The United States Supreme Court issued its opinion in Lawson v. FMR LLC on March 4, 2014.  This case looked at whether the whistleblower protection provisions of Sarbanes-Oxley, found at 18 U.S.C. § 1514A, protect the employees of a privately held contractor or subcontractor that provides services to a public corporation.  The opinion expressly holds that:

based on the text of §1514A, the mischief to which Congress was responding, and either legislation Congress drew upon, that the provision shelters employees of private contractors and subcontractors, just as it shelters employees of the public company served by the contractors and subcontractors.

The facts involve two former employees, Jackie Hosang Lawson and Jonathan M. Zang, who separately initiated proceedings under section 1514A against their former employers, privately held companies that provide advisory and management services to the Fidelity family of mutual funds.  The mutual funds, which are public companies, are not parties to either case because the Fidelity funds have no employees themselves but instead contract with investment advisors to handle the day-to-day operations.  Fidelity Brokerage Services, LLC employed Ms. Lawson as a Senior Director of Finance.  She alleges that after she raised concerns about certain cost accounting methodologies, believing that they overstated expenses associated with operating the mutual funds, she suffered a series of adverse actions by her employer, which ultimately amounted to constructive discharge.  FMR Co, Inc. employed Mr. Zang as a portfolio manager for several funds.  He alleges that he was fired in retaliation for raising concerns about inaccuracies in a draft SEC registration statement concerning certain Fidelity funds.  The entities that had employed Ms. Lawson and Mr. Zang moved to dismiss both suits, arguing that they are privately held and that section 1514A only protects employees of public companies.

In delivering the opinion of the Court, Justice Ginsberg clearly explained that the language of the statute is interpreted by giving the words used in the statute their ordinary meaning and the operative language of the statute means what it appears to mean.  In this case, that means that a contractor may not retaliate against its own employee for engaging in protected whistleblowing activity.  The opinion goes on to discuss how this interpretation fits with Congress’ goals at the time of enactment, namely to prevent another fraud on shareholders similar to Enron, and by protecting the employees of those that contract with the public company these goals would be meet because the contractor’s employees are likely to be aware of potential fraud.  On the other hand, the narrower interpretation, that contractors and subcontractors are prohibited from retaliating against the employees of the public company, does not make logical sense because contractors and subcontractors are unlikely to be in a position where they can retaliate against the public company’s employees.

On October 15, 2013, the United States Supreme Court issued an order denying certiorari of O’Donnell v. Commissioner, a case where summary judgment was granted by the Tax Court, and affirmed on appeal, because the information provided did not cause the IRS to initiate an administrative or judicial proceeding that resulted in the collection of Federal tax from the taxpayer to whom the information.  By denying certiorari, the United States Supreme Court effectively solidified Cooper v. CIR, 136 T.C. 597, 600 (2011) as the law of the land.  This means a whistleblower is not eligible for an award under section 7623(b) where the information provided did not result in an initiation of an administrative or judicial action or the collection of tax proceeds.  This is a reminder that it is not enough to merely hand the IRS information, but that the whistleblower’s submission must also cause the IRS to act on the information in a way that results in collected proceeds.

George and James O’Donnell filed a claim for an award on March 6, 2009, alleging significant tax underpayments based on court records.  The O’Donnells filed a petition with the Tax Court alleging that the IRS failed to proceed as required and that their filing of the Form 211 created a bilateral contract.  The IRS filed a Motion for Summary Judgment that stated the IRS “has not initiated any administrative or judicial proceeding nor collected any proceeds based on information provided by petitioners.”  The Tax Court stated that various statements in various documents submitted by the O’Donnells suggested that the IRS had failed to properly consider the information they submitted or failed to proceed as required by section 7623; however, the O’Donnells “do not allege, much less show, that an administrative or judicial proceeding was initiated by [the IRS] or that any Federal tax was collected from any taxpayer as [the] result of information that they provided to [the IRS].”  The Tax Court cited Cooper for the premise that a person’s eligibility for an award under section 7623(b) requires both an administrative or judicial proceeding and that the administrative or judicial proceeding results in the collection of Federal tax in the order granting the IRS’s Motion for Summary Judgment.

On appeal to the United States Court of Appeals for the District of Columbia Circuit, the DC Circuit Court affirmed the Tax Court’s Order and Decision in an unpublished per curiam decision.  The DC Circuit Court stated that “The Tax Court correctly concluded that because the information appellant provided did not result in ‘initiation of an administrative or judicial action’ or ‘collection of tax proceeds,’ Cooper v. Comm’r of Internal Revenue, 136 T.C. 597, 600 (2011), appellant was not eligible for a whistleblower award under 26 U.S.C § 7623(b).”  Following the decision of the DC Circuit, George O’Donnell sought certiorari, which was denied.  

