Court Opinion

ID: 4334037
Source: CourtListenerOpinion
Date Created: 2018-11-14 01:28:53.702127+00
Date Added: 2024-06-11T14:46:38.790800
License: Public Domain

119 T.C. No. 8

                  UNITED STATES TAX COURT

SCHNEIDER INTERESTS, L.P., RUSS SCHNEIDER FARMS, L.L.C., TAX
               MATTERS PARTNER, Petitioner v.
        COMMISSIONER OF INTERNAL REVENUE, Respondent

  Docket No. 200-02.               Filed September 30, 2002.

       Four months after the instant case was docketed, R sent
  P a so-called Branerton letter consisting of 68 pages of
  questions and requests for documents. Thirty-five days
  later, R instituted formal discovery by serving upon P 77
  pages of interrogatories and 78 pages of requests for
  production of documents. R rejected P’s suggestion that
  compliance with formal discovery be postponed until the
  parties held a conference, stating that the instant case is
  "a good candidate for designation for litigation under IRM
  35.3.14." P then filed a Motion for Protective Order
  seeking to stay compliance with formal discovery. Held, a
  protective order shall be issued. R’s service of formal
  discovery is inconsistent with Rule 70(a)(1) and with the
  cases, such as Branerton v. Commissioner, 61 T.C. 691
  (1974), which direct the parties to utilize informal
  consultation or communication before employing the formal
  discovery procedures.
                                - 2 -

     Scott G. Miller, N. Jerold Cohen, and Thomas A. Cullinan,

for petitioner.

     Michael Zima and John J. Comeau, for respondent.

                               OPINION

     WELLS, Chief Judge:    The instant case is before us on

Petitioner’s Motion for a Protective Order, Motion to Strike, and

Motion for Leave to File Reply to Respondent’s Objection to

Petitioner’s Motion for Protective Order.

                             Background

     During August 2001, the tax matters partner (TMP) of

Schneider Interests, L.P. (the partnership), received notice from

respondent that the partnership’s tax year ended December 31,

1997 (taxable year in issue), was being audited.     Three weeks

later, respondent mailed a notice of final partnership

administrative adjustment (FPAA) to the TMP.     The FPAA was dated

September 13, 2001, 2 days before expiration of the time period

within which respondent could issue an FPAA for the partnership’s

taxable year in issue.    The mailing of the FPAA to the TMP took

place the day before respondent received on the prescribed Form

872-P the TMP’s timely consent to extend the period of

limitations for issuance of an FPAA for the partnership’s taxable

year in issue.    On November 26, 2001, a revenue agent wrote to

petitioner’s counsel Scott Miller.      The agent apologized for the

precipitate mailing of the FPAA but explained that the Office of
                               - 3 -

Chief Counsel, in Washington, D.C., had decided that the FPAA,

once issued, could not be withdrawn.   On January 2, 2002,

petitioner filed its petition in this Court seeking a review of

the adjustments set forth in the FPAA, and respondent filed an

answer on March 7, 2002.

     On May 10, 2002, respondent’s counsel sent to petitioner a

so-called Branerton letter (Branerton letter).     The Branerton

letter stressed that the case is "not ripe for consideration" by

the Internal Revenue Service’s Appeals Division.    The Branerton

letter further stressed that factual development of the case was

necessary because this Court might set the case for its October

session in Tampa, Florida.   The Branerton letter consists of 68

pages of questions and requests for production of documents.

According to petitioner, the Branerton letter contains 155 parts

and 450 subparts and sought a response by June 12, 2002.     On June

14, 2002, respondent served formal discovery (formal discovery)

on petitioner’s attorney Scott G. Miller.   The formal discovery

consists of 77 pages of Respondent’s Interrogatories and a 78-

page Request for Production of Documents.   The formal discovery

appears to represent a recasting of the requests made in the

Branerton letter in a form meant to comply with the Rules1 for

formal discovery.   See Rules 71 and 72.

     1
      All section references are the Internal Revenue Code of
1986, as currently in effect. All Rule references are to the Tax
Court Rules of Practice and Procedure.
                               - 4 -

     There is some dispute about the timing of a related

development.   Petitioner’s attorney N. Jerold Cohen called

respondent’s counsel on behalf of petitioner.   Petitioner

contends that the telephone conversation left Mr. Cohen with the

impression that the parties would continue with informal

discovery.   Mr. Cohen’s subsequent correspondence indicates that

he placed the call on June 11, 2002, the day before the response

to the Branerton letter was due.   Respondent maintains that the

telephone conversation took place "a day or two" after June 14,

2002, the day respondent sent the formal discovery.

     On June 17, 2002, Mr. Cohen wrote to respondent’s counsel.

Mr. Cohen questioned the scope of the requests made in the

Branerton letter and suggested that the case proceed to

respondent’s Appeals Office.   Because other parties had engaged

in similar transactions, Mr. Cohen suggested exploring a "global"

settlement, and he proposed an informal conference during August

2002 between the parties’ representatives.   Mr. Cohen did not

indicate in the June 17, 2002, letter whether he was then aware

of respondent’s formal discovery requests.

     On June 19, 2002, respondent’s counsel replied, stating

that, although a conference is not a necessary predicate to

informal discovery, counsel nevertheless would "welcome a

telephonic conference any time you and Mr. Miller are available."

