Tax Court Dismisses Whistleblower Claim Because IRS Declined To Go After Taxpayer

William Prentice Cooper, III, (2011) 136 TC No. 30

The Tax Court has dismissed an attorney's claim for a whistleblower award based on an allegation that certain parties failed to pay millions of dollars of estate and generation-skipping transfer (GST) tax because IRS examined the allegation and decided not to go after the taxpayers. The Court said that, in a whistleblower case, its jurisdiction is limited to reviewing IRS's award determination and does not include any authority to redetermine the taxpayer's tax liability.

Background. The 2006 Tax Relief and Health Care Act (TRHCA, P.L. 109-432) amended Code Sec. 7623(b) to increase the amount of the award a whistleblower may receive and allow the whistleblower to appeal award determinations in the Tax Court. TRCA also established a Whistleblower Office within IRS to administer the whistleblower reward program.

A whistleblower claim qualifies under Code Sec. 7623(b), if it:

relates to a tax noncompliance matter in which the tax, penalties, interest, additions to tax and additional amounts in dispute exceed $2 million;

relates to any taxpayer, but in the case of an individual, one whose gross income exceeds $200,000 for at least one of the tax years in question; and

substantially contributes to a decision to take administrative or judicial action that results in the collection of tax, penalties, interest, additions to tax and additional amounts.

Under Code Sec. 7623(b)(1), if IRS proceeds with any administrative or judicial action, then an individual whistleblower will (unless his contribution is less than substantial) receive as an award at least 15%, but not more than 30%, of the collected proceeds (including penalties, interest, additions to tax, and additional amounts) resulting from the action (including any related actions), or from any settlement of the action. Under Code Sec. 7623(b)(2), an award is limited to 10% of collected proceeds if the whistleblower's contribution was less than substantial.

Facts. William Prentice Cooper, III, an attorney, filed two claims for a whistleblower award with IRS under Code Sec. 7623(b). In one claim, he alleged that a trust having over $102 million in assets was improperly omitted from the gross estate of Dorothy Dillon Eweson (Ms. Eweson), resulting in a possible $75 million underpayment in Federal estate tax. In the other claim, he alleged that Ms. Eweson impermissibly modified two trusts as part of a scheme to avoid the GST tax. The trusts at issue had a combined value of over $200 million at the time of Ms. Eweson's death in 2005. Cooper learned of the alleged violations through his representation of the widow of Ms. Eweson's grandson. He also verified the information by examining the public records and the records of his client. In addition, he submitted information to support the second allegation (filings in a New York Surrogate Court proceeding challenging the trust modifications as designed primarily to evade tax), and he provided a legal memorandum and draft legal documents from Ms. Eweson's attorneys that indicated the trusts were modified as part of a scheme to avoid the GST tax.

Some nine months after he filed the claims, the Whistleblower Office sent Cooper a letter denying the claims. The letter stated that an award determination couldn't be made under Code Sec. 7623(b) because he did not identify federal tax issues on which IRS would take action. The letter further explained that an award wasn't warranted for either claim because his information didn't “result in the detection of the underpayment of taxes.” Cooper filed petitions in the Tax Court seeking a review of IRS's denial of the whistleblower claims.

In response, IRS filed motions to dismiss these cases for lack of jurisdiction on the ground that no determination notice under Code Sec. 7623(b) had been made. In an earlier action, the Tax Court determined that the IRS letters denying the whistleblower's claims were “determinations” that gave the Tax Court jurisdiction to review the matter under Code Sec. 7623(b)(4).

In the current case, IRS filed answers to the two whistleblower award petitions. Attached to them was a memorandum from an IRS estate tax attorney. It summarized the facts, legal analysis and legal conclusion for IRS's denials of Cooper's claims.

Parties' arguments. IRS asked the Tax Court to dismiss the case on summary judgment because IRS said there were no genuine issues of material fact for trial. Cooper asserted that there were genuine issues of material fact because IRS failed to properly investigate facts relevant to the whistleblower claims. He further argued that IRS failed to apply the correct law in determining the merits of his claims. Cooper asked the Court to direct IRS to undertake a complete reevaluation of the facts in the matter, begin an investigation, open a case file, and take whatever other steps are necessary to detect an underpayment of tax.

Tax Court dismisses case. The Tax Court observed that generally, an individual who provides information to IRS that leads it to proceed with an administrative or judicial action is entitled to receive an award equal to a percentage of the collected proceeds under Code Sec. 7623(b)(1). Thus, stressed the Court, a whistleblower award is dependent upon both the initiation of an administrative or judicial action and the collection of tax proceeds.

Cooper wanted to litigate whether any transfer tax was due from the taxpayer. The Court said its jurisdiction in a whistleblower action is different from its jurisdiction to review a deficiency determination. In a deficiency action, the Tax Court can redetermine whether there is any income, estate or gift tax due under Code Sec. 6214(a). In a whistleblower action, however, the Court said its jurisdiction is limited under Code Sec. 7623(b) to IRS's award determination.

Congress did not authorize the Tax Court to direct IRS to proceed with an administrative or judicial action. IRS explained why it determined that there was no transfer tax due on the facts Cooper presented. He may disagree with IRS's legal conclusions for why there was no tax due. Nevertheless, whistleblower awards are preconditioned on IRS's proceeding with an administrative or judicial action. If IRS does not proceed, there can be no whistleblower award.

Since no tax was collected, there can be no award. Accordingly, the Tax Court dismissed the case.

References: For IRS's payment for information on tax violations, see FTC 2d/FIN ¶T-1030 et seq.; United States Tax Reporter ¶76,234 et seq.; TaxDesk ¶821,500 et seq.