John R. Dee v. Commissioner of Internal Revenue

Whistleblower’s $3M Claim Denied: Tax Court Asserts Jurisdiction Over Closed Audits

The Tax Court’s ruling in Dee delivers a dual message: a jurisdictional win for whistleblowers and a sharp reminder of the IRS’s unassailable discretion. After a decade-long battle, John R. Dee walked away empty-handed, but the court’s decision to assert jurisdiction over closed audits—despite denying his $3 million claim—signals a potential shift in the Tax Court’s willingness to challenge the IRS’s handling of whistleblower tips. The stakes were never higher: Dee’s $10.85 million tip could have triggered a 15–30% award under I.R.C. § 7623(b), netting him between $1.6 million and $3.2 million. Instead, the court held that the IRS had already acted on the issues he identified, leaving no basis for an award. The ruling arrives amid a broader power struggle between the Tax Court and the D.C. Circuit, which has repeatedly narrowed judicial review of whistleblower claims.

The jurisdictional conflict is no academic debate. The D.C. Circuit has consistently ruled that the Tax Court lacks authority to review the IRS’s decision not to act on a tip, as seen in Lissack v. Commissioner (2021) and Trongone v. Commissioner (2023). Yet in Dee, the Tax Court carved out an exception: it asserted jurisdiction over whistleblower claims when the IRS’s examination team had already reviewed the issues raised by the whistleblower—even if the audit was technically closed. This distinction could open the door for future whistleblowers to challenge the IRS’s handling of their tips, provided they can show the agency’s actions were tied to their submissions. The court’s reasoning hinges on Rev. Proc. 2005-32, which defines when an IRS examination is considered "closed" for whistleblower purposes. The procedure clarifies that a case remains open if the IRS has not finalized all administrative actions, leaving room for the Tax Court to intervene when the agency’s actions are ambiguous. The IRS, however, retains the upper hand: the court deferred to the agency’s determination that it had already addressed Dee’s concerns, underscoring the deference owed to the IRS under the abuse of discretion standard.

The Whistleblower’s Tip: A $10.85M Tax Gap Exposed

The whistleblower’s journey began in March 2010, when he filed Form 211, the IRS’s official application for whistleblower awards under Section 7623(b). This statute permits the IRS to pay awards of 15–30% of collected proceeds when a whistleblower’s original information leads to the recovery of unpaid taxes. Dee’s submission alleged that a publicly traded company—the Named Taxpayer—had underreported its federal income tax by $10.85 million for tax year 2008, a claim that would later trigger a jurisdictional battle over whether the IRS had adequately addressed his concerns.

Dee’s allegations centered on three distinct tax issues, all derived from his review of the Named Taxpayer’s 2008 SEC Form 10-K, a publicly available annual report filed under Section 13 or 15(d) of the Securities Exchange Act of 1934. First, he flagged gift card breakage—unredeemed gift card balances that the company had failed to recognize as income—arguing that these funds should have been treated as taxable revenue under Section 61(a)(3), which defines gross income to include "gains derived from dealings in property." Second, he challenged the company’s depreciation deductions for certain assets, claiming the taxpayer had improperly accelerated write-offs under Section 167, which allows deductions for the "reasonable allowance for the exhaustion, wear and tear" of property. Finally, Dee identified impairment charges that he contended were understated, asserting that the company had failed to comply with Financial Accounting Standards Board (FASB) rules—a violation that, in his view, signaled potential tax misreporting.

The whistleblower’s Form 211 was not submitted in a vacuum. Unbeknownst to Dee at the time, the IRS had already launched an audit of the Named Taxpayer in October 2009, months before his tip reached the Whistleblower Office. According to the IRS’s internal audit plan, the examination was anticipated to conclude by April 2010, with substantive adjustments to be proposed shortly thereafter. The agency’s pre-existing scrutiny of the taxpayer would later become a critical point of contention: Dee argued that his information had been overlooked, while the IRS maintained that its audit had already addressed the very issues he raised. The audit’s timeline—spanning from October 2009 to its formal closure on June 2, 2010, with no adjustments issued for tax year 2008—set the stage for a clash over whether the IRS’s actions had truly "closed" the case for whistleblower purposes.

The IRS’s Response: A Case of Too Little, Too Late?

