[00:00:00] Speaker 04:
Good morning, Miss Brady Gitlin.

[00:00:10] Speaker 02:
You may proceed when you're ready

[00:00:32] Speaker 04:
Good morning, and thank you for your support.

[00:00:34] Speaker 04:
I'm Erica Brady-Gitlin for the appellant, and I'm honored to be here today with my colleagues, Gregory Lineham and Scott Knott.

[00:00:40] Speaker 04:
I would like to reserve two minutes for rebuttal.

[00:00:44] Speaker 04:
At its floor, this case is about the IRS continuing to exercise discretion, where Congress has expressly removed that discretion from the IRS.

[00:00:53] Speaker 04:
There are three main issues presented in this case.

[00:01:00] Speaker 04:
the tax court's misapplication of the standard of review by erroneously applying abusive discretion to these cases, the tax court's jurisdiction to hear these cases, and the tax court's erroneous finding of ambiguity within the language of Section 73B1.

[00:01:20] Speaker 04:
By way of context, in 2006, Congress enacted amendments to Section 7623B that added

[00:01:29] Speaker 04:
and mandatory award regime to an already existing discretionary program.

[00:01:35] Speaker 04:
Paragraph one mandates that the IRS shall pay a percentage of the amounts collected from the action that the IRS took based on the whistleblower's information.

[00:01:48] Speaker 04:
Paragraphs two and three provide when the IRS may pay less than the award mandated in paragraph one.

[00:01:59] Speaker 04:
Where Congress has mandated agency action, excuse me, the action is traditionally reviewed to know the Viacorn, as was the case in Iowa League of Cities versus EPA.

[00:02:13] Speaker 04:
Because there is no discretion left as to whether the IRS may pay an award, there is no discretion for them to abuse.

[00:02:22] Speaker 03:
Why wouldn't the standard as under the APA vary depending on the nature of the

[00:02:29] Speaker 03:
of the action being reviewed.

[00:02:32] Speaker 03:
If there was a question about the scope of the record and whether a judgment had erroneously been made to grant or deny somebody an opportunity to expand the record, maybe that would be abusive discretion, whereas a question about interpreting the statute and whether the

[00:02:52] Speaker 03:
regulations are supported or in conflict with the statute would be de novo.

[00:02:57] Speaker 03:
I'm not entirely sure why the presentation seems to look to just one standard.

[00:03:07] Speaker 04:
I think that there could be a logical split in standard of review if you're looking to be amounted or once it's determined whether or not it is appropriate to be made, Congress should leave discretion for the IRS to

[00:03:22] Speaker 04:
determine the amount of the award within the range of 15% to 30%.

[00:03:28] Speaker 04:
And that would seem an appropriate place for an abusive discretion standard of review.

[00:03:33] Speaker 04:
However, Congress has mandated that awards be paid within the context of the other things being met within paragraph 1.

[00:03:45] Speaker 04:
And that would need to be reviewed in NOVA.

[00:03:49] Speaker 03:
I'm interested in the argument that you identified as the ambiguity in B1.

[00:03:59] Speaker 03:
How are you reading the regulations and responding to the services contrary reading?

[00:04:11] Speaker 04:
Paragraph one provides that where the secretary proceeds based

[00:04:18] Speaker 04:
proceeds in an administrative or judicial action as described in subsection A. They shall pay an award of 15% to 30% based on collected from the action.

[00:04:32] Speaker 04:
And the tax court, in its opinion, found that,

[00:04:46] Speaker 04:
An administrative or judicial action described in a subsection A doesn't describe an administrative or judicial action.

[00:04:54] Speaker 04:
However, the language of subsection A clearly describes the ability to pay awards for

[00:05:12] Speaker 04:
actions taken for the determination of an underpayment of tax or criminal liability for tax law violations.

[00:05:21] Speaker 03:
So your argument is detecting underpayments of tax is effectively referencing something like an examination and detecting and bringing to trial would be a criminal proceeding against any person as

[00:05:38] Speaker 03:
for example, referenced in the regulatory definition.

[00:05:43] Speaker 03:
And in fact, I take your argument also to be that before the 2006 amendments, that seemed to be the way the service also was treating the actions referenced in 7623A1 and 2.

[00:06:02] Speaker 04:
And we can see that not only from the Senate report,

[00:06:06] Speaker 04:
but also from various agency documents that had been produced at the time.

[00:06:10] Speaker 03:
Tell me how the Senate report and the agency documents support your view.

[00:06:20] Speaker 04:
So in the Senate report, there is a language of how the program worked at the time, specifically mentioning that awards were paid for the identification of non-compliant taxpayers.

[00:06:34] Speaker 04:
It references that non-compliant taxpayer, identification of a non-compliant taxpayer usually received an award of 1%.

[00:06:43] Speaker 04:
But at the time, the award range was 1% to 10% or 15%, depending on what you were looking at, which conveniently slides to the 15% to 30% under V. So why is

[00:07:00] Speaker 03:
If there's total discretion in the service before 2006 to give an award and to set the amount of it, and the amount is typically under much lower guidelines, it seems like under that kind of regime, there's no real need to parse out which subpart or issues within an administrative action may have been ones that the whistleblower's information

[00:07:31] Speaker 04:
The IRS had absolute discretion to pay awards and my understanding, I was not a practicing attorney at the time, sorry, but my understanding of the program as it existed was that it was very frustrating for people who participated in it as awards were really rarely paid and even when there was a contract it was hard to get

[00:08:00] Speaker 04:
review of the contract unless there was specific language that said that the contract was reviewable and that you could receive discovery to actually show and make your case.

