The Tax Court in Brief August 22 – August 28, 2020

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 August 22 – August 28, 2020

• Swanberg v. Comm’r, T.C. Memo. 2020-123
• Rivas v. Comm’r, T.C. Memo. 2020-124
• Whistleblower v. Comm’r, 155 T.C. No. 2
• TGS-NOPEC Geophysical Company & subsidiaries v. Comm’r, 155 T.C. No. 3.
• Van Bemmelen v. Comm’r, 155 T.C. No. 4

Swanberg v. Comm’r, T.C. Memo. 2020-123 

August 25, 2020 | Lauber, J. | Dkt. No. 10266-19L

• Opinion

Short Summary:  Mr. Swanberg filed a 2013 return but failed to pay in full the tax reported on the return.  The IRS later issued him IRS Letter 11, Notice of Intent to Levy and Notice of Your Right to a Hearing.  Mr. Swanberg timely requested a Collection Due Process (CDP) hearing.  During the hearing, he contended that the proposed levy was premature because the IRS had failed to adjust his tax liabilities for other tax years going back to 2000.  In addition, he expressed an interest in entering into an offer in compromise or installment agreement.

During the CDP hearing, the Settlement Officer (SO) reviewed Mr. Swanberg’s tax transcripts as far back as 2000 and determined that he did not have any overpayments or credits.  In addition, the SO reviewed the financial information Mr. Swanberg submitted and determined that:  (1) he did not qualify for an OIC; and (2) he could make monthly payments of $2,471.  Mr. Swanberg declined the SO’s offer for an installment agreement of $2,471.  Thereafter, the IRS issued a notice of determination sustaining the levy.    

Key Issue:  Whether the SO abused her discretion in concluding that the proposed levy action was appropriate.

Primary Holdings: 

• The SO did not abuse her discretion in concluding that levy was appropriate because: (1) although Mr. Swanberg expressed interest in an OIC, he never submitted a Form 656 or made an offer; (2) Mr. Swanberg offered no evidence to support his claims for overpayments or credits from prior tax years and, in any event, the Tax Court lacks jurisdiction over the overpayment/credit matter; and (3) the SO followed the procedures in the Internal Revenue Manual in determining that Mr. Swanberg could pay on an installment basis $2,471 per month.

Key Points of Law:

