                        T.C. Memo. 2017-108



                  UNITED STATES TAX COURT



              JAMES AWAD, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 3755-14W.                        Filed June 8, 2017.



      P provided information to the IRS Whistleblower Office (WO)
regarding individuals TH and TW’s alleged failure to disclose their
ownership interests in foreign bank accounts. WO forwarded P’s
information to the Large Business & International Division (LB&I),
which declined to examine TH and TW’s returns. TH died while
LB&I was considering P’s information. Thereafter TW and her adult
children filed voluntary disclosures with the Criminal Investigation
Division (CID) in which they reported income from a previously
undisclosed account at the same foreign bank P had identified.

       CID accepted the voluntary disclosures and forwarded them to
the Small Business/Self Employed Division (SB/SE) for examination.
The SB/SE examination resulted in the assessment of over $2 million
in income tax, accuracy-related penalties, and interest against TH and
TW, in addition to a title 26 miscellaneous penalty. Although WO
forwarded P’s information to SB/SE, the revenue agent who
conducted the examination denied using it.
                                       -2-

      [*2] WO also forwarded P’s information to SB/SE’s Estate and Gift
      Tax Group (E&G), which had selected TH’s estate’s estate tax return
      for examination. The revenue agent who was conducting the
      examination asserted that P’s information was not relevant to his
      investigation. Thereafter, WO issued a determination denying P’s
      claim for a whistleblower award.

            Held: We need not decide the standard of review in this case
      because we would sustain R’s determination under either a de novo or
      an abuse of discretion standard of review.

             Held, further, because the administrative action taken by the
      IRS against the taxpayers was not based on his information, P is not
      entitled to a whistleblower award.



      Howard W. Gordon, Leticia Vega, and Alyssa L. Razook Wan, for

petitioner.

      Marianna Lvovsky, Patricia P. Davis, and John T. Arthur, for respondent.



              MEMORANDUM FINDINGS OF FACT AND OPINION


      VASQUEZ, Judge: Pursuant to section 7623(b)(4), petitioner has appealed

the Internal Revenue Service’s (IRS) denial of his claim for a nondiscretionary
                                        -3-

[*3] whistleblower award.1 The issue for decision is whether petitioner is entitled

to an award under section 7623(b)(1).

                               FINDINGS OF FACT

      Some of the facts have been stipulated and are so found. The stipulation of

facts and the attached exhibits are incorporated by this reference. Petitioner

resided in New York when he filed his petition.

Petitioner’s Whistleblower Claim

      On November 18, 2008, petitioner filed Form 211, Application for Award

for Original Information, with the IRS Whistleblower Office (Whistleblower

Office). In the Form 211 petitioner implicated taxpayer husband, taxpayer wife,

and their three adult children (taxpayer children) (collectively, taxpayers) as

owners of undisclosed foreign bank accounts. Petitioner alleged that taxpayer

husband was likely transferring millions of untaxed dollars to these accounts.

While petitioner provided the name of the bank, he did not list any account

numbers or give other identifying information about the alleged accounts. The

Whistleblower Office confirmed receipt of the Form 211 and informed petitioner

that his claim had been assigned to analyst Nancy Burcham.

      1
         All section references are to the Internal Revenue Code in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and
Procedure.
                                         -4-

[*4] Referral of Whistleblower Information to LB&I

      In February 2009 Ms. Burcham forwarded petitioner’s information to the

IRS Large Business and International Division (LB&I). The matter was assigned

to LB&I examiner Alan Hymes.

      Mr. Hymes reviewed petitioner’s information and, in June 2009, decided to

accept the taxpayers’ returns as filed. In a written statement to the Whistleblower

Office Mr. Hymes wrote: “At this point there is not enough information to

determine that this is a good case for the field. * * * [Petitioner] did not provide

any documentation to show that the * * * account or accounts exist or that any

money was transferred”.

      Inexplicably, LB&I allowed several months to pass before returning the

case to the Whistleblower Office.2 The administrative record indicates that Ms.