[00:08:10] Speaker 03:
So I guess I'm saying doesn't that support the services view that there wasn't really a manifest interpretation or a practice that informs how we should understand an administrative action.

[00:08:26] Speaker 04:
But the IRS at the time has laid out guidelines for paying

[00:08:30] Speaker 04:
under the preamendment discretionary program.

[00:08:36] Speaker 03:
And your assertion is that it looked to the total award from, let's say an examination was triggered by taxpayers information as to tax issue A. And if there's a recovery, let's say on tax issues A and then B and C that the service further uncovered through its own investigation, your submission to us is that the service used to look at the total

[00:09:05] Speaker 03:
hall, let's say, from issues A, B, and C, and do a percentage from that, as opposed to what its current position is, which is we're only going to look at issue A, whether there was a recovery on that, and then decide whether we're obligated to give any award at all.

[00:09:23] Speaker 04:
That is my understanding of how it existed beforehand.

[00:09:26] Speaker 04:
And it would make sense, because if you are awarding whistleblowers for their contribution to a case,

[00:09:34] Speaker 04:
where somebody triggers the audit of a non-compliant taxpayer, the entire amount that's from that audit would not have been collected or assessed but for the whistleblower's contribution in triggering the audit.

[00:09:51] Speaker 03:
And that's your argument about this, both sort of the unit size of administrative action and I take it relying on

[00:10:02] Speaker 03:
the definition of proceeds based on that the IRS would not have initiated but for the information.

[00:10:09] Speaker 04:
And that position is in fact within the language of Treasury Regulation 301.7623-2B1.

[00:10:16] Speaker 04:
The examples exist in dash 2B2.

[00:10:26] Speaker 02:
Right.

[00:10:32] Speaker 03:
We'll save your rebuttal time and we'll hear from you after we hear from the service.

[00:10:48] Speaker 05:
Good morning, Your Honors, and may it please the Court, Julia Vetta, the Commissioner.

[00:10:52] Speaker 05:
A whistleblower award determination requires a sequence of events, and those events must happen in sequence.

[00:10:57] Speaker 05:
Each one is a condition of the next and a consequence of the one before.

[00:11:02] Speaker 05:
First, the whistleblower must provide information to the IRS, and that information must identify a discrete tax issue and to be significant and credible enough to investigate.

[00:11:11] Speaker 05:
The IRS must then proceed with an administrative or judicial action based on that information, and that action must result in the collection of proceeds.

[00:11:20] Speaker 05:
Only then can the whistleblower office make a determination that a whistleblower is entitled to an award.

[00:11:26] Speaker 03:
What's the site for us saying that a whistleblower has to

[00:11:32] Speaker 03:
Identify a discrete tax issue.

[00:11:36] Speaker 05:
He does not have to identify a discrete tax issue in general.

[00:11:40] Speaker 05:
There is no statutory obligation for him to do so.

[00:11:43] Speaker 05:
He must provide information that is, on which the second, that substantially contributes to the proceeds when the, as I said, it's a flow.

[00:11:54] Speaker 05:
The whistleblower must provide information.

[00:11:57] Speaker 05:
First, there is a level of IRS scrutiny to determine the value of information.

[00:12:00] Speaker 05:
It's not statutory to answer your honor's question.

[00:12:02] Speaker 05:
That is sort of an administrative determination, whether this information is good enough to proceed on.

[00:12:07] Speaker 03:
So there's nothing that would alert a potential whistleblower to the salience to the commissioner of the issue.

[00:12:17] Speaker 03:
I mean, one thing that strikes me in reading briefing in this case is that I take it the IRS functions very much in terms of issues.

[00:12:28] Speaker 03:
And that term is nowhere in the statute and nowhere.

[00:12:31] Speaker 05:
And the regulations that's correct, but it need not because of whistleblowers information need not be limited to a single issue or to a set of related issues whistleblower will just provide information.

[00:12:42] Speaker 05:
Based on what they know based on what they have access to about this taxpayer and the provision of that information that insider knowledge was what Congress was looking to do.

[00:12:52] Speaker 05:
when that was the incentive that this statutory system was set up.

[00:12:55] Speaker 03:
But when one's thinking about an incentive, one is generally making some kind of prediction, assumption, calculus about how the information would be used and what's the likelihood that it would pan out in a whistleblower award.

[00:13:14] Speaker 03:
And so where does

[00:13:20] Speaker 03:
blowers in the field that your ability to recover is going to depend on whether the issue on which the service ends up gaining revenue is the same is an issue that your information spoke to.

[00:13:44] Speaker 05:
First is in the Treasury regulation which provides examples and demonstrates how the IRS proceeds based on whistleblower information.

[00:13:53] Speaker 03:
So the example is the only place where this distinction is really spelled out?

[00:13:58] Speaker 05:
It's where it's being most thoroughly fleshed out, but I would also push back on the sense that there needs to be

[00:14:06] Speaker 05:
there's a demand of a whistleblower to present a distinct issue.

[00:14:08] Speaker 03:
What they have to do is provide a tip.

[00:14:10] Speaker 03:
But if they're thinking, you know, I'm going to anger some people, I'm going to put, you know, step out and, you know, blow the whistle on somebody maybe that I know or that I've worked for.

[00:14:25] Speaker 03:
But it's probably going to be worth it to me because I think when they start to dig in,

[00:14:30] Speaker 03:
they're going to see that there's a lot of underpayment.

[00:14:33] Speaker 03:
And it would be helpful to the whistleblower to understand what the scope is of the potential pool of funds in which he might eventually share.

