Luis Villa -Arce v. Commissioner of Internal Revenue

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued November 14, 2022 Decided May 26, 2023
No. 22-1006
LUIS VILLA -ARCE,
APPELLANT
v.
C OMMISSIONER OF INTERNAL R EVENUE,
APPELLEE
On Appeal from a Decision
of the United States Tax Court
Robert R. Duncan argued the cause for appellant. With
him on the briefs were Matthew S. Apfel and James Podolny.
Marie E. Wicks, Attorney, U.S. Department of Justice,
argued the cause for appellee. With her on the brief was Bruce
R. Ellisen, Attorney.
Before: P ILLARD and KATSAS , Circuit Judges, and
R ANDOLPH , Senior Circuit Judge.
Opinion for the Court filed by Circuit Judge P ILLARD.

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P ILLARD, Circuit Judge: Luis Villa-Arce sent
information to the Whistleblower Office of the Internal
Revenue Service that he believed showed a company was
underpaying taxes by taking unjustified deductions and using
improper pricing practices. Section 7623 of the Internal
Revenue Code entitles whistleblowers to a percentage of the
proceeds the IRS collects based on whistleblower information
identifying underpayment of taxes or violations of internal
revenue law. Villa-Arce claims he is entitled to a mandatory
whistleblower award under Section 7623.
The Whistleblower Office forwarded Villa-Arce’s
submission to an appropriate IRS investigative division, where
a revenue agent decided to proceed with an examination (i.e.,
an audit). During the examination, the revenue agent
investigated the tax issues Villa-Arce pointed out, along with
unrelated tax issues that the agent identified. Ultimately, the
agent concluded that the company did not violate tax laws on
the issues that Villa-Arce reported, but ordered tax adjustments
on several unrelated issues. Under Treasury regulations, a
whistleblower is not entitled to recover proceeds on issues
unrelated to the whistleblower’s submission that the IRS
identifies through its own information gathering. 26 C.F.R.
§ 301.7623-2(a)(2), (b). The Whistleblower Office
accordingly denied Villa-Arce’s application for an award.
Villa-Arce challenges the denial as arbitrary and
capricious. He claims the administrative record shows that the
revenue agent relied on Villa-Arce’s submission in
investigating the unrelated issues. He also argues that the
Whistleblower Office’s denial letter insufficiently explains
why the Office denied any award.
The Tax Court entered summary judgment in favor of the
IRS, and we now affirm. The administrative record shows that

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the Whistleblower Office’s denial was consistent with
Treasury regulations defining when a whistleblower’s
contribution is sufficient to justify an award. And the
determination letter sufficiently explained the Office’s
reasoning.
BACKGROUND
Whistleblowers who send information on tax
underpayment or internal revenue law violations are entitled to
awards under Internal Revenue Code Section 7623 if the
Internal Revenue Service (IRS) “proceeds with” an
administrative action and collects money “based on
information” the whistleblower provided. I.R.C. § 7623(b)(1).
The statute generally requires payment to a whistleblower of
15 to 30 percent of the Service’s resultant proceeds, and
provides that within that range the award amount “shall depend
on the extent to which the individual substantially contributed
to such action.” Id. In 2016, Luis Villa-Arce submitted
information to the IRS that he thought revealed that a company
he identified was falsely claiming deductions of $1,000 per
employee every month, a practice he called a “head-tax”
deduction. Later, Villa-Arce made a supplemental filing that
he thought showed the company also was violating Internal
Revenue Code Section 482 through a “transfer-pricing”
scheme: overpaying its parent company for information
technology services.
After reviewing Villa-Arce’s information, an analyst in the
Whistleblower Office referred the information to the IRS Large
Business & International Division. The revenue agent opened
an examination into the head-tax and transfer-pricing issues
that Villa-Arce identified. During the examination, the revenue
agent also investigated unrelated issues. At the close of the
investigation, the IRS ordered tax adjustments on the foreign

