motions and imposed protective rules under section 6103 for taxpayer return information.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Scope of discovery | Petitioners: discovery of IRS materials is relevant to prove collection of proceeds and attribution to their tip | Respondent: discovery limited to Whistleblower Office administrative record; material sought is outside that record | Court: discovery allowed; respondent may not unilaterally define administrative record; materials sought are relevant and should be produced under protective order |
| Whether there were collected proceeds | Petitioners: IRS collected proceeds (including ~$50M compromise) traceable to their information | Respondent: did not deny collections but treated related evidence as outside administrative record | Court: factual issue is central and relevant; discovery permitted to establish collections |
| Attribution of collections to petitioners' information | Petitioners: their information prompted IRS investigations and actions, thus collections are attributable to them | Respondent: disputes relevance only via administrative-record argument, not the factual link | Court: attribution is a core inquiry under I.R.C. §7623(b) and justifies discovery |
| Confidentiality of third‑party tax information | Petitioners: need material but must respect confidentiality | Respondent: invoked section 6103 protections to limit disclosure | Court: ordered production subject to a protective regime marking 6103 information confidential and restricting use/disclosure |
Key Cases Cited
- Thompson v. DOL, 885 F.2d 551 (9th Cir. 1989) (agency cannot unilaterally limit administrative record)
- Tenneco Oil Co. v. DOE, 475 F. Supp. 299 (D. Del. 1979) (supplemental discovery may be allowed to complete administrative record)
- Asarco, Inc. v. EPA, 616 F.2d 1153 (9th Cir. 1980) (court must ensure agency considered relevant matters; cannot solely rely on agency’s word)
- FPC v. Transcontinental Gas Pipe Line Corp., 423 U.S. 326 (1976) (distinguishes review of materials actually before an agency at decision time)
- Melea Ltd. v. Commissioner, 118 T.C. 218 (2002) (liberal discovery standard in Tax Court)