                            147 T.C. No. 3



                   UNITED STATES TAX COURT



        WHISTLEBLOWER 11099-13W, Petitioner v.
    COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No. 11099-13W.                         Filed July 28, 2016.


       Whistleblower petitioned for review of the IRS' decision not to
make an award to him for information that purportedly led to the
collection of unpaid taxes and other amounts. He moved to compel
production of documents. R objects principally on grounds of
relevance.

       Held: R's claim of lack of relevance presents an unsettled
question of law as to when the IRS proceeds on the basis of
information provided by a whistleblower. See I.R.C. sec. 7623(b)(1);
sec. 301.7623-2(b), Proced. & Admin. Regs.

       Held, further, the Court will not in the context of this discovery
dispute decide a question of law; if respondent is interested in a
pretrial ruling on matters of law, his proper course of action under our
Rules would be to file a motion for summary judgment.

      Held, further, R has failed to carry his burden of showing that
the documents need not be produced.

      Held, further, we will grant the motion.
                                       -2-

      Henry S. Lovejoy, Usman Mohammad, Bryan C. Skarlatos, and Brian C.

Wille, for petitioner.

      Navid Mehrjou and Marianna Lvovsky, for respondent.



                                    OPINION


      HALPERN, Judge: This is a case brought under section 7623(b)(4),1

appealing respondent's determination not to make an award to petitioner for

information provided by him and leading to the recovery of unpaid taxes and other

amounts (a so-called whistleblower award). Petitioner has moved to compel

production of documents (motion); respondent has responded to the motion

(response) and objects to our granting it. We will grant the motion.

                                   Background

Discovery Dispute

      The motion reflects the continuation of a discovery dispute that we

addressed by order dated September 16, 2015 (Sept. 16 order), in which we

granted petitioner's previous motion to compel production of documents and


      1
       Except as otherwise indicated, all section references are to the Internal
Revenue Code of 1986, as amended, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
                                         -3-

ordered respondent to produce the requested documents.2 In response to the Sept.

16 order, respondent did produce certain documents. The motion prays that we

compel respondent to produce 31 information document requests (IDRs) and

responses (without distinction, requested IDRs) that petitioner believes respondent

should have produced pursuant to the Sept. 16 order. Respondent's principal

ground for objecting to production of the requested IDRs is "relevance".

Petitioner's Whistleblower Claim

      In 20__ (year 1), petitioner filed a whistleblower claim with the Internal

Revenue Service (IRS) in which he informed the IRS of a tax evasion scheme

(TES) carried out by a target corporation and its affiliates (target). The TES, as

described by petitioner, involved target's engaging in an inventory purchasing

scheme that, on account of target's use of a last-in, first-out (LIFO) method of

accounting for inventory, allowed it to artificially inflate its cost of goods sold for

tax purposes. Petitioner claims that target used the TES to defer income taxes

indefinitely. He claims that he was employed by a corporation (corporation X)

      2
        Respondent had objected to petitioner's previous motion on the grounds
that the scope of our review under sec. 7623(b)(4) should be limited to the
administrative record and that the information that petitioner sought was outside
of that record and, therefore, irrelevant. We granted petitioner's previous motion,
relying in part on Whistleblower One 10683-13W v. Commissioner, 145 T.C. __,
__ (slip op. at 6-7) (Sept. 16, 2015), in which we held that the Commissioner
cannot unilaterally decide what constitutes an administrative record.
                                         -4-

affiliated with target that traded commodities that were integral to the purchasing

scheme that he had described. The parties agree that petitioner identified an issue

previously unknown to respondent and that respondent subsequently investigated

target's use of the TES. Respondent's position, however, is that he did not use

petitioner's information to make any adjustments to target's tax returns. He states

that his agents added the TES to their examination of target's tax returns for two of

its taxable years (years 1 and 2, respectively) but that because they were unable to

discover anything to substantiate petitioner's claim that the TES violated Federal

tax law, he made no adjustments and collected no proceeds on account of

petitioner's information. He does admit to making other adjustments to target's

returns for years 1 and 2, which apparently resulted in the collection of additional

taxes from target.