[00:14:47] Speaker 03:
And I wonder if you can point me as sort of rigorously as possible to what might help a whistleblower understand that when we say that

[00:15:00] Speaker 03:
the administrative action is going to yield something and then that as long as the IRS proceeded based on the information with something they wouldn't have initiated, but for the information that you're not talking about.

[00:15:20] Speaker 03:
an administrative action or an examination in the way we think of sort of ordinarily one audit, you're thinking in this, you know, in this more parsed out way.

[00:15:31] Speaker 03:
That's just not at all clear to me from the regulations.

[00:15:34] Speaker 05:
First, I would direct your honor to the language of the statute 7623B1, where it's stated clearly that the determination of the amount of the award that someone would be entitled to

[00:15:45] Speaker 05:
termination by the whistleblower office shall depend upon the extent to which the individual substantially contributed to such action.

[00:15:51] Speaker 05:
Now, I understand you're pointing out the ambiguity in the term action.

[00:15:54] Speaker 05:
And that's what the regulation is designed to resolve.

[00:15:57] Speaker 05:
And that's why the regulation is necessary there, because of that ambiguity that you have identified.

[00:16:02] Speaker 05:
What is an action?

[00:16:04] Speaker 05:
This does not say.

[00:16:05] Speaker 05:
The statute doesn't tell you.

[00:16:06] Speaker 05:
It refers to a non-existent antecedent and a whistleblower who's not aware of what practice was, or even if they were aware of what practice was, still may not understand

[00:16:16] Speaker 05:
that the focus on their issue, the requirement that they substantially contribute to the particular investigation of the particular point that results in the collection of proceeds, is not clear on the statute.

[00:16:28] Speaker 05:
And that's where you need to look to the reg.

[00:16:30] Speaker 05:
And the reg does make that clear.

[00:16:32] Speaker 05:
The reg defines that an action can be all or a portion of an audit.

[00:16:36] Speaker 05:
And that makes sense, because you're not looking to incentivize people to go out and find taxpayers who escape the audit

[00:16:44] Speaker 05:
and trigger audits and go on a phishing expedition.

[00:16:47] Speaker 05:
You want good information about actual tax avoidance strategies.

[00:16:52] Speaker 01:
Is there any penalty for a whistleblower submitting false information?

[00:16:59] Speaker 05:
Not in the award regime.

[00:17:04] Speaker 01:
There is a screening process.

[00:17:05] Speaker 01:
The form is, what, 211, is it?

[00:17:08] Speaker 05:
Is that under oath?

[00:17:13] Speaker 05:
Believe it may be, I don't know, certainly.

[00:17:23] Speaker 01:
It's a sealed part of the appendix, I think.

[00:17:35] Speaker 02:
Don't immediately recall whether or not it is under oath.

[00:17:38] Speaker 05:
However, the incentive obviously is to

[00:17:43] Speaker 05:
point the IRS in the direction of a non-compliant taxpayer and that's information that you are going to need to.

[00:18:15] Speaker 02:
I'm unable to locate it.

[00:18:17] Speaker 01:
I'm just wondering what incentive an individual would have other than not getting an award, but what incentive an individual would have

[00:18:33] Speaker 01:
in not providing or providing information that was accurate and truthful as opposed to all made up in the hope that it would trigger an investigation or audit.

[00:18:50] Speaker 05:
The incentive structure in the statute may well admit of an invitation to go fishing.

[00:18:58] Speaker 05:
may well admit an invitation to invite the IRS to undertake an audit to see what they can find based on information that is not unique to the taxpayer, that's not original.

[00:19:09] Speaker 01:
Do you have any idea what the volume of submissions is per year?

[00:19:16] Speaker 05:
It's significant.

[00:19:18] Speaker 05:
It's in the thousands.

[00:19:20] Speaker 01:
How many?

[00:19:20] Speaker 05:
I believe it's in the thousands.

[00:19:22] Speaker 05:
There is a whistleblower report that the IRS releases annually.

[00:19:26] Speaker 01:
To Congress?

[00:19:28] Speaker 05:
to the public.

[00:19:29] Speaker 05:
It's publicly available.

[00:19:32] Speaker 01:
One thousand or a hundred thousand.

[00:19:37] Speaker 05:
I believe it's less than a hundred thousand.

[00:19:39] Speaker 05:
The report is not in the record and there would of course be a new one for this year.

[00:19:44] Speaker 05:
But there is an enormous volume of whistles lower claims that come in and there's an enormous effort done by the IRS at the outset to filter out the claims that are not legitimate.

[00:19:55] Speaker 05:
I don't believe there is a penalty for false information, but I can't say that to a certainty.

[00:20:00] Speaker 05:
I do believe that the information goes through, and I more than believe, I can state that the information goes through a verification process first by the whistleblower office.

[00:20:11] Speaker 05:
And then if it is significant and credible, it's referred to the operating division.

[00:20:16] Speaker 01:
There's an overlay in this whole business of prosecutorial discretion involved.

[00:20:23] Speaker 01:
And I'm wondering also, if somebody goes to the whistleblower office and says that the following return is wrong and such and such a way, but if the whistleblower is correct, the IRS could collect another $100.

[00:20:42] Speaker 01:
Does the IRS have discretion to say, look, we're not going to bother with that.

[00:20:50] Speaker 01:
It's too small.

[00:20:51] Speaker 01:
We have our priorities, and we only have a limited number of revenue relations to conduct audits.

[00:21:01] Speaker 05:
ARIS does have non-enforcement discretion at the outset.

[00:21:04] Speaker 05:
The IRS can reject whistleblower claims that it does not believe will are significant and credible and will lead to the collection of proceeds.

