Shands v. Comm'r of Internal Revenue
| Decision Date | 08 March 2023 |
| Docket Number | 13499-16W |
| Parties | THOMAS SHANDS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
P filed a claim with the Internal Revenue Service (IRS) Whistleblower Office (WBO) requesting an I.R.C. § 7623(b) nondiscretionary award of 30% of the revenue collected from the 2011 Offshore Voluntary Disclosure Initiative (OVDI), in which the IRS offered lenient treatment for U.S. taxpayers that disclosed and paid back taxes on foreign accounts. The claim asserted that P's collaboration with federal agents in securing the highly publicized arrest and cooperation of Swiss banker Renzo Gadola led to widespread participation in OVDI.
The WBO denied P's claim, P appealed the denial in Tax Court, and the parties filed Cross Motions for Summary Judgment and Partial Summary Judgment as to whether the creation of OVDI or any taxpayer's participation in OVDI were I.R.C § 7623(b)(1) related actions that entitle P to an award. R then moved to dismiss the case on the ground that the IRS did not proceed with an I.R.C. § 7623(b)(1) administrative or judicial action based on information brought to its attention by P.
Held The Court lacks jurisdiction to review the WBO's denial because the IRS did not proceed with an administrative or judicial action by creating OVDI or by virtue of any taxpayer's participation in OVDI.
Alexander R. Olama, William M. Sharp, James P. Dawson, Robert F. Katzberg, and Nicole M. Elliott, for petitioner.
Rachel G. Borden, Cathy Fung, and Anna L. Boning, for respondent.
The Internal Revenue Service (IRS) Whistleblower Office (WBO) denied petitioner's claim of a section 7623(b) nondiscretionary award for his alleged contribution to the success of the 2011 Offshore Voluntary Disclosure Initiative (OVDI), an IRS program that encouraged taxpayers to come into compliance with tax reporting obligations by voluntarily disclosing foreign accounts and other assets.[1] Currently before us are respondent's Motion to Dismiss for Lack of Jurisdiction under Rules 40 and 53 and Motion for Summary Judgment under Rule 121, as well as petitioner's Cross Motion for Partial Summary Judgment under Rule 121 and discovery Motions under Rules 71(c), 72(b), and 104(b).
This Court lacks jurisdiction over a whistleblower case unless the IRS "proceeds with any administrative or judicial action . . . based on information brought to the [IRS's] attention" by the whistleblower. Li v. Commissioner, 22 F.4th 1014, 1017 (D.C. Cir. 2022) (quoting section 7623(b)(1)). We disagree with petitioner that the IRS proceeded with an administrative or judicial action by creating OVDI or by virtue of taxpayers' participation in OVDI. Accordingly, we will grant respondent's Motion to Dismiss.
The Court derives the following facts, other than the description of IRS voluntary disclosure programs, from the pleadings and Motion papers and from the administrative record, which respondent submitted on January 26, 2018, as an Exhibit to his Motion in Limine. Petitioner resided in Mississippi when he petitioned this Court.
Petitioner filed Form 211, Application for Award for Original Information, with the WBO on or about November 29, 2010, seeking a whistleblower award for any amounts emanating from his cooperation with the Department of Justice (DOJ) and the IRS Criminal Investigation Division (CI) in their investigations of Swiss bankers Martin Lack and Renzo Gadola. IRS agents arrested Mr. Gadola in Miami, Florida, in November 2010, the day after he had a meeting with petitioner in which petitioner wore a recording device provided by CI. Mr. Gadola revealed to prosecutors how he and others helped U.S. taxpayers open Swiss bank accounts to conceal income and assets from the IRS. He eventually pleaded guilty to conspiring to defraud the United States in violation of 18 U.S.C. § 371. The DOJ announced Mr. Gadola's guilty plea in a December 2010 press release, and the story received media coverage in 2010 and 2011.
