Lesson From The Tax Court: The Administrative Record Rule In Whistleblower Cases

Law is a slow-moving conversation.  I tell my students that one law year is seven human years, kinda like one human year is seven dog years.  So it was only a couple of years ago, in 2006, that Congress created the current whistleblower award program in the Tax Reform and Health Care Act of 2006, 120 Stat. 2922, 2959.  The provisions are codified in §7623.  Since then, the Tax Court has been in a slow-moving conversation with the D.C. Circuit and Treasury to develop the law.

Today we see how the Tax Court engages with Treasury regulations to apply something called the administrative record rule to the specifics of the IRS whistleblower program.  In Jeremy Berenblatt v. Commissioner, 160 T.C. No. 14, (May 24, 2023) (Judge Copeland), the unhappy whistleblower wanted the Tax Court to force the IRS to disclose information that the IRS said was outside the administrative record.  Judge Copeland’s excellent and nuanced opinion explains what constitutes the administrative record and the limited circumstances where a litigant can make the IRS add to the administrative record.  It’s complicated.  But we can find at least two lessons worth noting.  First, the IRS enjoys a very strong presumption that what it provides as the administrative record is complete.  Second, the Treasury regulations defining what constitutes the administrative record also enjoy a strong presumption of completeness.  Even a litigant as well represented as Mr. Berenblatt could not overcome those presumptions.  That is because a litigant must show more than some set of documents were available to the IRS; they must show that the documents or materials were considered, either directly or indirectly by the IRS office making the decision.  Details below the fold.

Law: General Administrative Law Principles
The Administrative Procedure Act (APA) is codified at 5 U.S.C. §551 et. seq.  It creates general default rules about how agencies are supposed to operate.  But those rules must always be compared to the rules Congress gives particular agencies in other statutes.  Especially important is what we call the organic statute: that’s the statute that gives an agency its powers and duties.

For example, when a federal agency makes a decision about how the law applies to a particular individual or entity, the APA defines that as an order, and further defines the process that leads to the order as an adjudication.  §551(6), (7).  That’s what today’s lesson involves.

There are two types of agency adjudications: formal and informal.  The APA gives really gnarly rules for formal adjudications in §554.  But, again, courts remind us that those are default rules and must be compared to what Congress has written in the relevant organic statute.  Thus, as a general matter, the formal adjudication rules in §554 are triggered only when Congress uses magic language in the agency’s statute that the adjudication be done “on the record after opportunity for agency hearing.”  Even then, however, the organic statute’s overall purpose and structure might outweigh even that triggering language. See, e.g., Ardestani v. I.N.S., 502 U.S. 129 (1991) (Immigration and Nationality Act’s language requiring adjudications to be determined on the record after a hearing did not trigger APA formal adjudication rules because of other language in the organic statute).  Again, the APA is not a hammer, but is rather a set of default rules.

Because Congress almost never uses the magic language, almost all agency adjudications are typed as informal and the agency must follow either the process specified in its governing statute or the minimal process specified in the APA §555 (consistent with the Fifth Amendment, of course). See generally, Koch & Murphy, Administrative Law And Practice §5:13 (2023) (no free link, sorry!), citing to Pension Ben. Guar. Corp. v. LTV Corp., 496 U.S. 633, 654 (1990).

When a person unhappy with an agency adjudication is able to obtain judicial review, the APA sets the default rule in §706 for both the standard and scope of judicial review: courts are basically to decide whether the contested agency action was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” That’s the standard of review.  They are to do that by reviewing “the whole record or those parts of it cited by a party, and due account shall be taken of the rule of prejudicial error.”  That’s the scope of review.

Again, both of those default rules can be modified by the particulars of the statute governing the particular agency.  Let’s take a look.

(1) Standard of review. The general abuse of discretion review basically forbids a court from substituting its judgment for that of the agency. That said, it is an undeniably squishy standard. Courts freely admit that some agencies get more deference than others.  Some agency decisions get overturned when they are unreasonable; others have to be outright cray-cray.  As the District Court in the District of Columbia recently explained: “The standard of review under the APA discussed above can vary from case to case. Relevant here, courts are obligated to apply the arbitrary and capricious standard in an ‘unusually deferential’ manner when reviewing personnel decisions made by the military.”  Galvin v. Del Toro, Civil Action 21-1813 (JDB) (D.D.C. Feb. 7, 2023) (citations omitted).