An order issued yesterday by the U.S. Tax Court in the case of Albert G. Hill, III v. Commisioner of Internal Revenue (No. 25539-10W) gave the Whistleblower (who is the Petitioner in the case) access to documents in the administrative file of the taxpayer who was the subject of a whistleblower claim. The order is a big win for the Whistleblower in the case because the determination of whether the Whistleblower is entitled to an award or not centers on how and when the IRS discovered information that led to collection of taxes from the taxpayer who is the subject of the whistleblower claim.

The question of whether or not the Whistleblower in the case is entitled to an award is further complicated by the fact that the IRS was conducting an examination of the underlying taxpayer at the time the Whistleblower provided information to the IRS. With access only to the documents that the Whistleblower initially provided to the IRS concerning the underlying taxpayer and a single document written by the IRS examiner containing that examiner’s thoughts on the Whistleblower’s claim, the Whistleblower was at a disadvantage in trying to show that it was his information the IRS utilized that led to the collection of taxes from the underlying taxpayer.

Although the IRS took the position that the Whistleblower was not entitled to documents from the underlying taxpayer’s administrative file, the Tax Court sided with the Whistleblower and directed the IRS to submit the underlying taxpayer’s administrative file to the Court. The order also instructed the Whistleblower to submit a list of specific documents or types of documents he sought to obtain from the underlying taxpayer’s administratrive file.  After an in camera inspection of the administrative file, the Court granted the Whistleblower’s motion to the extent of the Bates numbered and redacted documents listed in the order. 

In conclusion, the discovery order is a nice win for whistleblowers going head to head with the IRS on the issue of whether or not the collection of proceeds resulted from the use of whistleblower information.  An even greater appreciation for the discovery order in this case can be obtained when there is pause to consider that if the Tax Court sided with the IRS on this issue and prevented the Whistleblower access to the underlying taxpayer’s administrative file, it would have been tantamount to forcing the Whistleblower to fight for his award with one hand tied behind his back. In that respect, the Whistleblower in this case can keep swinging.



Joseph Insinga’s case has been watched closely from the time the petition was filed to see if the Tax Court would assert jurisdiction over a case where the IRS had not issued a formal determination but had allowed the claim to linger, causing a de facto denial of Mr. Insinga’s claim.  This proposed an interesting jurisdictional question that captured the attention of tax attorneys, whistleblowers, and the public.  As previously discussed on this blog, The Ferraro Law Firm filed an amicus curiae brief highlighting the fact that the IRS’s refusal to issue a whistleblower award determination, despite having allegedly collected proceeds within the meaning of section 7623(b), is tantamount to a negative award determination, or a de facto denial. 

However, on April 15, 2013, the IRS issued a letter formally denying Mr. Insinga’s claims for all but one taxpayer.  By issuing a formal denial letter, the Tax Court has jurisdiction under section 7623(b)(4) and leaves unresolved whether the Administrative Procedures Act or other non-tax-code procedural provisions might require the IRS to take affirmative action in whistleblower cases.  In a March 13th order, the Tax Court noted that the D.C. Circuit has held the Administrative Procedures Act and the All Writs Act to apply to all congressionally established courts and, under Telecommunications Research and Action Center v. FCC, that the Administrative Procedures Act and the All Writs Act confers jurisdiction over claims of unreasonable agency delay to a court that a statute confers exclusive jurisdiction to review a final agency order. 

The real precedent Insinga was going to set was that if you found out the taxpayer had been paid on an issue you submitted, you could then sue the IRS claiming that they had made a de facto determination not to pay you.  Now it is just a fight over whether the whistleblower provided information used by the IRS to collect tax.  As Greg said, the IRS probably denied the award because it saw the writing on the wall and did not want to set unfavorable precedent.  However, getting rid of the de facto determination issue in Insinga just leaves the question to perhaps be resolved by a court at a later date.  Scott elaborated on this point, saying that he was not surprised by the rejection, since the IRS was facing a potential adverse decision in court that would open up every whistleblower with a case to sue them and have the Tax Court hear the case.

We believe that this issue will be litigated eventually.  However, the next whistleblower in a situation similar to Mr. Insinga’s may have a difficult time because it is unclear whether his showing that the taxpayer paid tax will be enough to initiate an award challenge.  Instead, there may need to be evidence to suggest that the IRS intends not to pay the tax whistleblower.  In the Insinga case, there was both the belief of payment of tax by the taxpayer and the suggestion that the IRS had already decided they were not going to pay and just had not issued the formal denial.  It seems the IRS has learned from this experience and is less inclined to discuss the likelihood of an award during an investigation or the status of particular award determinations.

