Felix Luu v. Comm'r of Internal Revenue

• Decision Date: 28 December 2022
• Docket Number: 714-20W
• Parties: FELIX LUU, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

T.C. Memo. 2022-126

FELIX LUU, Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 714-20W

United States Tax Court

December 28, 2022

MEMORANDUM OPINION

WEILER, JUDGE

Felix Luu, pursuant to Rule 121,^[1] filed a Motion for Summary Judgment on November 9, 2020. On January 4, 2021, respondent filed his Response to petitioner's Motion for Summary Judgment. Commencing September 27, 2021, a remote hearing was held to determine the accuracy of the administrative record. After the hearing, on April 4, 2022, petitioner filed a First Supplement to his Motion for Summary Judgment (petitioner's original and supplemental motions are hereinafter collectively referred to as Motion for Summary Judgment). On June 27, 2022, respondent filed his Response (Supplemental Response) to petitioner's Motion for Summary

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Judgment. Petitioner filed his Reply to respondent's Supplemental Response on July 5, 2022.

For the reasons below, we will deny petitioner's Motion for Summary Judgment and grant respondent's Cross-Motion for Summary Judgment.^[2] Furthermore, we will enter a decision in this matter affirming the Internal Revenue Service (IRS) Whistleblower Office's (WBO) final determination regarding petitioner's whistleblower award.

Background

Petitioner submitted several Forms 211, Application for Award for Original Information, each dated February 24, 2009, to the WBO. Petitioner's Forms 211 were related to his family's business operations in California, which included a retail supermarket and a poultry farm. Petitioner served as the general manager of the retail supermarket and was an equal shareholder^[3] with his six siblings in the family's business operations. By letters dated April 14, 2009, the WBO acknowledged receipt of petitioner's application for award and Forms 211 and assigned petitioner's case an initial claim number of 2009-001609.^[4]

On December 8, 2009, petitioner, as a minority shareholder, filed a verified complaint in the Superior Court of California, County of Sacramento, to compel the payment of a dividend or declaratory relief, injunctive relief, an accounting, and appointment of a receiver against one or more California corporations and a California limited liability company (Companies), some of which were organized as S corporations for federal income tax purposes. In the verified complaint petitioner contended that he had only recently learned that he had received a lesser dividend than other shareholders of the Companies and that, on the basis of his own internal investigation, the other shareholders had been skimming profits from the Companies.

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On December 1, 2009, the Companies' six shareholders (excluding petitioner) filed voluntary disclosures with the IRS. The IRS preliminarily accepted these voluntary disclosures on January 12, 2010.

On December 10, 2009, petitioner wrote to the IRS and furnished detailed information including copies of his verified complaint and third-party accounting reflecting the Companies' and the shareholders' unreported income. Some of the information petitioner furnished was not disclosed by the Companies' other six shareholders in their voluntary disclosures. However, the IRS ultimately did not use the additional information petitioner furnished in making its adjustments to the Companies' unreported income.

On or around January 2011 the IRS commenced audits of returns of one or more of the Companies. Petitioner, as a shareholder of the Companies, was notified of the IRS audits. On August 15, 2011, an IRS revenue agent (RA) interviewed the Companies' president, and then on August 26, 2011, the RA separately interviewed the Companies' six shareholders (excluding petitioner), along with their respective spouses. According to the separately interviewed shareholders, cash funds were being skimmed from the Companies and distributed to all shareholders. Also, according to the shareholders interviewed, it was petitioner who handled these cash distributions since he was involved in the financial operations of the Companies. The RA subsequently met with the Companies' bookkeeper on September 29, 2011, and later held several meetings with petitioner regarding the Companies' audits.

The IRS ultimately proceeded with the assessment of additional federal income tax and employment taxes against the Companies and their shareholders. The assessments exceeded $2 million dollars and were directly related to the unreported income and payroll tax issues petitioner identified. The assessed additional taxes, including interest and penalties, have been paid.

