[00:00:00] Speaker 02:
Case number 22-10-06, Luis Villa-Arce, a balance versus Commissioner of Internal Revenue.

[00:00:08] Speaker 02:
Mr. Duncan for the balance, Ms.

[00:00:10] Speaker 02:
Wix for the appellee.

[00:00:14] Speaker 01:
Good morning, Mr. Duncan.

[00:00:15] Speaker 00:
Good morning.

[00:00:18] Speaker 00:
May it please the court?

[00:00:20] Speaker 00:
The question before your honors this morning is whether or not the whistleblower office and then later the tax court abused its discretion in arbitrarily and capriciously denying whistleblower Villarse's claim for a fee award as being unrelated to the subject matter or information that he provided to the IRS that triggered the audit.

[00:00:41] Speaker 04:
Can we assume from that formulation you're willing to accept

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APA-like review, you said abused its discretion.

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Certainly for purposes of this case, but that's not to sort of deny the tension that exists between the statute and the regulation.

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Because if you look at the statute and what the statute requires in terms of what someone like the RCA needs to do or accomplish in order to be entitled to an award, it's very simple.

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All he has to do is provide information that triggers an action that results in a recovery over $2 million.

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And he's seemingly entitled to an award.

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But then we get to this regulatory construct that makes the hill significantly steeper for folks in the RSA's position by adding many different requirements, the most relevant of which in this case is found in example two that was discussed earlier, where all of a sudden this concept of relatedness comes up.

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Prior to that,

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I thought you weren't challenging regulations.

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I'm not challenging the regulations.

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I'm just sort of acknowledging the tension that exists and the hill that needs to be climbed by people like Whistleblower Bjarse.

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And I think one of the questions that was asked in the case before that really needs a little bit of focus here is what's the reality of how these things come to be?

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And I think Bjarse's situation is meaningful.

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Meaning he's an HR manager, right?

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He's not a CFO.

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He's not somebody in the accounting practice, but rather he's a guy who hears information that he believes is leading to something that is wrong, some sort of wrongdoing.

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And to the best of his ability, whatever it may be, you know, whatever his training education or experience, he brings that information as a whistleblower, accepting the risk that's associated with doing so.

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to the IRS and says, here's what I know.

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What's the risk?

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I'm sorry?

[00:02:35] Speaker 00:
Did you say accepting the risk?

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Accepting the risk of being a whistleblower.

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In other words, there's a risk, according with being a whistleblower, somebody who's going to raise their hand and say, I'm here to provide the information that I'm well aware of.

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And I think it was alluded to by the panel that this is going against perhaps people that he works with, he or she might work with, or a company that they have loyalty to.

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It's a behavior that I think needs to be incentivized.

[00:03:00] Speaker 03:
Now- This has identity disclosed to the taxpayer?

[00:03:07] Speaker 00:
No, I don't believe the identity of the whistleblower is ever disclosed to the taxpayer.

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Right.

[00:03:11] Speaker 00:
By the IRS.

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By the IRS.

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So what's the risk?

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I think the risk is the possibility of it being disclosed.

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I think the risk is of the information being exposed or leaked.

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And the risk is also being involved in a process like in the Arce's case that's lasted six going on seven years now from the time that he reported it up until now.

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Now his information is disclosed.

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I'm sorry?

[00:03:38] Speaker 01:
Now his identity is public.

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His identity is public, but that of the taxpayer is... His identity is public because he's filed a lawsuit.

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That's correct.

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That was totally within his discretion.

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It is.

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And that circumstances admittedly in this case have changed over time between when he first filed it to 11 and where he is today.

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Nevertheless, the decision of the tax court and the decision of the whistleblower's office is in fact arbitrary, because if you look at the regulations and this concept of unrelated or relatedness that arises in example two, in connection with the administrative record that exists in the Arce's case, there's absolutely no information that directs the whistleblower's office and subsequently the tax court to the idea that the information provided by the Arce was unrelated.

[00:04:29] Speaker 00:
Diarse provided information that he believed the taxpayer was artificially inflating or fabricating its deductions and depreciations in an effort to diminish its tax liability.

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That triggered an investigation by the IRS that was based on and focused on the inflation or fabrication of deductions and depreciation that ultimately led to a recovery

[00:04:58] Speaker 01:
But everything in your presentation is packed into the level of generality at which you describe the issue.

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Mr. Villarse had said, well, there's this head tax, in the right case here.

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And that's the over, that's the tax avoidance strategy, whereas the service said that actually was fine.

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We checked that out, and that wasn't a problem.