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tax credit and several categories of improper deductions:
“[a]dvertising,” “[c]ost of goods sold,” “[d]epreciation,” “other
[d]eductions,” and “[r]epairs and maintenance.” App. 172-73,
175. In a report after the examination, the revenue agent
informed the Whistleblower Office that none of the issues
Villa-Arce identified led to adjustments.
The Whistleblower Office denied Villa-Arce’s application
for an award. The Whistleblower Office issued a preliminary
award denial letter to Villa-Arce, to which he responded
through counsel, explaining why he thought the information he
submitted merited an award and requesting reconsideration.
Several weeks later, the Whistleblower Office issued a final
determination letter denying any award. The letter stated that
“the IRS took no action on the issues you raised.” App. 203.
It noted that the IRS opened an examination after receiving
Villa-Arce’s submission, but explained “that review did not
result in the assessment of additional tax, penalties, interest, or
additional amounts with respect to the issues you raised.” App.
203. Thus, while the letter acknowledged that “[t]he IRS did
assess additional tax, penalties, interest or additional amounts,”
it told Villa-Arce “the information you provided was not
relevant to those issues.” Id.
Villa-Arce petitioned the Tax Court for review. On cross-
motions for summary judgment, the Tax Court ruled in favor
of the IRS. The court held that the Whistleblower Office
followed appropriate procedures, and that “the administrative
record establishes that the adjustments did not relate to the
whistleblower information and no adjustments were made
based on the head tax deduction or transfer pricing issues.”
App. 324.
Villa-Arce appealed. In Villa-Arce’s view, the
administrative record showed that the IRS relied on his

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information for the tax adjustments it ordered against the target
company, entitling Villa-Arce to an award under Internal
Revenue Code Section 7623. Villa-Arce also challenged the
Whistleblower Office’s determination letter for insufficiently
explaining how it concluded that the IRS’s financial recovery
was not based on his submission.
We heard argument on the same day as a related appeal by
a different tax whistleblower, Lissack v. IRS, No. 21-1268. In
both cases, the IRS argued primarily that the Tax Court does
not have jurisdiction over Whistleblower Office award denials
when the whistleblower did not receive an award, but also
defended the denials as consistent with the statute and Treasury
regulations and supported by the administrative record.
DISCUSSION
On de novo review, we begin by confirming the Tax
Court’s jurisdiction, then consider whether the IRS was entitled
to summary judgment. Byers v. Comm’r, 740 F.3d 668, 675
(D.C. Cir. 2014). We conclude that the Whistleblower Office
did not act arbitrarily or capriciously in denying Villa-Arce’s
award, and that its final letter adequately explained the
determination.
A.
Under subsection 7623(b)(4) of the Internal Revenue
Code, the Tax Court has jurisdiction over “[a]ny determination
regarding an award under” subsections 7623(b)(1), (2), or (3).
Those provisions set the conditions for payment of awards to
whistleblowers out of proceeds they help the IRS to collect.
The IRS argues that the Whistleblower Office makes a
reviewable “determination regarding an award”—and the Tax
Court has jurisdiction—only in the event the IRS collects
proceeds based on the whistleblower submission. In the related

