Recent Tax Court Whistleblower Case and the Administrative Record

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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