In February 2011 the IRS announced OVDI, its second offshore voluntary disclosure program and a counterpart to CI's longstanding practice of allowing taxpayers to avoid criminal prosecution by disclosing noncompliance. See IRS Large Business & International Division Memorandum, LB&I-1-09-1118-014, at 1 (Nov. 20, 2018); Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers 2014, Q&A-3.[2] OVDI offered the same benefit, along with reduced penalties, for eligible taxpayers that voluntarily disclosed foreign accounts for tax years 2003-10. See 2011 OVDI Frequently Asked Questions and Answers, Q&A-4, -7, -9 (hereinafter OVDI Q&A). Taxpayers whose returns are under examination by the IRS or who are under investigation by CI could not participate in OVDI. Id. Q&A-14. Participating taxpayers had to provide information on offshore financial accounts, institutions, and facilitators, and pay back taxes, penalties, interest, and a "miscellaneous" penalty based on the highest aggregate balance in the foreign accounts over a specified period. Id. Q&A-7, -24.[3] The IRS reserved the right to conduct examinations with respect to OVDI disclosures, and a taxpayer that considered the OVDI penalty unacceptable could opt out of the program and have its case handled under the standard audit process. Id. Q&A-27, -51.
In a letter to the WBO dated June 18, 2012 (OVDI claim letter), petitioner claimed the IRS owed him a nondiscretionary whistleblower award under section 7623(b) "on the monies collected as a result of the February 2011 OVDI" (OVDI claim), which by that time totaled over $1 billion. Petitioner alleged that his undercover collaboration with federal agents brought about Mr. Gadola's arrest and cooperation, which in turn led to the success of OVDI. The letter quotes the prosecution's supplemental sentencing memorandum in Mr. Gadola's case, which asserts that Mr. Gadola's guilty plea and "the very public nature of his cooperation" with prosecutors were of "great benefit to the IRS," because they "spurred U.S. taxpayers to enter into the voluntary disclosure program." As compensation for providing information on Mr. Gadola, the same information referenced in his 2010 Form 211, petitioner sought a whistleblower award of 30% of the OVDI proceeds. Neither the OVDI claim letter nor petitioner's Motion papers claim a share of collections from associated enforcement actions, such as seizures of taxpayer assets or follow-up audits of OVDI participants, taxpayers who opted out of OVDI, or taxpayers not in compliance that the IRS discovered through OVDI disclosures.
The WBO processed the OVDI claim separately from petitioner's Form 211. WBO analyst Kenneth J. Chatham prepared the initial draft of an internal memorandum (Chatham memo) on June 6, 2013.[4] The final version of the Chatham memo, which is undated, recommends denying petitioner's claim for lack of a "related action" within the meaning of Treasury Regulation § 301.7623-2(c)(1).[5]
The WBO denied the OVDI claim in a letter dated May 25, 2016 (denial letter), explaining that "the IRS took no action based on the information [petitioner] provided with respect to [OVDI] or any of the taxpayers who participated in it," and that neither OVDI nor the participating taxpayers are "valid related actions to [petitioner's] Whistleblower claim." Petitioner appealed the denial in this Court on June 9, 2016, and argues that the creation of OVDI and certain taxpayers' participation in OVDI are section 7623(b)(1) related actions that entitle him to an award. Petitioner argues that we cannot resolve this case without granting his discovery requests, which he says could demonstrate that the IRS created OVDI because of increased demand for voluntary disclosure following the Gadola case, or that the WBO withheld the denial letter until the regulations under section 7623(b) better supported a denial.
On January 11, 2022, the U.S. Court of Appeals for the D.C. Circuit held in Li v. Commissioner, 22 F.4th at 1017, that the Tax Court lacks jurisdiction under section 7623(b) if the IRS has not proceeded with an administrative or judicial action based on information the whistleblower brought to its attention.[6] Respondent then moved to dismiss, arguing that the IRS did not proceed with an administrative or judicial action that would confer jurisdiction on this Court.
Section 7623 provides for both discretionary and mandatory awards to individuals (i.e., whistleblowers) who submit information about third parties that have underpaid their taxes or otherwise violated the internal revenue laws. Section 7623(a) authorizes discretionary awards, which are not subject to Tax Court review. By contrast, section 7623(b) authorizes nondiscretionary awards, discussed infra, which may be subject to our review.
If the IRS "proceeds with any administrative or judicial action described in subsection (a) based on information brought to [its] attention" by a whistleblower, section 7623(b)(1) provides that the whistleblower, subject to exceptions not relevant here, shall receive an award of 15% to 30% of the "collected proceeds . . . resulting from the action (including any related actions) or from any settlement in response to such action."[7] Although the Code does not define "related actions," Treasury Regulation § 301.7623-2(c)(1) describes "related actions" as certain administrative or judicial actions against persons other than the ones the whistleblower identified. The IRS must be able to identify the target of the action using the information the whistleblower provided, "without first having to use the information provided to identify any other person or having to independently obtain...
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