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Preserving Witness Testimony (State & Local Tax Bulletin 8/97)
Preserving Witness Testimony Under
Section 2035 of the California
By Kerne Matsubara, now a tax partner in the San Francisco office of Pillsbury Winthrop Shaw Pittman LLP. If you have or can obtain the Acrobat Reader, or have an Acrobat-enabled web browser, you may wish to download or view our August 1997 State & Local Tax Bulletin (a 136K pdf file), containing a printed version of this article and also available via ftp at ftp.pmstax.com/state/bull9708.pdf.
Consider the following situation. It is 1997 and your corporation is under audit by the Franchise Tax Board ("FTB") for income years 1981 to 1983. The primary issue being examined is whether your corporation and its subsidiaries were engaged in a single unitary business during those years. The ex-CEO and other former executives of the corporation who have personal and intimate knowledge about the business operations of the corporation during the 1980s are now in their sixties or seventies. Their testimony would support strongly your unitary filing position. What can you do to preserve their testimony and use such testimony as evidence should the matter be litigated in state court?
One useful technique under the California Code of Civil Procedure ("CCP") is the perpetuation of testimony, which may be used as a presuit device to take the testimony of a friendly witness. This technique is particularly useful in California state tax matters, because California's proceedings to perpetuate testimony are more liberal than the corresponding United States Tax Court rules. Properly perpetuated testimony may be presented as evidence in proceedings before the California courts or the State Board of Equalization ("SBE"). Such testimony usually carries more weight than a self-serving declaration, because the FTB will have had the opportunity to cross-examine and test the credibility of the deponent. Although perpetuated testimony may be useful at trial, such testimony instead may encourage and expedite settlements by corroborating previously presented facts and revealing to the FTB the strength of your filing position.
Presuit Perpetuation of Testimony
The California and Tax Court rules on perpetuating testimony have their origins in Rule 27 of the Federal Rules of Civil Procedure. In general, Rule 27 provides that prior to the commencement of a civil action, a deposition to perpetuate testimony may be taken by filing a petition in United States district court, which must approve the petition if the court is satisfied that the perpetuation of testimony would prevent a failure or delay of justice. Although both the California and Tax Court rules adopt a "failure or delay of justice" standard, the California courts have been more liberal than the Tax Court in approving perpetuation of testimony proceedings.
Tax Court Rule 82 provides that a person may file a petition with the Tax Court to perpetuate testimony and take depositions regarding any matter that may be cognizable in Tax Court. The applicant must identify the persons to be deposed and state the reasons for the deposition, the expected substance of the deposition and how the proposed testimony is material to a matter in controversy.[fn. 1] In addition, the applicant must state any documents to be produced at the deposition by the person deposed, the time and place proposed for the deposition and the officer before whom the deposition is to be taken. The applicant also must show (i) that the applicant expects to be a party to a case cognizable in Tax Court but is at present unable to bring the case to court and (ii) the subject matter of the expected action and the applicant's interest in such matter.
Because the Tax Court considers Rule 82 to be an "extraordinary measure," the court additionally has required the applicant to show that testimony will, in all probability, be lost before trial.[fn. 2] The possibility that a witness might move away, become ill or lose his or her recollections or records is not sufficient to meet this standard.[fn. 3] Further, neither age nor a chronic medical problem alone is determinative. For example, the Tax Court has denied Rule 82 applications in the following situations: potential deponents who were in their sixties but in good health, an ailing 72-year old expert whose testimony the applicant failed to show would be unavailable at trial, and middle-aged witnesses whom the applicant alleged might move away and have diminished recollections.
CCP § 2035 generally provides for the perpetuation of testimony regarding matters cognizable in any California court by filing a petition in state court. The contents of the petition under CCP § 2035 are similar to that required under Rule 82. However, in contrast to the Tax Court, the California courts have approved perpetuation proceedings without requiring the applicant to show that there is danger that the testimony likely will be lost unless taken at once. The chance that a friendly witness may be unavailable when the case comes to trial because of, for example, old age, illness or moving away, should provide sufficient grounds to perpetuate the testimony of the witness.[fn. 4] Perpetuation proceedings, however, may not be used in California merely as a prelitigation investigatory discovery tool to determine whether a possible cause of action or defense exists or to identify potential parties.[fn. 5]
California Procedures to Perpetuate Testimony
To perpetuate testimony under CCP § 2035, you must file a verified petition in the superior court of the county in which the expected adverse party resides.[fn. 6] Because the FTB or the SBE will be the adverse party, the petition generally may be filed in superior court of Sacramento, San Francisco, Los Angeles or San Diego as the cities and counties in which the Attorney General currently has an office.[fn. 7]
The petition must state all of the following­
The expectation that the petitioner will be a party to an action cognizable in a court of the State of California,
The present inability of the petition either to bring that action or to cause it to be brought,
The subject matter of the expected action and the petitioner's involvement,
The particular discovery methods that the petitioner desires to employ (limited to (i) oral and written depositions, (ii) inspections of documents, things and places and (iii) physical and mental examinations),
The facts that the petitioner desires to establish by the proposed discovery,
The reasons for desiring to perpetuate or preserve these facts before an action has been filed,
The name or a description of those whom the petitioner expects to be adverse parties so far as known,
The name and address of those from whom the discovery is to be sought and
The substance of the information expected to be elicited from each of those from whom discovery is being sought.[fn. 8]
State tax matters should satisfy items (1) through (3) above, and item (7) is answered easily by identifying the FTB as the potentially adverse party. Item (2) usually will be satisfied because prior to filing a lawsuit in California superior court, a final determination must be made by the FTB or SBE and the taxpayer must pay any tax due.[fn. 9] These conditions necessarily will not have occurred at the time the taxpayer is undergoing an FTB audit. As for item (4), you should indicate that you will be preserving testimony through the taking of depositions. For item (6), you should emphasize the ages of the potential deponents, if applicable. Even if a deponent is not advanced in age, the petition should note that the income years under audit are, as in our example, ten or more years ago and the time until a lawsuit may be filed is several years away.[fn. 10]
Finally, you must serve notice and provide a copy of the petition to the FTB as the expected adverse party.[fn. 11] This service is made in the same manner as the service of a summons and must be made at least 20 days before the date specified in the notice for the hearing on the petition.
