Scope and Standard of Review in the Appeal of Whistleblower Cases

In this blog we (i) explore the Scope of Review (i.e. Quantity – what the court looks at) and the Standard of Review (i.e. Quality – how the court evaluates) that the Tax Court set in their 2018 Kasper decision and (ii) explore potential statutory changes.

Terms and Significance

Scope of Review – What the Court can review in the appeal of an IRS’ determination of a whistleblower award.

Why it matters: Scope of Review limits the material the Tax Court can review in determining whether IRS actions were proper.

Standard of Review – amount of deference (court’s acceptance of the IRS’ determination) Tax Court will give in reviewing decision of administrative agency.

Why it matters?  Standard of review can limit the types of errors the reviewing Court can correct.

Types of Standards of Review:

  1. De Novo: The De Novo Review allows the court to make its own determination based on the facts before it and can disregard the administrative agency’s determination.  This is what the U.S. Tax Court does in tax deficiency cases.

  2. Abuse of Discretion: An Abuse of Discretion review allows the reviewing court to determine whether the administrative agency’s erred in its determination.  The abuse of discretion standard is based upon an erroneous view of the law or a clearly erroneous assessment of the facts.  If the reviewing court determines there was an abuse of discretion, the court will remand the case to the administrative agency (IRS) for another determination.  This can result in numerous attempts by the IRS to get it right.

Kasper v. Commissioner, Defined Scope of Review and Standard of Review

After over ten years since the new Whistleblower law was enacted in 2006, the U.S. Tax Court finally addressed what they could and couldn’t do in the appeal of a Whistleblower case.  Both the scope of review and standard of review in whistleblower cases were established in the United States Tax Court’s opinion, Kasper v. Commissioner, 150 T.C. No. 2 (January 9, 2018)

Scope of Review:

With respect to scope of review, the Court noted that the standard starting point as enumerated by the Supreme Court is “consideration is to be confined to the administrative record and no de novo proceeding may be held.”  Citing US v. Carlo Bianchi & Co., 373 U.S. 709,715 (1963). The authorizing statute (i.e. I.R.C. § 7623) establishes the scope of review.  The Kasper Court reviewed I.R.C. § 7623(b) and determined that Congress failed to specify a different scope of review; and that under Carlo Bianchi, the Court was obligated to utilize the administrative record as the scope of review (i.e. the “record rule”).

However, the “record rule” doesn’t end with just the administrative record, as the record may be supplemented if one of the exceptions, as enumerated by the D.C. Circuit Court of Appeals.  The exceptions are:

  • when agency action is not adequately explained in the record;

  • when the agency failed to consider relevant factors;

  • when the agency considered evidence which it failed to include in the record;

  • when a case is so complex that a court needs more evidence to enable it to understand the issues clearly;

  • where there is evidence that arose after the agency action showing whether the decision was correct or not; and

  • where the agency’s failure to take action is under review. 

Standard of Review:

The Court notes that there are two standards of review noted in the Administrative Procedures Act (“APA”), and that since the scope of review inquiry the Court just conducted eliminated the de novo review scope, the de novo review standard of review likewise is inoperable.  Therefore, the default standard of review in I.R.C. § 7623(b) cases is abuse of discretion.  The Court also concludes, after a brief review of the standards of review for I.R.C. § 6015 and 6330 type cases, that the proper standard of review is abuse of discretion. 

The Court defines the abuse of discretion standard as deciding “whether the agency’s decision was ‘based on an erroneous view of the law or a clearly erroneous assessment of the facts.’”  The Court then states that under SEC v. Chenery Corp., 318 U.S. 80,93-95 (1943), the Court can uphold the Agency determination only on the grounds it actually relied on when making its determination.  The Kasper Court then required the IRS to “clearly set forth the grounds on which it made its determination so that the Court does not have to guess.”

Other Standards of Review the Court could have utilized instead of abuse of discretion:

Innocent Spouse – De Novo Review

In I.R.C. §6015(e) (Innocent Spouse) cases prior to the change in the statute in 2015, the Court interpreted these cases as requiring the Court to utilize the de novo standard of review.  The Court reasoned that after the 2006 modification to I.R.C. § 6015(e), stating “Congress’s failure to include any such limitation [i.e., limiting review to abuse of discretion standard] in section 6015(e) when it had previously included the limitation in a similar situation [i.e., in amending I.R.C. § 6404] indicates that our jurisdiction is not limited to reviewing the Commissioner’s determination for abuse of discretion.”  See Porter v. Commissioner, 132 T.C. No. 11, pgs. 10-11 (2009).  The Court reasoned that when Congress amended I.R.C. § 6404 (interest abatement) Congress included a provision providing for review based on an abuse of discretion; meanwhile when Congress amended I.R.C. § 6015(e) Congress did not include the same provision requiring review based on abuse of discretion.  The Court stated that absent this specific provision, the Court had the ability to review based on the de novo standard of review.

Hybrid approach: Abuse of Discretion, and if there is an Abuse, then De Novo Review:

In a transfer pricing context, the Court has adopted a hybrid approach to the standard of review.  For example, the Court has required that the petitioner present evidence rebutting the presumption of correctness of Respondent’s deficiency determination, the Court determined that the IRS’ determination was arbitrary, capricious, or unreasonable.  See Id., Medtronic v. Commissioner, T.C. Memo 2016-112 (2016), Slip Op. pg. 118.  The Court required the Petitioner Medtronic to show what the proper allocation was under I.R.C. § 482, and if Petitioner Medtronic failed, the Court was to determine the proper allocations.  See Id., Medtronic, T.C. Memo 2016-112, Slip Op. pg. 120 (citing Eli Lilly & Co. v. Commissioner, 856 F.2d 855, 860 (7th Cir. 1988)).  So in this hybrid approach, if the Petitioner can show an abuse of discretion or error in IRS’ determination, the Petitioner can then attempt to prove the proper outcome, and if not, the Court then can determine the proper outcome.  This approach differs from just an abuse of discretion standard because the Court has the power to bring about finality if the Petitioner cannot prove the proper outcome after initially proving that the IRS abused its discretion in the original award determination.  In the abuse of discretion standard, the IRS merely keeps getting additional chances to get the right result, and the petitioner must continually litigate to ensure the proper outcome.

Legislative Changes Required

With respect to the innocent spouse relief provision, I.R.C. § 6015(e), Congress in 2015 made changes to the statute to clarify that the standard of review was to be de novo, and the Court was authorized to make a determination of the innocent spouse’s tax deficiency.

In a similar vein, Congress should step in and require the Court to use the de novo standard or a hybrid type standard similar to the transfer pricing model, discussed above.  By enacting clarifying language about the standard of review, Congress can eliminate confusion about the standard of review, and hold the IRS accountable for making proper award determinations.  Otherwise, the standard of review currently used by the United States Tax Court merely ensures that the IRS can take multiple attempts at making an award determination.  Judicial efficiency and the success of the whistleblower program are dependent on such a legislative change.

Author, SHINE LIN strives to present a balanced yet focused claim which allows the IRS to concentrate on the key facts, legal issues, law and legal analysis so that the IRS may successfully pursue the alleged wrongdoers.