Freeman Law | The Tax Court in Brief

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Freeman Law | The Tax Court in Brief

The Tax Court in Brief

Freeman Law’s “The Tax Court in Brief” covers every substantive Tax Court opinion, providing a weekly brief of its decisions in clear, concise prose.

For a link to our podcast covering the Tax Court in Brief, download here or check out other episodes of The Freeman Law Project.

The Week of October 3 – October 9, 2020

Doyle v. Comm’r, T.C. Memo. 2020-139 | October 8, 2020 | Gustafson, J. | Dkt. No. 4865-19W

Short Summary: Mr. Doyle and Mr. Moynihan submitted to the Whistleblower Office of the Internal Revenue Service (“IRS”) two claims on Form 211, Application for Award for Original Information, alleging that several related entities failed to comply with the requirements of I.R.C. 501(c)(3) for tax-exempt organizations. The claims included specific credible documentation.

The Whistleblower Office acknowledged the claims and referred them to the Tax Exempt and Government Entities Division (“TEGE”) and the Criminal Investigation Division (“CI”). CI reportedly determined it would not investigate the claims. The Whistleblower Office issued a preliminary denial letter. The petitioners responded with opposition, stating that it was public knowledge that the IRS was investigating the target entities and that Mr. Doyle and Mr. Moynihan had worked with the FBI/IRS Task Force in the investigation. After consulting with CI, the Whistleblower Office issued a final determination letter denying the claims.

Mr. Doyle and Mr. Moynihan petitioned the Tax Court. The Commissioner moved for summary judgment on the grounds that the IRS (1) did not proceed with an administrative or judicial action against the target entities, and (2) did not collect any proceeds based on the claims. Mr. Doyle and Mr. Moynihan opposed the motion.

Key Issue: Whether the Whistleblower Office abused its discretion in denying the claims of Mr. Doyle and Mr. Moynihan.

Primary Holdings:

  • The Whistleblower Office’s determination that CI did not proceed with any action was not supported by the administrative record. As a result, the Commissioner’s motion for summary judgment is denied. Additionally, the Commissioner may not rely on the ground of the non-collection of proceeds since the Whistleblower Office’s determination was not based on such ground.

Key Points of Law:

  • Under Rule 121(b), the Tax Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
  • Section 7623(b) describes the circumstances in which the IRS shall give “Awards to Whistleblowers” and charges the Whistleblower Office with performing initial evaluations of whistleblower claims to determine whether they meet the minimum standards for an award. See 26 C.F.R. § 301.7623-1(c)(4), Proced. & Admin. Regs.
  • The Whistleblower Office will deny a claim if it determines that the IRS either (1) did not proceed based on the information provided by the whistleblower, or (2) did not collect proceeds as a result of proceeding against the taxpayer on the basis of the whistleblower’s information. 26 C.F.R. § 301.7623-3(c)(8).
  • Section 7623(b)(4) states that a determination regarding an award may be appealed to the Tax Court. Additionally, the Tax Court’s review is generally restricted to the administrative record, and the Tax Court reviews the Whistleblower Office’s determinations for abuse of discretion. See Kasper v. Comm’r, 150 T.C. 8, 21-23 (2018).
  • The Tax Court does not review the IRS’s decision whether to audit a target in response to a whistleblower’s claim and has no authority to require the IRS to explain a decision not to audit a target. See Lacey v. Comm’r, 153 T.C. at 164.

Insight: The administrative record ultimately undermined the Commissioner’s argument. Doyle underlines the fact that the Tax Court’s determination of “abuse of discretion” is based on the reasons stated in the final determination letter issued by the Whistleblower Office, not the arguments presented by the Commissioner’s counsel. Additionally, Doyle reinforces the idea that taxpayers, whistleblowers, and petitioners alike should maintain their own detailed records of events, as the administrative record maintained by the IRS may not include all the facts/details.


Spagnoletti v. Comm’r, T.C. Memo. 2020-140 | October 8, 2020 | Lauber, J. | Dkt. No. 10204-19L

Short Summary:  The case involved a collection due process (CDP) case in which the petitioner sought review pursuant to section 6330(d)(1) of a determination by the Internal Revenue Service (IRS or respondent) to uphold a notice of intent to levy.

Petitioner, an attorney, filed delinquent Federal income tax returns for 2015 and 2016 and did not pay the full amount of tax shown as due on either return. The IRS assessed the tax shown as due plus additions to tax for failure to timely file, failure to timely pay, and failure to pay estimated tax.

As of May 2018, petitioner’s outstanding liabilities for the two years (including interest) exceeded $1.2 million.

The IRS sent petitioner a Notice of Intent to Levy and Notice of Your Rights to a Hearing (levy notice). Petitioner timely requested a CDP hearing, indicating that he was interested in an installment agreement (IA).

Key Issue: Did the settlement officer abuse her discretion is sustaining the proposed levy?

Primary Holdings:  

  • The court held that the settlement officer (SO) did not abuse her discretion in sustaining the proposed levy.
  • The SO properly discharged all of her responsibilities under section 6330(c).
  • Finding no abuse of discretion in any respect, the court granted summary judgment for respondent and sustained the proposed collection action.

