Subpoenas in the Virtual Tax Court Age: Designated Orders 9/28/20 to 10/2/20

November 20, 2020 by 1 Comment

The focus for this blog post will primarily be about how the Tax Court is handling subpoenas in this age of virtual trials. There are some miscellaneous designated orders I will also touch on for the week I monitored. Also for those of you keeping track – I also monitored the week of August 31 through September 4, but did not write a report because there were no designated orders submitted that week. Perhaps the judges were ready for the Labor Day holiday?

Subpoenas and Virtual Tax Court

Docket Nos. 14546-15, 28751-15 (consolidated), YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, et al., Order available here.

I was listening to the UCLA Extension’s 36th Annual Tax Controversy Conference’s panel on “Handling Your Tax Court Matter in the Covid-19 Environment” on October 20. The panel was moderated by Lavar Taylor (Law Offices of Lavar Taylor) and panelists were Judge Emin Toro (U.S. Tax Court), Lydia Turanchik (Nardiello and Turanchik), and Sebastian Voth (Special Trial Counsel, IRS Office of Chief Counsel). The topic turned to subpoenas and Ms. Turanchik cited the YA Global order in question as being a good example of the Tax Court’s, specifically Judge Halpern’s, approach to subpoenas in our virtual Tax Court era.

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YA Global made a previous appearance in designated orders write-ups concerning scheduling issues in the pandemic. Now, the issue is that that the IRS requested an order setting the cases for remote hearing and a notice of remote proceeding in order to provide a return date and location for subpoenas duces tecum that they would like to issue. The petitioners requested a protective order precluding the IRS from issuing the subpoenas.

First of all, the Tax Court has a document with instructions on subpoenas for remote proceedings. With respect to subpoenas for production of documents from a third party, if a Tax Court litigant needs to obtain documents from a third party for use in a case set for trial, the litigant should, no later than 45 days before the trial session, file a motion for document subpoena hearing. If the motion is granted, the judge will issue an order setting the case for a remote hearing and issue a notice of remote proceeding. The hearing date will be approximately two weeks before the first day of the trial session. The litigant should immediately serve the subpoena for documents on the third party. The third party may voluntarily comply with the subpoena by delivering the documents and the Court will cancel the hearing. Otherwise, the third party may (assuming the party does not object to the subpoena) elect to present the relevant documents on the day of the hearing.

In the YA Global order, the IRS followed that procedure – their motion requested an order setting these cases for a remote hearing and a notice of remote proceeding. The notice then provides the date and location for the subpoenas duces tecum that the IRS would like to issue. That motion, however, triggered a motion from the petitioners for a protective order on the grounds that the IRS is trying an end run around the discovery deadline that the parties agreed to (May 1, 2020, which the Court incorporated into its pretrial order).

Tax Court Rule 147 is the rule on subpoenas, but we need some guidance on how it applies to this situation. Rule 147(d) subpoenas are time-bound by the period allowed to complete discovery, but Rule 147(b) subpoenas are not limited in the same way. Those subpoenas command the person who receives the subpoena to appear at the time and place specified (a hearing or trial). Does that mean a 147(b) trial subpoena allows a party to have additional discovery time?

There is relatively little authoritative Tax Court precedent regarding claims of misuse regarding 147(b) trial subpoenas. In Hunt v. Commissioner, the Court quashed subpoenas issued on the eve of trial for large quantities of documents not reviewed during discovery as impermissible. There, the Court stated “respondent simply cast an all-encompassing net in the search for information with which to build a case. Rule 147 was not intended to serve as a dragnet with which a party conducts discovery.”

There is, instead, larger authority in the Federal Rules of Civil Procedure (regarding civil actions and proceedings in United States district courts). In fact, when the Tax Court set up Rule 147, the goal was to have a rule governing subpoenas substantially similar to Fed. R. Civ. P. 45 (“Subpoenas”). Rule 45 has been subsequently amended to authorize the issuance of subpoenas to compel nonparties to produce evidence independent of a deposition. This is a different direction from Tax Court Rule 147.

Yet, it “is black letter law that parties may not issue subpoenas pursuant to Federal Rule of Civil Procedure 45 ‘as a means to engage in discovery after the discovery deadline has passed’” (Joseph P. Carroll Ltd. v. Baker). To expand and explain, Moore’s Federal Practice – Civil states “once the discovery deadline established by a scheduling order has passed, a party may not employ a subpoena to obtain materials from a third party that could have been procured during the discovery period.”