      Petitioner believes that, before the end of year 2, because of the information

he provided to the IRS, target stopped using the TES, which increased its year 2

tax bill and would increase its tax bills for subsequent years. Petitioner identifies

inventory-related adjustments of $273.7 million and $13.3 million that respondent

made to petitioner's year 1 and year 2 reported income tax, respectively, and that

petitioner claims are "in the very area--LIFO valuation--that had been the subject

of * * * [petitioner's] Whistleblower Claim." Finally, petitioner claims that, in
                                         -5-

year 5, target announced its abandonment of the use of LIFO altogether. That,

according to petitioner, increased its tax bill by at least $3 billion for subsequent

years. Petitioner believes that he is entitled to an award because it was his

information that caused target to pay, and the IRS to collect, additional tax.

      Petitioner has sought discovery to show that it was his information that led

both to an immediate increase in tax collected from target and to larger, future tax

bills for target because of its changed behavior. By the Sept. 16 order, we required

respondent to produce documents relating to the three inventory-related

adjustments for years 1 and 2 that petitioner had identified; documents that might

indicate that there were more TES-related adjustments of which petitioner was

unaware; documents mentioned in other documents that appear to relate to

adjustments or to the whistleblower investigation; and documents that petitioner

believed would help him compute the amount of additional tax target paid as a

result of stopping its use of the TES; as well as all nonproduced documents

created by the IRS and related to petitioner's whistleblower claim, along with all

nonproduced documents received by the IRS from target as a result of his claim.

Respondent's Production of Documents

      Respondent did produce in response to the Sept. 16 order documents that

petitioner characterizes as showing that, far from the limited investigation of the
                                        -6-

TES that respondent originally claimed had occurred, the IRS had conducted a

broad and far-ranging investigation of target's inventory purchasing practices,

which resulted in dozens of IDRs issued by multiple IRS practice groups over

many years. That investigation, petitioner reiterates, resulted in radical changes to

target's inventory practices and in numerous adjustments to target's reported tax,

all of which resulted in respondent's collecting additional Federal tax from target.

      On December 22, 2015, petitioner wrote to respondent, notifying him of the

deficits that petitioner perceived in respondent's compliance with the Sept. 16

order and identifying certain IDRs (including responses) that he believes

respondent should have produced. Respondent did not rectify petitioner's

perceived faults in respondent's production. The motion followed, and petitioner

prays that we require respondent to produce the requested IDRs.

      Of the requested IDRs, 11 are IDRs (and responses) identified in petitioner's

December 22, 2015, letter to respondent that relate to corporation X's inventory

procurement practices, its organizational structure, its hedging and related

activities (undertaken, petitioner claims, to minimize the financial risks associated

with target's purchases to implement the TES), and its compensation practices (as

some evidence of whether corporation X's purchases were tax motivated). An

additional 17 of the requested IDRs are IDRs (and responses) that petitioner did
                                         -7-

not identify in his December 22, 2015, letter to respondent but the existence of

which respondent had disclosed to petitioner in a log produced in response to the

Sept. 16 order. Petitioner identifies those IDRs as addressing target's use of

corporation X to carry out the TES (e.g., concerning hedging transactions,

commodities trading and procurement, derivatives reconciliation, training

programs, and employees' performance and compensation). Finally, petitioner

specifies three IDRs identified in the December 22, 2015, letter and not relating to

corporation X that prompted respondent to issue two IDRs that respondent did

produce and that sought information on target's cost of goods sold calculations for

the two years prior to year 1. Petitioner argues that, if the resulting IDRs were

deemed relevant by respondent, then the three causal IDRs should be produced as

well.

The Response

        In the response, respondent does not contradict petitioner's representations

about the scope of his examination of target. Respondent concedes: "The

documents he demands may well illuminate various portions of the audit".

