Opinion
1246-16W
05-10-2024
ESTATE OF DONALD M. ARNDT, DECEASED, KATHY R. ARNDT, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber Judge
This is a whistleblower award case brought pursuant to section 7623(b)(4).On December 10, 2020, petitioner filed a Motion to Compel Production of Documents, to which respondent filed a response. Petitioner seeks an order directing respondent to produce material from the IRS's examination files of a corporate taxpayer (target) for 2010 and 2011. Petitioner contends that these files will substantiate petitioner's theory of the case: that the claimant Donald M. Arndt (now deceased) alerted the IRS to a "step transaction" by target in 2009; that the IRS, while not adjusting target's income for 2009, did adjust it for 2010 and/or 2011 by challenging subsequent steps of the transaction; and that the IRS would not have made these adjustments but for the information that Mr. Arndt supplied.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
Proceedings in this case were held in abeyance, first on account of Mr. Arndt's death, and then to await resolution of appeals bearing on this Court's jurisdiction in whistleblower award cases. See, e.g., Lissack v. Commissioner, 68 F.4th 1312 (D.C. Cir. 2023), aff'g 157 T.C. 63 (2021). During this interim period, the Court issued a precedential opinion in which it clarified the discovery standard applicable to whistleblower award cases in the Tax Court. See Berenblatt v. Commissioner, No. 7208-17W, 160 T.C. (May 24, 2023). In light of this development, we directed the parties to file (and they did file on August 31, 2023) supplemental memoranda expressing their views as to the application of Berenblatt to the instant Motion. Having carefully considered the parties' arguments, we will deny the Motion to Compel.
Background
On August 14, 2019, petitioner filed a motion to compel production of documents (first motion to compel), requesting that respondent be directed to produce certain documents including Information Document Requests (IDRs) created during the 2010/2011 examination cycle of target, as well as correspondence among members of the IRS team that conducted that examination. Petitioner also sought the unredacted versions of target's Schedule UTP for 2010 (showing uncertain tax positions from 2009) and other documents. Respondent had previously provided only the redacted version of these documents, citing the taxpayer-privacy protections of section 6103. Petitioner asserted that all of the requested documents were relevant to his "step transaction" theory.
By Order served December 11, 2019, we granted the first motion to compel and directed respondent to produce certain additional documents from the 2010/2011 examination file. At the time we issued our Order the prevailing standard for discovery in whistleblower cases was the same relevancy standard under Rule 70 that applies in Tax Court cases generally. Cf. Whistleblower One 10683-13W v. Commissioner, 145 T.C. 204, 206-07 (2015) (applying relevancy standard in granting whistleblowers' motion to compel). Accordingly, we reasoned that discovery was appropriate in this case because the requested documents were "relevant to petitioner's theory of the case."
Following the issuance of our Order, respondent produced some additional documents from the 2010/2011 examination file, but declined to produce others on grounds of irrelevance, undue burden, and section 6103. When respondent did not comply with these requests, petitioner filed the instant Motion to Compel. By Order served June 27, 2023, we stated our intention to defer ruling on petitioner's Motion until the parties had had the opportunity to address the impact of Berenblatt upon this case.
Discussion
A. Petitioner's Request for Additional Disclosures Under Section 6103(h)(4)
Section 6103 bars IRS officers and employees from disclosing confidential taxpayer information unless an exception applies. One such exception authorizes the IRS to disclose return information in a Federal judicial proceeding pertaining to tax administration if "the proceeding arose out of, or in connection with, determining the taxpayer's . . . liability." § 6103(h)(4)(A); see Whistleblower 972-17W v. Commissioner, 159 T.C. 1 (2022). In Whistleblower 972-17W, the Court analyzed the section 6103(h)(4)(A) exception and concluded that the statute did not prevent the Commissioner from providing the whistleblower-typically, pursuant to a protective order-an unredacted copy of the administrative record.
Petitioner's Motion to Compel asks that respondent be directed to produce un-redacted versions of certain documents already produced to petitioner. He contends that respondent is not precluded from disclosing these documents in unredacted form because one or more exceptions to the general non-disclosure rule of section 6103 apply. In our June 27, 2023, Order, we suggested that section 6103 did not seem to bar disclosure because exceptions found in section 6103(h)(4)(A) and/or (B) arguably applied.
