Firm Seeks Clarifications Under Proposed Regs on Payment of Whistleblower Rewards

CC:PA:LPD:PR(REG-131151-10)

Dear Mr. Hurst,

Please accept this letter as comment on the proposed change to Section 301.7623-1(a). We at Kenney & McCafferty, P.C. encourage the IRS to adopt the change as proposed in the Federal Register on January 18, 2011, with additional clarifying language that applies the change to corporate NOLs. We request a public hearing so that we can provide additional information on the proposed rule change.

As the Service knows, the Whistleblower Office issued its definition of "collected proceeds" in the June 2010 Whistleblower Manual. The public was not permitted to comment on the Manual prior to its publication. The definition should be expanded as proposed because it will incentivize whistleblowers to report tax fraud being committed by large corporations. Under the current, very narrow definition, whistleblowers are denied an important financial incentive to report tax underpayment, evasion, and fraud being committed by large corporations. The proposed change, with our suggested additions, will correct this flaw in the Whistleblower Awards Manual, and the country will ultimately benefit from the efforts of corporate tax fraud whistleblowers' efforts.

The proposed change expands the definition of "collected proceeds" to include a reference to the term "credit balance." Typically, the term "credit balance" refers to individual taxpayers. Corporations either have a taxable balance, or they are in an NOL (net operating loss) position. Corporations in an NOL position do not pay tax for that period but instead apply a portion or all of their NOL balance to the current period taxable income. NOL positions can result from several situations other than a tax overpayment. For example, a corporation could acquire a smaller corporation and achieve a corporate credit balance, or NOL.

Because the proposed language uses the term "credit balance," it is unclear whether NOL offsets that occur through a whistleblower report would be included in the calculation of that whistleblower's award. We recommend that the proposed language be changed to specify that reductions in NOL balances that are attributable to a whistleblower report be included in the definition of "collected proceeds" and that the whistleblower be entitled to an award for the report thereof. We suggest that the definition of "collected proceeds" be clarified to allow for the inclusion of a reduction in a "special purpose NOL" derived from the acquisition of a company and application of IRC 338, as well as through other means.

We look forward to attending a public hearing on the issue and the Service's adoption of our proposed changes.