[00:21:14] Speaker 05:
Whether there's some threshold dollar value of proceeds that the IRS treats as a floor

[00:21:20] Speaker 05:
I think we don't see in this record, and I could not state with any certainty how an individual whistleblower analyst would approach that.

[00:21:28] Speaker 05:
But it does seem that the way the statutory framework is set up, it is not staked to the quantity of proceeds.

[00:21:40] Speaker 05:
It's staked to the provision of information.

[00:21:42] Speaker 05:
The value of the award ultimately given to a whistleblower who meets these jurisdictional

[00:21:49] Speaker 05:
prerequisites for a determination as to an award becomes a share of the proceeds ultimately collected.

[00:21:58] Speaker 05:
Now, the IRS doesn't necessarily know what proceeds will be collected if the whistleblower, say, identifies some information or an issue or issues within Judge Pollard's framing that they believe will lead to the collection of a million dollars.

[00:22:12] Speaker 05:
And then the IRS decides that that's credible, initiates an action or proceeds with an action

[00:22:19] Speaker 05:
investigates that information and concludes at the end, the adjustment is actually very small.

[00:22:25] Speaker 05:
It's only $100.

[00:22:26] Speaker 05:
You're still within this framework there.

[00:22:28] Speaker 05:
Then Elizabeth Lauer will collect their share of the proceeds out of what proceeds are ultimately recovered, regardless of what their original claim was.

[00:22:39] Speaker 03:
Can you speak to the standard of review?

[00:22:41] Speaker 03:
And I have the same question that I had from Ms.

[00:22:43] Speaker 03:
Brady-Gitlin about weather.

[00:22:46] Speaker 03:
We should just look at this the way we typically look under the APA for what the nature is of the matter under review and determining appropriate.

[00:22:56] Speaker 05:
We would submit here that the item being reviewed or the decision being reviewed is the determination as to the award, which is discretionary within a range.

[00:23:07] Speaker 05:
And to some extent influenced by the statute, subparagraphs two and three speak of ways in which

[00:23:14] Speaker 05:
that award can be adjusted within that range or outright denied if the whistleblower has committed criminal conduct in conjunction.

[00:23:24] Speaker 00:
But the question before us seems to turn on a legal dispute, right?

[00:23:30] Speaker 00:
Taxpayer comes in with theory A, that triggers an audit.

[00:23:34] Speaker 00:
You find a problem on theory B. Is that within the mandatory clause of B?

[00:23:41] Speaker 00:
That seems like a legal question.

[00:23:43] Speaker 05:
It's a factual question, Your Honor, to the extent that the determination must be made as a jurisdictional prerequisite because the court can only review determinations as to an award.

[00:23:54] Speaker 00:
Assume I disagree with you on that.

[00:23:57] Speaker 00:
Assume this is a merits question.

[00:24:00] Speaker 05:
The court nonetheless will need to verify that the proceeds were collected as a result of the action because the regulation

[00:24:11] Speaker 05:
clear that the action can be all or part of an audit, the adjustment that led to the collection of proceeds is a material factual finding, whether as a jurisdictional fact or if you're looking at it on the list.

[00:24:26] Speaker 05:
And that has to come from the record.

[00:24:28] Speaker 05:
And if that's not there in the record, then there is no established determination as to an award that's reviewable and the matter needs to be remanded

[00:24:38] Speaker 05:
additional vaccine to be requested of the whistleblower office at that level.

[00:24:44] Speaker 05:
Is that the determination that's being reviewed?

[00:24:46] Speaker 05:
The whistleblower office is making a discretionary determination.

[00:24:51] Speaker 00:
What, sorry, what fact is undisputed here?

[00:24:57] Speaker 05:
The fact is undisputed?

[00:24:58] Speaker 00:
I'm sorry, it's disputed.

[00:25:01] Speaker 00:
There's a finding that the

[00:25:06] Speaker 00:
theory that the whistleblower came forward with, it's not the theory on which you made an adjustment.

[00:25:14] Speaker 05:
That's correct.

[00:25:15] Speaker 05:
On this record, that's not the case.

[00:25:17] Speaker 00:
And the whistleblower has a legal argument that assuming that fact is true, he is still entitled to recover because of his interpretation of the word action and the regulations.

[00:25:33] Speaker 05:
Yes, that's correct.

[00:25:35] Speaker 05:
And on these facts,

[00:25:36] Speaker 05:
It is purely a legal question.

[00:25:38] Speaker 05:
But the decision that is being reviewed, if it turns out that the initiation of an audit were the only action that was necessary for a whistleblower to recover proceeds, then that would be to say an abuse of discretion by the whistleblower office to deny the award to which the whistleblower was entitled.

[00:26:03] Speaker 03:
How is the whistleblower supposed to know

[00:26:06] Speaker 03:
I mean, what's going on inside the IRS?

[00:26:12] Speaker 03:
And how can we test the grounds on which the IRS relied in saying the issue we decided here is different from the issue on which he came forward?

[00:26:22] Speaker 03:
It seems like that you're putting whistleblowers in a kind of a black box and asking the tax court in this court to accept somewhat conclusory assertions that what they ended up covering, what the service ended up recovering,

[00:26:37] Speaker 03:
on was a distinct issue from what the whistleblower can provide.

[00:26:44] Speaker 05:
The tax court is dissatisfied with the record evidence in support of a whistleblower office determination.

[00:26:50] Speaker 05:
It can find that that was an abuse of discretion based on insufficient evidence.

[00:26:52] Speaker 05:
What if it's not dissatisfied, but it should be?

[00:26:55] Speaker 03:
I mean, what if it just, you know, IRS told me

[00:27:00] Speaker 03:
These issues were distinct.