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And the second issue too, instead they recover on some alternative fuel credit or foreign tax credit, which I don't think Mr. Villarse ever provided information on.

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Villarse did his best to provide specific, incredible information that would trigger the action consistent with the regulatory scheme that exists.

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There's no doubt that the IRS then used its training, education, and experience based on its initial review

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to determine the scope of the investigation that it was going to conduct.

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But what we know about this case is the information that was provided by the regulator's report as well as the hourly documentation of what was performed is that the scope of the inquiry, there's no bright line indication that the scope of the inquiry ever increased or that they went down a separate path.

[00:06:20] Speaker 00:
Rather, the only conclusion that can be drawn is that they simply said, OK, we're going to slap one label on it that's different than what Mr. Villarse brought to our attention, or at least the spirit of what Mr. Villarse brought to our attention, and deem or declare it unrelated for purposes of his award petition.

[00:06:36] Speaker 01:
So spell out for us, with more concreteness, your understanding of why there's overlap or why the information that Mr. Villarse brought to the service's attention

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was actually substantially related to the, to the tax revenues that they collect.

[00:06:56] Speaker 00:
Sure.

[00:06:56] Speaker 00:
So VRC brought to the attention of the IRS a couple of different issues involving the head tax and the way he characterized the head tax.

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Basically, if this foreign corporation was taking a deduction, it wasn't otherwise entitled to, and also brought to its attention that it was overpaying or intentionally overpaying subcontractors in an effort to increase its deductions again, to minimize its tax liability.

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That is the information that he was aware of as a lay person.

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And so that's what he brought forward.

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What we know about the scope of the investigation is contained within the administrative record where the initial reviewer from the whistleblower's office, as well as the IRS auditor that was assigned to the case, identified certain codes, namely depreciation, costs of goods and services.

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They're laid out more specifically.

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So what's ultimately collected?

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What are the matters ultimately collected on?

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relating to this notion of a per employee deduction, thousand dollars a head for the overpayment of the subcontractor.

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So based on the nature of the process, the only thing that I can comment on is based on the information that's been provided to us as the whistleblower.

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And that's basically here's what we collected under and they tell us that they didn't collect under the head tax.

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But there is no explanation or reasoning provided to us to describe or explain why it is

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that they've made the determination that the information he provided is unrelated to the basis on which they collected the in excess of $2 million.

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I'll save the balance of my time for rebuttal.

[00:08:32] Speaker 00:
Thank you.

[00:09:02] Speaker 02:
Morning, Ms.

[00:09:03] Speaker 02:
Wicks.

[00:09:03] Speaker 02:
Yes.

[00:09:04] Speaker 02:
You may proceed when ready.

[00:09:06] Speaker 02:
Hey, please support.

[00:09:07] Speaker 02:
I'm Marie Wicks on behalf of the Commissioner of Internal Revenue.

[00:09:11] Speaker 02:
The critical question in this case is whether proceeds were collected based on whistleblower information.

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And the tax court correctly concluded that the record in this case establishes that no proceeds were collected based on Mr. Villa-Arce's information he submitted.

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He submitted form 211 describing a head tax of $1,000 per employee per month.

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And he attached to that form about 30 account codes with no description as to the role that those account codes played in his allegations.

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And he also stated in a cover letter through his counsel that he wasn't sure how

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The company disguises the head tax, but it fell under the HO expense with its internal account codes.

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And then he supplemented with another letter in March of 2018, I believe, where he made allegations pertaining to transfer pricing violations under Section 482.

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IRS conducted an audit.

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of the taxpayers 2014 returns and ultimately made adjustments on unrelated issues.

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The cogs, cost of goods sold, depreciation, foreign tax credit, other deductions and repairs and maintenance.

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And at the close of the audit, the revenue agent completed an evaluation of form 11369 where he

[00:10:58] Speaker 02:
summed up the role that the whistleblower's information played during the audit.

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And on that form, he clearly indicated that the adjustments were related to non-whistleblower information.

[00:11:13] Speaker 02:
But again, that report is not provided to the whistleblower, right?

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The whistleblower receives the preliminary determination letter

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And then.

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But not the report explaining the difference between the issues and why the recovery was not based on the information the whistleblower provided.

[00:11:35] Speaker 02:
I don't believe that he was prior to the tax court proceedings.

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But as part of the tax court proceedings, the administrative record is

[00:11:45] Speaker 01:
Talk to us a little bit about the jurisdictional question.

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I take it the commissioner takes the position that the two elements of a whistleblower award determination under B1 are jurisdictional prerequisites.

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What, as a practical matter, what rides on that?

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What difference does it make?