Respondent insists, however, that the IDRs petitioner requested deal not with the

TES but with other issues that were part of the IRS' examination of target and its

subsidiaries--primarily transfer pricing issues between target and its subsidiaries.
                                        -8-

He also objects to producing four IDRs that were identified in petitioner's

December 22, 2015, letter to him on the ground that petitioner had not sought

those IDRs in formal discovery. As to the 17 IDRs not identified in that letter, he

"notes" in a footnote to the response that petitioner did not informally seek to

resolve respondent's objection to producing them and that the motion is the first

time that he learned that petitioner considered them relevant.

      In support of his relevance objection, respondent states with respect to the

requested IDRs: "[S]uch documents are not relevant, nor are such documents

reasonably calculated to lead to the discovery of admissible evidence with respect

to respondent's use of the petitioner's information, respondent collecting proceeds

based on petitioner's information, or respondent's consideration and evaluation of

petitioner's whistleblower claim."

                                     Discussion

I.    Section 7623 (Whistleblower Awards)

      Section 7623 provides for awards to those individuals (i.e., whistleblowers)

who provide information to the Government about third parties who are

underpaying their tax. Specifically, section 7623(b)(1) 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 * * *
                                        -9-

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."

II.   Relevance

      As pointed out in Professor McCormick's treatise on evidence: "There are

two components to relevant evidence: materiality and probative value." 1

McCormick on Evidence, sec. 185, at 994 (7th ed. 2013).

      Materiality concerns the fit between the evidence and the case. It
      looks to the relation between the propositions that the evidence is
      offered to prove and the issues in the case. If the evidence is offered
      to help prove a proposition that is not a matter in issue, the evidence
      is immaterial. What is "in issue," that is, within the range of the
      litigated controversy, is determined mainly by the pleadings, read in
      the light of the rules of pleading and controlled by the substantive
      law. * * *

                          *    *    *     *    *      *   *

            The second aspect of relevance is probative value, the tendency
      of evidence to establish the proposition that it is offered to prove.
      ***

Id. at 994-995.

      Rule 401 of the Federal Rules of Evidence incorporates the twin concepts of

materiality and probative value. Id. at 995. Under that rule, evidence is relevant if

(a) "it has any tendency to make a fact more or less probable than it would be
                                        - 10 -

without the evidence" and (b) "the fact is of consequence in determining the

action." Fed. R. Evid. 401. The rule thus replaces the term "material" with the

equivalent expression "fact [that] is of consequence * * * [to the] determin[ation

of] the action." See id. subdiv. (b). "A fact that is 'of consequence' is material".

McCormick, supra, sec. 185, at 995.

       Rule 70 governs discovery, and paragraph (b) thereof provides that the

scope of discovery is "any matter not privileged and which is relevant to the

subject matter involved in the pending case." The paragraph further provides: "It

is not ground for objection that the information or response sought will be

inadmissible at the trial, if that information or response appears reasonably

calculated to lead to discovery of admissible evidence".

III.   Respondent's Argument

       Respondent does not in the response make clear which of the requested

IDRs are irrelevant because they are not material and which are irrelevant because

they lack probative value (or which are irrelevant for both reasons).3 Indeed,

       3
        The term "relevant" has a different meaning--and narrower scope--under
Fed. R. Evid. 401 than it does under Rule 70(b), our discovery Rule adopted in
1973 and based on Fed. R. Civ. P. 26(b)(1). See Rule 70 note, 60 T.C. 1098
(adoption of Rule 70(b)); cf., e.g., Cartagena v. Centerpoint Nine, Inc., 303 F.R.D.
109, 112 (D.D.C. 2014) (scope of Fed. R. Civ. P. 26(b)); 8 Charles Alan Wright et
al., Federal Practice and Procedure, sec. 2008, at 125-126 (3d ed. 2010) (similar).
                                                                       (continued...)
                                        - 11 -

respondent does not distinguish those two components of relevant evidence.

