The U.S. Court of Appeals for the D.C. Circuit (In re: Sealed Case, CA DC, Case No. 24-1001, September 24, 2025) recently vacated a Tax Court decision (Whistleblower 8391-18W v. Commissioner, 165 TC No. 5, October 16, 2023) in a significant whistleblower award case, providing insights for practitioners representing clients before the IRS Whistleblower Office (WBO). The appellate court’s opinion hinges on the factual support within the administrative record required for a WBO determination, particularly when the WBO treats a whistleblower’s claims inconsistently across different taxpayers involved in the same scheme. This article will detail the case’s journey from the Tax Court to the D.C. Circuit, focusing on the facts, the legal analysis, and the key differences in judicial interpretation that led to the appellate court’s reversal.

Factual Background

The case involves a whistleblower (Appellant) who, during his employment at a large investment bank, discovered that his firm and several other prominent Wall Street financial institutions were using complex transactions to help offshore hedge funds avoid U.S. dividend withholding taxes. These transactions included total return swaps (TRS) and securities or stock lending (SL) arrangements.

Initial Disclosures (2005-2006): In June 2005, the whistleblower resigned and began cooperating with the IRS Criminal Investigation Division (CID), providing internal documents and explaining the mechanics of the tax avoidance scheme. At the suggestion of an IRS official, he filed multiple Forms 211, Application for Award for Original Information, between 2005 and 2006, identifying the specific firms involved, including the taxpayer at issue in this appeal (referred to as "the Company").
Senate Investigation and Public Disclosure (2007-2008): After a period of inaction from the IRS, the whistleblower collaborated with the U.S. Senate’s Permanent Subcommittee on Investigations (PSI). This collaboration culminated in a 2008 public hearing and a detailed PSI report on the dividend tax abuse scheme, which discussed multiple financial institutions, including the Company. The whistleblower then filed a new set of Forms 211 in 2008 covering all firms mentioned in the PSI report.
The IRS Audit and Award Determination: An IRS Large Business & International (LB&I) audit team had opened an examination of the Company’s Forms 1042 for the relevant years in June 2006, before the PSI report was issued. In January 2009, this audit team was granted access to the PSI materials, which included information provided by the whistleblower. The IRS acknowledged that the audit team used this information to develop specific Information Document Requests (IDRs) and that it helped the team understand the connections between the transactions. In 2014, the IRS and the Company entered into closing agreements resulting in the collection of $88 million in tax proceeds.

The Whistleblower’s Claim for Relief and the WBO’s Decision

Under I.R.C. § 7623(b)(1), a whistleblower is entitled to a mandatory award of 15% to 30% of collected proceeds, with the specific percentage determined by the extent of their "substantial contribution". The WBO awarded the whistleblower the maximum 30% for his claims against four other firms involved in the same scheme, explicitly noting that he was "responsible for the identification of the taxpayer[] [and] the [IRS’s] understanding of the transaction[s]".

For his claim related to the Company, however, the WBO analyst recommended an award of only 22%. The justification for the lower percentage was that the LB&I audit team was "already pursuing the dividend withholding tax issues" before it received the whistleblower’s information via the PSI materials. The WBO determined that one positive factor under Treas. Reg. § 301.7623-4(b) was met—that the information "identified connections between transactions...that enabled the IRS to understand tax implications that might not otherwise have been understood"—warranting an increase from the 15% minimum to 22%, but not to 30%.

The whistleblower challenged this determination, arguing that the WBO acted arbitrarily by awarding him a lower percentage for a claim involving the same scheme and that he was entitled to the maximum 30% award. He also sought immediate payment of the undisputed 22% portion of the award, interest on the delayed payment, and argued against the application of sequestration.

The Tax Court’s Analysis and Holding

The Tax Court reviewed the WBO’s determination for an abuse of discretion, limiting its review to the administrative record. Under this standard, a court defers to the agency’s decision unless it is based on an "erroneous view of the law or a clearly erroneous assessment of the facts".