Key Points of Law:

  • Where the validity of the taxpayer’s underlying liability is properly at issue, the Tax Court reviews the SO’s determination of that issue de novo.
  • Where there is no dispute as to the taxpayer’s underlying liability the Tax Court reviews the IRS decision for abuse of discretion.
  • Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law.
  • Because the IRS did not issue petitioner a notice of deficiency for 2015 or 2016, he was permitted to challenge at the CDP hearing the existence or amount of his underlying tax liability for each year.
  • The phrase “underlying tax liability” includes the tax due, any additions to tax or penalties, and statutory interest.
  • A taxpayer must properly raise an issue during the CDP hearing in order to preserve it for the Court’s review. “The merits are not properly raised if the taxpayer challenges the underlying tax liability but fails to present the Appeals Office with any evidence regarding that liability after being given a reasonable opportunity to do so.”
  • The Code specifies the evidence a taxpayer must supply to qualify for abatement of interest and to defeat the additions to tax for late filing and late payment. See sec. 6404(e)(1)(A) (requiring proof that a deficiency was “attributable in whole or in part to any unreasonable error or delay by an [IRS] officer or employee * * * (acting in his official capacity) in performing a ministerial or managerial act”); sec. 6651(a)(1) and (2) (requiring a showing that the taxpayer’s failure was “due to reasonable cause and not due to willful neglect”).
  • In deciding whether the SO abused her discretion in sustaining the collection action, the Tax Court considers whether the SO: (1) properly verified that the requirements of applicable law or administrative procedure have been met, (2) considered any relevant issues petitioner raised, and (3) considered “whether any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of * * * [petitioner] that any collection action be no more intrusive than necessary.” Sec. 6330(c)(3).
  • It is not an abuse of discretion for an SO to reject collection alternatives where the taxpayer has declined, as petitioner did, to supply the requisite financial information.

Insight: The Spagnoletti case serves as a reminder that the abuse-of-discretion standard is a high hurdle, and that taxpayers are required to take a number of steps in order to preserve their argument/position that the IRS has abused its discretion in the collection due process hearing context to resolve collection issues.


Worthington v. Comm’r, T.C. Memo. 2020-141 | October 8, 2020 | Gustafson, J. | Dkt. No. 9026-19W

Short Summary: Mr. Worthington submitted to the Whistleblower Office of the Internal Revenue Service (“IRS”) a claim on Form 211, Application for Award for Original Information, (later supplemented) alleging that an entity or operation of law enforcement agencies of cooperating counties lacked status as a legal entity and therefore illegally collected millions of dollars from court awards.

The Whistleblower Office acknowledged the claim and assigned it to a “classifier.” The “classifier” recommended a referral of the claim for criminal investigation. Other personnel in the Whistleblower Office performed research on the claim and concluded the claim was “speculative.” As a result, the Whistleblower Office issued a final determination letter, stating that the claim was rejected because the IRS decided not to pursue the information provided in the claim.

Mr. Worthington petitioned the Tax Court. Both Mr. Worthington and the Commissioner moved for summary judgment as to whether the Whistleblower Office abused its discretion in rejecting and denying Mr. Worthington’s claim for award.

Key Issue: Whether the Whistleblower Office abused its discretion in rejecting and denying Mr. Worthington’s claim for award.

Primary Holdings:

  • Because the record fails to show that the Whistleblower Office never analyzed Mr. Worthington’s claim and because the Tax Court cannot compel the Whistleblower Office to act the way Mr. Worthington desires, Mr. Worthington’s motion for summary judgment is denied. Additionally, the Commissioner’s motion for summary judgment is denied because the Whistleblower Office’s final determination letter equivocated on whether it was a threshold rejection or substantive denial.

Key Points of Law:

  • Under Rule 121(b), the Tax Court may grant summary judgment when there is no genuine dispute as to any material fact and a decision may be rendered as a matter of law. Sundstrand Corp. v. Comm’r, 98 T.C. 518, 520 (1992), aff’d, 17 F.3d 965 (7th Cir. 1994).
  • Section 7623(b) describes the circumstances in which the IRS shall give “Awards to Whistleblowers” and charges the Whistleblower Office with performing initial evaluations of whistleblower claims to determine whether they meet the minimum standards for an award. See 26 C.F.R. § 301.7623-1(c)(4), Proced. & Admin. Regs.
  • Threshold criteria with respect to determining eligibility for an award include that the claim: contains specific, credible information; provides information that the whistleblowers believes will lead to collected tax proceeds; reports failure to comply with the internal revenue laws; identifies the person(s) believed to have failed to comply with the internal revenue laws; provides substantive information, including all available documentation; and does not provide speculative information. Lacey v. Comm’r, 153 T.C. 146, 160 (2019) (quoting 26 C.F.R. § 301.7623-1(c)(1), (4)).
  • Based on the threshold criteria, the Whistleblower Office may “reject” the claim without further investigation, which will preclude any subsequent administrative or judicial action against any taxpayer. See Lacey v. Comm’r, 153 T.C. at 168-69.
  • On the other hand, the Whistleblower Office may “deny” the claim, which is a determination that relates to or implicates taxpayer information. 26 C.F.R. § 301.7623-3(c)(8). A denial is a determination that is made after the Whistleblower Office engages in some substantive consideration of the claim. See Lacey v. Comm’r, 153 T.C. at 161-62.
  • Section 7623(b)(4) states that a determination regarding an award may be appealed to the Tax Court. Additionally, the Tax Court’s review is generally restricted to the administrative record, and the Tax Court reviews the Whistleblower Office’s determinations for abuse of discretion. See Kasper v. Comm’r, 150 T.C. 8, 21-23 (2018).
  • The Tax Court does not review the IRS’s decision whether to audit a target in response to a whistleblower’s claim and has no authority to require the IRS to explain a decision not to audit a target. See Lacey v. Comm’r, 153 T.C. at 164.

Insight: The Worthington case underscores the distinction between a rejection and a denial of a claim for award submitted to the Whistleblower Office. They are two entirely different determinations—threshold versus substance. Moreover, despite a claimant’s insistence, the Tax Court lacks the power to order the IRS to audit a taxpayer.