Tax Litigation in the Discovery Phase – Business Records and Responding to Discovery Requests: Designated Orders 2/17/20 to 2/21/20

0 Flares Filament.io 0 Flares ×

The week I reviewed for February included three orders.  The first order is a routine look at Collection Due Process.  The next two bring a theme of discovery in Tax Court.  The second order is about authentication of foreign bank records in Tax Court.  The third looks at how the Tax Court reviews discovery requests and responses.

Routine Collection Due Process

Docket No. 25954-17 L, Gary L. Shaw v. C.I.R., Order and Decision available here.

Overall, this order deals with a common theme for Collection Due Process cases in the Tax Court.  The petitioner did not file the requested income tax returns (tax years 2012 and 2016-2018).  While he requested an Offer in Compromise and checked the box for “I Cannot Pay Balance,” he did not submit either of the requested forms (656 or 433-A).  The judge found that because the petitioner was not compliant, the rejection of his proposed collection alternatives was justified and the Appeals Office did not abuse their discretion.

If repeating this helps out someone with their Collection Due Process case, I will say again that in order to advance with the IRS procedurally it is necessary to provide them the paperwork they request.

read more...

Foreign Bank Records

Docket No. 13531-18, George S. Harrington v. C.I.R., Order available here.

At issue in this case is whether Mr. Harrington is liable for deficiencies and fraud penalties due to his alleged receipt of unreported income during 2005-2010.  The IRS filed a motion in limine in order to seek admission into evidence of business records from the United Bank of Switzerland (UBS) to prove the truth of the matters asserted.  Mr. Harrington objected on grounds of hearsay and authentication.

Now, dealing with low income Kansas taxpayers does not mean I regularly focus on Swiss bank accounts so I found it interesting to learn about interactions between the United States and Swiss governments.  In 2009, the U.S. Department of Justice came to an agreement with the Swiss government concerning “accounts of interest” held by U.S. citizens and residents.  Pursuant to the agreement, the IRS submitted to the Swiss government, under the bilateral tax treaty between the two nations, a request for information concerning specific accounts they believed that U.S. taxpayers owned.  The Swiss government directed UBS to turn over to the IRS information in UBS files concerning bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore nominee accounts beneficially owned indirectly by U.S. persons.  The Swiss Federal Office of Justice was to oversee UBS’ compliance with those commitments.  The U.S. Competent Authority received from the Swiss government information concerning numerous U.S. taxpayers.

Regarding Mr. Harrington, the IRS received 844 pages of information concerning UBS accounts in September 2011.  That material included bank records, investment account statements, letters, emails between Mr. Harrington and UBS bankers, summaries of telephone calls, and documentation concerning entities through which assets were held.

Were the UBS documents business records?  They were 844 Bates-numbered pages accompanied by a “Certification of Business Records” by legal counsel for UBS.  The certification states the records were made at or near the time of occurrence of the matters set forth by people with knowledge of those matters, they were kept in the course of UBS regularly conducted business activity, and were “made by the said business activity as a regular practice.”  The legal counsel signed under penalty of perjury.  The court admitted the documents into evidence as self-authenticating foreign business records.

Mr. Harrington argues that legal counsel cannot certify the UBS records were business records because she is not as the Federal Rules of Evidence state a “custodian of records or other qualified witness.”  The Court points out that the requirement for a qualified witness is to be familiar with the record-keeping procedures of the organization.  Legal counsel for UBS meets that requirement.

Mr. Harrington argues against the records as being part of UBS regularly conducted business activity and questions the admissibility of emails, letters, third party communications, and summaries of client contacts.  The Court notes that UBS performed client services beyond those in connection with checking accounts.  The bank helped to create trusts, corporations, and other entities to hold client investments, solicited client goals for investments, and attempted to manage the investments in order to meet those goals.  The Court finds it consistent that the bank retained records of communication with clients in their business activity.