The Tax Court sided with the IRS, granting its motion for summary judgment. The court’s reasoning included several key points:

Discretion of the WBO: The court emphasized that the WBO has broad discretion in applying the positive and negative factors listed in Treas. Reg. § 301.7623-4(b). It noted that the regulations state the application of these factors "cannot be reduced to a mathematical equation" and that one factor may override others.
No Requirement for Consistency: The Tax Court held that the WBO is not required to maintain consistency between different claims, even if they are filed by the same whistleblower and involve a common scheme. The court found that the award percentage in the whistleblower’s other claims was "simply not a consideration" for the claim at issue.
Record Supported the Determination: The Tax Court concluded that the WBO’s decision was supported by the administrative record, which showed that the audit of the Company had already commenced and the relevant issues were identified before the team received the PSI information. The court cited Apruzzese v. Commissioner, T.C. Memo. 2019-141, for the proposition that a 22% award is not an abuse of discretion where a whistleblower contributes to an already-initiated audit.
Other Claims Denied: The Tax Court also denied the whistleblower’s requests for immediate partial payment, interest, and exemption from sequestration, citing established precedent and statutory silence on these matters.

The D.C. Circuit’s Reversal: Analysis and Key Differences

The D.C. Circuit Court of Appeals vacated the Tax Court’s decision, finding that the WBO’s central factual finding was "clearly erroneous" and not supported by the record.

The Standard of Review

While the appellant argued for a de novo standard of review, the D.C. Circuit found it unnecessary to resolve that dispute. It concluded that the WBO’s determination failed even under the more deferential abuse of discretion standard that the Tax Court had applied. A factual finding is "clearly erroneous" when the reviewing court, after examining the entire evidence, is "left with the definite and firm conviction that a mistake has been committed" (United States v. U.S. Gypsum Co., 333 U.S. 364, 395 (1948)).

Application of Law to the Facts

The D.C. Circuit’s analysis differed fundamentally from the Tax Court’s on what the administrative record actually demonstrated.

The Flaw in the WBO’s Factual Finding: The core of the D.C. Circuit’s decision was its rejection of the WBO’s sole justification for the 22% award: that the audit team had independently discovered the Company’s specific withholding tax issues. The appellate court found it highly improbable that this one audit team had managed to uncover these "novel and complex transactions" on its own when the WBO itself had acknowledged in other awards that the IRS’s "understanding of the transaction[s]" was owed entirely to the appellant.
Misinterpretation of Evidence: The court closely examined the email exchange between the WBO analyst and the audit team, which formed the basis of the WBO’s conclusion. The analyst had asked if the "exam" was started based on the whistleblower’s information, and the team replied it was not, clarifying it was a "subsequent year examination". The D.C. Circuit found that the WBO improperly conflated the initiation of a general audit with the identification of the specific, complex tax evasion scheme. The court stated, "The award improperly transmuted a statement that Appellant’s information did not lead to the team’s audit writ large into a far more specific claim that Appellant’s information did not lead to the team’s investigation of these exact withholding issues". The audit team never actually stated how it began investigating the specific dividend withholding issues.
Ambiguity of Pre-2009 Records: The court also dismissed the significance of 2008 audit team records mentioning the "TRS issue". It reasoned that by 2008, the whistleblower had already spent a year meeting with IRS officials (2005-2006) and his information had been publicized in The Wall Street Journal (2007). Therefore, these records were equally consistent with the team having learned of the issue through the whistleblower’s earlier efforts as they were with the theory of independent discovery.

Why the Courts Reached Different Results

The divergence between the Tax Court and the D.C. Circuit stems from a different level of scrutiny applied to the administrative record.

The Tax Court took a more deferential approach, accepting the WBO’s conclusion that the pre-existing audit distinguished this claim from the others. It focused on the WBO’s discretionary authority and did not deeply question the underlying factual basis for that distinction.
The D.C. Circuit, while operating under the same abuse of discretion standard, conducted a more exacting review of the evidence. It identified a critical leap in logic made by the WBO—equating a "subsequent year examination" with the independent discovery of a novel tax scheme—and found no concrete evidence in the record to support that leap. The appellate court was unwilling to accept the WBO’s justification at face value, especially given the contradictory treatment of the whistleblower’s other, related claims.

Conclusion for Practitioners

The D.C. Circuit’s opinion in this case serves as an important reminder for tax professionals representing whistleblowers. While the WBO possesses significant discretion, its decisions must be grounded in a factual record that can withstand judicial scrutiny. An award determination that treats similar claims inconsistently must be supported by a clear, unambiguous, and factually sound explanation. This ruling empowers whistleblowers and their counsel to challenge WBO determinations that appear arbitrary or rest on unsupported factual assertions, even under the deferential abuse of discretion standard of review. The case has been remanded for further proceedings consistent with the appellate court’s opinion.

Prepared with assistance from NotebookLM.