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I mean, I guess one difference is the service would never forfeit assertions of those grounds even if it failed to properly

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assert them, because jurisdiction is not waivable.

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But other than that, why is the commissioner taking the position that, in effect, the merits of the claim are jurisdictional purposes?

[00:12:29] Speaker 02:
Yes, Your Honor.

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We believe that the statute compels that in the wake of this court's decision in Lee versus commissioner.

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In that case, this court looked at

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7623B1, with respect to the threshold rejection of Ms.

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Lee's whistleblower claim, and found that the tax court lacked jurisdiction over the rejection there.

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And the main objective of the court's reasoning in Lee was not whether rejection had occurred, but whether an award determination had occurred.

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So in the course of that decision,

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This court found that the tax court's precedent, Lacey and Cooper, were wrongly decided.

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Lacey and Cooper found that both rejections and denials with lower claims satisfied the B4 scope of jurisdiction in the tax court.

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So this court's decision in Lee sufficiently abrogated the prior precedent.

[00:13:40] Speaker 03:
So if the award is $110,

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and the whistleblower thinks that's too low, then the tax court has jurisdiction to consider the whistleblower's argument.

[00:13:57] Speaker 02:
Well, yes, if there's an award.

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Yes, yes, your honor.

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And if the award is $1, the tax court has jurisdiction to consider.

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If the award is zero, it doesn't

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Does that make any sense to you?

[00:14:17] Speaker 02:
Yes, Your Honor.

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And part of that premise is under B1, the non-discretionary award.

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It's between 15% and 30% of proceeds collected as a result of the action based on whistleblower's information.

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There's a monetary threshold that has to be met.

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A determination regarding an award.

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is not, that standard is not satisfied if the determination is you don't get it.

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That's your argument.

[00:14:53] Speaker 02:
No, Your Honor.

[00:14:54] Speaker 02:
Actually, if the determination is no proceeds were collected based on your information, then it's not reviewable or determination.

[00:15:06] Speaker 02:
Under B3,

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there's an opportunity for the whistleblower office to deny an award if the whistleblower participated in initiating the tax violation itself.

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So those types of denials are reviewable under the before scope.

[00:15:26] Speaker 04:
If the tax court lacks jurisdiction, is there any other court that would have jurisdiction

[00:15:35] Speaker 04:
You couldn't go through the APA because you're seeking money.

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What are federal claims?

[00:15:41] Speaker 04:
Is there any other court that could hear this?

[00:15:43] Speaker 02:
The tax court can't honor the the tax courts would have jurisdiction to determine its own jurisdiction, which is common, which then just makes this whole exercise seem a little silly.

[00:16:03] Speaker 04:
if it's tax court or nothing, and your theory on jurisdiction merges into the merits, you're just, I don't know, doing something really strange so that if you forfeit, we don't hold you to it.

[00:16:20] Speaker 02:
Your Honor, we would argue that under the APA, there is a statute, 7623B4, that provides for

[00:16:32] Speaker 02:
jurisdiction in certain circumstances.

[00:16:35] Speaker 04:
And under... Provides for jurisdiction to determine jurisdiction.

[00:16:38] Speaker 02:
You need the prerequisites.

[00:16:41] Speaker 02:
But under 5 USC 701A2, that precludes judicial review when an action is committed to the discretion of an agency and also 702 precludes judicial review under the APA when another statute

[00:17:02] Speaker 02:
grant's consent to sue expressly or impliedly forbids such judiciary.

[00:17:09] Speaker 02:
I believe that would come into play here.

[00:17:11] Speaker 01:
If B4 says that any determination regarding an award may be appealed, doesn't that suggest that an unfavorable determination regarding an award may be appealed?

[00:17:29] Speaker 02:
Not necessarily, Your Honor.

[00:17:31] Speaker 02:
NE is indeed a broad term, but it's cabined by context, and it's tethered to the other language, NP4, determination regarding an award under paragraph one, two, or three.

[00:17:46] Speaker 01:
Well, you say that you've been pushed here by Lee, but in Lee, there was a rejection, as you noted.

[00:17:52] Speaker 01:
And your brief itself appropriately acknowledges that there's a clear distinction between Lee and this case, where

[00:17:59] Speaker 01:
In Lee, the whistleblower submission was not even referred to a revenue agent.

[00:18:05] Speaker 01:
So there wasn't even arguably any administrative action as the statute and regulations define it, whereas here there was.

[00:18:17] Speaker 02:
Yes, Your Honor.

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So the court in Lee found that it was sufficient for the court to only address whether an action had occurred.

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But the reasoning is

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fear that proceeds are also required for an award determination to occur.