The IRS has spent much time ensuring that they would not be whipsawed by paying an award on proceeds that is ultimately refunded to the taxpayer, but apparently, little consideration has been given to what happens when the IRS whipsaws a whistleblower using their information after it denied the whistleblower’s claim.  On November 2, 2012, Anonymous 1 and Anonymous 2 had their appeal of the IRS’s denial of their claim dismissed by the Tax Court despite the IRS’s notification that a division of the IRS was conducting an investigation of the taxpayer identified in Anonymous 1 and Anonymous 2’s claim.  The order dismissing Anonymous 1 and Anonymous 2’s claim states:

Petitioners provided respondent with information relating to Company X and approximately 90 of Company X’s clients.  Respondent evaluated petitioners’ information for almost two years, yet assets that he did not institute an administrative or judicial action and collect proceeds relating to Company X or its clients.  Furthermore, after the Whistleblower Office denied petitioners’ claims, a separate division of the IRS opened what respondent asserts is an independent investigation into Company X.  While we question whether the information provided by petitioners was used in the subsequent investigation, section 7623 does not provide a mechanism for petitioners to challenge respondent’s assertion.  See Cohen v. Commissioner, 139 T.C. at __ (slip op. at 9) (holding that “Congress *** has charged the Commissioner with resolving these claims and has not provided remedies until after an administrative or judicial action and the collection of proceeds.”).  Respondent established that petitioners have not met the prerequisites of section 7623(b) and petitioners have not set forth specific facts showing that there is a genuine issue for trial.

Now Anonymous 1 and Anonymous 2 are asking the Tax Court to vacate its prior decision in light of the fact that not only has the IRS begun an audit of the taxpayers identified in their whistleblower claim, but Anonymous 1 and Anonymous 2 have received letters from the IRS that the IRS has re-opened their whistleblower claims and the IRS has asked for assistance from Anonymous 1 and Anonymous 2.  We will be watching to see how the Tax Court rules on this motion to vacate its prior decision because the implications may be felt widely.  By reopening the whistleblower claims, the IRS has functionally rendered the prior denial of the claims an interim determination.  If the denial is treated as an interim decision, then it is likely that the case is not ripe under Cooper I.  However, if the decision is allowed to stand the concern is that the IRS will use Anonymous 1 and Anonymous 2’s information in an investigation and collect proceeds based on that information, and when it comes time to pay an award the whistleblowers will no longer have the right of review because the Tax Court has already ruled on that claim.  If the IRS is able to side step their duty to pay awards to whistleblowers by simply denying the claims and then opening an investigation and using the information, then the requirement to pay awards and the right of review are meaningless.  I cannot believe that this is the case.  The best end result for these whistleblowers is that the IRS successfully uses their information and then the Whistleblower Office determines that they are entitled to an award on all the proceeds collected, but in the meanwhile the Tax Court will hopefully see the position that all whistleblowers can be put in if the IRS denies their claim and then uses their information afterwards.  Therefore, we think the Tax Court should treat the previous determination of the IRS as an interim – not final – award determination and vacate its prior decision due to the subsequent re-opening of the case by the IRS.

The Eleventh Circuit released Ware v. Commissioner, an unpublished opinion, in which the Eleventh Circuit upheld the Tax Court’s dismissal of the pro se taxpayers’ request for redetermination of their tax liability and their whistleblower claim.  The Eleventh Circuit upheld the decision of the Tax Court to dismiss the taxpayer’s whistleblower claim because the Tax Court found that there was no evidence that the taxpayers filed a Form 211.  As there is no record of a Form 211 being filed, the IRS did not consider their claim for an award.  As the IRS did not consider their claim for an award, the IRS did not issue a final determination on their claim for an award and thus there can be no appeal of a determination to the Tax Court. 

This case serves as a reminder that the procedures for submitting a claim for an award must be followed.  The Eleventh Circuit does not give any details about the information that the taxpayers provided to the IRS.  The Eleventh Circuit simply states that the taxpayers’ last argument is that the Tax Court failed to consider their whistleblower claim.  However, the Eleventh Circuit states that the Commissioner asserts that the taxpayers never filed a Form 211.  The Eleventh circuit goes on to state that, “As a result, the Secretary did not issue a determination on a whistleblower claim, and the Tax Court could not hear the case.”  The Eleventh Circuit simply looked at the Treasury Regulations that describe the procedures that must be followed to file a claim for an award.  “Under § 7623, the Secretary of the Treasury may pay a reward to an individual for bringing information to the IRS about the underpayment of taxes.  A whistleblower must file a Form 211: Application for Reward for Original Information.  26 C.F.R. § 301.7623-1(f).” 

