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Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued September 28, 1995 Decided October 27, 1995

No. 94-5280

THE PENN MUTUAL LIFE INSURANCE COMPANY, ET AL.,

APPELLANTS

v.

UNITED STATES OF AMERICA

AND THE INTERNAL REVENUE SERVICE,

APPELLEES

Appeal from the United States District Court

for the District of Columbia

(No. 94ms00158)

Arthur L. Bailey argued the cause and filed the briefs for appellants.

David I. Pincus, Attorney, United States Department ofJustice, argued the cause for appellees, with

whom Loretta C. Argrett, Assistant Attorney General, Eric H. Holder, Jr., United States Attorney,

Gary R. Allen and Robert W. Metzler, Attorneys, United States Department of Justice, were on the

brief. Gerald A. Role, Attorney, United States Department of Justice, entered an appearance for

appellees.

Before: EDWARDS, Chief Judge, WALD and RANDOLPH, Circuit Judges.

Opinion for the Court filed by Circuit Judge WALD.

WALD, Circuit Judge: Appellants Penn Mutual Life Insurance Company, Provident Mutual

Life Insurance Company, and State Mutual Life Assurance Company of America ("appellants") seek

reversal of the district court's denial of their motion to perpetuate testimony by taking depositions

pursuant to Rule 27(a) of the Federal Rules of Civil Procedure ("Rule 27(a)"). We hold that the

district court erred in finding that appellants' efforts were not in anticipation of litigation as required

by Rule 27(a) and in failing to recognize that the age of proposed deponent Werner Marwitz creates

a risk that evidence will be lost if not perpetuated. We remand so that the district court may make

two determinations: whether Marwitz has sufficient unique knowledge to warrant granting

appellants' motion, and ifso, whether appellants have made an adequate showing of the substance of

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1Section 7805(b) grants the Secretary of the Treasury discretion in deciding whether to make a

tax ruling retroactive. 26 U.S.C. § 7805(b). Absent unusual circumstances, the Secretary will not

apply a revocation or modification of a private letter ruling retroactively to the taxpayer who

sought the ruling. Treas. Reg. § 601.201(l )(5). 

the testimony they seek to elicit from Marwitz.

I. BACKGROUND

Appellants are involved in an ongoing dispute with the Internal Revenue Service ("IRS" or

"Service") over federal income tax treatment oflife insurance policies. In the early 1980s, appellants

issued "policy updates" which increased benefits payable to policyholders, while policy premiums

remained constant. The tax consequences of these updates for the life insurance company issuers

depended on whether the IRS classified themasincreasesin dividends, or as exchanges of one policy

for another. Issuing companies would be taxed at an increased rate for policy exchanges, but not for

dividend increases.

In order to clarify their tax liability, several life insurance companies sought private letter

rulings from the IRS regarding tax treatment of these updates. In a private letter ruling, the IRS

applies the tax laws to a specific factual problem presented by a particular taxpayer; only that

taxpayer may then rely on the ruling. Treas. Reg. § 601.201(a)(2), (l ); Rev. Proc. 95-1, 1995-1

I.R.B. 13. These private letter rulings stated that the requesters' policy updates were dividends and

thus not taxable at an increased rate, citing as authority a 1982 revenue ruling which categorized

increased payments to policyholders as dividend distributions ("Rev. Rul. 82-133"). See Private

Letter Ruling ("LTR") 84-31-002 (Apr. 30, 1984); LTR 85-22-067 (Mar. 6, 1985); LTR 84-18-030

(Jan. 19, 1984). The IRS later revoked these private letter rulings but did not apply the revocation

retroactively to the requesters, in accord with its general practice under § 7805(b) of the Internal

Revenue Code.1 LTR 91-43-004 (Dec. 30, 1990); Tech. Adv. Mem. ("TAM") 92-06-007 (Oct. 25,

1991); TAM 91-21-001 (May 21, 1991); TAM 91-10-002 (Mar. 8, 1991). Appellants did not seek

private letter rulings from the IRS on the tax consequences of their policy updates.