In reviewing the IRS actions in these cases regarding the subpoenas, some fall in the category of opportunities passed up for discovery and others allude to a purpose to learn facts or resolve uncertainty. The Court states those subpoenas fall under the current Tax Court Rules for discovery, which apply appropriately here. Overall, the Court denies the IRS motion as the subpoenas would be used for an inappropriate purpose, the conduct of discovery.

Only one subpoena is excepted from the denied subpoenas. This subpoena is intended to facilitate authorization to view and potentially use documents already produced by that individual that he may not have been authorized to produce previously. The proposed IRS subpoena is to rectify the individual’s possible lack of authority in producing documents that the IRS already has in hand and may use (presumably at trial). The Court is allowing this subpoena as an appropriate use of a trial subpoena. The Court then grants the IRS motion to set a remote hearing and notice of remote proceeding with regard to that one third party subpoena.

Miscellaneous Cases

Another Scattershot Petition

  • Docket No. 13130-19, William George Spadora v. C.I.R., Order available here.

In my last designated orders post, I wrote about scattershot petitions. Bob Probasco made a comment and I sent him a follow-up email. His theory is that these scattershot petitions may actually be a promoter scheme for tax protestors to get the dismissal in Tax Court and then file a refund suit in district court or the Court of Federal Claim with the argument that “the IRS has no jurisdiction” and the usual result of no success in that court either. That may be a possibility as there seem to be several such petitions filed in the Tax Court.

Which brings us to Mr. Spadora (whatever his motivations are) as his petition refers to tax years 2000 through 2018.  The IRS checked and there were notices of deficiency for 2004 and 2010-2012 only, but all of those were expired.  Instead of immediately granting the IRS motion to dismiss, Judge Gale strikes the case from the San Francisco calendar scheduled for October 19. The petitioner has until November 18 to respond with his reasoning why the Court has jurisdiction and to submit the applicable notices of deficiency or determination.

A Day Late and a FedEx Receipt Short

  • Docket No. 13949-19, Artur Robert Smus v. C.I.R., Order of Dismissal for Lack of Jurisdiction available here.

Mr. Smus filed his Tax Court petition 91 days after the Notice of Deficiency was sent by the IRS. He was supposed to file a response to the IRS Motion to Dismiss for Lack of Jurisdiction, but did not. He was also supposed to appear at the remote hearing for Denver to explain at the hearing regarding the motion to dismiss. Mr. Smus did not appear so the IRS Counsel explained to the Court about the attempts to reach him and why the motion should be granted. The Court tried to contact Mr. Smus, but they were unsuccessful.

What did Mr. Smus do? He electronically filed his response to the motion ten minutes prior to the scheduled remote hearing. In his response, he states he petitioned the Court on the evening of July 23, 2019 (day 90), but FedEx did not ship out the package until the morning of July 24 (day 91). He is not able to find his FedEx receipt. Because of his late response and failure to appear at the hearing combined with admitting the mailing occurred on the 91st day, the Court grants the motion to dismiss for lack of jurisdiction.

My advice? Do not wait until the last minute to file the Tax Court petition. If you are close to the deadline, you have to make sure the filing gets done absolutely right.

How Old Is Old and Cold?

  • Docket Nos. 27268-13, 27309-13, 27371-13, 27373-13, 27374-13, 27375-13 (consolidated), Edward J. Tangel & Beatrice C. Tangel, et al., v. C.I.R., Order available here.

The Tangels appeared in a prior designated orders post I wrote concerning how the IRS was nonresponsive to discovery requests in this case about the research credit. This time, they are seeking to seal 2,472 trial exhibits. 2,417 relate to “Terminal High Altitude Area Defense” while the other 55 relate to “Capstone” (no, not Treadstone). About 75% of the first group of exhibits have a warning stamp concerning technical information where the export is restricted by federal law. The petitioners argue that disclosure of the proprietary information will irreparably harm their business, violate trade secret protections, and may impact national security.

In the Court’s analysis, there is not enough evidence to support those claims. The motion for protective order is two pages long and without supporting affidavits – a party must provide appropriate testimony and factual data to support claims of harm resulting from disclosure and not rely on conclusory statements.