Manner of Perpetuating Testimony
The perpetuation procedures are limited to the taking of oral or written depositions, the inspection of documents, things and places and physical and mental examinations.[fn. 12] Any deposition authorized by the court must be conducted in accordance with the ordinary discovery procedures pertaining to depositions.[fn. 13] If you take the deposition of a friendly witness, you should consider taking a video deposition as it may be more effective at trial, and perhaps have a greater impact on the FTB during administrative proceedings, than a printed transcript.[fn. 14]
As with the taking of depositions under regular discovery procedures in preparation for trial, you should prepare your witness and anticipate cross-examination by the FTB. You also should be careful not to preserve adverse testimony that otherwise might not be available at trial. Accordingly, even though the perpetuation procedures described above may be undertaken far in advance of trial, you should treat a presuit deposition with the same care as depositions taken during the pendency of a suit. If adverse testimony is elicited, at least you will have more time to take corrective measures than if such adverse testimony came to light on the eve of trial.
Perpetuation of Testimony During Pending Suit
It is not too late to perpetuate testimony even though a suit already has been initiated in state court. Tax Court Rule 81 provides that a party to a case pending in the Court may perpetuate testimony by deposition, provided that there is a "substantial risk" that the person to be deposed will not be available at trial. California, however, does not have such a stringent standard to preserve testimony through depositions taken during the pendency of a suit. Instead, the regular discovery procedures regarding depositions should apply.[fn. 15]
Use of Preserved Testimony
A deposition taken under CCP § 2035 to preserve testimony may be used as evidence in actions brought in a California court, subject to the limitations under the ordinary discovery rules relating to depositions.[fn. 16] Such deposition also should be admissible in SBE hearings under the SBE's liberal rules on evidence.[fn. 17] Perhaps more importantly, the perpetuation proceedings may be used to showcase the strength of your filing position and to demonstrate to the FTB your seriousness in the disputed tax matter. Depending on the strength and persuasiveness of the testimony obtained, preserved testimony may encourage and expedite settlements with the FTB. Thus, although the perpetuation of testimony proceedings are designed to prepare you to take your case to court, such proceedings could be a time and cost saving presuit device to give you a favorable settlement and avoid trial.
Tax Ct. R. 81, 82(b)(1). [return to text]
Reed v. Commissioner, 90 T.C. 698 (1988). [return to text]
See, e.g., Masek v. Commissioner, 91 T.C. 1096 (1988); Gale East, Inc. v. Commissioner, 49 T.C.M. (CCH) 797 (1985). [return to text]
See 2 B.E. Witkin, California Evidence (3d ed.) (1996 Supp.) §§ 1475-1479; Robert I. Weil & Ira A. Brown, California Practice Guide Civil Procedure Before Trial 8:419. [return to text]
CCP § 2035(a). [return to text]
CCP § 2035(c). [return to text]
CCP § 401; Cal. Gov't Code § 955; 3 B.E. Witkin, California Procedure (4th Ed.) §§ 779-782. [return to text]
CCP § 2035(d). [return to text]
Cal. Const. art. XIII, § 32; Cal. Rev. & Tax. Code § 19382. [return to text]
See Petition of Ernst, 2 F.R.D. 447, 451 (1942) ("It is common knowledge that the lapse of time is replete with hazards and unexpected events. This is so regardless of the age, health or general status of an individual . . . ."). [return to text]
CCP § 2035(e). [return to text]
CCP § 2035(b). [return to text]
CCP § 2035(f). [return to text]
See David Perry, A Vision of Video, The Recorder, Sept. 10, 1992, at 8. [return to text]
See CCP § 2025 [return to text]
CCP §§ 2025(a), 2035(g). [return to text]
"Any relevant evidence, including affidavits, declarations under penalty of perjury, and hearsay evidence, may be presented if it is the sort of evidence on which responsible persons are accustomed to rely in the conduct of serious affairs. . . . The board [SBE] shall be liberal in allowing the presentation of evidence, but objections to the presentation of and comments on the weaknesses of evidence shall be considered in assigning weight to the evidence. . . ." 18 Cal. Admin. Code § 5079(d). [return to text]