• The purpose of summary judgment is to expedite litigation and avoid costly, time-consuming, and unnecessary trials. Peach Corp. v. Comm’r, 90 T.C. 678, 681 (1988).  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).
• Where the validity or amount of the taxpayer’s underlying tax liability is properly at issue, the Tax Court reviews the IRS’ determination de novo. Goza v. Comm’r, 114 T.C. 176, 181-82 (2000).  But where the taxpayer’s underlying liability is not before the Tax Court, the Tax Court reviews the IRS determination for abuse of discretion only.    Abuse of discretion exists when a determination is arbitrary, capricious, or without sound basis in fact or law.  See Murphy v. Comm’r, 125 T.C. 301, 320 (2005), aff’d, 469 F.3d 27 (1st Cir. 2006).
• With respect to arguments that the IRS has failed to properly apply a credit balance for the year at issue, there is some uncertainty in the Tax Court’s precedent as to whether a de novo or abuse-of-discretion standard of review applies. See Landry v. Comm’r, 116 T.C. 60 (2001) (de novo standard of review used where the taxpayer challenged the IRS’ failure to apply an overpayment credit from another year); Melasky v. Comm’r, 151 T.C. 89, 92 (2018) (abuse-of-discretion standard of review applies because not a challenge to the taxpayer’s underlying liability).
• The Tax Court’s jurisdiction in CDP cases generally does not permit the Court to consider matters regarding nondetermination years, that is, tax years that are not the subject of the collection action before us. But the Court may consider facts and issues from other years to the extent they “are relevant in evaluating a claim that an unpaid tax has been paid.”  Freije v. Comm’r, 125 T.C. 14, 27 (2005).  An available credit from another year is a fact that may affect the taxpayer’s correct liability for the year before the Court.  Weber v. Comm’r, 138 T.C. 348, 371-72 (2012).  But a credit must actually exist in order to constitute an “available credit.”  A mere claim for a credit “is not an available credit,” and such a claim “need not be resolved before the IRS can proceed with collection of the liability at issue.  Id.; Del-Co W. v. Comm’r, T.C. Memo. 2015-142.
• In deciding whether the SO abused her discretion, we consider whether she: (1) properly verified that the requirements of any applicable law or administrative procedure had 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.”  See sec. 6330(c)(3).
• Section 6159 authorizes the Commissioner to enter into an installment agreement if he determines that it will facilitate full or partial collection of a taxpayer’s unpaid liability. See Thompson v. Comm’r, 140 T.C. 173, 179 (2013).  Subject to exceptions not relevant here, the decision to accept or reject an IA lies within the Commissioner’s discretion.  See Rebuck v. Comm’r, T.C. Memo. 2016-3; Kuretski v. Comm’r, T.C. Memo. 2012-262, aff’d, 755 F.3d 929 (D.C. Cir. 2014); Treas. Reg. § 301.6159-1(a), (c)(1)(i).  As a rule, an SO may “accept, at a minimum, a monthly payment equal to the excess of a taxpayer’s monthly income over the taxpayer’s allowable expenses.”  Boulware v. Comm’r, T.C. Memo. 2014-80, aff’d, 816 F.3d 133 (D.C. Cir. 2016); Bero v. Comm’r, T.C. Memo. 2017-235.  The Tax Court will not substitute its judgment for the SO’s, recalculate the taxpayer’s ability to pay, or independently determine what would be an acceptable offer.  Thompson, 140 T.C. at 179; Lipson v. Comm’r, T.C. Memo. 2012-252.
• An SO does not abuse her discretion by adhering to provisions of the Internal Revenue Manual (IRM) governing acceptance of collection alternatives. See Veneziano v. Comm’r, T.C. Memo. 2011-160; Etkin v. Comm’r, T.C. Memo. 2005-245.
• As a general rule, “all household income . . . will be used to determine the taxpayer’s ability to pay.” IRM pt. 5.15.1.12(1) (Aug. 29, 2018).  Income is includible in determining ability to pay even if it is not subject to income tax.  IRM pt. 5.15.1.12(2) (stating that household income includes amounts received from pensions, Social Security, and profit sharing plans); see Ligman v. Comm’r, T.C. Memo. 2015-79 (ruling that benefits not listed in the IRM were includible for purposes of determining eligibility).

Insight:  As Swanberg shows, the Tax Court’s review of collection alternatives proposed by a taxpayer during a CDP hearing is extremely deferential to the IRS.  Because of this deferential standard, taxpayers should strive to obtain as favorable of a collection alternative as possible during the pendency of the CDP hearing.

Rivas v. Comm’r, T.C. Memo. 2020-124 

August 25, 2020 | Greaves, J. | Dkt. No. 15742-19

• Opinion

Short Summary:  The IRS mailed a notice of deficiency to Ms. Rivas on May 21, 2019.  The notice of deficiency was sent to her last known address and the address that she used on her petition with the Tax Court.  The Tax Court received Ms. Rivas’ petition on August 27, 2019, in an envelope bearing a U.S. Postal Service postmark of August 20, 2019.

The IRS filed a motion to dismiss the petition on the ground that it was not filed within the 90-day filing period under Section 6213(a).  Specifically, the IRS argued that the 90-day period expired on August 19, 2019, and that Ms. Rivas’ petition was one day late.  In response, Ms. Rivas argued that her attorney had “dropped . . . [the petition] in the United States Mail Drop Box on the night of August 19, 2019.”  Ms. Rivas also argued that the 90-day period to file a petition with the Tax Court is a “claims processing rule” and subject to equitable tolling.