Next, the tax years at issue are 2008-2010 so the documents in question are presumably at least 10 years old. Sensitive documents lose saliency over time and become “old and cold.” In other cases, documents that were older than certain years (examples: 5, 7, or 10 years old) were excluded from being confidential information. The petitioners have not addressed how the age of the documents affects their confidential nature.

The Court was inclined to believe that a protective order may be necessary, but not for all 2,472 documents. The Court proposed that the parties work to submit a joint protective order or to submit their own separate proposed protective orders if they cannot agree. The current motion for a protective order from the petitioners was denied.

Filed Under: Designated Orders, Subpoena

A Tax Court Procedural Anomaly: the Trial Subpoena Duces Tecum, Designated Orders July 29 – August 2

September 24, 2019 by Leave a Comment

Subpoenas, morphing motions and a protestor’s use of the Tax Court judgment finality rule were covered in orders issued during the week of July 29th. Judge Leyden also made sincere efforts to help petitioners help themselves and prevent dismissal of their case (here), and the petitioners heeded her advice.

Docket No. 19502-17, Cross Refined Coal, LLC, U.S.A. Refined Coal, LLC, Tax Matters Partner v. C.I.R. (order here)

This first order was not actually designated, but Bob Kamman raised it as one that perhaps should have been, because it involves a distinctive aspect of Tax Court procedure: the trial subpoena duces tecum.

Information and documents can (and should) be requested well in advance of trial but if they are not provided, then the mechanism available to the parties to demand the production of documents is with a trial subpoena duces tecum. Section 7456(a)(1) requires subpoenaed third parties to appear and produce discovery-related documents at the “designated place of hearing,” rather than some other location at another time as allowed by other Courts (see Fed. R. Civ. P. 45). The rule is in contrast with typical Tax Court procedures that encourage the parties to exchange information informally and as early as possible.

In this order, the petitioner moves to quash the trial subpoenas that the IRS served on six non-parties. Petitioner argues that the issuance of subpoenas is the IRS’s attempt to obtain discovery from petitioner in violation of Rule 70(a)(2), which requires that discovery between parties be completed no later than 45 days prior to the calendar call date. The Court disagrees that the rule applies because the subpoenas were served on non-parties, rather than the petitioner or another party in the case.

Petitioner’s issue with the subpoenas is the IRS’s timing. The subpoenas were served on the non-parties 25 to 21 days before the calendar call, and since the subpoenas order the non-parties appear at trial it means there may be very little time for the petitioner to review any newly produced documents.

A rule governing the timing for subpoenas does not seem to exist in the Code or Tax Court rules. The Tax Court’s website suggests that the subpoena form can be obtained from the trial clerk at the trial session (it is also available on the Tax Court’s website, here). There are some references to timing in the Internal Revenue Manual which instructs IRS employees that, “[t] he time for the issuance of necessary subpoenas will vary from case to case depending to a large extent upon the finalization of stipulations,” and “[t]o be effective in enforcing the attendance of the witness, a subpoena must be served on the witness a reasonable time in advance of its return date. A ‘reasonable time’ will vary from witness to witness depending upon the location of the residence of the witness and the place of trial and, in the case of a subpoena duces tecum, the nature of the documents and records called for by the subpoena.” I.R.M. 35.4.4.4.1.1

The Court points out that its standing pretrial order requires exhibits be exchanged before trial, but an exception to the requirement can be made if the documents are received from a third-party at the trial session, when the proffering party had no prior opportunity to receive and exchange them.

That being said, the Court is somewhat suspicious of the IRS’s timing in this case and states, “[i]f respondent’s use of the subpoenas in this case were to result in a large number of previously undisclosed documents being offered at trial, we would expect to inquire about whether the last-minute production of the documents was actually imposed on respondent through no fault of his own, or whether instead the subpoenas were a blameworthy last-minute attempt to obtain documents that he could have attempted to obtain in time to comply with the standing pretrial order.”

The Court also sympathizes with petitioner’s concerns, but believes they are premature – because it is not guaranteed that the third parties will submit documents nor that the IRS will offer any submitted documents into evidence. Petitioner will still have the option to object later if the information produced by the subpoenas results in prejudice.