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case, Lissack v. IRS, we rejected that argument and held that
the Whistleblower Office made a reviewable “determination
regarding an award” within the meaning of subsection (b)(4)
where the IRS had opened an examination into the
whistleblower’s submission and made substantial tax
adjustments. Lissack v. IRS, No. 21-1268, slip op. at 14-15. In
Villa-Arce’s case, as in Lissack’s, the Whistleblower Office
referred the submission to the IRS, the IRS initiated an
examination, and the IRS ultimately made the tax adjustment
that is the object of the parties’ dispute on the merits. We are
thus satisfied that the Tax Court had jurisdiction over Villa-
Arce’s appeal.
B.
On the merits, Villa-Arce challenges as arbitrary and
capricious the Whistleblower Office’s decision to deny him an
award. See 5 U.S.C. § 706(2)(A). He argues that he is entitled
to a portion of the proceeds the IRS collected from the target
Taxpayer because “the IRS was not already investigating
Taxpayer when Mr. Villa-Arce submitted his Form 211, and
had no plans to,” so any audit and ensuing increased tax
liability of that taxpayer was “based on the allegations in Mr.
Villa-Arce’s Form 211.” Appellant’s Br. 16.
The Tax Court granted summary judgment to the IRS. The
court explained that the administrative record shows that the
IRS recovered proceeds only on issues “not related to the
whistleblower information,” App. 323, and held that, under the
statute and regulations, no award is justified under those
circumstances. We affirm the judgment of the Tax Court.
Internal Revenue Code Section 7623 and the Treasury
regulations interpreting it permit the course the IRS took here:
dividing separate portions of an examination into distinct
administrative actions and rewarding the whistleblower only if

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the portion based on the whistleblower’s submission yields a
tax adjustment. Under the statute, if the IRS “proceeds with
any administrative . . . action . . . based on information brought
to the [agency’s] attention by an individual,” that individual is
entitled to an award of “at least 15 percent but not more than
30 percent of the proceeds collected as a result of the action
(including any related actions).” I.R.C. § 7623(b)(1).
A Treasury rule interpreting the statute, which we refer to
as the Whistleblower Definitions Rule, allows the IRS to treat
investigations into unrelated tax issues of the same taxpayers
as separate “administrative action[s].” 26 C.F.R. § 301.7623-
2(a)(2), (b)(2) (Example 2). The part of the Rule defining
“proceeds . . . based on” states that “the IRS proceeds based on
information provided by a whistleblower when the information
provided substantially contributes to an action against a person
identified by the whistleblower.” Id. § 301.7623-2(b)(1). An
example accompanying that definition describes a scenario in
which an investigation “proceeds . . . based on” information
independent of the whistleblower submission. Id. § 301.7623-
2(b)(2) (Example 2). In the example, “the IRS obtains, through
the issuance of Information Document Requests (IDRs) and
summonses, additional facts that are unrelated to the activities
described in the information provided by the whistleblower”
and “[b]ased on these additional facts . . . expands the scope of
the examination.” Id. The rule explains that, in such a case,
the examination portions “relating to the additional facts . . .
are not actions with which the IRS proceeds based on the
information provided by the whistleblower because the
information provided did not substantially contribute to the
action.” Id.
Villa-Arce does not challenge the validity of the
Whistleblower Definitions Rule but argues that, correctly
applied, it entitles him to an award. He acknowledges his

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submission did not reference the issues that led to tax
adjustments, which were based on the company’s foreign tax
credit calculation and deductions for “‘Advertising,’
‘Depreciation,’ and ‘Repairs and maintenance.’” Appellant’s
Br. 17. But he argues that his submission put the IRS agent in
a position to discover those problems.
Villa-Arce’s claim rests on two incorrect premises, one
legal and one factual. First, he argues that the IRS initiated an
examination and recovered a tax adjustment only because of
his submission. As a matter of law, however, the IRS is not
required to reward every whistleblower who identifies a
delinquent taxpayer. Under the statute as the IRS has
definitively interpreted it, a whistleblower is not entitled to
recover proceeds from portions of an examination based on
information unrelated to the whistleblower claim, such as facts
that the revenue agent uncovers only through independent
investigation. 26 C.F.R. § 301.7623-2(b)(1), (b)(2) (Example
2). Here, the IRS pursued two separate administrative actions:
an investigation of the head-tax and transfer-pricing issues
Villa-Arce identified, and another investigation of unrelated
issues, such as the foreign tax credit. To show that the IRS
collected proceeds “based on information” he submitted, I.R.C.
§ 7623(b)(1), Villa-Arce would have had to show that the IRS
ordered tax adjustments in the administrative action on the
issues he identified.
Second, Villa-Arce’s factual argument—that the agent
never expanded the examination beyond the issues Villa-Arce
identified—falls short because the administrative record belies
it. The record shows the IRS made adjustments and recovered
proceeds based on the revenue agent’s independent
information gathering, not based on the information Villa-Arce
supplied. While reviewing the company’s tax return in
response to Villa-Arce’s submission, the revenue agent