Nevertheless, it is clear that respondent would have us deny the motion on the

ground that none of the requested IDRs contradict, or would lead to discovery of

admissible evidence that would contradict, his claim that he did not proceed on the

basis of petitioner's information to make any adjustment in target's tax.

Respondent does not deny that, on the basis of petitioner's information, he added

the TES to his examination of target for years 1 and 2, nor does he deny that he

made adjustments to target's income for those two years. What he does deny is

that he proceeded on the basis of petitioner's information about the TES to make

those adjustments (or to make any other adjustments). Implicitly, he is making an

argument about the meaning of the term "proceeds * * * based on" in section

7623(b)(1). By emphasizing that he made no adjustments "on petitioner's issue,"

he implies that the Secretary proceeds with an administrative adjustment based on

a whistleblower's information only when the adjustment redresses the specific

errors in tax reporting alleged by the whistleblower. Although he fails to refer to

either, respondent's implicit argument about the meaning of the term "proceeds

      3
       (...continued)
Rule 70(b) permits discovery of non-privileged matters "relevant to the subject
matter involved in the pending case." We assume that respondent's relevancy
objection to the requested IDRs is made on the basis of the narrower, Fed. R. Evid.
401 definition of the term (requiring probative value and materiality).
                                        - 12 -

based on" may have some purchase in the wording of section 7623(b)(1) and of an

implementing regulation, as will be discussed below. On the basis of his implicit

claim about that meaning, we assume respondent's argument is that he has no

authority to make a whistleblower award to petitioner. And because petitioner

does not contradict respondent's claim that he made no adjustments "on

petitioner's issue," the requested IDRs are beside the point and, therefore, not

material.

      We will discuss below whether the interpretative question that respondent's

relevance objection raises is appropriately before the Court in this discovery

dispute. Since we conclude that it is not, we will determine whether respondent

has appropriately objected to production of the disputed IDRs on other grounds,

viz, the irrelevance of the requested IDRs because they are not probative of any

consequential fact.

IV.   Petitioner's Argument

      To petitioner, it does not matter that respondent did not act to shut down the

TES on the basis of his information. To petitioner, it is a sufficient justification

for an award that the investigation respondent undertook on the basis of his

information put target on notice that the TES was under scrutiny by the IRS. That,

he believes, caused target (1) to abandon elements of the TES, which almost
                                        - 13 -

immediately resulted in its paying more tax and (2) eventually, to abandon LIFO,

which resulted in billions of dollars in increased tax collections. Moreover,

petitioner believes that respondent derived leads from the investigation that he

undertook on the basis of petitioner's information and that those leads led to

respondent's making adjustments for years 1 and 2 to target's reported income that

are attributable to his information.

      In contradistinction to respondent's apparent view that an award under

section 7623(b)(1) requires identification of an adjustment to a target's tax that

redresses the specific errors in tax reporting alleged by the whistleblower,

petitioner apparently believes that merely showing a causal relationship is

sufficient (in other words: "one thing led to another").

V.    Analysis

      A.     Respondent's Implicit Legal Argument

      Section 301.7623-1, Proced. & Admin. Regs., defines terms used in section

7623 and in the regulations interpreting it.4 In pertinent part, section 7623(b)(1)


      4
        Pursuant to sec. 301.7623-1(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 award that are open on that date. The determination that
petitioner appeals from is dated April 17, 2013. The petition was filed on April
20, 2013. We assume for purposes of the following discussion that petitioner's
                                                                      (continued...)
                                        - 14 -

provides authority for an award to a whistleblower if the Secretary proceeds with a

collection action that is "based on information brought to * * * [his] attention" by

a whistleblower. Section 301.7623-2(b)(1), Proced. & Admin. Regs., addresses

when the IRS shall be deemed to proceed on the basis of information provided by

a whistleblower. In pertinent part, the regulation provides:

      [T]he IRS proceeds based on information provided by a whistle-
      blower when the information provided substantially contributes to an
      action against a person identified by the whistleblower. For example,
      the IRS proceeds based on the information provided when 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. The IRS does not proceed based on
      information when the IRS analyzes the information provided or
      investigates a matter raised by the information provided.