Burcham may not have received Mr. Hymes’ written statement until July 2010,

over a year after LB&I had made its decision.

The Taxpayers’ Voluntary Disclosure

      Meanwhile, taxpayer husband died in August 2009. In January 2010 the

surviving taxpayers filed voluntary disclosures pertaining to a previously

      2
        In an internal memorandum Ms. Burcham stated: “The entire casefile
[sic] was received in the * * * [Whistleblower Office] a considerable time after the
signing of * * * [Mr. Hymes’ written statement].”
                                       -5-

[*5] undisclosed account at the same foreign bank petitioner had identified to the

Whistleblower Office.3 The taxpayers’ voluntary disclosures included account

information and amended returns reporting previously undisclosed income for tax

years 2003 through 2008. CID accepted the taxpayers’ voluntary disclosures and

forwarded their case file to the IRS Small Business/Self-Employed Division

(SB/SE) for examination. The matter was assigned to SB/SE revenue agent (RA)

Thomas George. RA George’s examination of the taxpayers’ voluntary disclosure

submission began in July 2010.

Referral of Whistleblower Information to SB/SE

      After learning that LB&I would not be examining the taxpayers’ returns,

Ms. Burcham contemplated issuing a rejection letter to petitioner. Before doing

so, she performed additional research and discovered that SB/SE was examining


      3
         The IRS Criminal Investigation Division (CID) maintains a longstanding
practice of voluntary disclosure whereby taxpayers can generally avoid criminal
prosecution by disclosing their tax noncompliance to CID timely and completely.
See Offshore Voluntary Disclosure Program Frequently Asked Questions and
Answers 2014, Q&A-3. In March 2009 the IRS launched the offshore voluntary
disclosure program (OVDP), a “counterpart” to this practice under which
taxpayers who timely disclosed their ownership of unreported foreign bank
accounts were eligible for reduced monetary penalties. See id. The extended
deadline for participating in the 2009 OVDP was October 15, 2009. Id. A second
OVDP (called the “Offshore Voluntary Disclosure Initiative”) was initiated on
February 8, 2011, and ran until September 9, 2011. Id. A third, open-ended
OVDP began in 2012. Id. Q&A-1. There was no OVDP in effect during 2010.
                                         -6-

[*6] the taxpayers’ returns in connection with their voluntary disclosure.

Consequently, in September 2010, Ms. Burcham forwarded petitioner’s

information to SB/SE “to determine if any of * * * [petitioner’s] information was

used to assist in the exams being opened on the taxpayers.”

      After receiving petitioner’s information, SB/SE subject matter expert Frank

Stamm contacted petitioner and arranged a telephone interview. During the

interview petitioner further explained the basis for his allegations against the

taxpayers. In an internal memorandum recounting the interview, Mr. Stamm

wrote: “While he could not provide account numbers he did provide lists of shares

owned in various * * * [foreign] corporations, and properties owned in the US and

abroad by the taxpayers.” Mr. Stamm recommended that petitioner’s submission

“be sent to the field for association with * * * [the taxpayers’] ongoing * * *

audits.”

      Petitioner’s information was forwarded to RA George. Thereafter RA

George provided the Whistleblower Office with a written statement indicating that

the sole cause of the examination was the taxpayers’ voluntary disclosure. He

stated: “There has been no indication in the case files that * * * [petitioner’s]

information initiated the investigation or assisted to gather any offshore accounts.”
                                        -7-

[*7] In August 2011 taxpayer wife and an SB/SE group manager signed a Form

906, Closing Agreement on Final Determination Covering Specific Matters

(closing agreement). The closing agreement, to which taxpayer wife and the estate

of taxpayer husband were parties, referenced the 2009 OVDP4 and stated that the

taxpayers’ voluntary disclosure was made pursuant to that program. In accordance

therewith, taxpayer wife and taxpayer husband’s estate agreed to pay a title 26

miscellaneous penalty “in lieu of any other penalties that the * * * [IRS] may

impose with respect to the offshore financial arrangements that were the subject of

the voluntary disclosure”. Additionally, the IRS adjusted taxpayer husband and

taxpayer wife’s tax liabilities for 2003 through 2008, assessing taxes, penalties,

and interest in excess of $2 million. Having reached an agreement with taxpayer

wife and taxpayer husband’s estate, RA George did not make any adjustments to

the returns of the taxpayer children. The examination of the taxpayers’ returns

was officially closed in November 2011.