The IRS’s Whistleblower Office (WBO) did not act on Dee’s claim for nearly five years after receiving it, a delay that would later become a central point of contention. The agency’s internal processes moved at a glacial pace, beginning with a referral to revenue agent Dawn Cotter on July 6, 2010—more than a month after Dee’s information was submitted. Cotter, assigned to examine the target taxpayer’s records, completed her evaluation on August 4, 2010, via Form 11369, a Confidential Evaluation Report on Claim for Award.

Her findings were damning to Dee’s case. Cotter determined that the issues he raised—gift card breakage, depreciation, and impairments—had already been examined by the IRS before his information was even received. The audit, which had been ongoing since October 2009, had closed on June 2, 2010, with no adjustments for tax year 2008. Cotter’s attachment to the form explicitly stated that no new issues were added to the audit after Dee’s tip, and all three categories he flagged had been addressed during the examination. The impairments issue, in fact, had resulted in an income increase of $2,663,898—but for tax year 2007, not the year in question.

The WBO, however, did not issue a denial—or any response at all—until August 2015, when the claim was reassigned to analyst Lev Glikman. On August 19, 2015, Glikman mailed a preliminary denial letter to Dee, followed by an award recommendation memorandum (ARM) on October 6, 2015. The ARM concluded that no administrative action had been taken based on Dee’s information, a finding that mirrored Cotter’s earlier assessment. Five years after the tip was submitted, the WBO issued its final determination: Dee’s claim was denied “because the IRS took no action based on the information that you provided.” The delay between the audit’s closure in June 2010 and the WBO’s denial in October 2015 underscored a critical gap in the whistleblower process—one that Dee would argue reflected either bureaucratic neglect or an intentional disregard for his submission.

Jurisdictional Showdown: Tax Court vs. D.C. Circuit

The Tax Court’s jurisdiction over whistleblower award disputes has become a battleground between judicial deference and statutory interpretation, with the D.C. Circuit repeatedly narrowing the scope of reviewable claims. The dispute centers on whether the Tax Court may assert authority over denials of whistleblower awards when the IRS has not formally initiated an administrative or judicial action based on the whistleblower’s information. In this case, the Tax Court seized an opportunity to reassert its jurisdiction by distinguishing its facts from the D.C. Circuit’s restrictive precedents, setting up a direct confrontation over the limits of judicial power in whistleblower matters.

The jurisdictional framework hinges on Section 7623(b)(1), which grants whistleblowers a mandatory award of 15–30% of "collected proceeds" if the IRS "proceeds with any administrative or judicial action" based on the whistleblower’s information. Section 7623(b)(4) vests the Tax Court with jurisdiction to review "any determination regarding an award" under subsection (b)(1). The statute’s text appears broad, but the D.C. Circuit has interpreted it narrowly, holding that the Tax Court lacks jurisdiction unless the IRS has already taken affirmative steps to act on the whistleblower’s tip.

The Tax Court initially adopted an expansive view of its jurisdiction in Cooper v. Commissioner and Lacey v. Commissioner, concluding that it could review denials of awards even when the IRS had not initiated an action. However, the D.C. Circuit decisively rejected this interpretation in Li v. Commissioner, holding that the Tax Court’s jurisdiction is contingent on the IRS having "proceeded with" an administrative or judicial action. Subsequent rulings—Kennedy v. Commissioner and Estate of Insinga v. Commissioner—reinforced this restrictive approach, emphasizing that jurisdiction turns on whether the IRS "proceeded with an action," not whether it ultimately collected proceeds based on the whistleblower’s information.

The Tax Court now finds itself in the crosshairs of this jurisdictional tug-of-war. In this case, the petitioner’s whistleblower claim was forwarded to an examination team on July 6, 2010, just weeks after the IRS had completed an audit of the taxpayer on June 2, 2010. The audit was not yet closed under Revenue Procedure 2005-32, which defines a "closed case" as one where the IRS has finalized all administrative actions, including any necessary internal reviews. Because the case remained open—despite the audit report being signed—the Tax Court reasoned that the IRS had "proceeded with an examination" when it received the whistleblower’s information, satisfying the jurisdictional threshold set by the D.C. Circuit.

