The Tax Court’s Protection of Sensitive Information

The Tax Court’s protection of corporate trade secrets is grounded in statute, the Tax Court’s rules (see rule 103(a)(7)), and the Tax Court’s jurisprudence.  More generally, the Tax Court has protected sensitive information in a variety of situations, including but not limited to corporate trade secrets.  Examples include:

• Taxpayer Information – Protecting the disclosure of sensitive taxpayer information. See, e.g., Guidant LLC, F.K.A. Guidant Corporation, and Subsidiaries, et al. v. Commissioner, Order dated Nov. 21, 2013, Tax Court Docket Nos. 5989-11, 5990-11, 10985-11, 26876-11, 5501-12, 5502-12 (issuing a protective order that permitted the filing under seal of discoverable information constituting corporate trade secrets); Anonymous v. Commissioner, 127 TC 89 (2006) (permitting taxpayer to proceed anonymously and sealing the record where disclosure of information could subject taxpayer or his family to physical danger).
• Whistleblowers – Permitting whistleblowers to proceed anonymously, but refusing to seal the record, where disclosure of the individual’s name could have subjected them to retaliatory action by a current employer, or preclude the individual from obtaining new employment. See, e.g., Whistleblower 10944-12W, Order dated July 11, 2012, Tax Court Docket No. 10944-12W; Whistleblower 14106-10W, 137 TC 183 (2011).
• Commissioner’s Convention Information – Allowing the Commissioner to file documents constituting tax convention information, and thereby protected from disclosure under Code section 6105, under seal. See, e.g., Estate of Sanders v. Commissioner, Order dated Aug. 28, 2013, Tax Court Docket No. 4614-11; Coffey v. Commissioner, Order dated Oct. 12, 2012, Tax Court Docket No. 4720-10.
• Third Party Information – Permitting the parties to file under seal sensitive third-party information relevant to the litigation. See, e.g., QinetiQ v. Commissioner, Order dated May 27, 2014, Tax Court Docket No. 14122-13; Manquen v. Commissioner, Order dated Nov. 10, 2014, Tax Court Docket No. 26666-12.

The foregoing examples reflect a careful balancing act that the Tax Court must undertake each time it is requested to limit the public’s access to sensitive information. The best way to accomplish this balance is to issue a protective order or other ruling that is as narrowly crafted as possible.  In other words, the Tax Court can best achieve a balance of interests by limiting the public’s access to only that information that is sensitive in nature.

This standard was confirmed by the Judicial Conference of the United States, which in 2011 encouraged courts to seal entire civil case files only where “required by statute or rule or justified by a showing of extraordinary circumstances and the absence of narrower feasible and effective alternatives such as sealing discrete documents or redacting information, so that sealing an entire case file is a last resort.”

The Tax Court has taken care to follow this standard. In whistleblower actions, for example, the Court generally permits whistleblowers to proceed anonymously, but the Court will not seal the record from public inspection. See, e.g., Whistleblower 10944-12W, supra; Whistleblower 14106-10W, supra.  Similarly, in cases involving corporate trade secrets, the Court has engaged in a thorough review of thousands of pages of documents, requiring redaction of only certain pages, or excerpts thereof, that if open to the public could result in financial harm to the corporate party. See, e.g., Manquen, supra.  And, the Court has been careful not to extend its protection of corporate trade secrets where it is unwarranted, refusing to issue protective orders where good cause was lacking. See, e.g., Willie Nelson, supra.

The Medtronic and Amazon Protective Orders

The Medtronic and Amazon protective orders are somewhat novel, however.  The large majority of protective orders issued by the Tax Court apply to the filing of documents under seal, or the ability of a litigant to proceed anonymously.  In Medtronic and Amazon, the Court protected not only documentary evidence, but also closed large portions of the trials from public view and required redaction of those portions of the record that could result in the dissemination of corporate trade secrets.

Some have argued that this goes a step too far. These commentators contend that the Tax Court’s rules governing the protection of corporate trade secrets, or other sensitive information, do not extend beyond the protection of discoverable materials (e.g., documentation that may be filed under seal), and that at the very least, the public’s heightened interest in an open trial should require the Court to apply a standard of review greater than the ‘good cause’ standard the Court has applied to the protection of discoverable materials.

But if the Tax Court lacks the ability to protect sensitive information at trial, or if the Tax Court must apply a heightened standard to justify the protection of that information, litigants are presented a dilemma – they may have their sensitive information protected throughout pre-trial proceedings, but if they choose to try their case, their sensitive information is subject to disclosure. For corporations with trade secrets, the disclosure of which would subject them to significant financial harm, this amounts to toll charge that could eclipse the tax adjustment being litigated.