[00:27:01] Speaker 03:
I have no information, and the I in that sentence being the tax court judge, no information independently to evaluate one way or the other, whether the matter, the whistleblower came in with is the same, different, overlapping to the one that the service ended up recovering on.

[00:27:24] Speaker 03:
But service tells me, fine with me.

[00:27:26] Speaker 03:
Is there anything

[00:27:30] Speaker 03:
that a whistleblower who's being diligent has any tool they have to flesh it out.

[00:27:38] Speaker 05:
They have recourse to the tax court to review a determination regarding an award.

[00:27:42] Speaker 03:
What about in the whistleblower process?

[00:27:45] Speaker 03:
Now, before they get to the tax court, if they want to make sure that they have something to point to when they go to the tax court and say, like, they're saying this is a different issue.

[00:27:53] Speaker 03:
But if you actually look at what they did, it's the same issue with a different name or with the same name

[00:28:01] Speaker 05:
Within the whistleblower office process, there is not that level of give and take.

[00:28:05] Speaker 05:
The whistleblower does not deal directly with the IRS back and forth in performing discovery.

[00:28:10] Speaker 05:
That's more the province of review in the tax board.

[00:28:13] Speaker 05:
The whistleblower submits information to the whistleblower office.

[00:28:18] Speaker 05:
If successful, that information is relayed to the operating division of the IRS to proceed with administrative or judicial action.

[00:28:26] Speaker 05:
The recovery of proceeds, if any, will produce the award

[00:28:30] Speaker 05:
whistleblower and then the whistleblower learns of that disposition, whether there is an award or whether there is a determination that there will not be an award given.

[00:28:38] Speaker 05:
That is, to go more precisely to your honor's question, in the task force, if there is a question as to the sufficiency of the record, then that is where the whistleblower has the opportunity to seek to supplement

[00:28:55] Speaker 05:
The whistleblower here did not do so, but the tax court decision specifically does identify that opportunity is available in a proceeding that's properly jurisdictionally before the tax.

[00:29:06] Speaker 03:
Is the revenue agent report something that the whistleblower would have access to?

[00:29:11] Speaker 05:
I believe they would not generally get the entirety of the audit obviously is not.

[00:29:19] Speaker 05:
I think that they do ultimately gain access to that information,

[00:29:25] Speaker 05:
I don't know if it comes as part of the determination letter.

[00:29:28] Speaker 05:
I feel it probably wouldn't.

[00:29:29] Speaker 05:
I think that would come later during the tax court proceedings.

[00:29:33] Speaker 01:
I thought that would be taxpayer information and it's protected from disclosure.

[00:29:42] Speaker 05:
With respect to issues unrelated or actions unrelated to the whistleblower information, Your Honor, that's correct.

[00:29:49] Speaker 05:
So the entirety of the audit would not be disclosed.

[00:29:52] Speaker 01:
Doesn't get it and shouldn't get it.

[00:29:53] Speaker 01:
I said that whistleblower doesn't get it and shouldn't get it.

[00:29:58] Speaker 05:
As to issues other than the one that they identified, absolutely not.

[00:30:01] Speaker 05:
And there is a danger in seeking to crack open the audit and to tether a whistleblower's recovery merely to the initiation of an action and the happenstance where the whistleblower identified a taxpayer who was not already under audit.

[00:30:20] Speaker 05:
And then to conclude that they were entitled to a fishing expedition throughout the audit to trace the correlation of proceeds to the information they provided could be disastrous and was absolutely not what Congress was seeking to incentivize in this structure.

[00:30:35] Speaker 03:
So what is the nature of the information that the whistleblower gets regarding what happened to the information they provided?

[00:30:43] Speaker 05:
They received a determination letter, and the letter is fairly

[00:30:50] Speaker 05:
High level.

[00:30:53] Speaker 05:
It says a determination has been made.

[00:30:55] Speaker 05:
You are not getting an award.

[00:30:57] Speaker 05:
And we did proceed based on your information with an administrative action.

[00:31:03] Speaker 05:
But we did not recover proceeds as a result of the action.

[00:31:07] Speaker 05:
The letter example in this case is at page 16 of the appendix.

[00:31:11] Speaker 05:
And the language is, as I said, very high level.

[00:31:16] Speaker 05:
We reviewed the information you provided as part of the examination, but that review did not result in the assessment of additional tax, penalties, interest or additional amounts with respect to the issues you raised.

[00:31:25] Speaker 05:
The issues is stated there in the plural even though this whistleblower identified specifically a single issue.

[00:31:33] Speaker 05:
The IRS did assess additional tax, penalties, interest or additional amounts, but the information you provided was not relevant to those issues.

[00:31:42] Speaker 05:
And then there's language.

[00:31:45] Speaker 05:
advising a whistleblower that there is potentially recourse in tax court.

[00:31:50] Speaker 05:
And our position in that regard would be that if the whistleblower believes that the information he provided did in fact lead to the proceeds, that inquiry would be conducted as a matter of jurisdictional fact-finding in the tax court.

[00:32:08] Speaker 00:
Could I ask you about the regulatory definition of administrative action

[00:32:15] Speaker 00:
It seems very broad.

[00:32:18] Speaker 00:
It covers all or a portion of a proceeding.

[00:32:24] Speaker 00:
It's a proceeding that may result in proceeds and it includes an examination.

[00:32:32] Speaker 00:
It seems like under that definition, it is perfectly permissible to talk about the action as just the audit writ large.

[00:32:44] Speaker 00:
rather than trying to slice and dice the audit into a claim-by-claim or theory-by-theory approach, which is what you want.