Key Issue:  Whether the Tax Court has jurisdiction to hear Ms. Rivas’ case.

Primary Holdings: 

• The Tax Court lacks jurisdiction over Ms. Rivas’ case because: (1) Section 6213(a) and its 90-day filing requirement is jurisdictional and not subject to equitable tolling; and (2) Ms. Rivas failed to file her petition on or before August 19, 2019.

Key Points of Law:

• The Tax Court is a court of limited jurisdiction and may exercise jurisdiction only to the extent expressly provided by statute. 7442; Naftel v. Comm’r, 85 T.C. 527, 529 (1985); Breman v. Comm’r, 66 T.C. 61, 66 (1976).  The Tax Court’s jurisdiction to redetermine a deficiency in income tax depends on the issuance of a valid notice of deficiency and a timely filed petition.  Rule 13(a), (c); Monge v. Comm’r, 93 T.C. 22, 27 (1989); Normac, Inc. v. Comm’r, 90 T.C. 142, 147 (1988).  Jurisdiction must be shown affirmatively, and, as the party invoking the Court’s jurisdiction, petitioner bears the burden of proving that jurisdiction exists.  See David Dung Le, M.D., Inc. v. Comm’r, 114 T.C. 268, 270 (2000), aff’d, 22 F. App’x 837 (9th Cir. 2001).
• In pertinent part section 6213(a) provides: “Within 90 days, or 150 days if the notice is addressed to a person outside the United States, after the notice of deficiency authorized in section 6212 is mailed . . ., the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency.”  The 90-day period prescribed by section 6213(a) sets forth a jurisdictional requirement.  See, e.g., Guralnik v. Comm’r, 146 T.C. 230, 237 (2016); McCune v. Comm’r, 115 T.C. 114, 117-118 (2000) (“The statutory periods are jurisdictional and cannot be extended.”); Joannou v. Comm’r, 33 T.C. 868, 869 (1960).  All Courts of Appeals that have considered this issue have reached the same conclusion, including the Court of Appeals for the Ninth Circuit, to which an appeal of this case would lie absent stipulation to the contrary.  See 7482(b)(1)(A); Pugsley v. Comm’r, 749 F.2d 691, 692 (11th Cir. 1985); Foster v. Comm’r, 445 F.2d 799, 800 (10th Cir. 1971); Healy v. Comm’r, 351 F.2d 602, 603 (9th Cir. 1965); Rich v. Comm’r, 250 F.2d 170, 175 (5th Cir. 1957); Organic Cannabis Found, LLC v. Comm’r, 962 F.3d 1082, 1093-94 (9th Cir. 2020).
• A taxpayer timely mails a petition to this Court when it is delivered to the U.S. Postal Service on or before the date it is due. 7502(a).  In such a case the date of the U.S. Postal Service postmark stamped on the envelope is deemed the date of delivery.  Id.; Treas. Reg. § 301.7502-1(a), (c)(1)(iii)(A).

Insight:  The Rivas decision acts as a cautionary tale for taxpayers to strictly comply with the Tax Court’s statutory jurisdictional requirements.  When mailing a petition to the Tax Court, taxpayers should ensure they keep documentary proof that the petition was timely filed through delivery to the United States Postal Service.

Whistleblower v. Comm’r, 155 T.C. No. 2

August 26, 2020 | Toro, E. | Dkt. Nos. 21276-13W, 21277-13W

• Opinion

 Short Summary:  Petitioner originally filed a suit against the IRS asking the Tax Court to consider whether they could be eligible for a whistleblower award, when they had not approached the Whistleblower Office until after the Government had collected approximately $74 million from a targeted business pursuant to a plea agreement and which the Petitioner asserted they had contributed to the Government’s recovery.   The Tax Court held that Petitioner could be considered for the whistleblower award and instructed the IRS to consider the merits of Petitioner’s claim.  The IRS and Petitioner agreed that Petitioner was eligible for a total award of 24% of the collected proceeds, however the parties could not agree whether certain amounts were collected proceeds for the purposes of the award.  The parties also agreed that any award would be reduced by a sequester reduction percentage.  The Tax Court then issued a second opinion determining the total amount of the collected proceeds for the purposes of the whistleblower award.  After Petitioner had received all the payments by the Government, it filed motions with the Tax Court asking the court to enforce its previous two decisions without the sequester reductions.  The IRS denied Petitioner’s motions finding that the Petitioner was not entitled to the relief requested.