In the course of ongoing audits, the IRS proposes to treat appellants' past policy updates as

taxable exchanges rather than nontaxable dividends, arguing that the facts of Rev. Rul. 82-133 are

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distinguishable from those presented by appellants. Government's Br. at 32. Appellants, facing a

sizable bill for back taxes, disagree. They contend that Rev. Rul. 82-133, issued in 1982, set forth

a general position on the tax treatment of policy updates which clearly extendsto their cases, and the

Service's current, more restrictive view of the ruling represents a modification of the IRS's public

position. As with private letter rulings, the Service generally exercises discretion under § 7805(b)

to protect taxpayers who have reasonably relied on a revenue ruling from retroactive revocation or

modification, and accordingly appellants claimprotection fromtaxes now sought to be levied on their

old policy updates. The IRS, on the other hand, contends that the scope of Rev. Rul. 82-133 was

never as broad as appellants suggest and plainly does not apply to their scenarios. Thus, the IRS

concludes, appellants did not reasonably rely on the ruling and do not now qualify for relief from its

retroactive application under § 7805(b).

Because the IRS and appellants are in conflict about the Service'sformer interpretation of the

scope of Rev. Rul. 82-133, appellants are looking for independent support for their version. They

want to obtain testimony from individuals employed in key positions at the Service during the period

whenRev. Rul. 82-133 wasinitiallyissued and subsequentlyapplied in the private letter rulingsissued

to other life insurance companies. Appellants have identified two retired IRS employees, Werner

Marwitz and Joseph Ryals, who they claim can provide this critical information. Since they are not

yet involved in litigation before a federal court and cannot invoke routine discovery, appellants filed

a petition to depose the two employees under Rule 27(a). Unlike other discovery rules, Rule 27(a)

allows a party to take depositions prior to litigation if it demonstrates an expectation of future

litigation, explains the substance of the testimony it expects to elicit and the reasons the testimony

is important, and establishes a risk that testimony will be lost if not preserved. Appellants claimed

that they would soon be involved in litigation over the IRS audits, and requested permission from the

district court to depose Marwitz and Ryals, arguing that the two witnesses might not be available at

trial, given their age, residence, and status as retired employees.

The district court denied appellants' petition, finding that they had failed to satisfy several of

Rule 27's prerequisites. The court first characterized appellants' petition as amounting to no more

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2The Service has already denied appellant State Mutual's § 7805(b) petition, but State Mutual

cannot yet file a claim alleging that the Secretary abused his discretion under § 7805(b) because

other administrative matters in State Mutual's case remain unresolved. The Service has not ruled

on the other two appellants' § 7805(b) petitions, but those appellants expect their petitions will be

denied as well because their circumstances are similar to State Mutual's. 

than "mere[ ] observ[ation] that the officers' recollections of certain facts might fade by the time they

filed their anticipated suit in court," NewEngland Mutual Life Ins. Co. v. United States, No. 94-158,

slip op. at 5 (D.D.C. Aug. 1, 1994), rather than more specific allegationsthat the would-be deponents

are seriously ill, so old that they likely would not be available at trial, or imminently leaving the

country for an extended time. Thus, the court concluded, appellants had not shown a sufficient

necessity to perpetuate their testimony as required by the third element of Rule 27(a)(1). Second,

the court found appellants had not alleged that no other IRS employee could provide the same

testimony. New England Mutual Life Ins. Co., slip op. at 6. Third, the court noted that appellants'

audits are still pending before the Service2and thus concluded that appellants had not fulfilled the first

element ofRule 27(a)(1)expectationoflitigationbecause they"stillhave a possibilityofreceiving

a beneficial result from the administrative process." Id. Appellants ask us to reverse the district

court's ruling and permit the depositions of Marwitz and Ryals.

II. DISCUSSION

Appellants argue that the district court made several errors in applying Rule 27(a) to their

facts. First, they contend that the remote possibility of future administrative relief did not preclude

a finding that the proposed depositions were in anticipation of litigation. Second, they argue that the

court failed to take into account the advanced age of the proposed deponents and the ever-widening

gap in time since the contested events of the early eighties. Finally, appellants claim that, contrary

to the district court's finding, they demonstrated a sufficient need to perpetuate testimony and

adequately established the substance ofthe testimony they sought to elicit. We agree with appellants

on their first point; a party need not demonstrate that litigation is an absolute certainty in order to

perpetuate testimony pursuant to Rule 27(a). We also agree that the district court abused its

discretion in failing to take into account the age of proposed deponent Marwitz. We remand for

further findings on whether Marwitz has unique knowledge which either Ryals, presumably the

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younger of the two retired IRS officials, or other identified officials could not provide, and if so,

whether appellants have adequately shown the substance of the testimony they expect to elicit from

him.

To successfully make out a case for a Rule 27(a) deposition prior to litigation, a petitioner

must show:

1) that the petitioner expects to be a party to an action cognizable in a court of the

United States but is presently unable to bring it or cause it to be brought,

2) the subject matter of the expected action and the petitioner's interest therein,

3) the facts which the petitioner desiresto establish by the proposed testimony and the

reasons for desiring to perpetuate it,

4) the names or a description of the persons the petitioner expects will be adverse

parties and their addresses so far as known, and

5) the names and addresses of the persons to be examined and the substance of the

testimony which the petitioners expects to elicit from each....