      Four examples follow that statement of the general rule. Example (2)

involves a whistleblower-prompted investigation of a taxpayer during the course

of which the IRS obtains through IDRs and summonses facts that are unrelated to

the activities described in the information provided by the whistleblower. On the

basis of those additional facts, the IRS expands the scope of its investigation of the

taxpayer. In part, the example concludes that the portions of the IRS' investigation


      4
        (...continued)
claim for an award is open so long as it is sub judice, notwithstanding that the
parties have not addressed the issue of whether the regulation applies.
                                        - 15 -

relating to the additional facts obtained through the issuance of IDRs and

summonses are not actions with which the IRS proceeds on the basis of

information provided by the whistleblower because the information provided did

not substantially contribute to the IRS' administrative action based on the

information provided by the whistleblower. Sec. 301.7623-2(b), Example (2),

Proced. & Admin. Regs.

      We need not at this point in the case address the merits of respondent's lack-

of-authority argument, which respondent has not fully developed. Petitioner's

case, grounded on the legal theory that the IRS collected proceeds from target on

the basis of petitioner's information about the TES, is well pleaded. It is not

obviously contradicted by section 7623(b)(1). The validity of section 301.7623-1,

Proced. & Admin. Regs., has not been tested, nor does respondent argue that it

applies. The proper interpretation of section 7623(b)(1) is something that the

Court may decide in due course during these proceedings upon argument or

briefing by the parties. If respondent is interested in a pretrial ruling from the

Court on matters of law, then his proper course of action under our Rules would be

to file a motion for summary judgment under Rule 121. See Hosp. Corp. of Am.

v. Commissioner, T.C. Memo. 1994-100, 1994 WL 79522, at *3. Respondent has
                                        - 16 -

not convinced us that the requested IDRs are not material and, for that reason, not

discoverable.

      B.     Further Relevance Objection

      Nor has respondent convinced us that the requested IDRs are not probative

of, or would not lead to admissible evidence with respect to, petitioner's theory of

the case. Undoubtedly, if we understand it correctly, petitioner's interpretation of

the term "proceeds based on" is broad; i.e., that the Secretary proceeds on a

whistleblower's information if there is merely a causal relationship between the

whistleblower's information and the Secretary's collection of additional tax

(whether that additional tax is collected on the basis of adjustments to a taxpayer's

reported tax or on changes in the taxpayer's behavior in reporting its tax). Section

7623(b)(1) may not support that broad interpretation. But, in a discovery dispute,

once the discovering party makes some minimal showing of the relevance of the

information or response sought to the subject matter involved in the pending case,

the party opposing the production of information has the burden of establishing

that the documents sought by the other party are not relevant or otherwise not

discoverable. See, e.g., Dynamo Holdings Ltd. P'ship v. Commissioner, 143 T.C.

183, 189 (2014). Respondent has failed to carry his burden of showing that the

requested IDRs are not discoverable.
                                        - 17 -

      C.     Other Arguments

      Respondent's principal objection to the motion is, as we have discussed,

relevance. He also objects to producing four of the requested IDRs on the ground

that petitioner cannot move to compel discovery for documents that he has not

sought through discovery. Petitioner, by his December 22, 2015, letter made

known his request for those four IDRs, and we see no benefit to making petitioner

ask again for something respondent has made clear he will not produce except

upon order of the Court. With respect to the 17 IDRs petitioner did not identify in

that letter, we likewise see no benefit in making petitioner take any further steps to

make his request for those IDRs clear to respondent.

VI.   Conclusion

      Cognizant of the importance of the confidentiality concerns and disclosure

restrictions embodied in section 6103, we will in our order granting the motion

require that all documents produced by respondent be subject to the protective

order governing pretrial discovery in this case.


                                                 An appropriate order will be issued.
