On January 9, 2018, the Tax Court issued an important decision on the scope and standard of review in whistleblower cases, ruling that the record rule (limiting review to the agency record) would apply and then delineating specific exceptions that may apply in whistleblower cases; the court also held that IRS whistleblower determinations would be reviewed for abuse of discretion. Kasper v. Comm’r, 150 T.C. No. 2, 2018 U.S. Tax Ct. LEXIS 2 (Jan. 9, 2018).
In 2006, section 7623 of the Internal Revenue Code was amended to make changes to the regime for whistleblower awards in tax cases. Prior to the amendments, the IRS had essentially unfettered discretion, as there was no mechanism for judicial review of awards. The amendments added section 7623(b) to the Code, which imposes guidelines on the range of awards and also authorizes an appeal to Tax Court if the whistleblower is dissatisfied with the administrative determination. See I.R.C. § 7623(b).
Kasper involved a pro se whistleblower claim that appeared to be flawed on its face: Mr. Kasper believed that his former employer imposed uncompensated overtime on its employees, and his theory was that the federal government was losing tax money as a consequence. 2018 U.S. Tax Ct. LEXIS 2 at *1-*2. Kasper’s claim, which was filed in January 2009, named both the former employer and its CEO, so two different claim numbers were assigned by the IRS Whistleblower Office (“WBO”). Id. at *2. The IRS employee responsible for classifying whistleblower claims concluded that the issues raised were Department of Labor issues, not violations of the Code, and recommended that the claims be rejected. Id. at *3. Meanwhile, Mr. Kasper sent an information referral to the IRS office in Fresno, California; Mr. Kasper later asserted that this filing caused the IRS to “hold open” its proof of claim in the target company bankruptcy. Ultimately, the IRS recovered $37.5 million in the bankruptcy. Id. at *6.
The WBO prepared denial letters for Mr. Kasper in June 2009. After some mishap relating to the initial notice of denial of his claims, the IRS sent Mr. Kasper another copy in 2011. The denial notice was perfunctory: It advised that Mr. Kasper’s information did not meet the relevant criteria for an award, while indicating that the WBO could not tell him the specific reason because of “Federal disclosure and privacy laws.” It then listed a series of common reasons why the IRS denies whistleblower claims without indicating whether any of them applied to Mr. Kasper’s claims. Id. at *4-*5.
The Tax Court commenced its substantive analysis by evaluating the government’s argument that review should be limited to the administrative record, noting initially that application of the record rule was the default rule under the Administrative Procedure Act. Id. at *9. The court then turned to a textual analysis to assess whether there was some reason why the default application of the record rule should not apply in whistleblower cases. Here, the court noted that de novo review was applied in innocent spouse cases because section 6015(e)(1)(A) gave it jurisdiction “to determine the appropriate relief” in those cases. Id. at *11 ; see also I.R.C. § 6015(e)(1)(A). That language was sufficiently similar to the term “redetermine” used in the Code provisions establishing its deficiency jurisdiction to indicate that Congress intended that the same de novo review applied in deficiency cases be utilized in innocent spouse cases. 2018 U.S. Tax Ct. LEXIS 2 at *11-*12 (citations omitted). In contrast, the Code provision creating jurisdiction over whistleblower claims provides that an award determination “may . . . be appealed to the Tax Court.” Id. at *12 (quoting I.R.C. § 7623(b)(4)) (emphasis by the court). The Tax Court held that the use of the word “appeal” was sufficient to establish that whistleblower cases were subject to the record rule. Id. at *13. For good measure, the court noted that other factors that had animated the use of de novo review in innocent spouse cases, specifically concerns for consistency and for fairness to a potential intervenor, were not present in whistleblower cases. Id. at *13-*15.
Next, the court considered the relevant exceptions to the record rule, which include situations in which the agency’s action is not explained sufficiently, where it failed to consider relevant factors, where it considered evidence not contained in the administrative record, where the case is particularly complex, where there is new evidence after the agency action, or where the agency failed to act. Id. at *16 (citing Esch v. Yeutter, 876 F.2d 976, 991 (D.C. Cir. 1989)). After reviewing the list of potential exceptions, the Tax Court indicated that it would “allow the record to be supplemented if one of the exceptions applies.” Id. at *17.
Having resolved the scope of its review, the Tax Court then turned to the applicable standard of review under 5 U.S.C. § 706(2), concluding that an abuse of discretion standard applied, given its decision that de novo review was not applicable. Id. at *17-*18. The court then articulated its standard of review as follows: “Review for abuse of discretion means that we will not substitute our judgment for the WBO’s but will decide whether the agency’s decision was ‘based on an erroneous view of the law or a clearly erroneous assessment of the facts.’” Id. at *18 (citations omitted).
The court then focused on the Chenery doctrine, which is derived from SEC v. Chenery Corp., 318 U.S. 80 (1943). The Tax Court noted that under Chenery, an agency’s actions can only be judged on the basis of the grounds that it articulates. Kasper, 2018 U.S. Tax Ct. LEXIS 2 at *19. As the Tax Court explained, “[t]his means that the WBO must clearly set forth the grounds on which it made its determination, so that we don’t have to guess.” Id. (citations omitted). Mr. Kasper sought to seize on this principle, noting the perfunctory nature of the response that he received. The Tax Court agreed that the explanation he received was “completely inadequate,” but observed that courts are supposed to “uphold a decision of less than ideal clarity if the agency’s path may reasonably be discerned.” Id. at *21. Since the administrative record plainly indicated that the IRS denied an award because Kasper’s information related to unpaid wages, a Department of Labor issue, and that determination was not an abuse of discretion, it appeared that the IRS did not abuse its discretion.
The Tax Court, however, did not stop there. It expressed concern that limiting the record to only those items considered by the WBO in denying a whistleblower claim could permit the WBO to deny claims on the assumption that the claimant’s information was never used without conducting any inquiry to determine whether that was true, a result which would undermine the whistleblower statute. Id. at *22. Accordingly, the court held that the information referral and the IRS’s bankruptcy files were relevant factors that the WBO failed to consider. Id. at *23.
That decision did not, however, redound to Mr. Kasper’s benefit. After reviewing the additional evidence, the Tax Court concluded that the IRS did not act on the basis of Mr. Kasper’s information; instead, it simply followed standard procedures that it uses in bankruptcy cases. Id. at *25-*26.
It is more than a little remarkable that the Tax Court was called upon to address the scope and standard of its review in whistleblower cases over ten years after it was granted jurisdiction to review them. The court, however, observed that “few—if any—whistleblower cases have reached this Court on their merits.” Id. at *8.
The court’s analysis on the scope and standard of review is sound, and it demonstrates an appropriate sensitivity towards its role as a check on agency power. Mr. Kasper went home empty-handed, but the court plainly gave his case due consideration.