FED.R.CIV. P. 27(a)(1). If the court is "satisfied that the perpetuation of the testimony may prevent

a failure or delay of justice," it shall permit the depositions to be taken. FED. R. CIV. P. 27(a)(3). A

reviewing court will reverse the district court's decision to deny a Rule 27(a) petition for an abuse of

discretion. Carey Canada, Inc. v. Columbia Casualty Co., 940 F.2d 1548, 1559 (D.C. Cir. 1991)

("We may reverse the District Court's discovery and evidentiary rulings only if these rulings are an

abuse of discretion.") (citing Viles v. Ball, 872 F.2d 491, 494 (D.C. Cir. 1989); Brune v. IRS, 861

F.2d 1284, 1288 (D.C. Cir. 1988)); United States v. Price, 723 F.2d 1193, 1194 (5th Cir. 1984)

(district court's ruling on Rule 27(a) motion reviewable for abuse of discretion); Ash v. Cort, 512

F.2d 909, 912 (3d Cir. 1975) (same).

At the threshold, we disagree with the district court's determination that appellants are not

acting in anticipation of litigation for purposes of Rule 27(a) because they may still obtain relieffrom

the IRS. The district court stated that it "will not order the perpetuation of testimony desired in this

case when the Petitionersstill have a possibilityofreceiving a beneficialresult fromthe administrative

process." New England Mutual Life Ins. Co., slip op. at 6. Apparently, the court would have

appellants wait until the IRS has completed its audits and finally rejected all of appellants' claims for

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relief. If such an exhaustion requirement were absolute, however, Rule 27(a) would be rendered

useless as a mechanism for preserving testimony prior to litigation; once the administrative process

is concluded, appellants will ordinarily have no need for perpetuating testimony since they can file

their action and take depositions as part of routine discovery.

We also note that the risk of permanent loss of the desired testimony appears quite different

for the two individuals appellantsseek to depose. As to proposed deponent Ryals, appellants offered

no evidence regarding his age or health which suggests he may be unavailable for any trial that might

ensue when the audits are completed. They simply alleged that Ryals is retired, and "with the passage

of time, [his] ability ... to recall relevant facts and testify completely as to these matters may be

impaired." Complaint at 10, New England Mutual Life Ins. Co. v. United States, No. 94-158,

(D.D.C. Aug. 1, 1994). Such a general allegation is not sufficient to satisfy Rule 27's requirement

that a petitioner demonstrate an immediate need to perpetuate testimony. See, e.g., Ash v. Cort, 512

F.2d at 913; 8 CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE AND PROCEDURE: CIVIL 2D §

2072 (1994) (petitioner must establish danger that testimony may be lost).

Because of his age, appellants make a stronger case for deposing Marwitz. The age of a

proposed deponent may be relevant in determining whether there is sufficient reason to perpetuate

testimony. Advanced age certainly carries an increased risk that the witness will be unavailable by

the time of trial. See Texaco, Inc. v. Borda, 383 F.2d 607, 609 (3d Cir. 1967) (granting writ of

mandamus directing district court to allow Rule 27(a) deposition because "[i]t would be ignoring the

facts of life to say that a 71-year old witness will be available, to give his deposition or testimony, at

an undeterminable future date"); De Wagenknecht v. Stinnes, 250 F.2d 414, 417 (D.C. Cir. 1957)

(permitting deposition of 74-year old witness); In re Boland, 79 F.R.D. 665, 667 (D.D.C. 1978)

(noting that age of proposed deponent is relevant to Rule 27 petition, but denying petition on other

grounds). In explaining why it found that appellants had not shown a valid reason for perpetuating

testimony here, the district court commented that "[n]o statement has been made that the two

proposed deponents are currently in advanced age or poor health." New England Mutual Life Ins.

Co.,slip op. at 6. Appellants' affidavit, however, clearly states that Mr. Marwitz is 80 (now 81) years

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3One of appellants' affidavits also notes that Marwitz resides in Germany. While appellants

claim that his overseas residence is grounds for granting their Rule 27(a) motion, we think that

this point does not weigh heavily in their favor. Several cases have stated that a potential

deponent's plans to leave the country for a long period of time may be grounds for perpetuating

testimony, presumably because the difficulties of serving process and conducting a deposition

overseas create a risk of losing testimony. See, e.g., In re Deiulemar di Navigazione, S.p.A., 153

F.R.D. 592, 593 (E.D. La. 1994); In re Boland, 79 F.R.D. 665, 667 (D.D.C. 1978). Marwitz is

already overseas, though, and according to appellants, is willing to return to the United States for

a deposition whenever it occurs. Thus, we find his residence alone an insufficient reason for

granting appellants' motion. 

