Tax Court Order Sets Out Quick Peek Process in Discovery Dispute

A couple of weeks ago the Tax Court issued an order in the ongoing dispute between IRS and Guidant relating to over billions in adjustments for the years 2001-07 involving transfer pricing and the transfer of intangibles to foreign corporations (as well an accuracy-related penalty). We have on occasion in the blog discussed the high stakes and intense battles surrounding privilege disputes (see for example DOJ and Davis Polk Take off the Gloves in Recent Discovery Dispute Involving GE’s $660 Million Tax Refund Suit).

There have been a series of discovery disputes in the Guidant case, which is not surprising for a case of this size. In the latest dispute, Guidant has been seeking documents from IRS, and IRS has claimed deliberative process privilege for over 4,000 documents. Guidant filed a motion to compel. IRS had sent across privilege logs and Guidant thought the logs were “inadequate and fail to provide the necessary information to support the privilege or at the minimum are deficient in a number of formatting and practical issues or have missing essential information.” The taxpayers argued that “hundreds of entries on respondent’s logs fail to identify the deliberative process involved and fail to identify the decision to which they relate.” The taxpayers suggested that the Court “issue a Protective Order for the benefit of respondent if respondent would release the documents to petitioners during discovery.” IRS felt that the Protective Order “would not adequately protect respondent and suggested “that a sampling of the thousands of documents claimed to be subject to the privilege be examined in camera by the Court.” The taxpayers objected to the sampling because they felt that it “would be inherently biased because respondent would know what the documents contained because they had possession of them but petitioners would not know.”

With that impasse, the order notes that the parties agreed to use a “quick peek” procedure to resolve the dispute, with the requirement that the parties file a status report. I was not familiar with that process, and briefly describe it below.


A 2015 New York Law Journal article from attorneys Christopher Boehning and Daniel Toal at Paul Weiss discusses their use and defines them as follows:

Under “quick peek” agreements, parties to a litigation may produce documents after little to no privilege review, subject to the understanding that any privileged documents disclosed will be returned to the party who produced them free from the recipient’s assertion of waiver.

Quick peek agreements grew out of 2008 changes to the Federal Rules of Evidence (FRE) that sought to mitigate the risks of inadvertent waivers of privilege. FRE 502(b) provides that if a party takes reasonable steps to prevent disclosure a mistaken production of privileged material does not waive the privilege. The FRE 502(b) change resolved conflicts in common law and were significant. In addition to FRE 502(b), as the 2015 NY Law Journal article states “FRE 502(d) is even more sweeping. Under that provision, parties may ask a court to enter an order specifying that the parties’ production of privileged material does not constitute waiver, even if the parties fail to take reasonable steps to prevent its disclosure.”

From FRE 502(d) (and Advisory Committee Notes accompanying Federal Rule of Civil Procedure 26(b)(2)) is how we get to quick peek. The Paul Weiss authors state that FRE 502(d) has encouraged the use of quick peek agreements, which has the potential to speed discovery because it reduces the amount of privilege review before production.

Observations on the Procedure

As my recent Tax Court experience is in tax clinic cases where discovery was rare, I sought thoughts on the process from Sean Akins, Special Counsel at Covington, co-author of Thomson Reuters’ Litigation of Federal Tax Controversies and former Procedurally Taxing guest poster. While Sean likewise has no direct experience with the process, he does have significant insight, noting that quick peek “is consistent with the Tax Court’s practice of seeking to have the parties communicate and cooperate to the greatest extent possible” and that he “suspects that the Court hopes that the parties will be able to agree that certain documents are truly protected by the deliberative process privilege, some are not, and as to the others there remains a fair dispute.” As Sean observes, even if the parties still may dispute whether privilege attaches, it could lessen the need for further court intervention “because Petitioners will have the opportunity to review the substance of the documents, and it may be that they elect not to challenge the privilege claim if they determine some of the documents lack relevance/materiality.”

Sean also however expressed “a little surprise” at its use in the context of the government claiming deliberative process privilege:

[T]the quick peek method was utilized concerning documents purportedly subject to the deliberative process privilege.  The theory behind that privilege, as I understand it, is that assuring government employees of confidentiality with respect to their decision-making process should permit those individuals to provide more candid advice.  Allowing a quick peek, even if the privilege attaches and remains unwaived, cuts against this, as the decision-making process is revealed.  Somewhat ironically, the IRS resisted the notion that a protective order would adequately protect the IRS should the documents be produced to Petitioners.  But, nothing in the Order that the Court issued would preclude Petitioners or their counsel from disclosing to others the substance of what they learned during the quick peek process.  In the absence of protections against such disclosure, I would have opted for a protective order.

Sean adds that “he would be interested to keep an eye on this and see how it is ultimately resolved, and whether the parties are again before the Court with a more narrow set of documents requiring an in camera review.” We will keep an eye on the Guidant case and also for other orders where the Tax Court uses this approach.

