Whistleblower office rejection of whistleblower claim reviewable

By James A. Beavers, CPA, CGMA, J.D., LL.M.

The Tax Court held that it had jurisdiction to review a determination by the IRS Whistleblower Office (WBO) not to proceed with a whistleblower claim but that it did not have sufficient information in the record to grant the Service summary judgment in the case or remand it to the WBO for review.


In 2010, there was an explosion at the BP Deepwater Horizon oil platform in the Gulf of Mexico. As a result of the explosion, the wellhead began releasing huge amounts of oil into the Gulf.

Richard Lacey is an ex-employee of BP, who worked for the company from 1987 to 1996 and apparently dislikes his former employer. Lacey believed that BP had been involved in some ­illegal activities related to the Deepwater Horizon blowout.

According to Lacey, BP knew that after the blowout the well was releasing up to 110,000 barrels a day into the Gulf. BP under federal law was subject to a fine of up to $4,300 per barrel of oil released into the environment, and it believed that in the 100 days it would take to fix the problem, it could incur up to $47 billion in fines, which would be catastrophic for the company. It therefore lied to Congress about the amount of oil being released, stating in a letter that it was only around 6,000 barrels a day. The company later was convicted of lying to Congress about the amount of oil released into the environment due to the incident.

Lacey also claimed that in an attempt to cover up this lie, and to avoid having to pay fines based on the actual amount of oil released from the well, rather than simply cleaning up the oil in the open sea, BP injected large amounts of oil dispersants into the wellhead, which caused most of the oil to disperse and be absorbed into the ocean environment. The company also engaged in a showy and expensive cleanup operation to deal with the oil that came ashore, which was purportedly done at least partially to divert attention from the amount of oil that was being released at the wellhead.

The cost of these remediation operations was much greater than what it would have cost to clean up the oil in the open sea. BP later deducted the full costs for the dispersant injection into the wellhead and the cleanup as ordinary expenses on its tax returns.

Lacey believed that the deductions BP took for the remediation costs should be disallowed because they were not genuine remediation costs but rather the costs to cover up the company's lies about the amount of oil that was released to avoid the massive fines it should have owed. Lacey in 2015 filed a whistleblower claim under Sec. 7623 based on the deductions.

The claim Lacey submitted did not contain much information. The claim application form stated that the tax year involved was 2010 and that the dollar amount was $12.89 billion, and attached to it was a one-page narrative that briefly stated Lacey's version of the facts, his theory as to why the deduction should be disallowed, and his willingness to work with the IRS to determine the exact amount of the deduction that should be disallowed. It did not explain how the $12.89 billion amount was calculated; cite or suggest sources for the information in the claim or mention that Lacey had any inside information resulting from his former employment with BP; cite any Code or regulation section or any other legal authority; specify the deduction that was supposed to be disallowed; or substantiate that the deduction had been reported.

The WBO rejected the claim out of hand. The rejection letter the IRS sent to Lacey stated:

The claim has been rejected because the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws. This letter does not contain a determination regarding an award under section 7623(b).

Lacey then hired a lawyer, who sent a letter to the IRS asking for further explanation of the rejection. The IRS responded by stating that it had considered the additional information provided (although the lawyer had not provided any additional information) and determined that the claim still did not meet the criteria for an award.

In March 2016, the lawyer submitted a second claim consisting of a whistleblower award application form accompanied by a 21-page brief. This second submission contained information that was not in the first submission, including information about Lacey's employment with BP, sources Lacey relied on to substantiate his allegations, quotes from two men identified as expert witnesses, an explanation of why BP's remediation expense deduction should be disallowed, and legal citations supporting Lacey's contention that BP's deduction should be disallowed. In response to the second submission, the IRS sent another letter stating, "We considered the additional information you provided and determined your claim still does not meet our criteria for an award. Our determination remains the same despite the information contained in your latest letter." How much consideration the IRS gave to the second submission is unknown.

Lacey then petitioned the Tax Court to review the WBO's determination. He challenged the IRS's determination that the information in his first submission was "speculative and/or did not provide specific or credible information." He also challenged the determination that the information in the second submission still did not meet the criteria for an award, asserting that the WBO did not review the second submission and that no WBO analyst made a recommendation to reject his claim as supplemented by the second submission.

The IRS filed a motion for summary judgment, arguing first that it should be granted because the IRS did not proceed with any administrative or judicial action or collect any proceeds on the basis of Lacey's information and thus no award was possible. The IRS also maintained that Lacey's claim was properly rejected "because the claim lacked specific or credible information, was purely speculative in nature, and did not allege a tax issue." Lacey countered that the WBO had failed to process the second submission properly, so the Tax Court should remand the case to the WBO for processing.

The Tax Court's decision

The Tax Court, after determining it had jurisdiction to review the WBO's rejection of Lacey's claim, denied the IRS's motion for summary judgment and Lacey's request for the case to be remanded to the WBO for further consideration. It found that, based on the partial record before it, it could not determine whether the IRS had properly considered Lacey's whistleblower claim, making summary judgment or remand inappropriate.