Accordingly, like the Tax Court’s protective orders that preceded them, the Medtronic and Amazon protective orders attempt to strike a balance between the protection of the taxpayers’ trade secrets and the public’s interest in access to the trial record.  Each of the orders limits the public’s access to the trial testimony of factual and expert witnesses.  But in doing so, the Tax Court requires the taxpayers to submit copies of the record that redact only that information that the taxpayer views as protected information.  These redactions are subject to objection by the Commissioner and review by the Tax Court.  This procedure helps ensure that only those portions of the record that are deemed protected information are excluded from public review.

Additionally, the Tax Court carefully defines ‘protected information’ in a limited way. For example, in Amazon, the Court orders that protected information includes, in part, “Business analyses, results, data, and reporting information less than five years old or otherwise still in use for business purposes at the time such material is designated as Protected Information….”  (emphasis added).  By employing an “in use” or five-year window standard, the Court helps ensure that stale information, the release of which could no longer financially harm the taxpayer, would be made available to the public.

This is not to say that the Medtronic and Amazon protective orders are perfect.  Although the definition of ‘protected information’ limits that information subject to protection, once a document or record excerpt satisfies the definition, there appears little means for the public to access the information in the future.  Both orders provide that the protections offered thereunder will continue after the trial concludes, ostensibly in perpetuity.  This means that even after information ceases to be sensitive in nature, it will remain subject to protection under the continuing terms of the protective orders.  Additionally, even if the Tax Court could be petitioned to lift the protections at some future date, this places the financial and resource burden on the public to do so.

One alternative the Tax Court could employ to alleviate this concern would be to place a time boundary on the protections offered by its protective orders. In other words, the protective orders could protect sensitive information after the conclusion of the trial, but only for a set number of months or years, unless otherwise requested by an interested party.  Such a limit could be further tailored so that different information would become public at different times.  Pricing information, for example, may be sensitive for a shorter period time than a long-term strategic corporate plan. Such a time boundary would help ensure that documents and trial records would become open to public review once the information was no longer of a sensitive nature.

For the time being, however, the Tax Court’s protective orders in Medtronic and Amazon have recognized those taxpayers’ interests in keeping their secrets hidden from view.  It is likely that physicists will continue to grapple with dark matter and dark energy for decades to come –  hopefully the public will not have to wait that long to review the full records in Medtronic and Amazon.

Background and Rule 183 Procedures

The initial decision in Snow, issued in 1996, involved classic jurisdictional questions of whether the Service properly issued a notice of deficiency to the taxpayers’ last known address, and whether the taxpayers timely petitioned the Tax Court with respect to that notice. Pursuant to Rule 180, the Chief Judge assigned a Special Trial Judge to hear the case. Because the amount at issue exceeded the then-applicable $10,000 threshold, however, Section 7443A and Rule 183 required a Regular Judge to issue the decision of the Court after the Special Trial Judge had heard the case.

At the time Snow was decided in 1996, the Tax Court employed a collaborative two-step process for deciding cases subject to Rule 183. First, the Special Trial Judge heard the case and issued a draft report to the Regular Judge. This report was never provided to the parties. Second, the Regular Judge and Special Trial Judge engaged in a back-and-forth revision process, leading to the Regular Judge’s agreement with and adoption of the rewritten report.

In Snow, the first step of this process produced a draft report that recommended granting the Petitioners’ motion to dismiss for lack of jurisdiction because the notice had not been sent to the taxpayers’ last known address. Subsequently, though, the Regular Judge rejected this finding and reached the opposite conclusion, granting Respondent’s motion to dismiss for lack of jurisdiction on account of the Petitioner filing the petition in an untimely manner. The two judges revised the draft report using the collaborative process and issued it as the formal decision.

Nine years after the Snow decision was entered the Supreme Court, in Ballard v. Commissioner 44 U.S. 40 (2005), rejected the Tax Court’s collaborative Rule 183 approach (which had been in place since 1983). The Ballard Court held the collaborative process contradicted Rule 183, which required the Regular Judge to adopt, modify or reject the Special Trial Judge’s report, not engage in a cooperative re-drafting process. Additionally, the Ballard Court ruled that the Tax Court was required to provide a copy of the Special Trial Judge’s initial report to the parties for purposes of any Appeal.