Key Issue:  Does the Tax Court have the jurisdiction over whistleblower decisions with respect to appeals of the amount awarded, and does it have the authority to enforce such decisions.

Primary Holdings: 

• The Tax Court has jurisdiction over whistleblower decisions which appeal the award determination and can enforce those decisions.

Key Points of Law:

• The Tax Court is a court of limited jurisdiction. See Estate of Wenner v. Commissioner, 116 T.C. 284, 286 (2001) (citing Flight Attendants Against UAL Offset v. Commissioner, 165 F.3d 572, 578 (7th Cir. 1999)).
• The Tax Court exercises jurisdiction only over matters that Congress expressly authorizes it to consider. See IRC §7442; See also Estate of Young v. Commissioner, 81 T.C. 879, 881 (1983).
• The Tax Court has jurisdiction to determine whether it has jurisdiction. See Cooper v. Commissioner, 135 T.C. 70, 73 (2010).
• IRC § 7623(b)(4) grants the Tax Court jurisdiction over whistleblower actions with respect to such actions as follows: Appeal of award determination.–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).
• The Tax Court has the authority to remand a whistleblower action to the Whistleblower Office when that office has abused its discretion. See Whistleblower 769-16W v. Commissioner, 152 T.C. 172 (2019).  However, where the Tax Court believes that a remand would be futile, it has the authority to retain the matter and decide the issue.  See George Hyman Constr. Co. v. Brooks, 963 F.2d 1532, 1539 (D.C. Cir. 1992); accord NLRB v. Food Store Emps. Union Local 347, 417 U.S. 1, 8 (1974).
• IRC § 7456(c) gives the Tax Court the authority to enforce its own orders. A motion to enforce a Tax Court decision already issued does not challenge the finality of the prior decision.
• In the concurring opinion, Judge Gustafson noted that neither party questioned the power of the Tax Court to enforce its earlier decisions regarding Petitioner. Judge Gustafson wrote that he believes that the majority opinion does not state what “enforcing” a decision might mean.

Insight:  This case highlights and solidifies the Tax Court’s jurisdiction over whistleblower actions with respect to appeals of award determinations.  It also illustrates that the Tax Court has authority to enforce its decisions.

TGS-NOPEC Geophysical Company & Subsidiaries v. Comm’r, 155 T.C. No. 3. 

August 26, 2020 | Paris, J. | Dkt. No. 28140-14

• Opinion

Short Summary:  The case involves the analysis and discussion of the provisions related to the activities that qualify as domestic production activities, pursuant to section 199. Specifically, the Court analyzes whether the sale or license of processed seismic data meets the definition of Qualifying Production Property (QPP) for purposes of calculating the Domestic Production Gross Receipts (DPGR) and hence to determine the amount of the domestic production deduction allowed to TGS-NOPEC Geophysical Company & subsidiaries (the “taxpayer”)

In 2008 the taxpayer, a company specialized in the processing and licensing of seismic data to companies in the oil and gas industry, claimed a Domestic Production Activities Deduction (DPAD) in accordance to section 199. Such deduction was based on the grounds that its gross receipts from the sale or license of processed seismic data constituted DPGR. The taxpayer position was that the processed seismic data met the QPP definition either as tangible personal property or sound recordings produced in the U.S. or as engineering services performed in the U.S. with respect to the construction of real property in the U.S. The IRS disagreed with that position and denied the deduction.