      Meanwhile, petitioner’s whistleblower claim remained open. In 2012 or

2013 Ms. Burcham left the Whistleblower Office, and petitioner’s claim was

reassigned to analyst Kenneth Chatham. Mr. Chatham reviewed the claim file and

decided to email RA George for clarification regarding whether petitioner’s

      4
          See supra note 3.
                                        -8-

[*8] information had been used during the examination. In a subsequent telephone

call RA George stated that he had relied exclusively on information provided by

the taxpayers and that he had not used petitioner’s information.

Referral of Whistleblower Information to SB/SE Estate and Gift Tax

      In August 2013 Mr. Chatham learned that SB/SE’s Estate and Gift Tax

Group (E&G) had selected taxpayer husband’s estate’s estate tax return for

examination. Mr. Chatham forwarded petitioner’s information to E&G.

      E&G examiner James Truman did not find petitioner’s information to be

helpful. Mr. Truman provided the Whistleblower Office with a written statement

in which he explained: “The whistleblower claim has nothing to do with the estate

tax return, only income tax issues. This estate tax return should never have been

classified as a whistleblower case.”

Award Determination and Appeal

      On January 28, 2014, the Whistleblower Office issued a determination letter

to petitioner denying his claim for an award. Petitioner timely filed a petition

appealing the Whistleblower Office’s determination. Petitioner asserts that he is

entitled to 15% to 30% of the total amounts collected from: (1) the assessment of

additional income tax, accuracy-related penalties, and interest for 2003 through

2008 against taxpayer husband and taxpayer wife; (2) “FBAR penalties” against
                                         -9-

[*9] taxpayer husband and taxpayer wife; and (3) additional estate tax for which

taxpayer wife’s estate is liable on account of the inclusion of the foreign bank

account in her gross estate.5

      A trial was held in Miami, Florida. Thereafter both parties filed opening

and answering briefs.

                                      OPINION

      We decide whether petitioner, a whistleblower, is entitled to a section

7623(b) award after a trial on the merits. Because petitioner failed to prove that

the IRS proceeded with administrative or judicial action against the taxpayers on

the basis of his information, we hold that he is not.

I.    Statutory Framework

      The IRS has long had authority to pay discretionary awards to persons, now

called “whistleblowers”, who provide information leading to the recovery of

unpaid taxes. See sec. 7623 (1954). In response to concerns about the

management of the discretionary award regime, Congress enacted legislation in

2006 to address perceived problems with the whistleblower program. Tax Relief

and Health Care Act of 2006, Pub. L. No. 109-432, div. A, sec. 406, 120 Stat. at

2958 (effective Dec. 20, 2006). The 2006 legislation added to section 7623 a new

      5
          Taxpayer wife died in July 2014.
                                        - 10 -

[*10] subsection (b), which requires the payment of nondiscretionary

whistleblower awards in specified circumstances and provides this Court

jurisdiction to review IRS determinations regarding such awards. See Cooper v.

Commissioner, 135 T.C. 70, 73 (2010).

      Section 7623(b)(1) requires payment of an award if the IRS “proceeds with

any administrative or judicial action” to collect taxes “based on information

brought to the Secretary’s attention by an individual”. The award amount must be

at least 15% and not more than 30% of “the collected proceeds (including

penalties, interest, additions to tax, and additional amounts) resulting from the

action” or settlement thereof. Id. The determination of the amount of the award

“shall depend upon the extent to which the individual substantially contributed to

such action.”6 Id.