[00:32:53] Speaker 05:
That's not an unreasonable reading of the definition at all.

[00:32:55] Speaker 05:
And in some cases, that may actually be true.

[00:32:57] Speaker 05:
In some cases, that may be 100% of the scope of the whistleblower investigation.

[00:33:02] Speaker 00:
If here, for example.

[00:33:03] Speaker 00:
OK, but if the relevant action is just the audit writ large, then the information provided here

[00:33:14] Speaker 00:
did cause an action that resulted in a recovery?

[00:33:20] Speaker 05:
I'll explain why that's not.

[00:33:21] Speaker 00:
Okay.

[00:33:23] Speaker 05:
If the whistleblower here provided information, the IRS proceeded with an action based on that information, opened the audit, and the entirety of the audit consisted only of the investigation of that information.

[00:33:35] Speaker 05:
They looked at what the whistleblower said, they examined membership deposits in tax year 2008, they found nothing, they made no changes, and they said, we're done.

[00:33:43] Speaker 05:
close it up, that's the end.

[00:33:44] Speaker 05:
Then the audit would be the actual.

[00:33:48] Speaker 05:
They didn't do that.

[00:33:49] Speaker 05:
They didn't stop.

[00:33:51] Speaker 05:
They actually noticed something in a subsequent tax year involving a different issue.

[00:33:57] Speaker 05:
But that was not due to the whistleblower's information.

[00:33:59] Speaker 05:
That was due to IRS diligence.

[00:34:01] Speaker 03:
Well, in a but for sense, it was due to the whistleblower's information.

[00:34:05] Speaker 03:
As the commissioner's brief acknowledges, they would not have looked under the hood at all, but for

[00:34:13] Speaker 03:
This whistleblower.

[00:34:15] Speaker 03:
That's correct.

[00:34:16] Speaker 03:
Information.

[00:34:17] Speaker 05:
That's also coincidental, because what if, for example, this whistleblower had identified a Fortune 500 taxpayer already under audit?

[00:34:24] Speaker 05:
Instead, same issue, same pointers, same quality of information, the IRS had, instead of starting an audit, merely initiated or proceeded with the administrative action as we describe it here, which is to pursue and investigate that issue.

[00:34:40] Speaker 03:
they would not have been the but for cause of the audit by pure happenstance, based on the nature of the taxpayer, not based on their... Would not have initiated or expanded, they would have expanded the scope in the direction of the information potentially, if it wasn't vague and frivolous.

[00:34:56] Speaker 05:
They could have expanded, initiated... Our position is actually that if they had undertaken to investigate a new issue of which the whistleblower's information was the but for cause, within the definition of the regulation, that's a new action.

[00:35:11] Speaker 03:
That's what I think we're probing is what in the regulations tells us that what you really mean when you say administrative action is all or a portion of an internal revenue service, civil or criminal proceeding that may result in proceeds.

[00:35:30] Speaker 03:
What you really mean is that administrative action is pursuit of any specific issue or issues in

[00:35:39] Speaker 03:
an internal revenue service, civil or criminal proceeding.

[00:35:42] Speaker 03:
That's clearly the way the service is using it.

[00:35:44] Speaker 03:
But that is not what an ordinary reader of this rule discerns.

[00:35:49] Speaker 05:
We would again direct it to the substantially contributed language, which is the focusing language.

[00:35:54] Speaker 05:
That's about what?

[00:35:57] Speaker 05:
The value of the information, which in our view is to the extent to which the information directs the service to detect an underpayment of tax that it would not otherwise

[00:36:09] Speaker 05:
And that's precise.

[00:36:10] Speaker 05:
That's not simply open an audit.

[00:36:11] Speaker 03:
But that's circular because you're reading B1, which says that the IRS proceeds on information provided by Whiskler when the information provided substantially contributes to an action against a person.

[00:36:22] Speaker 03:
Well, here it did.

[00:36:23] Speaker 03:
It actually caused the action against a person who would not have otherwise been investigated.

[00:36:29] Speaker 03:
And then later in the same rule, it talks about something that the IRS would not have initiated, but for.

[00:36:36] Speaker 03:
the information provided, but for the information provided.

[00:36:38] Speaker 03:
And it doesn't say that there has to be a substantial contribution to recovery on a subsidiary issue.

[00:36:47] Speaker 03:
It just says an action.

[00:36:49] Speaker 03:
And that brings us back to this difficulty in the regulation A2, which doesn't say its pursuit of a specific issue.

[00:37:00] Speaker 05:
It does not.

[00:37:01] Speaker 05:
And that's why it's not

[00:37:04] Speaker 05:
we're relying not only on the definitions but also in the examples.

[00:37:07] Speaker 05:
Because there's an example in that same regulation that's illustrative of these definitions that resolves that tension that you've identified.

[00:37:14] Speaker 05:
And it tracks the facts here.

[00:37:15] Speaker 05:
And it makes clear that when the IRS proceeds based on your information, it's looking into what you told it to look into.

[00:37:25] Speaker 05:
And if it needed to open a new audit, it's still just looking into the information you told it to look into.

[00:37:30] Speaker 05:
The action the IRS is proceeding with

[00:37:32] Speaker 05:
is viewed the same way whether the audit was ongoing or initiated by prompted by the whistleblower's information.

[00:37:39] Speaker 05:
However, when the IRS is done with your issue, if there are no adjustments there, then there are no proceeds as a result of the action and there is no recovery.

[00:37:54] Speaker 05:
Other issues identified in the same audit are coincidental.

[00:37:59] Speaker 05:
They're not consequences of your whistleblower information.

[00:38:03] Speaker 01:
It's been a long time.