To determine whether the DPAD was allowed, the Court first analyzed if the processed seismic data sale or license by the taxpayer fall within the concept of QPP as provided by section 199(c)(5). For such purposes, the Tax Court focused the analysis on the definition of (i) tangible personal property as defined in section 199(c)(5) and the concept of (ii) sound recordings as described in section 168(f)(4). Additionally, the Court analyzed whether the processing carried by the taxpayer fall within the concept of engineering services performed with respect to construction of real property in the U.S as provided by section 199(c)(4).

The Tax Court rejected the taxpayer’s position that the processed seismic data qualified as tangible property or sound recording. However, the Tax Court agreed with the taxpayer, that the processing of seismic data constituted engineering services with respect to the construction of real property in the U.S.

Key Issues:  Does the processed seismic data qualifies as tangible personal property or sound recording under the definition of section 199(c)(5)? Does the processing of such data qualify as engineering services performed in the U.S. with respect to the construction of real property as provided by 199(c)(4)?

Primary Holdings: Processed seismic data is not QPP because such property is not tangible nor a sound recording. The processing of such data qualifies as engineering services performed in the U.S. with respect to the construction of real property. However, the processing of the taxpayer’s parent company data for clients of the parent company does not constitute DPGR.

Key Points of Law:

Section 199 provides a deduction for a specific percentage of the lesser of “qualifying production activities income” (QPAI) or the taxpayer’s income. QPAI is the excess of the taxpayer’s DPGR over the sum of COGS allocable to such receipts and other expenses. DPGR means the gross receipts that the taxpayer derives from any lease, rental, license, sale, exchange, or other disposition of QPP. For this purpose, QPP includes tangible personal property and sound recordings as defined in section 168(f)(4).

To determine that the processed seismic data does not fall within the concept of QPP, the Court reasoned as follows:

• Tangible property is that which is “corporeal” and does not include property in a form other than a tangible medium. As provided by Sec. 1.199-3(j)(2)(iii) property like software computer or sound recordings are not tangible, even if affixed to a tangible medium.
• Because the item licensed by the taxpayer is “data”, such is clearly intangible despite the fact that such data is contained within a tangible medium, like a CD or USB.
• Although in Texas Instruments I 551 F.2d 599, 608 (5th Cir. 1977), the Court ruled that seismic data contained in the original tapes that the taxpayer would later use to produce copies of the data, which it would license to its clients, qualified as tangible property, in the instant case, such is not applicable. The Court distinguished Texas Instruments I from the instant case because in the former case, the property at issue were the original tapes that contained the original data, whereas in the present case, the item at issue is not the original tapes but rather the processed data that is copied and licensed to the clients, which was recognized by the Court in Texas Instruments, Inc. v Commissioner (Texas Instruments II), 98 T.C. 628 (1992). Such distinction is crucial to determine the intrinsic value of the item and in the former case, the value of the data derived from the existence of the tapes. In the present case, it’s the data that is valuable, and the physical medium is a mere delivery vehicle.
• Following such reasoning, the Court ruled that in this case the taxpayer does not license the original tapes, but rather the processed data and consequently, an intangible, that does not qualify as QPP.
• The Court also ruled that the processed seismic data does not qualifies as sound recording because such constitutes a “visual representation of the subsurface of the surveyed area”. To support its conclusion, the Court relied on the section 1.199-3(j)(4)(ii), Income Tax Regs. which states that representations of sounds in a manner other than in an audible format are not sound recordings.