(2) Scope of review. The general rule is called the administrative record rule. That rule says that the reviewing court should have before it the same information set that was before the agency making the adjudication.  Focusing on the phrase “whole record” in 5 U.S.C. §706, the Supreme Court has explained that the Court must be able to review "the full administrative record that was before the Secretary at the time he made his decision." Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 420 (1971).

What complicates the administrative record rule is that agencies are not humans.  Agency decisions often reflect a process involving multiple people in different agency offices who contribute to the ultimate decision.  That makes it sometimes difficult to pin down “the” administrative record.  For example, in Thomson v. Dept. of Labor, 885 F.2d 551, 555 (9th Cir. 1989), Mr. Thomson blew the whistle on his employer, a nuclear power plant operator.  He was fired and he filed a complaint with the Department of Labor (DOL).  The matter went to an Administrative Law Judge at the DOL.  While pending, the parties worked out a settlement in a series of letters, copies of which were sent to the ALJ and incorporated into a proposed decision for the ALJ to sign.  The ALJ signed it.  As drafted and signed it reflected the parties' agreement that the settlement would be without prejudice to either party pursuing other remedies.  But the ALJ’s boss—the Secretary of Labor—was the final decision-maker and changed the decision to be “with prejudice.”

Mr. Thomson sued, arguing that the insertion of the “with prejudice” language was arbitrary given the explicit negotiations reflected in the letters.  The government argued that those letters were not in the materials sent to the Secretary and therefore were not part of the administrative record.  The 9th Circuit held the letters were indeed part of the administrative record because the “whole administrative record ... consists of all documents and materials directly or indirectly considered by agency decision-makers and includes evidence contrary to the agency's position.” Id. at 555 (emphasis supplied).

Responsibility for providing the administrative record to the reviewing court lies with the agency, and what the agency provides gets a presumption of correctness.  See, e.g., Wilson v. Hodel, 758 F.2d 1369, 1374 (10th Cir.1985) (“The court assumes the agency properly designated the Administrative Record absent clear evidence to the contrary.”).  However, if a party can cast sufficient doubt on the completeness of the record, limited discovery may be appropriate.  Id.

The administrative record is not the kitchen sink.  That is, the agency is not required to include pre-decisional documents, or documents the agency decides are irrelevant or immaterial to the decision being reviewed.  Nor is the agency required to provide a log of all omitted documents.  Oceana, Inc. v. Ross, 920 F.3d 855, 865  (D.C. Cir. 2019) (“The federal rules do not require parties to provide logs of all documents that were not produced because they were deemed immaterial or irrelevant. It would be quite odd to require a different procedure in agency review cases.”).  Rather, if a party believes there are missing documents, the burden is on that party to identify the documents and show the agency actually used the documents in its decisional process. See, e.g., Marcum v. Salazar, 751 F. Supp. 2d 74, 78 (D.D.C. 2010) (litigant seeking to include documents in the administrative record must “put forth concrete evidence that the documents...were actually before the decisionmakers.”).

Again, however, when the administrative decision is made in several stages, the administrative record consists of all relevant documents that were before various decision-makers in each stage, and not just the last stage in the decisional line.  See Thomson v. Dept. of Labor, Wilson v. Hodel, supra.

Law: The Whistleblower Award Determination Process
Section 7623(b)(1) says that if the IRS “proceeds with any administrative or judicial action described in subsection (a) based on information brought to the Secretary’s attention by an individual” then the whistleblower must be awarded between 15% and 30% “of the proceeds collected as a result of the action.”  The actions described in subsection (a) are “detecting underpayments of tax” or “detecting and bringing to trial and punishment those found guilty of violating the tax laws.”