Following Ballard, the Tax Court issued copies of initial reports drafted by Special Trial Judges that were issued in connection with Rule 183 cases, including those in old cases where the initial report could be located. The Tax Court provided such a report to the Snow Petitioners in 2005 who, for the first time, learned of the Special Trial Judge’s initial conclusion that the jurisdictional question should have been decided in Petitioners’ favor.

Motion to Vacate

Eight years after receiving the initial Special Trial Judge report, its discovery lead the Snow Petitioners to file a motion to vacate the 1996 decision. In denying the Snow Petitioners’ motion, the Tax Court held that it was without jurisdiction to vacate a final decision (in this case nearly 18 years final) except in limited situations. Those situations include where there has been a fraud upon the court, mutual mistake, and where the Court had never acquired jurisdiction in the first place (the “lack of jurisdiction exception”). The Tax Court rationalized the lack of jurisdiction exception, stating that “it would ‘border on absurdity’ to prevent the tax court on jurisdictional grounds from vacating a decision it lacked jurisdiction to enter in the first place.”

The Tax Court rejected this exception, though, stating that “because petitioners filed petitions, we had jurisdiction to decide our jurisdiction” and therefore to “grant Respondent’s original motions to dismiss for lack of jurisdiction.” In other words, because the Court had limited jurisdiction to grant Respondent’s motion to dismiss, that decision could no longer be vacated using the lack of jurisdiction exception.

The reasoning behind the Tax Court’s refusal to grant the Snow Petitioners’ motion to vacate on the grounds that it never had jurisdiction appears, at least initially, inconsistent with the authorities describing the Tax Court’s ability to vacate a final decision under this exception. This is because the lack of jurisdiction exception has been applied in other cases where taxpayers filed Petitions and decisions became final. See, e.g., Abeles v. Commissioner 90 T.C. 103 (1988); Billingsley v. Commissioner 868 F.2d 1081, 1084-1085 (9th Cir. 1989); Brannon’s of Shawnee, Inc. v. Commissioner 9 T.C. 999, 1002 (1978). Similarly, cases applying the lack of jurisdiction exception, and other cases addressing the Tax Court’s jurisdiction to determine its jurisdiction, have recognized, for example, that “[t]he defense of lack of subject matter jurisdiction cannot be waived, and the court is under a continuing duty to dismiss an action whenever it appears that the court lacks jurisdiction.” Billingsley v Commissioner, at 1085.

If the foregoing is indeed the case, then the Tax Court may review its jurisdiction at any time – at the initiation of the case, during the litigation, after the decision is entered, and after the decision is final. Similarly, the foregoing cases do not foreclose the Court from revisiting the jurisdictional question at any point in the future. How then does this comport with the Snow opinion, where the Court held it lacked jurisdiction to vacate and revisit its earlier jurisdictional ruling issued in 1996?

Although not addressed explicitly by the Court, one answer is an old common law doctrine known as the “bootstrap doctrine.” That doctrine recognizes that courts are inherently imbued with the jurisdiction to determine their own subject matter jurisdiction. But courts are not infallible, and they may incorrectly determine whether they have jurisdiction. Irrespective of whether such determination is correct or incorrect, the bootstrap doctrine provides that once the jurisdiction determination is made, it is thereafter valid, and further dispute is precluded once the decision becomes final. For additional background on the bootstrap doctrine, see here 51 Minn. L. Rev. 491 at 494-99 (1967) (HeinOnline) and here 53 Harv. L. Rev. 652 (1940) (HeinOnline).

This doctrine makes sense – if the Tax Court could always revisit its earlier jurisdictional rulings, then the lack of jurisdiction exception would be available in perpetuity. Taxpayers and Respondent would have unlimited ability to challenge prior jurisdictional determinations and true finality would be an impossibility.

And so here we return to the concept of superposition and the Tax Court’s subject matter jurisdiction. Before it is measured, a photon exists in a state of quantum superposition as both a wave and a particle, but once observed this duality coalesces into a single identifiable state. The Tax Court’s subject matter jurisdiction is similar. Before it is measured, the Court’s subject matter jurisdiction may exist or it may not. This state of ‘superposition’ permits the Court to vacate a decision, even after that decision has become final, using the lack of jurisdiction exception. But this exception is available only insofar as a state of superposition exists. Once the Tax Court measures its jurisdiction, as the Snow Court did in 1996, the bootstrap doctrine permanently fixes that measured state so that it can no longer be attacked or revisited.