The flip side of the subpoena issue involves the timing of their return.  Neither the IRS nor a taxpayer who issues a subpoena duces tecum has the ability to force the third party to provide the documents prior to calendar call.  While the IRS could have summoned the documents prior to issuing the notice of deficiency, once in Tax Court the summons procedure no longer applies.  It may be fair to fault the IRS for not using its summons power to obtain necessary third party information prior to issuing the notice but if the need for the third party documents does not become apparent until after the notice has gone out, the IRS has no way to force the third party to turn over the documents before calendar call.  This is not ideal for either party since neither party may know what the documents will provide.  Usually, a party issuing a subpoena duces tecum will try to get the recipient of the document to produce the documents before calendar call in order to avoid the problem of having to come down to court.  This informal process can circumvent the problems described here.  However, if the third party does not want to turn over the documents until calendar call, the party seeking the documents does not have easy tools in the Tax Court to force their hand prior to calendar call.

Docket Nos. 17038-18L & 17353-18L, The Diversified Group Incorporated, et al. v. C.I.R. (order here)

Next up is yet another section 6751(b)(1) case, in a consolidated docket, addressing the timeliness standard established in Clay, but this order also involves the application of a Tax Court rule that allows the Court to treat the petitioners’ motion for judgment on the pleadings as a motion for summary judgment. This is permissible when matters outside the pleadings are presented to the Court, and not excluded, which then allows the motion to be governed by Rule 121.

A judgment on the pleadings is appropriate when it is clear from the pleadings themselves that the case presents no genuine issues of fact and only issues of law. The basis for the judgment is limited to the pleadings and admissions already presented, so there is no option to present additional information.

A motion for summary judgment is appropriate when there are issues raised by the pleadings, but the issues are not genuine issues of material fact and the moving party is entitled to judgment as a matter of law. A motion for summary judgment can address matters outside of the pleadings and the parties are given a reasonable opportunity to present all information pertinent to the motion pursuant to Rule 121.

In this case, petitioners moved for a judgment on the pleadings because the IRS included proof that it had met the timeliness standard under Graev III in the pleadings, but the time frame established by the pleadings is too late under Clay. In response, however, the IRS presented (and the Court did not exclude) the declaration of the immediate supervisor of the revenue agent involved in the case, and exhibits showing that supervisory approval was obtained much earlier than the date on the Form 8278 included in the pleadings. The Court finds the IRS’s information sufficient to raise a genuine issue of material fact regarding when, and in what fashion, managerial approval was obtained. As a result, the Court denies the petitioners’ motion for summary judgment.

Docket No. 335-19, Jalees Muzikir v. C.I.R. (order here)

In this designated order, the IRS’s motion for judgment on the pleadings is granted. Petitioner had previously filed a “years petition” for the year at issue. According to a footnote in the order, “a ‘years petition’ does nothing other than allege that for a substantial number of consecutive taxable years the taxpayer did not receive any jurisdictionally-relevant IRS notice, such as a notice of deficiency or a notice of determination, that would permit an appeal to the Tax Court. A ‘years petition’ is the manifestation of protest from tax deniers and tax protestors.” The case petitioner instituted with the “years petition” was dismissed for lack of jurisdiction, but then he subsequently received a notice of deficiency for one of the years which is the year at issue in this order.

Petitioner argues that since the Court dismissed his initial case, the IRS doesn’t have jurisdiction over the year at issue now because of the Tax Court judgment finality rule under section 7481. The Court disagrees with this analysis and grants the IRS’s motion, because petitioner did not raise any issues other than the IRS’s lack of jurisdiction.

Filed Under: Designated Orders, Subpoena, Tax Court

Some Updates to Prior Posts and Tax Procedure Conferences of Note

December 12, 2016 by 1 Comment

In today’s post I will update readers on some past cases we have discussed and highlight a couple of conferences that relate to tax procedure and administration.

First, to the updates.

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Senyszen v Commissioner: Tax Court Holding Insufficient to Free Convicted Former IRS Employee

Readers may remember the Tax Court case of Senyszen v Commissioner. Keith discussed it twice, first in Collateral Estoppel in Civil Tax Case Following Conviction of Tax Evasion and also Motion for Reconsideration. In that case, Mr. Senyszen, a former CPA who was working for the IRS, pled guilty to 1) filing false returns; (2) tax evasion; (3) structuring financial transactions; and (4) bank fraud. The Tax Court considered the impact of his tax evasion conviction on the amount of his civil liability. The evasion charge included allegations in the information that he embezzled about $250,000 from a former business associate.