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Under the regulations, section 301.7623-3, C7 and C8 define rejection and denial.

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And with respect to both of those definitions, the word determination is used.

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So the court's finding that,

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A rejection is not an award determination under V4 implies that a denial is also not an award determination.

[00:19:11] Speaker 01:
And on the merits, you say the proceeds were collected not based on Mr. Versailles information, but from a separate, distinct administrative act.

[00:19:21] Speaker 01:
And the separate, distinct administrative action was what?

[00:19:24] Speaker 01:
It was one examination initiated,

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The statute says proceeds are obtained from any administrative action.

[00:19:34] Speaker 01:
There was an administrative action that would not have been initiated for Mr. VRSA's information.

[00:19:42] Speaker 01:
And the tax court itself held the IRS would not have audited the target taxpayer but for the whistleblower's information.

[00:19:57] Speaker 01:
What's the rebuttal to the arbitrary and commercial challenge on the commissioner's part?

[00:20:02] Speaker 02:
Your Honor, this fits in large part example two in the regulation, dash two, that describes the action and proceeds based on the IRS conducted additional fact finding during the audit.

[00:20:22] Speaker 02:
The revenue agents.

[00:20:23] Speaker 01:
I understand what happened, but you're not really

[00:20:27] Speaker 01:
explaining why the, even the distinction in example two seems potentially arbitrary.

[00:20:35] Speaker 01:
If the commissioner is taking the position that there's, you know, one issue is this distinct administrative action, then why would year two necessarily be related and a different person with the same conduct in year one wouldn't?

[00:20:53] Speaker 01:
I mean, it just seems out of thin air.

[00:20:57] Speaker 01:
What's part of the same administrative action and what's not?

[00:21:01] Speaker 01:
Which is the same issue and which is not?

[00:21:03] Speaker 01:
It's just that the commissioner seems to have total free reign in defining that in any way.

[00:21:11] Speaker 01:
And is that rational?

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Non-arbitrary?

[00:21:16] Speaker 02:
Your Honor, the reasonable interpretation of the definitions in the regulation here, the IRS looked into

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the transfer pricing allegations.

[00:21:30] Speaker 02:
The records show that the revenue agent was looking into appreciation in one entry on page 73 of the revenue agent's case history.

[00:21:44] Speaker 02:
He says he communicated with the representative of the taxpayer to determine how the life of the property was determined.

[00:21:53] Speaker 02:
For other deductions, that category, there's a reference to office equipment, and that's on A71.

[00:22:03] Speaker 02:
And the cost of sales subcontracting invoices, another reference, repairs and maintenance, so that there's concrete references to what the revenue agent looked into during the audit.

[00:22:17] Speaker 01:
In addition, we have... Thank you.

[00:22:20] Speaker 01:
And I think Mr. Duncan has a couple more minutes for a bottle.

[00:22:23] Speaker 01:
Thank you, Ms.

[00:22:25] Speaker 01:
Wick.

[00:22:38] Speaker 00:
Thank you very much.

[00:22:38] Speaker 00:
I'll be very brief.

[00:22:39] Speaker 00:
I just wanted to direct the court's attention to where it can be found, where the information on which the whistleblower's office

[00:22:50] Speaker 00:
claims to have made recoveries, uh, or the subject matter on which they make a recovery.

[00:22:54] Speaker 00:
And that's on, uh, page three, 72 of the appendix page eight, three 72 of the appendix.

[00:23:03] Speaker 00:
Um, and it's a, basically a worksheet gets filled out and specifically it's, um, three.

[00:23:11] Speaker 00:
And under F3, it is a table and it asks the individual filling it out, you know, what recoveries were made related to what the whistleblower reported and what recoveries were made unrelated to what the whistleblower reported.

[00:23:26] Speaker 00:
And they list as unrelated advertising, costs of goods and services, depreciation, other deductions and repairs and maintenance.

[00:23:36] Speaker 00:
which again in the absence of any explanation and contingent exclusively on this word unrelated as it appears in exhibit or example rather to in the regulations supports that the decision was arbitrary.

[00:23:52] Speaker 00:
In other words, the exact same listing could have been placed on the other side of that table in the absence of rationale and made complete sense with the decision being that the whistleblower was entitled to an award

[00:24:05] Speaker 00:
based on the information that he submitted.

[00:24:11] Speaker 00:
There are no questions.

[00:24:14] Speaker 00:
I don't think I have anything further.

[00:24:15] Speaker 01:
Thank you very much.

[00:24:16] Speaker 00:
Thank you.

[00:24:17] Speaker 01:
The case is submitted.