Exceptional Circumstances in Discovery - Not in Stein.

In United States v. Stein, 2007 TNT 32-19 (S.D.N.Y. 2007), the Court denied the Government’s motion to depose certain witness that live abroad. The denial was based on the Court’s reading of Federal Rule Criminal Procedure 15, (hereinafter referred to as “FRCP 15”). Being that Tax Court Rules contain similar language and the Tax Court decisions/orders are infrequently reported, the district court’s decision is worth taking “a look at”.

FRCP 15 Depositions provides in relevant part as follows:

(a) When Taken.

(1) In General. A party may move that a prospective witness be deposed in order to preserve testimony for trial. The court may grant the motion because of exceptional circumstances and in the interest of justice. If the court orders the deposition to be taken, it may also require the deponent to produce at the deposition any designated material that is not privileged, including any book, paper, document, record, recording, or data. (Emphasis Added).

Tax Court Rule 75. Depositions for Discovery Purposes--Without Consent of Parties in Certain Cases provides in relevant part:

(a) When Depositions May Be Taken. After a notice of trial has been issued or after a case has been assigned to a Judge or Special Trial Judge of the Court, and within the time for completion of discovery under Rule 70(a)(2), any party may, without leave of Court, take a deposition for discovery purposes of a nonparty witness in the circumstances described in paragraph (b) of this Rule. Unless the Court shall determine otherwise for good cause shown, the taking of such a deposition will not be regarded as sufficient ground for granting a continuance from a date or place of trial theretofore set.

(b) Availability. The taking of a deposition of a nonparty witness under this Rule is an extraordinary method of discovery and may be used only where a nonparty witness can give testimony or possesses documents or things which are discoverable within the meaning of Rule 70(b) and where such testimony, documents, or things practicably cannot be obtained through informal consultation or communication (Rule 70(a)(1)) or by a deposition taken with consent of the parties (Rule 74). (Emphasis Added).

With the plethora of tax shelter cases that are about to hit the United States Tax Court’s calendars, the Government’s use of the Tax Court’s discovery rules need to be understood by those litigators that have submitted themselves to the Tax Court’s jurisdiction. Admittedly the language contained in the rules is not exact but the opinion does enlighten what the United States Tax Court should consider to be “exceptional circumstances”.

In Stein, the Government was seeking to depose four individuals who the Government would label as facilitators and/or the tax exempt parties, whose only involvement in the transaction would be to collect a check for the use of their/or the entities names. The defendants, needless to say, did not agree to the Government’s characterizations and opposed the Government’s motion on the grounds that said motion did not set forth any exceptional circumstances. The Court agreed with the defendants.

The Court first noted that for defendants and their counsel to attend the depositions would impose a financial hardship on the defendants. Thus, a factor in the Court’s decision was this financial burden.
Next, the Court noted that two of the non-party witnesses would testify at trial. The Court citing to United States v. Drogoul, 1 F.3d 1546, 1557 (11th Cir. 1993) noted that "[i]n the ordinary case, exceptional circumstances do not exist when the prospective deponent has declared that he or she is willing to testify at trial. . . .[I]f there is very little chance that a deposition will be admissible -- if the witnesses are available to testify live, for example -- the district court need not engage in the wasteful practice of authorizing useless depositions." As they that is where the tire hits the pavement.

The Tax Court is bound to follow its rules otherwise face reversal. See Ballard v. Commissioner, 544 U.S. 40 (2005). The language in Tax Court Court Rule 75 is clear: depositions are only to be granted in exceptional circumstances. If informal discovery is being pursued by the parties, and this does not mean informal interviews as the Government likes to maintain, and the witnesses are available for trial then the Government should not be able to conduct depositions under the terms of Tax Court Rule 75. FRCP 15 provides authority for said proposition. If said analysis was incorrect then the Tax Court should just follow the rules of Federal Rules of Civil Procedure, which the Tax Court has consistently articulated it will not do. See Branerton v. Commissioner, 61 T.C. 691 (1974); Schneider Interests, L.P. v. Commissioner, 119 T.C. 151 (2002).

Accordingly, Tax Court Litigators please remember one important lesson- The United States Tax Court Rules have their own rules. So get to know these rules, failure to do so will allow the Government greater access to your case than otherwise permitted under the Tax Court Rules.

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