Mr. Harrington argued that email is informal and less trustworthy than other business records.  The Court noted that it would be normal for UBS to communicate by email with their clients in the United States and around the world.

Finally, Mr. Harrington argued that the 844 pages produced also referred to additional documents.  Since UBS produced to the IRS all documents they could locate in their files pursuant to the U.S.-Swiss agreement and under supervision of the Swiss Federal Office of Justice, the Court did not see why that was problematic.  Mr. Harrington could explain why that was so or produce further documents into evidence, but he did not.

The Court granted the IRS motion in limine admitting into evidence the foreign business records.

Discovery Requests and Responses

Docket Nos. 13382-17, 13385-17, 13387-17, Adrian D. Smith & Nancy W. Smith, et al., v. C.I.R., Order available here.

To begin with, this order is 38 pages, which is at greater length than the average designated order (for example, the other two this week were 4 pages each).  The nature of these consolidated cases is not discussed in the order because it focuses on discovery requests from the IRS to the petitioners and how responsive the petitioners’ responses have been.  Since the order is lengthy, I tried to summarize as best I could to provide the procedural issues without listing items that are more important to the parties of the case.

Basically, the IRS has sent to the petitioners several sets of interrogatories and requests for production of documents.  The IRS later submitted a report to the Court stating that the petitioners have not been responsive to specific interrogatories and requests for production of documents.  Based on those failures, the IRS seeks an order imposing sanctions against the petitioners.

In reviewing the specific interrogatory responses, the Court finds that the response to one is satisfactory while the responses to the other three are unsatisfactory.  In reviewing the specific responses to the requests for production of documents, the Court finds that the two responses in question are unsatisfactory.

There is lengthy discussion regarding the details and analysis of the responses to those four specific interrogatories and two specific requests for production of documents.  The petitioners relied on Tax Court Rule 71(e) regarding sufficiency of business records to answer interrogatories.  The Court finds their reliance on Rule 71(e) inadequate.  As an example regarding interrogatory one, it is unsatisfactory because requests regarding years 2008, 2009, and 2010 received business records concerning 2007 and 2008 (but did not provide information on 2009 and 2010).  Another example is that the response regarding contractors for the second interrogatory is not complete or adequate.  Basically, partially responsive is not responsive.

The Court also notes additional litigation that involved the petitioners where the courts imposed sanctions because the petitioners were not compliant concerning orders regarding discover requests (CRA Holdings US, Inc. v. United States and United States v. Quebe).

Turning to the requests for production of documents, the Court does not find either sufficiently responsive.  With regard to the second response, the Court finds it was not in good faith.  This is because the petitioners responded first with 12 pages.  Their supplemental answer references over 25,000 pages of previously produced documents.  The Court that the response was not in good faith.  As a result, the Court partially grants sanctions.

At the end of this designated order, there are 4 pages mainly made up of the 16 individual paragraphs regarding the specific court orders in this case.  The range of court orders includes deadlines and other miscellaneous orders.  The sanctions granted with regard to the 12 pages produced by the petitioners are that the petitioners may not introduce at trial extrinsic evidence as to whether the alleged research conducted under the six sample contracts was “funded research.”

Overall, this order provides a thorough examination of whether specific discovery requests in Tax Court are responsive or not.  The order would be worth reviewing by anyone wanting to learn more on the subject.

William Schmidt About William Schmidt

William Schmidt joined Kansas Legal Services in 2016 to manage cases for the Kansas Low Income Taxpayer Clinic and became Clinic Director January 2017. Previously, he worked on pro bono tax cases for the Kansas City Tax Clinic, the Legal Aid of Western Missouri Low Income Taxpayer Clinic and the Kansas Low Income Taxpayer Clinic. He records and edits a tax podcast called Tax Justice Warriors.

Comments

  1. Steven LaBounty says

    In the Harrington order the judge cites 901(11) for the notification requirement before offering evidence of business records by way of a certification. FRE 901(11) does not exist. The judge should have cited FRE 902(11).

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*