Decisions such as this serve as a reminder that the ensuring that proper procedures are followed is just as important as the information that is provided.  If a whistleblower fails to file a Form 211, then the whistleblower has not made a claim for an award.  An attorney can help ensure that a whistleblower meets all of the procedural hurdles throughout the process.  If you have provided information to the IRS without properly filing a claim for an award, you should contact an attorney who can discuss how you should proceed in order to protect your claim.

The Tax Court dismissed a whistleblower’s complaint that challenged the IRS’s decision not to act on the whistleblower’s information.  In Raymond Cohen v. Commissioner of Internal Revenue, 139 T.C. No. 12 (October 9, 2012), the Tax Court holds that section 7623(b) does not authorize the Tax Court to order the IRS to reopen Petitioner’s award claim.

The Petitioner, Raymond Cohen, is a CPA who provided information to the IRS Whistleblower Office regarding a corporation that he believes had unreported income from uncashed dividend checks that had not been turned over to the state.  The Whistleblower Office informed Mr. Cohen that he was not entitled to an award because no proceeds were collected based on the information he provided.  Mr. Cohen requested the Whistleblower Office to reconsider the claim.  The Whistleblower Office reiterated the denial, noting that the claim was based on publicly available information.  Mr. Cohen filed a petition with the Tax Court requesting that the Tax Court order the IRS to reopen his claim, arguing that the IRS abused its discretion by not acting on his information.  The IRS moved to dismiss for failure to state a claim upon which relief can be granted.

The opinion’s reasoning starts with a review of the Tax Court’s ability to review whistleblower award determinations.  Tax Court may exercise jurisdiction only to the extent authorized by Congress.  In a whistleblower action, that jurisdiction is limited to the Commissioner’s award determination.  The opinion states that the “jurisdiction under section 7623(b) does not contemplate that we review the Commissioner’s determinations of alleged tax liability to which the claim pertains.  See Cooper v. Commissioner, 136 T.C. 597, 600 (2011) (Cooper II).  Nor does section 7623 confer authority to direct the Commissioner to commence an administrative or judicial action.  Id.”  Mr. Cohen admits that his information did not lead to the Commissioner commencing an action against, or collecting any proceeds from the corporation.  Nevertheless Mr. Cohen argues that he should be granted relief.  Mr. Cohen first argues that he is entitled to relief because the IRS did not comply with the Administrative Procedure Act (“APA”).  The opinion states that “[t]he APA, however, does not create a right of action or expand our jurisdiction.  See Anonymous v. Commissioner, 134 T.C. 13, 19 (2010).”  As the APA does not expand the Tax Court’s jurisdiction the Tax Court can provide relief under section 7623(b) only after the Commissioner has initiated an administrative or judicial action and collected proceeds.  Mr. Cohen’s second argument is that he is entitled to a legal and factual explanation of respondent’s denial of the claim.  While the opinion in Cooper II noted that the Commissioner had produced through the course of litigation a memorandum explaining why the whistleblower claim had been denied, the court “did not hold that the Commissioner was obligated under section 7623 to detail his legal and factual reasons for not pursuing a claim.”  Mr. Cohen’s third argument is that he is entitled to equitable relief; however, the Tax Court is not a court of equity and section 7623 does not provide for equitable relief. 

For these reasons, submissions made to the IRS Whistleblower Office should be carefully prepared and should act as a roadmap that the IRS can simply follow to detect underpayments, making the decision to act on the information an easy one for the IRS.

As discussed in an earlier blog post, the Tax Court formally adopted amendments to the Tax Court Rules of Practice and Procedure on July 6, 2012.  The amendments rules include Rule 345, which provides that a whistleblower may proceed anonymously by redacting the whistleblower’s identifying information, if appropriate, and provides that the taxpayer’s identifying information be redacted.  On September 13, 2012, the IRS issued CC-2012-016 to alert its attorneys to the amendments to the Tax Court Rules and how the IRS will implement the rules.  The discussion of Rule 345 focuses largely how to prevent the whistleblower from disclosing the taxpayer’s information to third parties outside of the whistleblower’s Tax Court appeal of a whistleblower award determination.

