Tax Court Sustains IRS WBO Denial of Whistleblower Claim for Award Based on All OVDI Collected Proceeds (3/13/23)

In Shands v. Commissioner, 160 T.C. 388 (2023), TC here and TN here, the Tax Court sustained the IRS Whistleblower Office ("WBO") denial of a § 7623(b) claim for nondiscretionary minimum of 15% of collected proceeds with discretionary increases to 30%. (Actually, as described by the Tax Court, his claim was for 30%, but the statute requires only 15% as a nondiscretionary award; I guess he could have thought his contribution was so great that the IRS must exercise its full discretion.) As best I understand, Shands claimed that, based on information he gave federal agents related to the arrest and cooperation of one Renzo Gadola, a misbehaving Swiss banker (misbehaving is perhaps redundant), the IRS created the OVDI program and collected proceeds from many taxpayers, most or even all of whom were unknown to Shands. In his claim letter dated 6/6/12, Shands was unable to name those taxpayers but said he was nevertheless entitled to the § 7623(b) award based on collected proceeds from those taxpayers entering OVDI. "Neither the [Shands] OVDI claim letter nor petitioner's Motion papers claim a share of collections from associated enforcement actions, such as seizures of taxpayer assets or follow-up audits of OVDI participants, taxpayers who opted out of OVDI, or taxpayers not in compliance that the IRS discovered through OVDI disclosures."

The basis for denial was that the creation of OVDI was not an administrative or judicial proceeding as defined in "Treasury Regulation § 301.7623-2(a) [which] defines both terms for claims open as of August 12, 2014. See Treas. Reg. § 301.7623-2(f).” (Emphasis supplied by JAT.) Shands' claim had not been acted on by August 12, 2014, so relying on the regulation seems to be appropriate.

But Shands had another trick up his sleeve. He claimed that the IRS WBO had already decided to deny his claim and in the normal course would have except (he claimed), the IRS improperly delayed issuing the denial until the proposed regulation on August 12, 2014 in order to subject his claim to the Regulation's interpretation of administrative or judicial proceeding. His argument was that the Administrative Procedure Act ("APA" does not permit an agency to effectively make the decision on action (here a denial) and withhold the formal notice of the action pending issuing proposed regulations as a basis for the action.

This sets up a nice APA conundrum, possibly. The claim is that the regulation cannot apply because the court must treat the denial as occurring in effect before the August 12, 2014 stated effective date. In that case, the statute's use of "administrative or judicial proceeding" must be interpreted without the regulation's spin, and Shand's claim is that his information delivered to the IRS allegedly causing OVDI meets the definition of the statute. (Actually, Shands dressed his APA claim up in APA-type terminology such as "set aside" and "arbitrary, capricious," etc., but it all boiled down to a claim that the IRS denial "must be evaluated based on the law applicable as of the date of respondent's initial decision to deny petitioner's claim.")

Initially, it is not clear to me why the IRS put an effective date later than the date of enactment of the statute. The regulation was an interpretive regulation which could be retroactive. (My claim about retroactivity is contested by many, but I think rock-solid. See John A. Townsend. The Report of the Death of the Interpretive Regulation Is an Exaggeration (SSRN December 14, 2021), https://ssrn.com/abstract=3400489)

Setting aside the retroactivity issue, how did the Tax Court deal with the issue? I am not sure exactly how the Tax Court got there. The Tax Court claimed to rely on Bergerco Can. v. U.S. Treas. Dep't, Office of Foreign Assets Control, 129 F.3d 189, 190–91 (D.C. Cir. 1997), but I can't understand the Tax Court's interpretation in Bergerco. In any event, the Tax Court concluded:

The same reasoning [as Bergerco] permits us to apply the regulatory definition of "administrative or judicial action" adopted while petitioner's claim was pending. Petitioner cites no authority requiring the WBO or the Tax Court to ignore the regulation in reviewing claims filed before its effective date, and he identifies no other action he took that would entitle him to such review. We do not inquire into the IRS's reasons for issuing the regulation before the denial letter. Cf. Lissack, 157 T.C. at 63–68, 71–76 (applying the regulatory definition where the WBO may have had enough information to deny the claim nearly three years before its effective date).

I am not sure that the conclusion really addresses the claim that Shands made. I don't mean to suggest that Shands' claim is a good claim; I just suggest that the Tax Court's reasoning seems weak.

Now, just to wrap back to the interpretive regulation issue, although the IRS volunteered post-enactment effective date of the regulation (an unforced error), still the regulation does present the IRS's considered interpretation of the statute. Consider this from Smiley v. Citibank (South Dakota), N. A., 517 U.S. 735, 744 n.3 (1996), here (decision of the Court authored by Justice Scalia an administrative law expert) (emphasis supplied by JAT):

   n3 In a four-line footnote on the last page of her reply brief, and unpursued in oral argument, petitioner raised the point that deferring to the regulation in this case involving antecedent transactions would make the regulation retroactive, in violation of Bowen v. Georgetown Univ. Hospital, 488 U. S. 204, 208-209 (1988). Reply Brief for Petitioner 20, n. 17. There might be substance to this point if the regulation replaced a prior agency interpretation—which, as we have discussed, it did not. Where, however, a court is addressing transactions that occurred at a time when there was no clear agency guidance, it would be absurd to ignore the agency's current authoritative pronouncement of what the statute means.

That point is more like Skidmore respect.  Remember Skidmore is misnamed as deference; it is not deference but simply respectful consideration to reach the most persuasive interpretation of the statute.  Really, Skidmore "Deference?" (Federal Tax Procedure Blog 5/31/20; 2/14/21), here.