In 2014 petitioner sought appeal to the IRS Office of Appeals (Appeals Office)^[5] protesting the proposed tax deficiencies for the Companies, as determined by the IRS, as being too low since the assessments failed to include other sources of unreported income. Ultimately, the Appeals Office declined to accept petitioner's appeal

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based on his protest disagreeing with the IRS audit findings and seeking an increase in the proposed tax deficiency amounts.

On or about August 29, 2018, the WBO sent petitioner a preliminary award recommendation letter. The purpose of the letter was to seek petitioner's agreement or disagreement with the preliminary award recommendation, as determined by the WBO. Enclosed with the WBO's letter was a summary report explaining the preliminary award recommendation of $368,289. Also enclosed was a response form and a confidentiality agreement for petitioner to sign and return to the WBO.

The WBO also sought the IRS's input in making petitioner's preliminary award recommendation. The IRS furnished the WBO a report written by the RA who handled the Companies' audits. The RA completed several Forms 11369, Confidential Evaluation Report on Claim for Award, one related to each of petitioner's whistleblower claims.^[6] In her report to the WBO, the RA generally reflected petitioner's actions and cooperation during the Companies' audits. Her report to the WBO states that "throughout the audit [petitioner] has fully cooperated with the IRS in providing additional documents and analyzing the documents."

Furthermore, the RA's report to the WBO notes that the RA

believe[s] that if [petitioner] had not filed a 211 claim his siblings would have not filed a voluntary disclosure and provided the documents and cooperation necessary for the government to determine the correct adjustments. Therefore I believe that [petitioner] took the first step that led to this examination that allowed the government to collect more than $2 million dollars in taxes, penalties and interest

On or about September 25, 2018, petitioner signed the response form and the confidentiality agreement and returned the forms to the WBO, indicating that he wanted to receive "a more detailed explanation of the award recommendation . . . ."

In response to petitioner's request, by letter dated December 6, 2018, the WBO furnished petitioner a two-page memorandum entitled

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"Detailed Report." The detailed report was broken into five parts: (1) petitioner's submission to the WBO, (2) the actions taken by the IRS audit team based on the information furnished, (3) the proceeds collected on the basis of information received from petitioner, (4) the award percentage analysis performed by the WBO, and (5) the determination of the proposed award amount. Within the detailed report, the WBO outlined its analysis in determining petitioner's award percentage. The detailed report states, in relevant part:

The information provided identified taxpayer behavior that the IRS was unlikely to identify or that was particularly difficult to detect through the IRS's exercise of reasonable diligence. The WB provided information that the TP underreported income and unreported payroll to reduce their U.S. tax burden . . . [t]he WB also provided documentation which supported their allegation.

The detailed report also states, in relevant part:

The whistleblower delayed informing the IRS after learning the relevant facts, particularly if the delay adversely affected the IRS's ability to pursue an action or issue. As an operation manager of the [redacted Corporation 5] most likely the WB was aware of the activities in 2006, however he did not report the actions to the IRS until 2009 after being fired from the company.

The WBO's preliminary award recommendation was based, in part, on an internal memorandum^[7] prepared by a WBO employee. In the internal memorandum, the WBO employee outlined the background of petitioner's claim and made a basis for her award recommendation to the WBO director. In part, the WBO employee stated in the memorandum:

The WB brought new information during the examination that allowed the exam team to show unreported income from [redacted Corporation 4]. The unreported income computations were based on kill sheets signed the United

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States Department of Agriculture (USDA). The RA did a third-party contact to the USDA to get the kill sheets. The RA prepared a spreadsheet showing what gross receipts should be if the government used the total number of chickens slaughtered per USDA records and average sales prices and average purchase price provided by the WB.

In summary, the WB didn't hand the adjustment to the Service. The Service still had to take the appropriate audit steps to calculate the correct unreported income and unreported payroll. As a shareholder and manager of the business, the WB was most likely aware of the fraudulent activities and participated in the accumulation of cash. According to the WB, he never participated in these activities and he was not aware the cash accumulation and underreporting of income. During the examination, [redacted Taxpayer 2] and the other 5 siblings state that the WB had full knowledge of the fraudulent activities conducted in the business and participated in the cash skimming operations.

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