The notice asks IRS attorneys to balance privacy concerns of taxpayers with the need for disclosure of taxpayer information to whistleblowers.  The notice points out that Rule 345 “does not require that confidential taxpayer information be sealed or otherwise protected in whistleblower cases.  Instead, the court stated it will address the need to protect nonparty taxpayer information on a case-by-case basis.”  The notice states that “section 6103(h)(4) may permit the disclosure of nonparty taxpayer information to a petitioner in a whistleblower award case during discovery, but neither a petitioner nor petitioner’s attorney are under any duty not to further disclose that information once it has been produced to them.”  When the Tax Court announced the finalization of the amendments, the court explained that section 7461(b)(1) provides ample authority for the court to protect the confidential taxpayer information on nonparty taxpayers in whistleblower award cases.  The notice instructs attorneys to be mindful of limitations on discovery in Rule 70(b)(1), which limits discovery to matters that are not privileged and relevant to the pending case.  To limit redisclosure of the taxpayer’s information that is produced in discovery or at trial the IRS may seek a protective order under Rule 103, under the appropriate circumstances.  So far there is no elaboration of when the IRS considers it appropriate to seek a protective order to prevent the redisclosure of nonparty taxpayer information.

In line with the Tax Court’s Whistleblower favorable ruling in Whistleblower 14106-10W v. Commissioner, 137 T.C. 183 (2011), the court formally adopted Rule 345 on July 6, 2012.  The new rule has two effective parts, the first deals with Whistleblowers wishing to appeal award determinations anonymously.  While the new rule does not significantly expand the decision in Whistleblower 14106-10W, Rule 345(a) does note that a Whistleblower can file the motion to proceed anonymously with or without supporting affidavits or declarations.  While a minor point, it does show that a Whistleblower has the right to allege fear of reprisal without an affidavit detailing the specific facts making up the fear.  A Whistleblower appealing an award determination should consult with their tax attorney to determine the best approach in their specific case.

The second part of the new rule creates a new administrative burden for Whistleblowers, even those who choose to openly file under their name.  Rule 345(b) requires Whistleblowers to redact out the names and other identifying information of the taxpayers on whom they blew the whistle.  Whistleblowers will be required to create a redaction log which will be filed under seal with the Tax Court.  The court will then decide whether to make the log publicly available.  We do not see the new rule having a large impact, other than on the assistant required to create the redaction log and the clerk required to scan it in at the Tax Court.  In cases where the Whistleblower wishes to proceed anonymously, information about the target taxpayer will already be redacted.  In cases where the Whistleblower does not wish to proceed anonymously, there is nothing stopping the Whistleblower – including the U.S. Tax Court – from shouting the target taxpayer’s name from the rooftops.  We are happy to take whatever steps the court feels are necessary to ensure a fair review of IRS award determinations.  In fact, the Ferraro Law Firm adopted this procedure while the rule was in proposed form.

Some of our clients and readers of this blog have asked that we publish the amicus curiae brief that The Ferraro Law Firm recently filed with the United States Tax Court in the case of Joseph A. Insinga v. Commissioner of Internal Revenue.  Mr. Insinga is the whistleblower who reported his former employer, Rabobank, to the IRS for facilitating tax avoidance transactions for United States taxpayers.  Mr. Insinga saw SEC disclosures by several of the United States taxpayers/Rabobank customers he turned in that lead Mr. Insinga to believe that last year they paid some of the tax he alleged that they owed, and therefore he is due an award.  However, the IRS has refused to make an award determination.  The Ferraro Law Firm’s amicus curiae brief highlighted the fact that the IRS’s refusal to issue a whistleblower award determination, despite having allegedly collected proceeds within the meaning of section 7623(b), is tantamount to a negative award determination, or what we call a de facto denial.  

The denial of an award through the IRS’s refusal to make a determination could potentially be more harmful for the whistleblower than a flat denial because a flat denial is clearly a determination, which a whistleblower can appeal to the Tax Court under Cooper v. Commissioner.  Mr. Insinga never received a rejection letter, even after being told that it was unlikely that he would receive an award and requesting that if the IRS intended to deny his claim that the IRS issue him a rejection letter.  We believe that the failure to either pay an award or deny a whistleblower’s claim in a timely manner could side step whistleblowers’ rights to judicial review unless the IRS’s failure to act is treated as a de facto denial.  Our brief’s argument centered on the fact that other IRS “determinations” (pursuant to other Internal Revenue Code sections) can be “denied” by the passage of time without requiring a written denial, and that the Tax Court would be treating section 7623(b) award determinations consistent with other determinations by assuming jurisdiction when such a de facto denial occurs.

The need for award determination timelines was echoed just days later in Deputy Commissioner Miller’s field directive to the extent that it called for the Whistleblower Office to make an award determination within 90 days of when proceeds are finally determined in a matter.  It appears based on the allegations in Insinga’s petition that this new timeline was not met.  Not even close.  We hope that the establishment of an internal timeline prevents these de facto denials from happening in the future.