4The government argued for the first time in this court that the proposed testimony is

irrelevant to appellants' claims. We express no view on the merits of this contention. We do

note, however, that perpetuation of testimony that is not legally relevant to appellants' claims is

unnecessary to "prevent a failure or delay of justice." See 8 WRIGHT, ET AL., supra § 2072

(proposed testimony should be material and competent evidence in the matter in controversy)

(citing Arizona v. California, 292 U.S. 341, 348 (1934)). 

old.3 His age presents a significant risk that he will be unavailable to testify by the time of trial, and

the court should have considered this fact in deciding whether there were sufficient grounds for

perpetuating Marwitz's testimony.

But even though appellants have made a case for Marwitz's likely unavailability, they must

still show that the perpetuation of his testimony "may prevent a failure or delay of justice." FED. R.

CIV. P. 27(a)(3); cf. In re Application of Checkosky, 142 F.R.D. 4, 7 (D.D.C. 1992) (denying Rule

27(a) petition in part because "[t]he sheer number of potentialwitnessesto the same events drastically

reduces the risk that the demise of any one witness will harm petitioners' case"). Thus, appellants

must demonstrate a need for Marwitz's testimony that cannot easily be accommodated by other

potential witnesses. Appellants claim that Marwitz was the only actuary at the IRS National Office

who worked on life insurance matters, and the government has not disputed this allegation in its brief

to this court. As a result of his position, Marwitz may possess distinctive information about the

issuance and application of Rev. Rul. 82-133. But if Ryals or other IRS employees can provide the

same information that appellants plan to elicit from Marwitz, perpetuation of Marwitz's testimony

may not be necessary. The record does not presently reflect whether Marwitz has some unique

knowledge about the Service's former interpretation of the contested revenue rulings that is legally

relevant to appellants' claim.4 On remand, the district court should make further inquiry on this point.

Finally, there remains an additional hurdle to taking Marwitz's deposition which the district

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5The government argued to the district court that appellants had not spelled out sufficiently the

substance of the testimony they desired to elicit. The government argues on appeal that the

district court's statement that it based its denial "upon a consideration of ... the entire record"

reflects agreement with the government on this point. Government's Br. at 24-25. Absent a more

direct ruling on this point, and in view of our disagreement with other grounds the district court

explicitly relied upon, we are reluctant to pretermit the case based on that general catch-all

phrase. 

court did not address. A Rule 27(a) deposition "may not be used as a substitute for discovery."

Consequently, the party seeking to take the pre-litigation deposition must set forth in some detail the

substance ofthe testimony it needsto preserve. Nevada v. O'Leary, 63 F.3d 932, 936 (9thCir. 1995)

(because thoughts and views of proposed deponents are unknown, petitioners do not satisfy

requirement that party set forth substance oftestimony to be elicited by deposition); Ash v. Cort, 512

F.2d at 912; 8 WRIGHT, ET AL., supra § 2071 (citing cases).

Because of its other grounds for rejecting the petition, the district court did not rule on

whether appellants' description of the testimony they expect to obtain meets this Rule 27 standard.5

Appellants did provide some information as to the testimony they expected from the proposed

deponents, noting that both Marwitz and Ryals were involved in life insurance tax matters in the

National IRS Office during the time Rev. Rul. 82-133 was being applied to the private letter rulings

issued to appellants' competitors. Appellants anticipate that the deponents will testify as to their

understanding of the Service's position on the scope of the revenue ruling at that time and its

application to different factualsituations. "Petitioners believe that the testimony of Messrs. Ryals and

Marwitz will confirm the existence of [these] facts [regarding the Service's initial position on Rev.

Rul. 82-133]." Complaint at 11, New England Mutual Life Ins. Co. The district court must

determine on remand whether these allegations constitute a "narrowly-tailored showing of "the

substance of the testimony which the petitioner expects to elicit from each' person to be deposed."

In re Application of Checkosky, 142 F.R.D. at 7 (quoting Rule 27(a)). Accordingly, the opinion of

the district court is affirmed with respect to proposed deponent Ryals and remanded for further

inquiry as to proposed deponent Marwitz.

So ordered.

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