In his August 31, 2023, supplemental memorandum, respondent modified his earlier position regarding the application of section 6103, acknowledging that he may disclose the "de-redacted" versions of documents previously produced to petitioner. He represented that, "[i]n order to pursue stipulation as to the contents of the administrative record pursuant to T.C. Rule 93, respondent will, within sixty days of the filing of this memorandum, by October 31, 2023, re-produce to petitioner the administrative claim file which de-redacts the information that the Court's decision in Whistleblower 972-17W now authorizes." We assume that respondent followed through on this pledge. Because the promised disclosures may resolve petitioner's section 6103-related concerns, we will deny at this time the Motion insofar as it concerns the application of section 6103 to the contents of the administrative record.
B. Petitioner's Request for Discovery
Petitioner also requests an order directing respondent to produce materials that were compiled as part of the IRS's 2010/2011 examination of target. Applying the Court's current discovery standard as articulated in Berenblatt, we will deny this request.
The standard of our review for whistleblower award determinations is abuse of discretion, and the scope of our review is limited to the administrative record (the record rule). See Berenblatt, 160 T.C. slip op. at 14. Ordinarily, the record before this Court (designated record) is comprised of those documents that were before the IRS Whistleblower Office (WBO). See ibid. The U.S. Court of Appeals for the D.C. Circuit, whose case law we follow in whistleblower award cases, see § 7482(b), has held that "[d]iscovery typically is not available" in record-rule cases because it is presumed that the agency has properly designated the record. See Berenblatt, 160 T.C. slip op. at 14 (quoting Air Transp. Ass'n of Am. v. Nat'l Mediation Bd., 663 F.3d 476, 487 (D.C. Cir. 2011)). However, there are two narrow exceptions to this general rule. See id. at 14, 18. Limited discovery may be appropriate if a whistleblower makes a significant showing that there is material in the IRS's possession (1) indicative of bad faith on the IRS's part or (2) indicating that the designated record omits material the WBO actually considered or that otherwise falls under a category listed in Treasury Regulation § 301.7623-3(e). See Berenblatt, 160 T.C. slip op. at 18.
Under the theory advanced by petitioner, the IRS used Mr. Arndt's information concerning the alleged "step transaction" during the 2010/2011 examination of target and collected proceeds as a result. Petitioner contends that the WBO "negligently excluded from the administrative record any evidence [of] how the IRS may have used [Mr. Arndt's] whistleblower information in the 2010/2011 audit cycle." Petitioner urges that further "discovery must be permitted to remedy this deficiency in the administrative record."
Respondent urges that petitioner is entitled to no further discovery. Respondent does not dispute that the IRS considered Mr. Arndt's information in the context of its 2008/2009 examination of target, while rejecting his claim for award because no proceeds were collected. But respondent represents that Mr. Arndt's Form 211, Application for Award for Original Information, "and the rest of the whistleblower claim file w[ere] not sent to the [2010/2011] Exam Team." Respondent contends that, because the 2010/2011 exam team did not access petitioner's information, materials from the 2010/2011 audit cycle are not a proper part of the administrative record. Respondent likewise rejects petitioner's allegation that the WBO "negligently excluded" from the administrative claim file the documents petitioner seeks.
We conclude that petitioner has not shown entitlement to additional discovery of target's 2010/2011 audit files. "[A]bsent clear evidence to the contrary, an agency is entitled to a strong presumption . . . that it properly designated the administrative record." Berenblatt, 160 T.C. slip op. at 17; Whistleblower 14376-16W v. Commissioner, T.C. Memo. 2024-22, at *33. On this point, one relevant question is whether petitioner has provided "concrete evidence . . . that the specific documents allegedly missing from the administrative record were directly or indirectly considered by the [WBO]" in denying petitioner an award. Ibid. Petitioner did not argue in his August 31, 2023, supplemental memorandum that the WBO actually considered any of the 2010/2011 audit files when evaluating his claim for an award, and the record does not appear to contain any evidence to the contrary. Thus, petitioner has not made a "significant showing" (or any showing at all) that the administrative record as compiled by the WBO "omits material the WBO actually considered." Berenblatt, 160 T.C. slip op. at 17; Whistleblower 14376-16W, T.C. Memo. 2024-22, at *29.