At Tax Court IRS argued that Senyszen was subject to collateral estoppel on the issue of his civil tax liability stemming from the embezzled $250,000. The Tax Court, however, found that Senyzsen had actually returned the embezzled funds and held that the IRS cannot use collateral estoppel to impose a liability where it otherwise does not exist. The IRS did not like that outcome and filed a motion for reconsideration. On reconsideration the Tax Court refined its reasoning but stuck to its guns and held that without an actual tax liability the prior tax evasion conviction was not enough to justify his civil tax liability.

As a result of the Tax Court victory, Mr. Senyszen filed a motion with a federal district court in New Jersey for relief from his criminal conviction. The court considered the pro se motion as a writ of error coram nobis, which gives the court the power to overturn a prior conviction if he could establish, in light of all the evidence, it was more likely than not that no reasonable juror would have convicted him.

Senyszen essentially argued that the district court should reconsider his conviction in light of the Tax Court finding that he had no taxable income from the embezzlement (an issue he had raised previously with the district court and Third Circuit when he tried unsuccessfully to withdraw his tax evasion plea). The district court opinion took note of the significance of the Tax Court outcome on the evasion charge:

The Tax Court’s finding certainly contradicts a portion of the second count of the Information, which alleged tax evasion as a product of “embezzled taxable income from the sale of real estate.”…To that extent, the Court acknowledges that the Tax Court’s decision conclusively establishes that Petitioner is not guilty of evading taxes through the embezzlement of taxable income in 2003.

The district court did not go as far as Senyszen wanted:

[H]owever, that is not all that the Information alleges. Notably, the first paragraph under the second count reads: “The allegations contained in paragraphs 1 through 10 of Count One of this Superseding Information are repeated, realleged and incorporated by reference as though fully set forth herein.” In other words, Petitioner’s conduct under the first count was also sufficient to establish his guilt under the second count. The Tax Court confirmed: “[Petitioner’s] preparation of a fraudulent return on behalf of [the corporation] were themselves sufficient grounds to justify his conviction for tax evasion.”

The upshot is that for now Senyszen’s 36 month sentence stands. The court’s power to overturn a conviction is narrow; the Tax Court holding only went so far and did note that the Senyszen’s preparation of a false return on behalf of the corporation was sufficient to justify the evasion conviction.

For more detail on the opinion check out Jack Townsend, who in his Federal Tax Crimes blog has discussed the Tax Court case, and he also reports on the case’s latest chapter. Jack notes that the oft-litigating Senyszen has filed a motion for reconsideration and suggests that another appeal is likely.

More on the Secret Subpoena in Tax Court

The law firm of McDermott Will & Emery has an excellent tax controversy practice and that group publishes a blog called Tax Controversy 360. Last week Andy Roberson, a PT guest poster, partner in the firm’s tax controversy group, petitioner’s counsel in the important penalty decision in Rand which Keith discussed in Government Drops Appeal in Rand Case, and prior winner of the ABA Tax Section Janet Spragens Award for his commitment to pro bono, discussed the Tangel case. In his post he noted the differing approach Judges Chiechi and Holmes have on whether parties have a notice requirement before service of non-party subpoenas for the production of documents, information or tangible things, a topic I also discussed last week. Andy offers some practical tips for overcoming the surprise that is the harm from allowing a party to issue a subpoena without notifying the other side:

Until the Tax Court adopts a uniform rule against “secret subpoenas,” taxpayers should routinely and regularly issue discovery requests on the IRS seeking: (1) a list of all third-party contacts, including the documents sent and received; (2) copies of all subpoenas, including a copy of all documents sent and received; and (3) a list of the dates on which the third-party contacts occurred, including phone calls and meetings. These requests should be made at the beginning of every case, and it should be stated that the requests are continuing in nature.

Conferences on Tax Administration and Procedure of Note

There are some interesting tax procedure conferences that Keith and I are involved in, one very near term and another in March of next year.

 Low Income Taxpayer Workshop

This afternoon in Washington at the offices of McDermott Will & Emery the ABA Tax Section is cohosting a low income taxpayer representation workshop that will cover important developments, property tax issues, criminal tax matters and health insurance marketplace issues. The session includes Keith and Andy Roberson talking about their so far unsuccessful actions seeking to get the IRS to abate the penalties made against taxpayers that the IRS agrees were wrongfully made based on the Tax Court decision in Rand (for more on Counsel guidance after the 2015 PATH legislation see Keith’s January 2016 post here), Tax Court Special Trial Judge Judge Diana Leyden, Harvard Tax Clinic fellow Caleb Smith and Vermont Legal Aid’s Christine Speidel, Treasury’s Rochelle Hodes, and many others.