Because the taxpayer argued alternatively that the processing of seismic data constitutes engineering services with respect to construction of real property in the U.S., which constitute DPGR, the Court reasoned as follows:

• The Regulations provide that the concept of “Engineering services” include “any professional services requiring engineering education, training, and experience and the application of special knowledge of the mathematical, physical, or engineering sciences to those professional services such as consultation, investigation, evaluation, planning, design, or responsible supervision of construction…, or erection, in connection with any construction project.” Sec. 1.199-3(n)(2), Income Tax Regs.
• Based on various circumstances of the taxpayer, such as employing a team of 55 individuals with extensive experience in the physical sciences, or maintaining a processing center, the Court concludes that the processing of the data, constitutes engineering services.
• To support such conclusion, the Court adds that the activities of the taxpayer fall squarely within the NAICS business activity code 541360 “Geophysical Surveying and Mapping Services” categorized under designation 5413 entitled “Architectural Engineering, and Related Services”. Given such, the Court concludes that is clear that the activities of the taxpayer are engineering services.
• As for the relationship of such services with the “construction of real property”, the Court points that processed seismic data is used by oil and gas companies in support of explore, develop or drill oil and gas wells. Even if the clients of the taxpayer do not drill a well, the Court adds that the ultimate purpose of the clients is to identify deposits of hydrocarbons and construct drilling, which is consistent with section 199 that provides that engineering services must be “with respect to” construction and with Regulations that provide that engineering services be provided “in connection with any construction project”, sec. 1.199-3(n)(2), Income Tax Regs.
• The Court makes a distinction between the services provided to its own clients for processing services for construction activities in the U.S. and those services using data owned by its parent company to provide services to the parent’s clients. For the former services, the Court agrees that such services are to be included within the DPGR, whereas the latter services are not to be included because they are not related to activities in the U.S.
• Finally, the Court rules that the revenue derived from the taxpayer’s ownership of overriding royalty interests does not meet the requirements of section 199(c)(4)(A)(iii), and consequently not includable within the DPGR calculation.

Insight:  This case makes evident the strict application of the concepts used in section 199 and allows to confirm the distinction set up by Texas Instruments I and II. This distinction is relevant to establish the type of items that the taxpayer may use in the planning, specifically to obtain the more benefit from a deduction. Analysis of the specific concepts should be construed strictly to meet the requirements provided by the Code and relevant in other similar areas like the DISC section.

Van Bemmelen v. Comm’r, 155 T.C. No. 4

August 27, 2020 | Thornton, J. | Dkt. No. 19787-18W

• Opinion

Short Summary:  On March 12, 2018, Dr. Van Bemmelen’s attorney submitted to the IRS Whistleblower Office (WO) a completed Form 211, Application for Award for Original Information.  The IRS reviewed the claim and determined that the allegations were “not specific, credible or . . . [were] speculative[.]”  Accordingly, the IRS issued a letter entitled “FINAL DECISION UNDER SECTION 7623(a)” which denied any award to Dr. Van Bemmelen.

Dr. Van Bemmelen timely filed a petition with the Tax Court in response to the IRS’ determinations in the letter.  The IRS filed a motion for summary judgment, which was opposed by Dr. Van Bemmelen.  Later, Dr. Van Bemmelen filed a motion to supplement the record, in addition to a first supplement to motion to supplement the record, requesting that the administrative record be supplemented with two items that were not included in the materials the IRS certified as the administrative record:  a 2012 document and a 2019 docuement.  The IRS filed an opposition to the motions.

Key Issue:  Whether:  (1) the administrative record should be supplemented; and (2) the IRS’ motion for summary judgment should be granted.

Primary Holdings: 

• To supplement the administrative record, a taxpayer must overcome the presumption that the IRS has properly designated the administrative record. To overcome this presumption, the taxpayer must make a substantial showing with clear evidence.  Here, because Dr. Van Bemmelen has made a substantial showing with clear evidence that his 2012 submission is properly included in the administrative record, he may supplement the record so much as it relates to the 2012 submission.  However, because Dr. Van Bemmelen has not demonstrated that the 2019 document meets any exception for consulting extrarecord evidence, his motion to supplement the record will be denied to the extent it relates to the 2019 document.
• Because the WBO’s rejection of Dr. Van Bemmelen’s claims is supported by the administrative record, as supplemented, and was not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law, the IRS’ motion for summary judgment will be granted.