Nothing in §7623 tells the IRS how it must decide whether to give an award or not.  The IRS has developed a three-stage process that one finds in both Treasury regulations and the IRM.  For a more detailed explanation, see Lesson From The Tax Court: The Slippery Slope Of Tax Court Review, TaxProf Blog (Oct. 12, 2020).  The point here is that while the WBO is the ultimate decision-maker, it coordinates its decision with other offices in the IRS, notably the relevant Operating Division (such as CI, SB/SE, LBI, etc).  For details, see generally Treas. Reg. 301.7623-3, IRM 25.2 (Information and Whistleblower Awards).

Whistleblowers who are unhappy with the WBO’s award decision can petition the Tax Court for review.  It is now settled, after a slow-moving conversation between the Tax Court and the D.C. Circuit, that the Tax Court has the power to review a WBO decision only if the IRS actually “proceeds” with any administrative or judicial action against the taxpayer the whistleblower fingers.  Li v. Commissioner, 22 F.4th 1014, 1017 (D.C. Cir. 2022).  That verb “proceeds” is right in the statute.

Section 7623, however, does not contain words on what standard of review the Tax Court must use or what information the unhappy whistleblower can bring to the Court.  The absence of magic language means that the IRS decisions are informal adjudications under general principles of administrative law.  That leaves the Tax Court to apply general principles of administrative law to (1) use an abuse of discretion standard of review and (2) base its review only on the administrative record.  See Kasper v. Commissioner, 150 T.C. 8 (2018).

The Tax Court does not do this alone.  Treas. Reg. 301.7623-3(d) fills in the statutory silence as to what constitutes the administrative record by providing that “the administrative record comprises all information contained in the administrative claim file that is relevant to the award determination and not protected by one or more common law or statutory privileges.”  The regulation then gives a specific laundry list of materials that constitute the administrative claim file, including stuff like the Form 211, any relevant Forms 11369, etc.

Today’s case teaches us the extent to which a whistleblower can use the Tax Court to force the IRS to supplement what it has designated as the administrative record.  Spoiler alert: it’s a very steep hill to climb.  Let’s see what we can learn.

Facts
Starting the late 1990’s and into the early 2000’s, the IRS began investigating all kinds of sophisticated tax shelters, one of which was called the Short Option Strategy (SOS) tax shelter.  The IRS went after various promotors, such as KPMG, to find out what taxpayers were participating.  For example, here is a 2004 court case where you see how the IRS was summonsing documents from KPMG related to several tax shelters, including the SOS shelter.  United States v. KPMG LLP, 316 F. Supp. 2d 30, 38 (D.D.C. 2004).  The IRS did this, in part, to identify taxpayers who might have participated in the tax shelters.

Apparently, the IRS got Mr. Berenblatt’s name in connection with its investigations because, in November 2007, an IRS Special Agent (SA) (part of the IRS Criminal Investigation (CI) unit) asked to meet with Mr. Berenblatt.  In other words, unlike traditional whistleblowers, Mr. B. did not approach the IRS.  The IRS approached him, one of hundreds the IRS interviewed.  Mr. B. met with the IRS in November 2007.  The principal SA at his meeting was Shawn Chandler.

Mr. Berenblatt—an experienced stock trader—never participated in the SOS scheme because he had determined it was a shell game.  Nor does it appear that he blew the whistle, in the traditional sense of identifying someone the IRS did not know about.  Rather, he claims that during the November 2007 meeting he gave the CI team an explanation of exactly why the SOS scheme was fraudulent. “Mr. Berenblatt claims he was the first person to provide the IRS with a successful litigation tactic for proving the fraudulence of the SOS transaction.” Op. at 4.

Over the years, the IRS went after various taxpayers and promoters of the SOS scheme.  For example, here’s a 2012 DOJ press release touting a deferred prosecution agreement where BDO Seidman agreed to pay $50 million to escape prosecution for selling fraudulent tax shelters, including the SOS scheme.

Apparently, Mr. Berenblatt was paying attention to all the government successes.  In July 2015 he submitted a Form 211, along with supporting memoranda, claiming he was due a whistleblower award because the information he provided enabled the IRS to win cases and collect at least $7.3 billion from taxpayers and tax shelter promoters.  Hey, you can’t get something if you don’t ask!