Second International Taxpayer Rights Conference

This March in Vienna the Institute for Austrian and International Tax Law at Vienna University of Economics and Business is hosting the second international taxpayer rights conference. It is sponsored by Tax Analysts and is convened by the US’s National Taxpayer Advocate. The first international taxpayer rights conference in 2015 brought together many administrators, practitioners and academics. It was a terrific conference, with panelists discussing issues like transparency, privacy, rights to administrative and judicial appeal, the relationship of trust to ensuring tax compliance and the role of ombuds offices. The above link takes you to the 2015 proceedings. Keith and I were speakers at that conference. If you would like to read our conference papers, Keith wrote about tax collection and taxpayer rights which you can see here; I discussed how IRS can learn from nontax scholars who have looked at the ways that administrative agencies interact with low-income individuals; that paper is here.

The second conference is accepting registrations at the conference website; the agenda includes the following topics:

  • Taxpayer Rights in Multi-Jurisdictional Disputes
  • Privacy and Transparency in Tax Administration
  • Access to Taxpayer Rights: The Right to Quality Service in Today’s Environment
  • Transforming Cultures of Agencies and Taxpayers
  • Impact of Penalty Administration on Taxpayer Trust

I will be speaking about taxpayer rights with a focus on refundable credits and am in the process of writing a paper on that important topic.

I was reminded of the importance of taxpayer rights as last week I watched parts of Senator Harry Reid’s farewell speech to the Senate. It was a personal and deeply moving speech, touching on topics like the suicide of Senator Reid’s father and the stigma of growing up poor in Searchlight, Nevada. As part of his talk Senator Reid discussed some of his legislative highlights. The first item he mentioned was his role, along with Senators Pryor, Grassley and others, in getting the first Taxpayer Bill of Rights enacted. Taxpayer rights have come a long way since that legislation but there is considerable room for improvement. Conferences like the International Taxpayer Rights Conference help situate some of the issues and identify common global challenges and best practices.

Filed Under: Civil Penalties, Criminal Penalties, Subpoena

The Practice of Secret Subpoenas in Tax Court: Tax Court Out of Step with Other Courts and IRS Itself

December 6, 2016 by 2 Comments

I read with interest blogger Lew Taishoff, whose blog Taishoff Law mainly covers the Tax Court. Last week in The Stealth Subpoena is Alive and Well Lew discussed Tangel v Commissioner. Tangel reveals an odd practice that distinguishes Tax Court litigation apart from other federal courts.  Rule 45(a)(4) of the Federal Rules of Civil Procedure requires parties who issue subpoenas to third parties compelling the production of documents or other evidence to notify the opposing party of the subpoena issuance. Tax Court rules do not explicitly require a party to notify the other side. The absence of an explicit notice requirement with respect to subpoenas creates the possibility of surprise. In addition to being out of step with other federal courts, it is inconsistent with the Tax Court’s general approach of encouraging parties to communicate and cooperate.

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Tangel involves a series of motions that the taxpayers filed relating to IRS counsel having issued subpoenas to third parties under Tax Court Rule 147(a) or 147(b). We have not discussed Rule 147(a) or (b) but the Tax Court rules give the process for which a party may compel attendance of a person or of evidence at a trial or Tax Court proceeding. Essentially 147(a) applies to people required to give testimony; 147(b) extends the reach to commanding a person to bring documents or other evidence, with the Tax Court retaining discretion to quash or modify the latter subpoena if it is “unreasonable or oppressive.”

On their face, Tax Court Rules 147(a) and (b) do not mention of notice, and the subpoena is not filed with the court. It is thus not subject to the general Tax Court rules on notice, found in Rule 21(a). That rule provides that parties serve on other parties or other persons involved in the matter all filed paper including “pleadings, motions, orders, decisions, notices, demands, briefs, appearances, or other similar documents or papers relating to a case….”.