Key Points of Law:

• Section 7623(a) authorizes the Secretary to pay discretionary whistleblower awards from collected proceeds. Section 7623(a) makes whistleblower awards mandatory if certain requirements are met.  One of the requirements is that the proceeds in dispute exceed $2 million.  7623(b)(5).  Section 7623(b)(4) gives the Tax Court jurisdiction over “any determination regarding an award under paragraph (1), (2), or (3)” of subsection (b), including rejections and denials of claims for awards.  See Lacey v. Comm’r, 153 T.C. 146, 163 (2019).
• In reviewing a determination of the WBO, the Tax Court employs the standard of review of section 706(2)(A) of the Administrative Procedure Act (APA), which tells a reviewing court to reverse agency action that it finds “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Kasper v. Comm’r, 150 T.C. 8, 21 (2018).  The Tax Court does not substitute its judgment for that of the agency but instead confines itself to ensuring that its determination “remained ‘within the bounds of reasoned decisionmaking’”.  Dep’t of Commerce v. New York, 588 U.S. ___, ___, 139 S. Ct. 2551, 2569 (2019) (quoting Gas & Elec. Co. v. Nat. Res. Def. Council, Inc., 462 U.S. 87, 105 (1983)).  In the course of its review, the Tax Court cannot compel the IRS to commence an audit or to provide an explanation of its decision not to commence an audit.  See Cohen v. Comm’r, 550 F. App’x 10, 11 (D.C. Cir. 2014), aff’g 139 T.C. 299 (2012); Lewis v. Comm’r, 154 T.C. ___, ___ (slip op. at 22) (Apr. 8, 2020).
• In reviewing a determination of the WBO, the Tax Court generally confines its review to the administrative record. Kasper v. Comm’r, 150 T.C. at 20; see James Madison Ltd. by Hecht v. Ludwig, 82 F.3d 1085, 1095 (D.C. Cir. 1996).  The administrative record in a whistleblower case normally is expected to include “all information provided by the whistleblower (whether provided with the whistleblower’s original submission or through a subsequent contact with the IRS).”  Reg. § 301.7623-3(e)(2)(i).  The information that a whistleblower provides to the IRS’ operating divisions before submitting a Form 211 to the WBO may be relevant to the whistleblower’s claim for an award.  See Whistleblower 21276-13W v. Comm’r, 144 T.C. 290 (2015).
• An administrative record may be “supplemented” in one of two ways, “either by (1) including evidence that should have been properly a part of the administrative record but was excluded by the agency, or (2) adding extrajudicial evidence that was not initially before the agency but the party believes should nonetheless be included in the administrative record.” Animal Legal Def. Fund v. Vilsack, 110 F. Supp. 3d 157, 160 (D.D.C. 2015).
• Absent a substantial showing made with clear evidence to the contrary, an agency is presumed to have properly designated the administrative record. See Oceana, Inc. v. Ross, 920 F.3d at 865; See also Latif v. Obama, 677 F.3d 1175, 1178 (D.C. Cir. 2011).
• Although it is sometimes appropriate to consider extrarecord information, this “is the exception, not the rule.” Theodore Roosevelt Conversation P’ship v. Salazar, 616 F.3d 497, 514 (D.C. Cir. 2010).  The Court of Appeals for the D.C. Circuit has “recognized a small class of cases where district courts [or, as here, the Tax Court] may consult extra-record evidence when ‘the procedural validity of the [agency]’s action . . . remains in serious question.”  Hill Dermaceuticals, Inc. v. FDA, 709 F.3d 44, 47 (D.C Cir. 2013).  That Court of Appeals has most recently identified three circumstances in which extrarecord evidence may be consulted:  “(1) if the agency ‘deliberately or negligently excluded documents that may have been adverse to its decision,’ (2) if background information was needed ‘to determine whether the agency considered all the relevant factors,’ or (3) if the ‘agency failed to explain administrative action so as to frustrate judicial review’ . . . City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 2010); James Madison Ltd. by Hecht, 82 F.3d at 1095.
