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IRS Whistleblower Office Can Abuse its Discretion By Not Referring Claim to Operating Division

01 / 22 / 2020

Lacey v. IRS, 153 T.C. No. 8 (11/25/2019)

In a case involving a whistleblower formerly employed with BP, in which he claimed that when the company was facing a maximum fine of $47 billion on its Deepwater Horizon oil drilling platform oil spillage in the Gulf of Mexico back in 2010 and then sought to cover up and lie to Congress, thereby denying it a proper deduction for the money BP spent, the IRS Whistleblower Office summarily dismissed the claim as speculative or lacking credible information, and did not allege a "tax issue."  In doing so, the IRS WBO issued a letter, setting forth that it was NOT a determination under Section 7623(b), but rather, a "final decision" under the discretionary award program under Section 7623(a), which is not reviewable by the Tax Court, and in particular, a "final determination to reject" the WB's claim for an award (presumably under 7623(b)). 

A second submission provided by Mr. Lacey's counsel was sent to the IRS WBO, by way of a cover letter, and a 21-page Brief in Support of Form 211, with a NEW Form 211.  Included in the referenced material was specific reference to the how expenditures having their origin in an environmental law violation and incurred to prevent impositions of a fine designed to be punitive was itself a "fine or penalty" not otherwise deductible under Section 162(f) of the Code.  In other words, that the IRS SHOULD disallow the $12.9 billion portion of BP's Spill Response Deduction (classified as "Clean-Up Expense"), apply the proper tax rate, and recover the deficiency (approximately $3.7 million) and issue and award.  

The Tax Court could not tell what consideration (if any) the IRS WBO actually gave to this second submission, as no internal emails or memoranda were submitted.  The IRS WBO did issue a letter simply saying that they considered the additional information and determined that the claim still did not meet their criteria for an award, that their determination remained the same.  The letter referenced the same claim number.  The IRS did not initiate any administrative or judicial proceedings on the basis of the WB's information.

The WB petitioned for review by the Tax Court of the IRS WBO determination, claiming that the IRS WBO did not review the second submission and that no analyst made a recommendation to reject the WB's claim as supplemented by the second submission.  

The IRS moved for summary judgment, claiming it did not abuse its discretion when rejecting the WB's claim in the manner in which it did.  The WB claims that the Tax Court should deny the motion and remand the case to the WBO with instructions to "process" the second submission.

The Tax Court analyzed the issues by looking at whether the determination to "reject" a claim must always be sustained because there has been no administrative or judicial action and no collection of tax proceeds; and that the WB's claim was properly "rejected" because it did not meet the threshold requirements for an award under 7623(b).  A third issue was whether the matter should be remanded to the IRS WBO, as the WB Lacey requested.

Recognizing that the Tax Court did not have authority to DIRECT the IRS to commence or continue an audit, nor authority to direct collection, the Tax Court noted that it does have jurisdiction to review the WBO's exercise of discretion as to any decision it reaches to "reject" a claim for failure to meet threshold requirements without referring it to an IRS operating division.  In this case, the IRS operating division makes a determination not to proceed with an action; which the Tax Court does not review.  At the same time, acts of the WBO are the subject of review (e.e.g, the decision to summarily "reject" a claim).  Issuance of a form letter does not allow the Tax Court to review what attention, if any, the IRS WBO gave to the submission.  

The Tax Court also believed that it would be premature to remand the case to require the IRS WBO to articulate a decision that it could then review, given that the administrative record was incomplete.  A complete administrative record allows the Tax Court to evaluate whether the IRS WBO failed to consider a claim.

A dissenting opinion sets forth the view that it should grant summary judgment to the IRS, because no action was taken on the basis of information provided, with no proceeds collected.  The dissenting view was that the majority decision interposes the Tax Court into the IRS's decisions over WHICH claims to pursue, not within the scope of its review.