      Section 7623(b)(5) defines the scope of claims that are subject to the

nondiscretionary award program established in subsection (b). The IRS must pay

claims on a nondiscretionary basis only with respect to actions against a taxpayer

      6
         The IRS may determine a lower percentage award if the whistleblower’s
information is derived from publicly disclosed allegations (unless such
information “was originally provided by” the whistleblower) or if the
whistleblower planned and initiated the activities leading to the underpayment of
tax. Sec. 7623(b)(2) and (3). The IRS is directed to deny an award altogether if
the whistleblower is convicted criminally for planning and initiating such
activities. See sec. 7623(b)(3).
                                         - 11 -

[*11] whose “gross income exceeds $200,000 for any taxable year subject to such

action” and only “if the tax, penalties, interest, additions to tax, and additional

amounts in dispute exceed $2,000,000.” Sec. 7623(b)(5)(A) and (B). The IRS

must raise a failure to satisfy these monetary thresholds as an affirmative defense.

See Lippolis v. Commissioner, 143 T.C. 393, 400 (2014).

II.   Jurisdiction and Standard of Review

      Section 7623(b)(4), captioned “Appeal of award determination”, governs

our jurisdiction over whistleblower claims. It provides: “Any determination

regarding an award under paragraph (1), (2), or (3) may, within 30 days of such

determination, be appealed to the Tax Court (and the Tax Court shall have

jurisdiction with respect to such matter).” A “determination regarding an award”

means a determination as to the amount of an award or a determination to deny an

award. Cooper v. Commissioner, 135 T.C. at 75. Thus, this Court has jurisdiction

under section 7623(b)(4) where, as here, (1) the IRS makes a determination

denying a claim for award under section 7623(b); and (2) a petition invoking our

jurisdiction over that matter is timely filed. See Kasper v. Commissioner, 137

T.C. 37, 41 (2011).

      Neither the text nor the legislative history of section 7623(b)(4) specifies

the standard of review that the Court is to apply in reviewing IRS determinations.
                                        - 12 -

[*12] Petitioner contends that de novo review is appropriate, while respondent

argues for an abuse of discretion standard. We need not resolve this question

today since we would sustain respondent’s determination under either standard of

review.7 See Golub v. Commissioner, T.C. Memo. 2013-196, at *7.

III.   Analysis

       Respondent’s determinations are presumptively correct, and petitioner bears

the burden of proving that those determinations are erroneous. See Rule 142(a);

Welch v. Helvering, 290 U.S. 111, 115 (1933).

       Section 7623(b) provides: “If the Secretary proceeds with any

administrative or judicial action * * * based on information brought to the

Secretary’s attention by an individual, such individual shall * * * receive as an

award at least 15 percent but not more than 30 percent of the collected proceeds

* * * resulting from the action (including any related actions) or from any

settlement in response to such action.” Section 301.7623-2, Proced. & Admin.




       7
         At trial we heard testimony from petitioner and Mr. Chatham. Neither
party argued that we could not consider this testimony because it was outside the
administrative record. Nor did the parties attempt to introduce other evidence
outside the administrative record. Accordingly, we need not decide whether our
scope of review is limited to the administrative record.
                                       - 13 -

[*13] Regs.,8 defines terms used in section 7623(b) and the regulations

interpreting it. The IRS “proceeds based on information provided by a

whistleblower” when, for example, “the IRS initiates a new action, expands the

scope of an ongoing action, or continues to pursue an ongoing action, that the IRS

would not have initiated, expanded the scope of, or continued to pursue, but for

the information provided.” Sec. 301.7623-2(b), Proced. & Admin. Regs.

      In sum, petitioner’s entitlement to an award turns on two issues: first,

whether there was a collection of proceeds; and, second, whether that collection

was attributable to the IRS’ proceeding with administrative or judicial action on

the basis of petitioner’s information. See Whistleblower One 10683-13W v.

Commissioner, 145 T.C. 204, 206 (2015).