This reasoning marks a deliberate effort by the Tax Court to carve out an exception to the D.C. Circuit’s restrictive jurisprudence. By focusing on the IRS’s receipt of the whistleblower’s information during an open examination, rather than the ultimate collection of proceeds, the court asserts that it retains jurisdiction over denials where the IRS has at least initiated an administrative process. The court’s reliance on Revenue Procedure 2005-32—while not binding—serves as a strategic counter to the D.C. Circuit’s deference to IRS discretion, signaling that the Tax Court will not cede jurisdiction without a fight.

The jurisdictional dispute underscores a broader power struggle between the Tax Court and the D.C. Circuit, with whistleblower cases emerging as a flashpoint for judicial authority. The Tax Court’s assertive stance in this case suggests that it will continue to push the boundaries of its jurisdiction, even as the D.C. Circuit seeks to confine it. For whistleblowers, this means that the path to judicial review remains fraught with uncertainty, but the Tax Court’s willingness to challenge the D.C. Circuit’s precedents offers a glimmer of hope for those seeking to contest IRS denials.

The Battle of the Record: Dee’s Attempt to Supplement the Administrative Record

The Tax Court’s refusal to expand the administrative record in Dee v. Commissioner underscores the stringent standards governing record supplementation in whistleblower disputes—a legal battleground where taxpayers often find their evidentiary ambitions frustrated by the court’s deference to the IRS’s designated record.

Dee argued the administrative record was incomplete, pointing to three categories of evidence he claimed should have been included: the Named Taxpayer’s 2010 SEC Form 10-K, excerpts from other Tax Court cases, and a summary of a conversation with IRS Analyst Glikman. His theory centered on the contention that these materials either reflected documents the Whistleblower Office (WBO) had improperly omitted or contained critical context the IRS had failed to consider when denying his award claim. Under the governing framework, however, the Tax Court applies a two-tiered test for record supplementation. First, it may complete the record with evidence that was actually before the WBO but mistakenly omitted from the designated record. Van Bemmelen v. Commissioner, 155 T.C. 74, 75–76 (2020). The court presumes the WBO’s record is complete and requires a “substantial showing with clear evidence” that the omitted documents were in fact considered by the agency. Id. at 74–75. Second, the court may supplement the record with extrarecord evidence—material not before the WBO—only in exceptional circumstances, such as when the agency deliberately excluded adverse documents, when background information is necessary to assess whether the agency considered all relevant factors, or when the agency’s explanation frustrates judicial review. Id. at 76 (citing City of Dania Beach v. FAA, 628 F.3d 581, 590 (D.C. Cir. 2010)); Berenblatt v. Commissioner, 160 T.C. 534, 549 (2023).

Dee’s SEC Form 10-K submission fared poorly under this framework. He claimed it demonstrated the IRS had collected proceeds from the Named Taxpayer based on an audit of tax year 2009, but the court found no evidence the WBO had ever reviewed or relied on the document. Without proof the 10-K was actually before the agency, it could not qualify as omitted evidence under Van Bemmelen. Nor did it fit any exception for extrarecord evidence: it neither contradicted the IRS’s position that the audit was completed before receiving Dee’s tip, nor provided necessary background to evaluate the WBO’s decision-making, nor exposed any failure by the agency to explain its actions. Similarly, the excerpts from other Tax Court cases offered no support for supplementation. The court rejected them outright, noting Dee had not shown they were considered by the WBO or that they met any of the three recognized exceptions.

The conversation with Analyst Glikman met the same fate. According to Dee, Glikman allegedly questioned how Dee could know about IRS collections, but the court dismissed the summary as immaterial to the merits of the claim. The purported dialogue did not constitute omitted evidence because it was not part of the WBO’s record, and it offered no substantive insight into the agency’s decision-making process. The court further rejected it as extrarecord evidence, finding it neither explained the WBO’s actions, revealed deliberate exclusion of adverse material, nor provided necessary background for judicial review. In short, the Tax Court concluded the administrative record was complete as designated and that Dee’s proffered materials failed to satisfy the exacting standards for supplementation under Van Bemmelen and Berenblatt.

Dee’s Claim: Did the IRS Act on His Information?

