The end of the Chevron deference is already impacting whistleblower award cases. The Supreme Court of the United States (SCOTUS) recently reversed and remanded an appeals court decision in an IRS whistleblower case where a whistleblower is challenging the denial of their award application.

On June 28, SCOTUS overruled a long-standing case requiring the courts to defer to agency interpretation of ambiguous terms in statutes. SCOTUS’s decision in Loper Bright Enterprises v. Raimondo, reversed Chevron v. Natural Resources Defense Council, which was decided by the Court in 1984, and held that courts are no longer compelled to defer to agency expertise when interpreting statutes. In the aftermath of this ruling, the Supreme Court also reversed and remanded to the D.C. Circuit a whistleblower’s petition in an IRS tax whistleblower case.

In Loper, Chief Justice Roberts asserted in the majority opinion that “the Court does not call into question prior cases that relied on the Chevron framework.” Previously, in Chevron, the Supreme Court had held that a government agency must conform to clear legislative statements but, the agency is given deference in ambiguous situations within a reasonable interpretation. A two-step test under Chevron was adopted by the Court to determine (1) if the language in a regulatory rule is ambiguous and (2) if the agency’s interpretation of that law is reasonable. If the answer to both questions is yes, the Court ruled that it should defer to the expertise of the agency over their own legal interpretation. However, the Chevron ruling is now reversed.

The impact of the Supreme Court’s Loper decision was immediately felt in an IRS whistleblower case. On July 2, in Lissack v. Commissioner, SCOTUS granted the petition for writ of certiorari to the United States Court of Appeals for the District of Columbia Circuit and vacated and remanded the case as a result of Loper.

In Lissack, the D.C. Circuit held that the Tax Court had jurisdiction over appellant Michael Lissack’s petition for a whistleblower’s award under I.R.C. § 7623(b)(4) and affirmed the decision of the Tax Court, determining that Lissack was not eligible for a mandatory award under §7623.

In 2009, Lissack filed an Application for Award for Original Information (Form 211) with the IRS Whistleblower Office. He submitted hundreds of pages of materials identifying a condominium development group that was allegedly underpaying taxes on golf club memberships. Lissack believed that after making the membership deposits non-refundable, the development group should have reported the retained deposits to the IRS as gross income.

The information that Lissack provided opened an investigation into the development group. The IRS admitted that they had not been planning to open an investigation on the development group but the information disclosed by Lissack “was sufficient to warrant beginning of examination.” The IRS fully investigated the development group and found that they had reported their deposits accurately, however the IRS claimed that a different tax issue, unrelated to Lissack’s claim, was allegedly discovered.

Lissack’s claim for reward was denied by the IRS Whistleblower Office because “the IRS reviewed the information provided as part of that examination. However, that review did not result in the assessment of additional tax, penalties, interest or additional amounts with respect to the issues raised.” Lissack then petitioned for the Tax Court to review the Whistleblower Office’s denial, arguing the IRS misapplied its own rule and asserted that provisions of the Treasury Department regulation (referred to by the Court as the Whistleblower Definitions Rule) were contrary to the statute. The Tax Court ruled in favor of the IRS because “the IRS did not collect any proceeds ‘as a result of th[is] action’” or any “related action.”

Lissack challenged three parts of the Whistleblower Definitions Rule; (1) the definition of “administrative action,” (2) one of the examples illustrating what counts as the Service “proceed[ing]” with an administrative action “based on” whistleblower information, and (3) the definition of “related action.” The District Court determined that the challenged definitions are ambiguous, and upheld the interpretation of the IRS under Chevron. Both the Tax Court and District Court’s used the Chevron deference by relying on the IRS’s interpretation of the statute.

As a result of the Supreme Court’s reversal of Chevron, the interpretation of the IRS’ Whistleblower Definitions Rule will be brought back into question when the Lissack case is considered again on remand. A discussion on the language of the 2006 Statute is to be expected.

The D.C. Circuit Court will have jurisdiction to determine the statutory interpretation of the language in § 7623(b). In the October 17, 2023 petition for certiorari, Lissack’s counsel emphasizes Congress’ long recognized history of incentivizing whistleblowers. The first tax whistleblower award law, dating back to 1867, authorized whistleblower awards to informants. Lissack argues that § 7623(b) is clear: Congress intends for whistleblowers to be paid when their information leads to an additional collection of taxes.

The Circuit Court will likely analyze the language of the text. Section 7623(b) provides that:

[i]f the Secretary proceeds with any administrative or judicial action described in subsection (a) based on information brought to the Secretary’s attention by an individual, such individual shall, subject to paragraph (2), receive as an award at least 15 percent but not more than 30 percent of the proceeds collected as a result of the action (including any related actions) …

Terms such as “if,” “any,” and “shall” will be thoroughly examined from a historical perspective, acknowledging Congress’ intent and how similar language has been interpreted in other statutory contexts. In seeming contrast to the language of the text, the IRS determined that the Whistleblower Definitions Rule only requires a reward when a whistleblower identifies underpayment and provides information to the recovery of those underpayments. This interpretation effectively narrows whistleblowers’ claim to rewards, even if their information opened an investigation that resulted in a sanction.

Throwing out the IRS’ interpretation will allow for a de novo standard of review on the language within Section 7623(b), as it pertains to Lissack’s case. The IRS interpreted the definition of “administrative action” to “be limited to action on the discrete tax issue or issues the whistleblower’s information identifies.” Lissack argues for a plain language interpretation, looking at the Congressional intent of the 2006 Act. The Technical Explanation for the 2006 Act acknowledges that the previous language treats the entire audit as the action for determining the award payable.

Second, Lissack challenges an example outlined in Section 7623(b) that discusses when the IRS discovers “additional facts that are unrelated to the activities described in the information provided by the whistleblower” by expanding the scope of the examination. Lissack proposes that this example should be expanded to include facts that “are actions with which the IRS proceeds based on the information provided by the whistleblower.” The IRS concluded that the statute does not unambiguously require a reward when the whistleblower’s information was unrelated to the issue than the one that they collected proceeds from.

Finally, Lissack challenged the definition of “related action” as the IRS interpreted it to mean “an action against a person other than the person(s) identified in the information provided and subject to the original action(s).” The IRS contends that definition does not treat an action that involves the same taxpayer to be a related issue, even if they only discovered the issue because of the whistleblower’s information. Lissack argues that this definition impermissibly narrows the statute’s reach. He challenges this definition, invoking an ordinary meaning of “related” defined in the Oxford English Dictionary as “belonging to the same family, group, or type; connected.”

The Supreme Court has opened the door for IRS whistleblowers to challenge the IRS’s determination that collected proceeds were not recovered as a result of an action that was commenced in response to a whistleblower claim.

“No longer can the courts simply defer to the IRS’s interpretation of terms in the whistleblower statute to deny claims,” says David Colapinto, a partner at the whistleblower law firm of Kohn, Kohn and Colapinto, LLP. “Rather, the courts must decide those disputes based on a review of the agency’s actions and the entire record,” he said.

On remand, the court will be asked to determine whether the whistleblower’s allegations were sufficiently related to, or caused the IRS, to collect proceeds from the taxpayer. “If the answer is yes, then the statute requires that the whistleblower be paid,” Colapinto said.

 
Avery Hudson authored this article.