      A.    Collection of Proceeds

      Whether there was a collection of proceeds from the taxpayers is not in

serious dispute. The parties stipulated that the IRS’ adjustment of taxpayer

husband and taxpayer wife’s tax liabilities for 2003 through 2008 resulted in the

      8
         Pursuant to sec. 301.7623-2(f), Proced. & Admin. Regs., the section is
effective on August 12, 2014, and applies to information submitted on or after that
date and to claims for awards that are open on that date. Respondent concedes that
the regulations are not controlling here because the petition was filed before the
effective date of the regulations. Nevertheless, we find the above-quoted wording
instructive. We express no opinion on the validity of other wording in sec.
301.7623-2(b), Proced. & Admin. Regs., or its applicability in other contexts.
                                       - 14 -

[*14] assessment of over $2 million in tax, penalties, and interest. Furthermore, in

their closing agreement, taxpayer wife and taxpayer husband’s estate agreed to

pay, and the IRS agreed to accept, a title 26 miscellaneous penalty for the 2007 tax

year “in lieu of any other penalties that the * * * [IRS] may impose with respect to

the offshore financial arrangements that were the subject of the voluntary

disclosure”. Respondent has not claimed that the taxpayers failed to pay these

sums. We therefore find that there was a collection of proceeds from the

taxpayers.

        B.    Administrative or Judicial Action

        Next we must decide whether the collection of the above proceeds was

attributable to the IRS’ proceeding with administrative or judicial action on the

basis of petitioner’s information. Our inquiry here turns on whether petitioner’s

information had any effect on the IRS’ examination of the taxpayers’ returns.

        The record shows that, on three separate occasions, the Whistleblower

Office forwarded petitioner’s information to other operating divisions of the IRS

for further investigation: first, to LB&I in February 2009; then, to SB/SE in

September 2010; and finally, to E&G in August 2013. We address each referral in

turn.
                                        - 15 -

[*15]         1.    LB&I Referral (February 2009)

        With respect to the LB&I referral, a representative of that division reviewed

petitioner’s information and decided not to examine the taxpayers’ returns.

Nothing in the record indicates that LB&I later changed course. Because LB&I

did not proceed with administrative or judicial action against the taxpayers,

petitioner is not entitled to an award on the basis of this referral. See Cooper v.

Commissioner (Cooper II), 136 T.C. 597, 601 (2011) (“[W]histleblower awards

are preconditioned on the Secretary’s proceeding with an administrative or judicial

action.”).

              2.    SB/SE Referral (September 2010)

        Unlike LB&I, SB/SE opted to examine the taxpayers’ returns. The parties

disagree about whether petitioner’s information prompted and/or facilitated the

examination. Under respondent’s theory of the case, the taxpayers’ voluntary

disclosure was the sole cause of the examination and resulting adjustments.

Respondent contends that there is no evidence that RA George or anyone else at

SB/SE used petitioner’s information during the examination.

        Conversely, petitioner argues that his information prompted the examination

of the taxpayers’ returns and the adjustments that followed. Under petitioner’s

theory of the case, the IRS had received his information about the taxpayers’
                                       - 16 -

[*16] undisclosed bank accounts before it accepted their voluntary disclosure. By

admitting the taxpayers into the OVDP when it was already on notice of the their

noncompliance, the IRS disregarded its own rules and procedures.9 Such

disregard, petitioner argues, is evidence that the IRS shepherded the taxpayers into

the OVDP in order to avoid paying him an award.10 Petitioner cites respondent’s

apparent refusal to provide him with documents concerning the taxpayers’

acceptance into the OVDP as evidence of this scheme.

