U.S. Tax court considers whistleblower's appeal of an award determination by the IRS Whistleblower Office

Posted in Articles & Publications on July 9, 2010 | Share

The U.S. Tax Court held July 8 in a case of first impression that it has jurisdiction under section 7623(b)(4) to consider a whistleblower's appeal of an award determination by the IRS Whistleblower Office. (For William Prentice Cooper III v. Commissioner, 135 T.C. No. 4 (Jul. 8, 2010), see Doc 2010-15202  .)

William Prentice Cooper III submitted two whistleblower claims to the IRS in 2008 alleging that a taxpayer had impermissibly modified two trusts in order to avoid paying estate and generation-skipping transfer taxes. The IRS sent Cooper a notice of receipt of the submitted claims; nine months later, he received a letter from the IRS Whistleblower Office denying the claims on the grounds that they did not identify specific tax issues or result in the detection of underpaid taxes. Cooper filed petitions in the Tax Court regarding the IRS's award determinations, and the IRS sought to have the cases dismissed for lack of jurisdiction.

In its motions for dismissal, the IRS argued that the letter Cooper received was not a final agency determination that could be appealed, and that consequently the Tax Court had no jurisdiction under section 7623(b)(4).

In an opinion by Judge Diane L. Kroupa, the court held that it has jurisdiction to review the petitions. As part of the revised tax whistleblower statute enacted in the Tax Relief and Health Care Act of 2006, Congress required the Treasury secretary to pay nondiscretionary awards that included Tax Court jurisdiction to review the award determinations. Notice 2008-4 and the subsequent June 2010 Internal Revenue Manual updates detailed the procedures by which the IRS will process whistleblower claims, including notice of award determinations. (For Notice 2008-4, 2008-2 IRB 253, see Doc 2007-27740  or 2007 TNT 245-13 . For the IRM guidance, see Doc 2010-13536  or 2010 TNT 117-20 . For prior coverage, see Doc 2010-13529  or 2010 TNT 117-2 .)

Although the IRS argued that its letters to Cooper were not determinations that could be appealed because the claims had not led to administrative or judicial actions to collect unpaid taxes, the Tax Court held that its jurisdiction "is not limited to the amount of an award determination but includes any determination to deny an award." That the IRS did not call its letter to Cooper a determination had no bearing on the matter because "labeling [is] not dispositive," the court said.

The court also hinted at the IRS Whistleblower Office's disorganized past, calling the office's pre-2006 discretionary award process "arbitrary and inconsistent" as a result of "a lack of standardized procedures and limited managerial oversight."

Senate Finance Committee ranking minority member Chuck Grassley, R-Iowa, on June 21 wrote to Treasury Secretary Timothy Geithner to express concern about how the office handles claims, saying that the IRM changes could have a limiting effect on future submissions. Grassley also wrote that he is troubled because the changes seem to create a "perverse incentive" for a whistleblower to wait until an improper refund is made before filing a claim. (For Grassley's letter, see Doc 2010-14794  or 2010 TNT 128-70 .)

Bryan C. Skarlatos of Kostelanetz & Fink LLP called the court's decision "a welcome clarification." The Tax Court correctly read the legislative history to determine that the IRS's position that appeal of a determination is limited to the amount of the award is contrary to the statute, he said, adding, "It is consistent with Congress's legislative intent to give individuals a full scope of review of the whistleblower award determination process, which is important because there are cases out there where the IRS is not taking action."

"The court's opinion reaches the correct result," agreed Kevin Thorn of Thorn Law Group. He told Tax Analysts he hopes that the IRS Whistleblower Office "will take seriously its responsibility to carefully consider each award claim and clearly communicate, to the extent permitted by law, its actions to whistleblowers."

For more information on these developments and offshore tax issues, please contact Kevin E. Thorn, Managing Partner at the Thorn Law Group, PLLC, 888 16th Street, NW, Suite 800, Washington D.C., Telephone: 1.202.349.4033, Email:

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