[00:38:05] Speaker 01:
But this whole discussion reminds me of my torts class and the difference between but for cause, which is necessary at a minimum and proximate cause.

[00:38:18] Speaker 01:
But for is fine, but it's not the end.

[00:38:21] Speaker 01:
And the question is, and I'm going back about 100 years to my torts class, but it's been a while.

[00:38:30] Speaker 01:
But anyway, this whole discussion reminds me of that portion of the talk.

[00:38:37] Speaker 05:
Very much, Your Honor.

[00:38:38] Speaker 05:
Very much.

[00:38:39] Speaker 05:
Absolutely.

[00:38:40] Speaker 05:
And when you're dispersing funds from the Treasury, you want that degree of proximity.

[00:38:46] Speaker 05:
You want to be sure that if you're paying someone who has helped you detect an underpayment of tax, that it was their information that actually led you to the underpayment of tax.

[00:38:55] Speaker 05:
It didn't just prompt you to start doing your job, which then

[00:38:58] Speaker 05:
led you in the course of normally doing your job to find unrelated.

[00:39:08] Speaker 05:
Thank you.

[00:39:24] Speaker 04:
I'd like to start by addressing some of Judge Randolph's questions that seem to have not been fully answered.

[00:39:31] Speaker 04:
First, the Form 211 is signed under oath and penalty of perjury.

[00:39:37] Speaker 04:
Failure to sign the form under penalty of perjury will cause a rejection.

[00:39:42] Speaker 04:
A rejection that may or may not be durable,

[00:39:45] Speaker 04:
Depending on which letter the IRS sends, but.

[00:39:49] Speaker 01:
I'm having trouble.

[00:39:50] Speaker 01:
Are you saying that the 211 form is done under penalty of perjury?

[00:39:55] Speaker 04:
It is.

[00:39:56] Speaker 01:
It is, okay.

[00:39:58] Speaker 04:
Very much is.

[00:40:00] Speaker 04:
The whistleblower office receives about 10,000 submissions in a year, a little bit more.

[00:40:06] Speaker 04:
I don't have the exact number in front of me.

[00:40:09] Speaker 04:
About 50% in the last report were rejected or

[00:40:15] Speaker 04:
reasons that were on the face of the form.

[00:40:18] Speaker 04:
There is a provision somewhere within the regs that a de minimis amount that would result in an award of under $100 need not be paid.

[00:40:29] Speaker 04:
And I'm sorry, I don't have that site in front of me.

[00:40:31] Speaker 04:
I didn't know I would need it.

[00:40:35] Speaker 01:
Sorry, $100 is the minimum?

[00:40:38] Speaker 04:
They believe that anything under $100 would be de minimis.

[00:40:41] Speaker 04:
And I think when we're looking in the context of

[00:40:44] Speaker 04:
Subsection B, where the amount of issue is $2 million or more, $100 is well below what math would lead us to.

[00:40:56] Speaker 04:
Factually speaking.

[00:40:57] Speaker 01:
You seem pretty knowledgeable about this.

[00:40:59] Speaker 01:
I'm grateful for your fulfilling these gaps.

[00:41:03] Speaker 01:
But do you know, is there, does the IRS generally, forget about whistleblower, does it have any guidelines that are published about

[00:41:13] Speaker 01:
the undertaking an audit.

[00:41:17] Speaker 01:
In other words, internal guidelines at least that we want to undertake an audit unless there's a pot of gold at the end of this rainbow.

[00:41:28] Speaker 04:
I don't believe there is.

[00:41:29] Speaker 04:
I know that there is a line item within the whistleblower report that says denials below IRS threshold for action.

[00:41:40] Speaker 04:
And that's about 10% of the

[00:41:42] Speaker 04:
cases that are closed for the year.

[00:41:46] Speaker 04:
But I believe the IRS, as far as which taxpayers to audit, is not a results oriented endeavor.

[00:41:56] Speaker 04:
There's a myriad of reasons why they might choose a taxpayer.

[00:42:00] Speaker 03:
Okay, thank you.

[00:42:01] Speaker 03:
I know we're keeping you over, but I had a question just following on this discussion about

[00:42:08] Speaker 03:
administrative action and what the scope of that is and what the regulations say about what the scope of that is.

[00:42:13] Speaker 03:
And you argue that the word action is flexible.

[00:42:18] Speaker 03:
And I think take the position that where there's an ongoing audit,

[00:42:23] Speaker 03:
that administrative action would be limited to one issue, whereas if there isn't, as in this case, that it would refer to the whole audit.

[00:42:33] Speaker 03:
And I wonder what the statutory regulatory ground is for that distinction.

[00:42:39] Speaker 04:
So when you think of what action is undertaken by the IRS in a case, if you have an individual that is one of millions of taxpayers that may or may not be audited in a particular year,

[00:42:53] Speaker 04:
and has thus far been able to go about happily without having so much as received a letter from the IRS.

[00:43:03] Speaker 04:
Drawing the IRS's attention to that taxpayer, which would trigger an audit.

[00:43:09] Speaker 04:
The action that the IRS takes is opening the audit.

[00:43:14] Speaker 04:
Where you have, say, a Fortune 500 taxpayer,

[00:43:18] Speaker 04:
you would never be the one that opens the audit because they're been really under continuous audit at the IRS.

[00:43:24] Speaker 04:
They're always under audit.

[00:43:25] Speaker 04:
There's usually a waiting list to get onto the next cycle even.

[00:43:31] Speaker 04:
And then it would be, how did you impact that audit?

[00:43:37] Speaker 04:
Did you open a new issue?

[00:43:39] Speaker 04:
Did you cause the IRS to look at an issue that was already under audit differently?