Dee’s whistleblower claim hinged on a single, critical question: Did the IRS proceed with any administrative or judicial action based on his information? Under Section 7623(b)(1), the IRS is required to pay an award to a whistleblower if their information “substantially contributes” to an action against a taxpayer. The statute does not define “substantially contributes,” but Treasury Regulation § 301.7623-2(b)(1) fills that gap. It explains that the IRS proceeds based on whistleblower information when it “initiates a new action, expands the scope of an ongoing action, or continues to pursue an ongoing action that the IRS would not have initiated, expanded, or continued but for the information provided.”

Dee’s argument rested entirely on the assertion that the IRS’s examination of the Named Taxpayer was a direct result of his tip. He claimed that the audit—completed in 2010—was hastily conducted and fabricated to obscure the IRS’s reliance on his information. The IRS, however, presented a different narrative. According to Revenue Agent (RA) Cotter’s evaluation, the examination team had already identified and addressed the issues Dee raised before receiving his tip. The administrative record confirmed that the examination commenced on October 30, 2009, months before Dee’s claim was submitted on July 6, 2010. RA Cotter’s report stated that the team had “independently identified and addressed all of the issues petitioner identified before receiving petitioner’s claim.”

The court’s focus turned to whether Dee’s information had “substantially contributed” to the IRS’s actions. The regulation’s language is precise: the IRS must have proceeded because of the whistleblower’s information. In this case, the record showed no evidence that the WBO forwarded Dee’s claim to the examination team before July 6, 2010, nor any indication that the IRS took any administrative action based on his tip after that date. The examination team merely surveyed his claim and confirmed that their work had already covered the issues he raised. Dee’s contention that the IRS fabricated a record to hide its tracks was unsupported by anything in the administrative record or the timeline of events. The court would later weigh whether Dee’s speculation could overcome the IRS’s documented timeline—but for now, the record stood as the IRS presented it.

The Court’s Verdict: No Award, But a Jurisdictional Victory for Whistleblowers

The Tax Court’s ruling in Dee v. Commissioner delivered a mixed verdict—denying John R. Dee’s $3 million whistleblower claim while affirming the court’s jurisdiction over closed audits, a decision that bolsters whistleblowers’ legal standing even as it upholds the IRS’s discretion. The court held that it has jurisdiction over whistleblower petitions when the IRS’s examination of the target taxpayer remains open under Rev. Proc. 2005-32, even if no administrative action was taken based on the whistleblower’s information. This marks a significant assertion of judicial authority over IRS procedures, countering the D.C. Circuit’s restrictive interpretation in Li v. Commissioner and its progeny.

The IRS’s Whistleblower Office (WBO) had denied Dee’s claim under I.R.C. § 7623(b), which requires the Commissioner to proceed with administrative or judicial action based on the whistleblower’s information for an award to be mandatory. The WBO concluded that no such action had been taken, a determination the court found was not an abuse of discretion. The court emphasized that its jurisdiction hinges on whether the examination was open—not whether the whistleblower’s tip directly led to IRS action—a distinction that aligns with the D.C. Circuit’s recent ruling in Estate of Insinga v. Commissioner, but expands it to cover cases where the IRS had already planned or initiated an examination before receiving the tip.

For future whistleblowers, the implications are twofold. First, the Tax Court will assert jurisdiction if an examination is open under Rev. Proc. 2005-32, even if the IRS’s actions were preordained, as in Dee’s case. This means whistleblowers can challenge denials in Tax Court as long as their information was forwarded to an active examination team, regardless of whether the IRS’s actions were influenced by the tip. Second, however, the court made clear that the whistleblower must still prove that their information substantially contributed to the IRS’s administrative action—a high bar that Dee failed to meet. The IRS’s documented timeline, which showed that the examination team had already identified and acted on the issues Dee raised before receiving his tip, was deemed sufficient to deny the award.

The ruling also underscores the ongoing tension between the Tax Court and the D.C. Circuit, which has repeatedly narrowed the scope of judicial review in whistleblower cases. While the Tax Court’s jurisdiction over open examinations is now firmly established, the merits of a whistleblower’s claim remain constrained by the IRS’s discretion, leaving little room for judicial second-guessing. This dynamic ensures that the IRS retains significant control over whistleblower awards, even as the Tax Court carves out a more expansive role in policing procedural fairness. For practitioners, the lesson is clear: Whistleblowers must not only secure jurisdiction by ensuring their tip reaches an open examination but also meticulously document how their information directly shaped the IRS’s actions—a task that remains as challenging as ever.