In Tangel, IRS counsel issued subpoenas to third parties and did not notify the Tangels. The order is brief and I have not read (nor can I unless I were to head down to DC) the underlying motions but the Tangels objected to the issuance of the subpoenas in part on the grounds that Counsel failed to notify them of their actions. Judge Chiechi, the judge in Tangel, dismissed that argument, noting that “[a] party that issues a subpoena under Rule 147(a) and/or (b) is not required to give prior notice to the other party.”

Tax Court practice is not always in lock step with federal court practice but not giving notice of a subpoena compelling the production of documents or other evidence seems wrong. Attorney Taishoff has discussed this aspect of Tax Court practice in a prior post called Judge Holmes’ Vendetta, where he discussed an order earlier this year in Ryder v Commissioner, which also involved the issuance of a subpoena under Rule 147(b). Unlike the outcome in Tangel, in Ryder, Judge Holmes explicitly disapproved of the practice of issuing subpoenas without notifying the taxpayer. In so doing, Judge Holmes gave a history lesson on why it is likely that Tax Court rules differ from the federal rules of civil procedure:

We do have to disagree with the Commissioner, however, that this absence of a rule creates an implication that secret subpoenas are favored. We promulgated our Court’s Rule 147, which governs subpoena practice, back in 1973. Tax Court Rules of Practice and Procedure, 60 T.C. 1057, 1137 (1973). At that time, we said that our goal was a rule substantially similar to FRCP 45. Id. Back then, FRCP 45 didn’t require notice for subpoenas. Fed. R. Civ. Proc. 45 (1970). The notice requirement was added in 1991 to give parties the same opportunity to challenge nonparty subpoenas for documents that they had to challenge subpoenas for depositions (since FRCP 30 and 31 already provided notice protection in these circumstances). See Fed. R. Civ. Proc. 45 advisory committee’s note (1991). We have never publicly stated that we intended to deviate from Article III practice — it’s just an example of the two sets of rules drifting apart over time.

We think that the current federal rule is a good one in litigation that is, as in these cases, especially hard-fought. The Court will therefore adopt the notification requirement of Federal Rule 45 as a modification to the pretrial order that governs this case.

Mr. Taishoff suggests perhaps that the judges in Ryder and Tangel get together and “discuss bringing Tax Court into the last decade of the Twentieth Century, if not into the second decade of the Twenty-First.” An earlier post of his suggested the Ryder approach find its way in a published opinion. Another thought is perhaps it is time for the Tax Court to modify its rules and coordinate Tax Court practice with that in other federal courts through a rule change.

It is interesting as well that the Tax Court practice is somewhat inconsistent with the IRS’s administrative practice. Consider the related issue of the notice that is required to be given when the IRS contacts third parties in an examination. As of 1998, Section 7602(c) provides that an employee of the Internal Revenue Service may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with persons other than the taxpayer may be made.”

This RRA 98 notice of third party contact rule has generated some controversy. The statute fails to define reasonable notice for these purposes, and IRS and taxpayers have fought about whether the IRS’s inclusion of generic notice in its Publication 1 at the start of an exam constitutes “reasonable notice” of a third party contact. For example, earlier this year a district court in California in Baxter v US that found that Publication 1 was insufficient as a matter of law to constitute the advance notice that Section 7602(c) contemplates. That resulted in the district court finding that the IRS did not meet the prima facie good faith requirement under US v Powell and to the court’s quashing of a summons IRS served on a third party.

TAS in its 2015 annual report flagged IRS third party contact procedures as one of its most serious problems, making the sensible point that advance adequate notice allows taxpayers the possibility of themselves providing the IRS what it needs without the possible damage to a taxpayer’s business or reputation that may follow IRS third party contacts. That report criticizes the IRS use of generic notice, finding them “ineffective because they do not identify the information the IRS needs, inform the taxpayer the IRS will make a [third party contact] in the taxpayer’s particular case, or provide the taxpayer with enough advanced notice to deliver the information before the contact.” TAS 2015 Annual Report MSP # 12, at p. 123 (note omitted).

It seems to me that similar taxpayer interests are implicated when considering notice rules for subpoenas at trial, with possibly more at stake in terms of both taxpayer reputation and damage and a heightened need to know what the other side is gathering as a trial looms. It seems prudent for the Tax Court to modify its approach and require both parties to give notice consistent with the Federal Rules of Civil Procedure. This will reduce surprise and provide another chance for the taxpayer himself (if the government is seeking the information) to serve up what is needed, all at rather minimal costs to the government.

 

 

Filed Under: Subpoena, Summons