The WBO officer charged with making the decision on Mr. Berenblatt’s claim was a Ms. Meis.  Per the process set out in the IRM (Part 25.4) and the regulations, she asked for, and received, a Form 11369 (“Confidential Evaluation Report on Claim for Award”) from Mr. Chandler, the SA who had met with Mr. Berenblatt.  Here’s part of what he wrote:

“The investigation of the [target] taxpayers was well under way by the time the Whistleblower met with, and provided information to, Internal Revenue Service–Criminal Investigation in or around November 2007. *** The whistleblower was one of hundreds of individuals identified as having had contact with the taxpayer(s) relative to the tax shelter transactions at issue in the investigation. The whistleblower did not provide any new information relative to the investigation. The whistleblower was not considered a viable potential witness in the investigation and did not testify during the two criminal trials in this matter. In addition, over 100 individuals had been interviewed in the investigation at the point in time the Whistleblower met with Internal Revenue Service–Criminal Investigation...and a vast number of financial and tax related subpoenaed records had been analyzed as well.”

Based on Mr. Chandler's report and other information, Ms. Meis prepared a preliminary recommendation to deny any award to Mr. Berenblatt.  The WBO sent that to Mr. Berenblatt in January 2017.  The opinion is silent on what response, if any, Mr. Berenblatt made.  The next fact recited is that the WBO sent him a final denial letter two months later.  He timely petitioned the Tax Court in 2017, and now here we are some six human years later.  But less than one year in the life of the law.

The reason it seems to have taken so long is apparently because Mr. Berenblatt was concerned that the 765-page administrative record that the IRS submitted to the Tax Court was incomplete.  Accordingly, he filed extensive discovery requests and followed up with motions asking the Tax Court to compel the IRS to produce a bunch of documents that he did not see in the administrative record but thought should be there.

Lesson: The Administrative Record is What the IRS Says It Is, With Very Narrow Exceptions.
Mr. Berenblatt argued that the administrative record was incomplete for two reasons.

First, it did not contain documents that supported all the statements and reasons given by SA Chandler in the Form 1139 for denying Mr. Berenblatt an award.  For example, Mr. Berenblatt asked the Tax Court to compel the IRS to identify each of the “over 100” individuals referenced by SA Chandler as well as any documents about them.  Op. at 7, 8.  Those were not in the administrative record the IRS provided.  Mr. Berenblatt also wanted to see that "vast number of financial and tax related subpoenaed records" referenced in Mr. Chandler's narrative. 

Second, Mr. B. thought the WBO negligently failed to properly evaluate whether the information he gave in November 2007 was what he claimed: the golden key that unlocked a winning theory for the IRS in litigation.  For example, he wanted the IRS to turn over “all documents [created or modified between march 24, 2007 and March 24, 2008) containing the objectives, strategies, and progress of the SOS Shelter Investigation....”  Id.  He wanted copies of all written reports prepared by experts retained by the IRS in all the SOS litigations.  Id.  And, oh, he wanted much, much more!  Such a fisherman!

The most generous characterization of Mr. B’s arguments is that he believed the administrative record was not complete unless it included all documents that were available to (and not just used by) each decision-maker in the chain (here, Mr. Chandler), and not just the documents and information that the WBO officer had in front of her.  You can see where that argument comes from: it goes back to the idea that an agency is not a person, it's a process.  There may be important information in earlier stages of a decisional path that should be included in the final administrative record.  That is why I described Thomson v. Dept. of Labor, Wilson v. Hodel, above.

Judge Copeland rejected the arguments, giving us our take-aways:

First, she explains that the Court will use the Treasury Regulations to define what are the “necessary part of the complete record.” Op. at 17.  Law is a slow-moving conversation and the well-crafted Treasury Regulations tell the IRS, the court, and the world what ought to be in a whistleblower's administrative record.