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identified additional issues and expanded the investigation to
address them. During the expanded investigation, the agent
visited the company’s place of business, communicated with
company representatives, sent information document requests,
and reviewed documents. The investigation lasted more than
two years, and the agent reported over 400 hours of work. In a
final report, the revenue agent stated that Villa-Arce’s
information did not contribute to the issues that led to the
adjustments, and the Tax Court credited that report.
Villa-Arce challenges the revenue agent’s statements and
the Tax Court’s interpretation, contending that his submission
“influenced” and “guided” the examination because, in his
view, the issues that ultimately resulted in tax adjustments are
similar to the issues he identified. Appellant’s Br. 17. Villa-
Arce contends the agent’s investigation into “subcontracting
invoices” is “directly correlate[d]” with his own “allegation
that [the company] claimed fictitious business expense
deductions for temporary employees supplied by staffing
agencies.” Id. at 17. Villa-Arce similarly argues that an
adjustment related to depreciation was based on his submission
about the head-tax issue. The revenue agent must have relied
on his submission, Villa-Arce says, because the agent “never
expanded the scope of the examination after commencing it.”
Id. at 18.
The Whistleblower Office logically and reasonably
concluded otherwise. The administrative record shows that the
IRS did not make tax adjustments on either the head-tax or
transfer-pricing issue. The revenue agent investigated both of
those issues. The IRS did not order any adjustments on the
deductions relevant to the head-tax issue; the portion of the
revenue agent’s activity record that Villa-Arce cites suggests
that the depreciation issue supporting the adjustment related to
“how the life of property was determined,” not to the head tax

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Villa-Arce described. App. 73. On the transfer-pricing issue,
an examiner in the IRS International Division concluded that
the pricing agreement was within the accepted range.
The Tax Court accordingly correctly granted summary
judgment in favor of the IRS on Villa-Arce’s challenge to the
Whistleblower Office’s determination. Villa-Arce admits that
his submission “did not explicitly reference” the tax issues that
led to adjustments, Appellant’s Br. 17, and the administrative
record supports the revenue agent’s statements that those tax
issues were not related to the issues Villa-Arce identified. The
record also shows substantial independent information
gathering by the revenue agent. See 26 C.F.R. § 301.7623-
2(b)(2) (Example 2). The Whistleblower Definitions Rule
allows the IRS to treat a portion of an examination into
unrelated tax issues as a separate administrative action, and
Villa-Arce does not show that the agency incorrectly applied
that rule here.
C.
Finally, the Whistleblower Office sufficiently explained
the award denial. Villa-Arce argues that the Office’s final
determination letter “failed to articulate an explanation for its
denial that connects the facts in the administrative record to its
denial of Mr. Villa-Arce’s Form 211.” Appellant’s Br. 20. In
particular, he says that the determination letter “failed to
reconcile the record evidence supporting” his claim with the
Whistleblower Office’s “stated reasons for denial.” Reply Br.
10. But, as discussed in the previous section, the facts as
reflected in the administrative record do not make out a legally
viable claim. The reasons stated in the determination letter are
entirely consistent with that conclusion.
We have previously held that a determination letter
sufficed where it “notified [the whistleblower] of the

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Whistleblower Office’s final decision on his claim.” Myers v.
Comm’r, 928 F.3d 1025, 1033 (D.C. Cir. 2019). The letter
Villa-Arce received meets that standard. The final
determination letter disclosed in general terms the IRS’s
reasons for denying Villa-Arce’s petition, and that explanation
is adequate.
* * *
For the foregoing reasons, we affirm the Tax Court’s
decision.
So ordered.

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