For those interested I include the language from the order setting out the procedure:

  1. Respondent does not waive any privilege it has asserted with respect to deliberative due process or any other privilege it has previously asserted in this case. The privilege is not waived in this litigation and any disclosure is also not a waiver in any other Federal or State proceeding.
  2. Counsel for respondent shall disclose each document for which he claims privilege and counsel for petitioners shall review such document but is not permitted to retain or copy such document unless both counsel agree otherwise or except as provided.
  3. All documents which both counsel agree are properly claimed as privileged shall remain so and respondent shall not be required to produce that document further. All documents which both counsel believe are not properly claimed as privileged shall be immediately produced and given to petitioners.
  4. The parties shall file a status report after they have concluded their quick peek procedure.

Dark Matter: When to Seal the Tax Court Record

Today’s returning guest blogger is Sean Akins. Sean is special counsel at Covington & Burling, LLP whose practice includes representing corporations, partnerships, and individuals in tax controversy matters. Sean is a co-author of Kafka, Cavanagh & Akins: Litigation of Federal Civil Tax Controversies and a co-author of Effectively Representing Your Client Before the IRS, Chapter 7, Litigation in the Tax Court. Sean is also a Nolan Fellow (2014-2015) of the Section of Taxation of the American Bar Association, and an Associate Member of the J. Edgar Murdock American Inns of Court (U.S. Tax Court). He is an avid (albeit amateur) physics buff, for which he begs the readers’ indulgence. Keith

For most of the past century, one of the most challenging problems facing physicists has been explaining the existence and nature of dark matter and dark energy. Dark matter and dark energy are estimated to account for 95.1 percent of all the ‘stuff’ in the universe; with everything we see (i.e., galaxies, stars, planets, you and me, etc.) accounting for the remaining 4.9 percent.  Despite this, dark matter and dark energy are referred to as such because (i) we can only infer their existence, and (ii) physicists know very little about either despite decades of intense research.  The universe, it seems, holds onto its secrets very carefully.

Taxpayers, like the universe, are protective of their secrets.  Whether in the form of a taxpayer identification number, the names of minor children, or corporate trade secrets, taxpayers have an interest in keeping the public ‘in the dark’ about sensitive information.  The public, like physicists, has a countervailing interest in learning about America’s judicial system and having open trials.  These competing interests have most recently come to a head in the context of the Tax Court’s consideration of whether corporate trade secrets merit protection from public disclosure during the course of a trial.

Specifically, the Tax Court has recently sided with taxpayers, closing trials from public view in several high-profile transfer pricing cases where corporate trade secrets were at issue. See, e.g., Medtronic Inc. & Consolidated Subsidiaries v. Commissioner, Inc. & Subsidiaries v. Commissioner.  Several commentators have found this to be a “troubling practice” that “subordinat[es] the public interest in open trials.” See, e.g., Gupta, Ajay, Tax Court Continues with Secret Transfer Pricing Trials, Tax Notes (Feb. 23, 2015).  These concerns are understandable – the public’s interest in maintaining the openness of a public trial is a strong one.  But the Tax Court’s role is to find an appropriate balance between the competing interests of taxpayers and the public; a balance that each of the protective orders in the Amazon and Medtronic cases attempts to reach.



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.


Snow Case Highlights Limits on Tax Court’s Jurisdiction to Vacate

Today’s guest poster is Sean Akins. Sean Akins is a senior associate at Latham & Watkins, LLP whose practice includes tax controversy matters for corporations, partnerships, and individuals. Sean is a co-author of Kafka, Cavanagh & Akins: Litigation of Federal Civil Tax Controversies and a co-author of Effectively Representing Your Client Before the IRS, Chapter 7, Litigation in the Tax Court. Sean is an Associate Member of the J. Edgar Murdock American Inns of Court (U.S. Tax Court), and a Nolan Fellow (2014-2015) of the Section of Taxation of the American Bar Association. Sean is also an avid (albeit amateur) physics buff, for which he begs the readers’ indulgence.Les

In quantum physics (bear with me) a physical system is in a state of quantum superposition when it exists in all of its theoretical states at a single moment, but when measured or observed, coalesces to a single identifiable state. A rudimentary example of this is the nature of a photon in quantum superposition as both a particle and a wave until the photon is measured, whereupon it behaves as a particle. Although superposition is a concept limited to the quantum world, one procedural aspect of the Tax Court bears a striking resemblance – the Tax Court’s subject matter jurisdiction (more on this later).

The Tax Court’s recent division opinion in Snow v. Commissioner 142 T.C. No. 23 (2014) implicates the Court’s subject matter jurisdiction, as well as several other procedural issues including: (i) the Tax Court’s two-tiered procedure for deciding a case under Tax Court Rule 183, and (ii) the Tax Court’s limited ability to vacate a final decision. In Snow, the Court denied Petitioners’ motion to vacate. As described below, this result appears, at least initially, inconsistent with authorities addressing the Tax Court’s ability to vacate a final decision. These inconsistencies, however, can be resolved through the application of an old common law doctrine known as the “bootstrap doctrine.”


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.