Second, she invokes the strong presumption that the IRS has provided a complete administrative record.  “Absent a substantial showing made with clear evidence to the contrary, an agency is presumed to pave properly designated the administrative record.”  Id. at 17 (quote and citations omitted).  To be sure, if Mr. Berenblatt could show bad faith—such as a record of Mr. Chandler saying evil things about Mr. B.—then that might overcome the presumption.  But notice how that presumption is packed with strong words: "substantial showing" and "clear evidence."  As presumptions go, this is a very strong one.

Third, and to me the meat of the opinion, she explains that the question is not what documents were available, but what documents were used.  Thus, for example, as to Mr. B’s demand for all the documents concerning the 100 or so other folks interviewed by CI, Judge Copeland writes: “Mr. Chandler’s Form 11369 narrative contains no description whatsoever of the contents of the interview documents or subpoenaed records.” Op. at 19-20.  She further notes, echoing the D.C. Circuit’s concern in Oceana (noted above) that “[i]f any potentially available document in the IRS’s possession at the time the WBO made its decision were discoverable, that would render the record rule all but meaningless.” Op. at 20 (emphasis supplied).  She drops this footnote: “Meanwhile, we cannot accept (and the regulation does not indicate) that just any external document that a Form 11369 refers to—however glancingly—is per se part of the record.”  Op. at 21, note 8.  This is entirely consistent with how other courts approach the issue, as I explained above.

Thus, for Mr. B. to win his contention that the administrative record was incomplete, he needed to prove there were missing documents actually used by the WBO either directly (i.e. used by Ms. Meis) or indirectly (i.e. used by Mr. Chandler) in coming to the decision to deny him an award.  He failed to do that.

Finally, as to the negligence claim, Judge Copeland took judicial notice that one IRS expert’s report submitted in litigation before Mr. B.’s first interview had the same theory of the case that Mr. B. was claiming was his contribution for which he deserved an award.  Judge Copeland is careful to explain that this does not mean she is deciding that his award claim lacked merit.  “Rather, we determine only that the existence of [the expert report] defeats any significant showing of WBO negligence in failing to exhaustively review interview documents and subpoenaed records collected in connection with the SOS litigation.” Op. at 22, note 11 (emphasis supplied).  Readers who are litigators will recognize this move!  It's the ole “Your Honor, I am not introducing this really juicy and damning hearsay for the truth of its content but only to show what my client was reacting to.”

Judge Copeland acknowledges that if Mr. B. could prove the WBO deliberately (or even negligently) excluded from consideration documents that may have been adverse to its decision, he would have a shot at compelling the IRS to turn those over, but that is an extremely difficult lift.  The taxpayer did it in Emery Celli Cuti Brinckernhoff & Abady, P.C. v. Commissioner, T.C. Memo. 2018-55.  There the taxpayer had a CDP hearing and sent documents to the Office of Appeals after  the deadline given by Appeals.  Appeals ignored them.  The Tax Court said those documents should have been made part of the administrative record because the taxpayer showed they sent the documents and they cut against the decision being reviewed.  Judge Copeland explains that, unlike the taxpayers in Emery Cell, Mr. B. could not identify any documents he had sent that had been omitted from the administrative record.

Bottom Line: This case shows how and why the Tax Court is very reluctant to allow litigants to use the discovery process to fish for additional information when the Court is performing its judicial function on the basis of an administrative record.  That is because of the very strong presumption that the IRS has properly created the administrative record, following the Treasury regulation guidance.

Coda: The Tax Court has recently added to the slow-moving conversation of what constitutes the administrative record by adopting Tax Court Rule 93.  Consistent with the Court's general approach, Rule 93 requires the parties to stipulate to the administrative record.  Litigants are permitted to move the court to complete or supplement the record, but that "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."  You can see why this was of no help to Mr. B. and why he thought he needed to file a motion to compel the IRS to produce documents in response to his discovery requests: he wanted to investigate whether the IRS had left out documents.  As Judge Copeland notes, most of his requests were simply a fishing expedition.  Op. at 23. 

Bryan Camp is the George H. Mahon Professor of Law at Texas Tech University School of Law.  He invites readers to return each Monday (or Tuesday if Monday is a federal holiday) to TaxProf Blog for another Lesson From The Tax Court.

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