Office of Chief Counsel's views on E-Discovery

In Chief Counsel Notice 2007-007, which consisted of five pages, IRS counsel issued guidelines as to the E-Discovery Amendments to the Federal Rules of Civil Procedure, (hereinafter referred to as the “E-Discovery Amendments”). In all honesty my initial reaction was: why? Why would/should United States Tax Court litigators be concerned with these new amendments? Then I saw who signed the Chief Counsel Notice and realized that as usual, the scrivener was ten steps ahead of the game.

The E-Discovery Amendments are set forth in FRCP 16(b)(5) and (6), Rule 26(a)(1)(B), Rule 26(b)(2)(B), Rule 26(b)(5)(B), Rule 26(f), Rules 33(d), 34(a)(1), 34(b), Rule 37(f), and Rule 45. For an excellent synopsis on the E-Discovery Amendments, I highly recommend the American Bar Association, Section of Litigation, Special Publication on E-Discovery, (2007). This publication analysis the amendments and sets forth some of the important precedent that pertains to E-Discovery.

We are all aware of the famous/infamous passage from Ash v. Commissioner, 96 T.C. 459, 462 - 463 (1991) which provides as follows:

Section 7453 provides that proceedings of the Tax Court shall be conducted in accordance with such rules of practice and procedure as the Court may prescribe. Petitioner argues that respondent's use of administrative summonses to obtain information related to the case pending before this Court allows respondent to undermine the discovery rules contained in title VII of our Rules of Practice and Procedure (Rules 70 through 76) and gives him an unfair advantage. Title VII provides rules addressing interrogatories, production of documents and things, examination by transferees, depositions upon consent of the parties, depositions without the consent of the parties, and deposition of expert witnesses.

The purpose of discovery in the Tax Court is to ascertain facts which have a direct bearing on the issues before the Court. Penn- Field Industries, Inc. v. Commissioner, 74 T.C. 720, 722 (1980). Discovery is not as broad in the Tax Court as it is in the Federal District Courts. Estate of Woodard v. Commissioner, 64 T.C. 457, 459 (1975). The discovery procedures established by our Rules in essence follow the Federal Rules of Civil Procedure (Federal Rules), but are not identical. See 60 T.C. 1097 (1973) (note accompanying Rule 70(a) (1974), which, for the first time, permitted interrogatories and requests for production and inspection of papers and other things). Thus, absent a Court order, discovery through depositions without the consent of the opposing party is not available under our Rules (with the exception of a deposition taken under Rule 75), as it is under the Federal Rules. That limitation is intentional. See 60 T.C. 1097 (1973). Unnecessarily broad discovery may cause extensive delays and jeopardize the administration, the integrity, and the effectiveness of the Internal Revenue laws. Penn-Field Industries, Inc. v. Commissioner, supra at 724. The discovery procedures should be used only after the Parties have made reasonable informal efforts to obtain needed information voluntarily. Rule 70(a)(1); Branerton Corp. v. Commissioner, 61 T.C. 691 (1974). Under Rule 103, we may issue orders to protect persons from annoyance, embarrassment, oppression, or undue burden or expense resulting from discovery. Rule 123 allows this Court to impose sanctions, including the exclusion of evidence obtained in direct violation of an existing Court order or the Court's rules. Rule 1(a) provides that, where in any instance there is no applicable rule of procedure, the Court or the Judge before whom the matter is pending may prescribe the procedure, giving particular weight to the Federal Rules of Civil Procedure to the extent that they are suitably adaptable to govern the matter at hand.

 See also Schneider Interests, L.P. v. Commissioner, 119 T.C. 151 (2002).

As of now, the Unites States Tax Court has no counter part to the E-Discovery Amendments. Therefore at first glance one might conclude that the application of the E-Discovery Amendments as to the United States Tax Court may fall into the same category as other FRCP provisions that are the subject to the discovery wars before the United States Tax Court – We will take a look at the FRCP but are not bound to the rule because we have our own discovery rules – informal and formal.

But are the E-Discovery Amendments a different creature? One could submit that as to Tax Court Rules 70 (General Provisions), 71 (Interrogatories), 72 (Production of Documents, 90 (Admissions), the FRCP do apply and therefore any amendment to the FRCP applies equally to the counterparts in the United States Tax Court. Whether said statement is a valid assumption need not be tested as it appears the Office of Chief Counsel is concluding and expecting the E-Discovery Amendments to be applied in the United States Court, if not sooner.

Why do I say sooner? Take a look at Ash v. Commissioner, 96 T.C. 459, 462 - 463 (1991), were the IRS was seeking documents through its summons power. The United States Tax Court recognized that the IRS has certain rights when the Court stated:

“Respondent is authorized by sections 7602 and 7609 to issue summonses and to utilize the information obtained through them. In relevant part section 7602(a) provides that for the purpose of determining the liability of any person for any internal revenue tax the Secretary is authorized: (1) To examine any books, papers, records, or other data which may be relevant or material to such inquiry; (2) to summon the person liable for tax, any officer or employee of such person, or the person having possession, custody, or care of books of account containing entries relating to the business of the person liable for tax, or any other person the Secretary may deem proper, to appear before the Secretary and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and (3) to take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry. Section 7609(a) provides for special procedures when a summons is served on any person who is a third-party recordkeeper.”

So we can expect E-Discovery Amendments to come into play during the examination/audit phase regardless of the size of the taxpayer, but this not the concern that I glimpse from the notice. Rather, the concern that emanates from this Notice is that taxpayers will be seeking information/discovery on the IRS.

Remember in Jade Trading, LLC v. United States, Dkt. No. 03-2164T (U.S. Cl. Ct.), during the deposition of an attorney from the Office of Chief Counsel, taxpayer’s counsel obtained notes as to a meeting between the attorney and the Chief Counsel of the IRS. The notes supported the taxpayer’s position and contradicted the IRS’s position as to options and liabilities. See 2006 TNT 11-14. Thus the attorneys from Jade Trading are hoping that said memo will support the taxpayer’s argument in chief but if not said memo clearly mitigates any potential addition to tax.

Other tax practitioners/litigators will like wise want to see what else the IRS has to say on the issues that the IRS now considers abusive or inconsistent with the intent of the statute. The E-Discovery Amendments create, or at least attempt to, set up a mechanism for tax practitioners to obtain useful discovery, electronically stored information, as to their issues. Thereby, through the IRS's own words the taxpayer can severely cripple the IRS’s case in chief or at least remove the additions to tax. 

A certain associate chief counsel does not want her litigators to lack guidance on these E-Discovery Amendments and if I were them, I would listen to her. The same message bodes well with private practitioners – learn these E-Discovery Amendments. Like I said, a certain associate chief counsel is one-step ahead.