Petitioner contends in the alternative that "Berenblatt has no bearing [on this case] because there is an existing discovery order requiring the production of documents from the 2010/2011 audit cycle." But our December 11, 2019, Order granting the first motion to compel relied on a "relevancy" standard for discovery in whistle-blower proceedings that has been superseded. See Berenblatt, 160 T.C. slip op. at 14 (distinguishing the standard of discovery in record-rule cases from cases reviewed de novo). And although the "law of the case" doctrine, which is referenced by petitioner, may sometimes apply to bar the relitigation of decided issues, that doctrine applies only where the governing law has not changed. Here, the Court's adoption in a precedential opinion of a revised discovery standard leads us to conclude that discovery is now inappropriate.
C. Petitioner's Request for Supplementation of the Administrative Record
Petitioner contends alternatively that, even if the WBO did not actually review target's 2010/2011 audit files, the designated record should be supplemented to include them. Respondent contends that, in order for the record to be so supplemented, an exception to the record rule would need to apply, see City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 2010), and urges that no such exception applies here.
In Van Bemmelen v. Commissioner, 155 T.C. 64, 76-77 (2020), we explained that in exceptional circumstances we may supplement the designated record with evidence that the WBO did not consider. The D.C. Circuit has "recognized a small class of cases where district courts [or, as here, our Court] may consult extra-record evidence when 'the procedural validity of the [agency]'s action . . . remains in serious question.'" Hill Dermaceuticals, Inc. v. FDA, 709 F.3d 44, 47 (D.C. Cir. 2013). The D.C. Circuit and our Court have held that extra-record evidence may be consulted in three "unusual circumstances":
(1) if the agency 'deliberately or negligently excluded documents that may have been adverse to its decision,' (2) if background information was needed 'to determine whether the agency considered all the relevant factors,' or (3) if the 'agency failed to explain administrative action so as to frustrate judicial review.'Van Bemmelen, 155 T.C. at 76-77 (quoting City of Dania Beach, 628 F.3d at 590).
Petitioner's request appears to be in the nature of a motion to complete or supplement the administrative record under Rule 93(b). See Berenblatt, 160 T.C. slip op. at 17 n.6 (distinguishing such motions from motions to compel discovery). Rule 93(b) states:
If a party contends that the administrative record is incomplete or should be supplemented, that party may move to complete or supplement the administrative record no later than 60 days after the notice setting the case for trial is served, unless the Court orders otherwise. The motion must state in detail why the party contends that the administrative record is incomplete or should be supplemented, and the party must attach any documents or other information that the party alleges is or should be part of the administrative record.
The text of Rule 93(b) appears to contemplate that the parties will have already filed the administrative record (or that the Commissioner will have already filed what he contends constitutes the administrative record) before the whistleblower files a motion to complete or supplement that record. Moreover, the Rule provides that the time for filing such a motion is "no later than 60 days after the notice setting the case for trial is served, unless the Court orders otherwise." As the Court has not set this case for trial or otherwise decreed a timeline for filing motions to complete or supplement the administrative record, petitioner's request appears to be premature. Accordingly, we will deny petitioner's request without prejudice. Petitioner will be free to renew the request at the appropriate time.
In consideration of the foregoing, it is
ORDERED that petitioner's Motion to Compel Production of Documents, filed December 10, 2020, is denied at this time insofar as it concerns the application of section 6103 to the contents of the administrative record. It is further
ORDERED that petitioner's Motion to Compel Production of Documents, filed December 10, 2020, is denied insofar as it concerns petitioner's requests for further discovery. It is further
ORDERED that petitioner's Motion to Compel Production of Documents, filed December 10, 2020, is denied at this time without prejudice insofar as it relates to petitioner's request for supplementation of the administrative record. It is further
ORDERED that the parties shall file, on or before June 14, 2024, the entire administrative record stipulated as to its genuineness and completeness. If the parties are unable to file a stipulated administrative record, respondent shall instead file what he contends constitutes the entire administrative record, appropriately certified as to its genuineness and completeness. In either event the administrative record as designated shall incorporate the additional disclosures to which respondent refers in paragraph 31 of his Second Supplement, filed at docket entry #156 on August 31, 2023. It is further
ORDERED that if petitioner asserts that the administrative record filed as ordered is not complete, petitioner may file, on or before July 15, 2024, a motion to complete or supplement the administrative record as filed.