Tax Court blows the whistle on whistleblower claim.

• Author: Beavers, James A.

Although the IRS proceeded with an examination against an affiliated group based on a whistleblower's tip that the group had underreported income, the whistleblower was not eligible for an award for amounts collected related to an erroneous deduction taken by the group that the IRS independently discovered during the examination opened by the IRS based on his underreported income claim.

Background

In 2009, Michael Lissack filed a claim for a whistleblower award under Sec. 7623. Lissack knew of an affiliated group of entities (Target) that developed condominiums and offered golf and beach club memberships to condominium residents. The residents of the condominiums paid substantial upfront membership fees, which Target treated as nontaxable deposits in the year received. Lissack claimed that, in November 2008, Target changed its refund policy such that the group acquired "complete control over" the fees received and therefore was required to include the membership fees in gross income in 2008.

Lissack's claim was reviewed by an analyst in the IRS Whistleblower Office, who assigned the claim to a revenue agent (RA) in the IRS's Large Business and Industry group for review. The RA reviewed Lissack's allegations by researching Target and analyzing the group's tax returns and IRS account transcripts. Based on his review, the RA found that the information Lissack had submitted was sufficient to begin an examination, but after examining the facts and relevant law, he concluded that Target had properly reported the income in question and proposed no adjustment be made related to the membership deposits issue. However, during his examination of the income issue, the RA found that there was possibly another issue--namely a deduction in excess of $60 million that Target had claimed "for intercompany bad debt." The RA indicated in his report to the analyst from the Whistleblower Office that while the bad debt issue would take some time to examine, it was "unrelated to the subject of the whistleblower claims."

The RA soldiered on with his examination and completed it in 2013. As a result of his findings, the IRS issued Target notices of proposed adjustment. In those notices, the IRS disallowed the intercompany bad debt deduction. The RA then forwarded the entire case file to the analyst in the Whistleblower Office. The documents in the file showed that none of the adjustments had anything to do with the membership deposits issue reported by Lissack, and when asked for confirmation of this by the analyst, the RA emphatically replied they had not. After reviewing the report, the analyst agreed with the RA's determination.

The analyst recommended to the Whistleblower's Office that it deny Lissack's claim. She explained that, although "there was an assessment for additional taxes," the information Lissack had provided "was not relevant to those issues." The Whistleblower's Office accepted the analyst's recommendation and...