      On the basis of the record before us, we disagree with petitioner. In a

written statement to the Whistleblower Office, RA George stated that there was no

evidence in his case file that petitioner’s information had prompted the

examination. RA George also confirmed to Mr. Chatham that he did not use

petitioner’s information during his examination of the taxpayers’ voluntary

disclosure submission. There is nothing in the record that shows or even suggests

otherwise. Also absent from the record is any evidence of a causal connection


      9
         Internal Revenue Manual (IRM) pt. 9.5.11.9(3) (Dec. 2, 2009) states that a
voluntary disclosure must be timely. A voluntary disclosure is timely if received
before the IRS “has received information from a third party (e.g., informant, other
governmental agency, or the media) alerting the IRS to the specific taxpayer’s
noncompliance.” Id. pt. 9.5.11.9(4)(b).
      10
         Petitioner also argues that the taxpayers were ineligible for the OVDP
because they submitted their voluntary disclosure after the extended deadline for
the 2009 OVDP and before the start of the 2011 OVDP.
                                        - 17 -

[*17] between petitioner’s whistleblower submission and the taxpayers’ decision

to come forward to the IRS.11

      Furthermore, the IRS’ purported disregard of its own rules in accepting the

taxpayers’ voluntary disclosure does not support the inference that the IRS used

the OVDP as a cover for denying petitioner an award. For one, the rule petitioner

primarily relies on is found in the Internal Revenue Manual (IRM). See supra note

9. It is a well-settled principle that the IRM does not have the force of law and is

not binding on the IRS. McGaughy v. Commissioner, T.C. Memo. 2010-183, slip

op. at 17; see United States v. Caceres, 440 U.S. 741 (1979); Fargo v.

Commissioner, 447 F.3d 706, 713 (9th Cir. 2006), aff’g T.C. Memo. 2004-13.

Second, Congress explicitly authorized the IRS to enter into closing agreements

like the one it reached with the taxpayers. See sec. 7121 (authorizing the IRS to

enter into a written closing agreement “with any person relating to the liability of

such person * * * in respect of any internal revenue tax for any taxable period”).

Such agreements “may be used for procedural economy, or to prevent a dispute

from arising.” United States v. Nat’l Steel Corp., 75 F.3d 1146, 1151 (7th Cir.

      11
          Accordingly, we need not decide whether the IRS “proceeds with
administrative or judicial action” based on a whistleblower’s information when:
(1) the IRS examines a taxpayer’s return in connection with a voluntary disclosure
and (2) the disclosure was prompted by the taxpayer’s discovery that an informant
had named him or her in a whistleblower submission.
                                        - 18 -

[*18] 1996). We cannot conclude that the exercise of this authority, absent proof

of any actual wrongdoing, is evidence of a scheme to deprive petitioner of an

award.

      Nor can we conclude that respondent’s apparent refusal to provide

petitioner with certain documents evidences such a scheme. If a party is troubled

by another party’s response to a discovery request, Rule 72(b)(2) permits the

requesting party to file an appropriate motion with the Court. See Whistleblower

One 10683-13W v. Commissioner, 145 T.C. at 207 (granting a whistleblower’s

motion to compel the production of documents and responses to interrogatories).

Having proceeded to trial without taking this step, petitioner cannot cite the failure

to produce documents as grounds for requesting a negative inference against

respondent. Accordingly, petitioner is not entitled to an award on the basis of the

referral to SB/SE.

             3.      E&G Referral (August 2013)

      In a written submission to the Whistleblower Office, an E&G examiner

stated that petitioner’s information “has nothing to do with * * * [taxpayer

husband’s estates’s] estate tax return, only income tax issues” and that “[t]his

estate tax return should never have been classified as a whistleblower case.”

There is no evidence that E&G later changed course. Because E&G did not
                                         - 19 -

[*19] initiate, expand the scope of, or continue to pursue its examination of

taxpayer husband’s estate’s estate tax return on account of petitioner’s

information, petitioner is not entitled to an award on the basis of this referral.

IV.   Conclusion

      Because the administrative action taken by the IRS against the taxpayers

was not based on his information, petitioner is not entitled to a whistleblower

award. Accordingly, we sustain respondent’s determination.

      The Court has considered all of the arguments made by the parties, and to

the extent they are not addressed herein, they are considered irrelevant, moot, or

without merit.

      To reflect the foregoing,


                                                  Decision will be entered for

                                        respondent.