• The Supreme Court has declared that “where there are administrative findings that were made at the same time as the decision . . . there must be a strong showing of bad faith or improper behavior before such inquiry [into the mental processes of administrative decisionmakers] may be made.” Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971).
• Either party may move for summary judgment upon all or any part of the legal issues in controversy. Rule 121(a) and (b); Naftel v. Comm’r, 85 T.C. 527, 528-29 (1985).  Ordinarily, under Rule 121(b) the 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 (7^th 1994).  However, this summary judgment standard is not generally apt where the Tax Court must confine itself to the administrative record to decide whether there has been an abuse of discretion.  The purpose of summary judgment is to avoid unnecessary trials.  Fla. Peach Corp. v. Comm’r, 90 T.C. 678, 681 (1988).  The Tax Court denies a summary judgment motion where there is a genuine factual dispute that requires a trial; but in a “record rule” whistleblower case there will not be a trial on the merits.  In such a case involving review of final agency action under the APA, summary judgment serves as a mechanism for deciding, as a matter of law, whether the agency action is supported by the administrative record and is not arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.  See Univ. Med. Ctr. Of S. Nev. v. Shalala, 173 F.3d 438, 440 n.3 (D.C. Cir. 1999).
• Although the WBO’s rejection of a claim necessarily precludes any subsequent administrative or judicial action against any taxpayer and any subsequent collection of proceeds from the taxpayer based on the information provided, the WBO’s rejection of a claim does not preclude judicial review. See Lacey v. Comm’r, 153 T.C. at 161-62.  This Court has authority to review, for abuse of discretion, the WBO’s decision to “reject” a claim for failing to meet threshold requirements.  at 166-67.
• The WBO is charged with making the initial evaluation of whistleblower claims to determine whether they meet the minimum standards for an award. See Reg. § 301.7623-1(c)(4).  The threshold criteria include that a claim should:  (1) contain specific information; (2) contain credible information; (3) provide information that the whistleblower believes will lead to collected tax proceeds; (4) report failure to comply with the internal revenue laws; (5) identify the persons believed to have failed to comply with the internal revenue laws; (6) provide substantive information, including all available documentation; and (7) not provide speculative information.  See Lacey v. Comm’r, 153 T.C. at 160.  If a claim fails to meet those criteria, then the WBO may summarily “reject” the claim without further consideration.   “A rejection is a determination that relates solely to the whistleblower and the information on the fact of the claim that pertains to the whistleblower.”  Treas. Reg. § 301.7623-3(c)(7).
• The law expressly provides that in analyzing information received from an individual, the WBO “in its sole discretion, may ask for additional assistance from such individual or any legal representative.” Tax Relief and Health Care act of 2006, Pub. L. No. 109-432, sec. 406(b)(1)(C), 120 Stat. at 2960.  Because the WBO’s actions in this regard are committed to its “sole discretion,” and the statute provides no meaningful standard by which to judge the WBO’s exercise of that discretion, those actions are immune from judicial review.  See 5 U.S.C. sec. 701(a)(2) (2012); see also Heckler v. Chaney, 470 U.S. 821, 830 (1985).
• According to the Internal Revenue Manual (IRM), for purposes of classifying a claim as arising under section 7623(a) or (b), the whistleblower’s description of the amount owed by the taxpayer is not determinative; even if the alleged amount exceeds $2 million, the claim is to be considered a section 7623(a) claim if “the claim does not identify a specific/credible tax issue or is purely speculative in nature.” IRM pt. 25.2.2.7.1(2) (Jan. 12, 2018); Smith v. Comm’r, 148 T.C. 449 (2017).

Insight:  The Van Bemmelen decision shows the significance of ensuring the administrative record is complete and also the hardship tax whistleblowers have in receiving an award where the IRS refuses to act on the whistleblower information.

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