SCOTUS Revives Whistleblower’s Claim After Chevron Overturned

The Supreme Court vacated a judgment denying an IRS whistleblower’s award claim, citing its recent decision on agency deference. The case revolves around the reasonableness of a regulation defining when a whistleblower’s submission “substantially contributes” to an IRS action for mandatory awards purposes. (Lissack v. Commissioner, 2024 WL 3259664 (July 2, 2024))

The case arose after plaintiff Michael Lissack submitted information to the IRS Whistleblower Office in 2009 that he said showed a condominium group underpaid taxes on nonrefundable membership deposits. Lissack alleged those deposits should have been reported by the condo group as gross income. The IRS investigated the condo group and concluded that it had correctly reported the deposits. However, the agency uncovered another issue with the condo group’s tax filings during the investigation — an improper $60 million “bad debt” deduction.

Under Code Sec. 7623(b)(1), whistleblower awards of 15 to 30% of proceeds are mandatory if the IRS “proceeds with any administrative or judicial action… based on information” supplied by the whistleblower and collects proceeds “as a result of the action.” But in 2017, the IRS Whistleblower Office informed Lissack that he was not eligible for a whistleblower award. Although the agency reviewed information Lissack provided, “that review did not result in the assessment of additional tax, penalties, interest or additional amounts with respect to the issues [he] raised,” according to a Whistleblower Office letter.

Lissack asked the Tax Court to review the determination, challenging the IRS’ Whistleblower Definitions Rule, Reg §301.7623-2(b), on which the agency based its denial of his award. Under that rule, for the purposes of a Code Sec. 7623(b) mandatory whistleblower award, “the IRS proceeds based on information provided by a whistleblower when the information provided substantially contributes to an action against a person identified by the whistleblower.” (emphasis in original) But Lissack alleged that “Congress did not intend to limit awards directly to the issues that the whistleblower provided information on.” Drawing the IRS’ attention to the condo group’s potential tax violations — whether the membership deposit reporting issue he raised or the bad debt issue the IRS uncovered — should qualify him for an award, Lissack contended.

In a 2021 decision, the Tax Court upheld the IRS’ award determination, granting summary judgment to the agency. (Lissack, (2021) 157 TC No. 5) On appeal, the DC Circuit affirmed, finding that “a whistleblower whose information may have ‘substantially contributed’ to a fruitless action against a person is not entitled to share proceeds from a distinct action against that same person that did not draw on the whistleblower’s information.” (Lissack, 131 AFTR 2d 2023-1834, (CA Dist Col) (05/26/2023))

The Tax Court and the DC Circuit relied heavily on the Supreme Court’s 1984 decision in Chevron v. Natural Resources Defense Council. Both courts found the Whistleblower Definitions Rule to be a reasonable interpretation of Code Sec. 7623(b)‘s mandatory awards provision. And under Chevron, they noted, courts were to defer to an agency’s interpretation of a statute “as long as it is consistent with the statutory terms and is reasonable.”

However, with Chevron deference now overturned, the Supreme Court has reopened Lissack’s claim — and the question of whether the IRS’ Whistleblower Definitions Rule is a proper statutory interpretation. Chief Justice John Roberts, writing for the Court in a June 28 decision striking down Chevron, said that the Administrative Procedure Act — which sets guardrails for agency rulemaking — “incorporates the traditional understanding of the judicial function, under which courts must exercise independent judgment in determining the meaning of statutory provisions.” (Loper Bright Enterprises v. Raimondo and Relentless v. Dept. of Commerce, 2024 WL 3208360 (June 28, 2024)).

Days later, on July 2, the Court granted certiorari in Lissack’s case, vacating the DC Circuit’s 2023 decision and remanding the case for further consideration in light of Loper Bright.

According to Renée Brooker, a partner at Tycko & Zavareei, “this latest decision allows Lissack another bite at the apple, but it certainly does not guarantee this whistleblower a win. It simply allows him to argue that the Tax Code’s whistleblower provisions are ambiguous — and if the court agrees, requires the court to exercise independent judgment in determining whether the IRS acted within its statutory authority in denying the award claim.”

Brooker said she “would expect the Loper Bright decision to lead to far more challenges of the Tax Code’s whistleblower provisions as ‘ambiguous.’ And this could considerably delay even further IRS decisions on whistleblower rewards — a most unfortunate outcome given the existing problems getting timely decisions from the IRS Whistleblower Office.”

But even before Chevron‘s fall, some had argued that the IRS whistleblower provisions under Code Sec. 7623(b) were a special case, and awards decisions warranted a less deferential standard of review. In a 2022 amicus brief, the National Whistleblower Center said that “[t]o allow the IRS to have full discretion over the decision-making process for rewarding … whistleblowers without appropriate judicial review would result in an inevitable chilling effect on the IRS Whistleblower Program.” According to the NWC, based on legislative history, the IRS’ denial of award claims should be reviewed under the de novo standard, rather than arbitrary and capricious typically used where Chevron deference was applicable.

For more information about IRS whistleblower awards, see Checkpoint’s Federal Tax Coordinator ¶ T-1030.