The Tax Court viewed the IRS as making two arguments in its motion: (1) that a determination "rejecting" a claim must always be sustained because there was no administrative or judicial action and no collection of tax proceeds; and (2) that Lacey's claim was properly "rejected" because it did not meet the threshold requirements for a whistleblower award as set out in Sec. 7623(b).

Under Sec. 7623(b)(1), a whistleblower award will be granted only if two requirements are met: The IRS "proceeds with any administrative or judicial action" against a taxpayer and collects "proceeds" from the action. Under Sec. 7623(b)(4), the Tax Court has authority to review "[a]ny determination regarding an award." However, the Tax Court does not have the authority to direct the IRS to commence or continue an audit and cannot review the IRS's decisions regarding whether to audit or collect from taxpayers.

Must a claim always be rejected if there was no administrative or judicial action or collection of proceeds?: Although the Tax Court did not identify it upfront as an issue, the IRS apparently argued that summary judgment was also justified because the WBO's rejection of Lacey's claim was a determination not to proceed with an action and therefore an audit decision, which the Tax Court did not have jurisdiction to review. The Tax Court's answer to this was that Lacey was challenging a decision of the WBO, not of an operating division of the IRS, which in the whistleblower award process makes the determination whether to proceed with an action and performs the audit if it determines to proceed. Rather than challenging a decision not to act on the whistleblower information, Lacey was challenging the preceding decision by the WBO to reject the claim because it failed to meet minimum threshold criteria, which the court said was not an audit decision.

The court then considered whether it was able to review the WBO's decision to reject a claim because on its face the claim fails to meet minimum threshold standards. The court found that it could because otherwise "even a wholesale failure of the WBO to perform its congressionally mandated function would be utterly unreviewable." The court believed that under Sec. 7623(b)(4), it was required to review all actions of the WBO (not just its determination of the amount of a whistleblower award) for an abuse of discretion, so it was obligated to review the WBO's summary rejection of a claim based only on a review of the information and allegations on the face of the claim.

Having determined it could review the rejection of Lacey's claim, the Tax Court then considered whether the WBO could reject a whistleblower claim if there had been no "administrative action" or "proceeds" resulting from the claim. In Lacey's case, the only evidence before the court of why the WBO rejected Lacey's claim was the WBO's rejection letters for the second claim submission, and the office only stated that the claim was rejected because it failed to meet the IRS's criteria for an award. Thus, the Court found that under the Supreme Court's precedent in Securities and Exchange Commission v. Chenery Corp., 332 U.S. 194 (1947), it could not consider whether the lack of administrative action or proceeds from the claim justified rejecting the claim. Having said this, the court followed with the perfunctory statement "[t]he Tax Court's review of a WBO determination to 'reject' a claim is not preempted by the absence of 'action' and 'proceeds,' which will always be absent in the instance of the WBO's 'rejection' of a claim in the threshold."

Was Lacey's claim properly "rejected" because it did not meet the whistleblower award threshold requirements?: With respect to the first claim submission, the Tax Court found that based on the IRS emails and memoranda in evidence and Lacey's concession, it had been considered and properly rejected. However, Lacey continued to contend that his second claim submission had not been properly rejected.

The Tax Court found, without deciding whether the second submission contained all the required information to meet the whistleblower claim criteria, that it contained much more information than the first submission and should have been reviewed by the WBO. However, it noted that it did not have the complete administrative record before it, as the IRS had not provided any staff memoranda or other evidence of recommendations regarding its rejection. The court only had the WBO's rejection letter, which, while stating the claim still did not meet the criteria for an award, was unclear about why the claim did not meet the criteria and whether the WBO had actually reviewed the additional information in the second submission.

Because under the Tax Court's rule for summary judgment (Rule 121), the court was required to draw all reasonable inferences in favor of Lacey, it therefore assumed that the WBO had issued the rejection letter for Lacey's second submission without reviewing it. Thus, it denied the IRS's request for ­summary judgment.

Should the case be remanded?: In response to the IRS's motion for summary judgment, Lacey had requested that the case be remanded to the WBO with instructions for it to review his second claim submission. The court rejected this request, finding that on the partial administrative record before it, a genuine dispute existed as to whether the IRS had reviewed the submission, which might be resolved by the complete administrative record. Thus, before seeing the complete record, the court determined that it would be "premature to remand this case to require the WBO to articulate a decision that we can review."


Four out of the 12 Tax Court judges who heard the case signed on to a dissenting opinion, in which they note that the majority's opinion is flawed. The dissenters come to the correct conclusion that, as Sec. 7623, the regulations under the statute, and existing case law clearly state, the Tax Court only has the jurisdiction to review an award determination, not to review the determination to move forward with an administrative or judicial proceeding. In addition, it found that the majority had erroneously determined that Chenery precluded the court from considering whether the lack of administrative action or a collection of proceeds was the reason for the rejection.

In this case the majority engaged in judicial reverse engineering. It started with what it believed was the equitable result (the whistleblower having an opportunity to have the WBO's determination not to proceed with a claim reviewed) and created a convoluted legal justification for why the Tax Court could perform such a review. While giving the Tax Court the power to review the WBO's determination not to proceed with a claim would arguably improve the whistleblower claim process, under the plain language of Sec. 7623, Congress did not give the court that power, and the court should not take it unilaterally.

Lacey, 153 T.C. No. 8 (2019)   

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