[00:43:43] Speaker 04:
Did they expand it further?

[00:43:45] Speaker 03:
So I guess I'm saying that if action

[00:43:48] Speaker 03:
is susceptible of that meaning, you know, an incremental meaning rather than a sort of on off, whole audit, no audit.

[00:43:57] Speaker 03:
In the context of an ongoing audit, then why wouldn't that same language permissibly support the commissioner's view of sort of the more that we conceive of the audit as containing multitudes and that every issue goes to the auditing with respect

[00:44:17] Speaker 03:
to that issue.

[00:44:22] Speaker 03:
I think I've lost the thread that I'm going to try to answer.

[00:44:24] Speaker 03:
I think I was pretty unclear in the way I wrapped up that sentence.

[00:44:27] Speaker 03:
But I take their position to be that administrative action means action relating to the information the whistleblower brought forward, not the entire examination

[00:44:43] Speaker 03:
which is more kind of the colloquial way we might understand, you know, there's an audit or there isn't an audit.

[00:44:49] Speaker 03:
It would be the whole thing.

[00:44:51] Speaker 03:
And I take you to be saying that the regulatory language is actually susceptible of the, you know, issue specific understanding that that's a separate administrative action for purposes of the whistleblower regime where somebody is under continuous audit.

[00:45:05] Speaker 03:
And I guess the question then is if that's the case, why can't the IRS say the same thing when it's trying to distinguish between

[00:45:14] Speaker 03:
proceeds from a whistleblower's information and proceeds from its own investigation.

[00:45:21] Speaker 04:
So within the statute, after you get through the bulky bit of proceeds, when you come to the comma of shall pay between 15 and 30% of either proceeds collected or collected proceeds, depending on which year statute you're looking at,

[00:45:43] Speaker 04:
collected from the action.

[00:45:46] Speaker 04:
The action would refer to whatever action was taken based on the whistleblower's information.

[00:45:51] Speaker 04:
So a whistleblower who's turning in a Pepsi is unlikely to have figured it out.

[00:45:59] Speaker 04:
Pepsi is always under audit.

[00:46:02] Speaker 04:
You may provide a new issue that the IRS wasn't looking at, or you may change how the IRS is looking at a particular issue.

[00:46:11] Speaker 04:
And at that point,

[00:46:13] Speaker 04:
At that point, the action taken based on the whistleblower's information is the, it's not the full audit, it's the issue.

[00:46:25] Speaker 03:
The incremental audit expansion.

[00:46:27] Speaker 03:
Yes.

[00:46:28] Speaker 00:
And that seems to put a lot of weight on the fortuity of whether the taxpayer is under audit at the moment the whistleblower comes forward.

[00:46:43] Speaker 04:
Yes and no, there are certain taxpayers that just based on the nature of the taxpayer will always be under audit and there's no way around that.

[00:46:54] Speaker 04:
Whereas the smaller taxpayers are almost never under audit.

[00:46:59] Speaker 04:
And so you're kind of looking at different ways that the language fits depending on who your taxpayer is and the language needs to fit

[00:47:13] Speaker 04:
all taxpayers in a way that is reasonable and slicing it into directly related, adds words to the statute that just aren't there.

[00:47:24] Speaker 04:
Also, I would like to note that the IRS opened the 2009 audit of the taxpayers at issue here, not just by happenstance, but they opened it to ensure that the membership deposits

[00:47:42] Speaker 04:
that were being treated as debt were problematic, were in fact picked up in 2009.

[00:47:48] Speaker 04:
It was a continuation of the same issue.

[00:47:52] Speaker 04:
And while looking at the membership deposits as debt issue, they found another related party debt issue that is where the adjustment was made.

[00:48:03] Speaker 00:
I get it.

[00:48:03] Speaker 00:
Just the colloquy this morning just tends to confirm

[00:48:09] Speaker 00:
I was trying to work through the statute, which seems pretty ambiguous, both on the breadth or granularity at which you think of the relevant action and on the degree of proximity for the standard of causation.

[00:48:26] Speaker 04:
I think that when you start looking at it as a practical application, as opposed to simple theory,

[00:48:39] Speaker 04:
the clarity is much easier to discern when you're looking at what the IRS has done with the information.

[00:48:51] Speaker 00:
I mean, if there's no grand unified legal theory and you need practical applications to make sense of this, that might well be true, but that sort of drives me to not so much

[00:49:07] Speaker 00:
staring at the words of the statute as to thinking about example two in the regs.

[00:49:14] Speaker 04:
Example two in the regs was not originally part of the definition of proceeds based on.

[00:49:19] Speaker 04:
It was originally written for a related action and was moved after the publication of the proposed regs.

[00:49:29] Speaker 00:
Well, I mean, it's part of the reg and it has the force and effect of law.

[00:49:33] Speaker 04:
But I believe that

[00:49:38] Speaker 04:
It cuts short what the statutory language requires.

[00:49:48] Speaker 04:
If the statutory language, which says that the award shall be paid based on the amounts collected from the action, the statutory language is clear that it's

[00:50:05] Speaker 00:
the action and I mean when then we're just coming back to whether action is ambiguous or not.

[00:50:11] Speaker 04:
And action is a flex has to be a flexible term.

[00:50:14] Speaker 04:
You have a wide variety of information that the civil office receives.

[00:50:22] Speaker 04:
Much of it is rejected as speculative.

[00:50:26] Speaker 04:
About 35% last year.

[00:50:30] Speaker 03:
All right, we've taken you way over your time.

[00:50:33] Speaker 03:
We really appreciate the argument and the case is submitted.