The June 19, 2002, letter further stated, however:    "We do expect
                               - 5 -

petitioner to respond to our discovery."   The letter explained

that factual development was needed not only for purposes of this

case, but also "to set the factual predicate for third party

discovery."   Respondent’s counsel suggested that petitioner might

wish to cooperate in depositions of nonparty witnesses under Rule

74.   The June 19, 2002, letter further stated:

           We are interested in developing the facts in this
      case because we believe it is a good candidate for
      designation for litigation under IRM 35.3.14.
      Accordingly, we do not believe that postponing
      discovery until August, as you suggest, is an
      appropriate course of action for this case.

      On July 5, 2002, petitioner filed the instant motion for a

protective order, seeking a stay of formal discovery "until the

parties have had sufficient time to confer and have engaged in

meaningful informal discovery."   On July 11, 2002, this Court

entered an order staying compliance with respondent’s

interrogatories and request for production of documents pending

consideration of the instant motion for a protective order.    The

Court subsequently received respondent’s Notice of Objection to

Petitioner’s Motion for a Protective Order.   Respondent’s

objection is 23 pages long, exclusive of 6 additional charts and

11 other attachments.   Ten days later, on August 1, 2002,

petitioner responded to respondent’s objections by sending to

this Court both a Motion to Strike and a separate Reply to

Respondent’s Objection to Petitioner’s Motion for Protective
                                 - 6 -

Order together with a motion for leave to file that reply.      We

address the 3 motions herein.

                              Discussion

     Congress has provided this Court with its own rulemaking

authority.   Section 7453 of the Internal Revenue Code states

that, with the exception of certain small tax cases, proceedings

before this Court are to be conducted in accordance with such

rules of practice and procedure as this Court may prescribe.

Pursuant to that grant of authority, this Court promulgated Rule

70(a)(1), which states, in part:    "the Court expects the parties

to attempt to attain the objectives of discovery through informal

consultation or communication before utilizing the discovery

procedures provided in these Rules."       In 1979, the Court

emphasized its insistence upon informal discovery by adding the

language quoted above to Rule 90(a), which applies specifically

to Requests for Admissions.    See Odend’hal v. Commissioner, 75

T.C. 400, 403 (1980).

     A principal purpose of the requirement for informal

discovery is to save the time and resources of the Court and of

the parties before it in the development of relevant and

undisputed facts.   In Branerton Corp. v. Commissioner, 61 T.C.

691, 692 (1974), we explained:

     The discovery procedures should be used only after the
     parties have made reasonable informal efforts to obtain
     needed information voluntarily. For many years the
     bedrock of Tax Court practice has been the stipulation
                               - 7 -

     process, now embodied in Rule 91. Essential to that
     process is the voluntary exchange of necessary facts,
     documents, and other data between the parties as an aid
     to the more expeditious trial of cases as well as for
     settlement purposes. The * * * discovery procedures
     were not intended in any way to weaken the stipulation
     process. * * * [Fn. Ref. omitted.]

     We amplified upon these principles in Intl. Air Conditioning

Corp. v. Commissioner, 67 T.C. 89, 93 (1976), where we said:

     Rule 70(a)(1) contemplates "consultation or
     communication," words that connote discussion,
     deliberation, and an interchange of ideas, thoughts,
     and opinions between the parties. Petitioners’ refusal
     to enter into any informal discussion prior to
     receiving responses to interrogatories-–whether
     formally submitted under Rule 71, or informally
     submitted in a letter-–"sharply conflicts with the
     intent and purpose of Rule 70(a)(1) and constitutes an
     abuse of the Court’s procedures." Branerton Corp.,
     supra at 692 * * *.

     The specialized scope of cases before this Court makes the

informal discovery procedures mandated by Rules 70(a) and 90(a)

especially useful.   For example, the requirement in section 6001

that taxpayers maintain adequate records promotes the informal

development of much relevant evidence.   Additionally, under

sections 7602 and 7609, the Commissioner, who is always a party

to cases before us, possesses broad statutory authority to compel

the production of documents and testimony by the use of

administrative summonses even before a case is filed in our

Court.   See Ash v. Commissioner, 96 T.C. 459 (1991).
                               - 8 -

     Many years of experience with the use of informal discovery

in a variety of circumstances have demonstrated to our

satisfaction the efficacy of that procedure.   We see no reason to

modify that procedure because here respondent proposes to develop

a test case.   Respondent’s correspondence contemplates that the

instant case will involve a "designated issue" under Internal

Revenue Manual sec. 35.3.14., "Designation for Litigation

Procedures."   That section provides:

     In order to resolve recurring significant issues,
     establish judicial precedent, conserve resources, or
     reduce litigation costs for the Service and taxpayers,
     it is appropriate to designate that an issue in a case
     be litigated rather than settled. In a case in which
     an issue has been designated for litigation, it is the
     position of the Office of Chief Counsel that the
     designated issue is not to be settled without a full
     concession by the taxpayer * * *. [Id. at sec.
     35.3.14.2.]

     As a general proposition, we agree that the Commissioner is

entitled to all relevant information regarding the matters in

issue before this Court, and we agree that the Commissioner is

entitled to that information without undue delay.   The purpose of

our discovery rules, however, is not to assist respondent in

developing a test case.   As we have explained: "The purpose of

discovery in the Tax Court is to ascertain facts which have a

direct bearing on the issues before the Court."   To that end, "we

have the power to uphold the integrity of the Court’s process by

enforcing the limited discovery that, by rule, we have adopted."

Ash v. Commissioner, supra at 463, 470-471.
                                - 9 -

     In the instant case, respondent has not demonstrated that

most, if not all, of the information respondent needs could not

be obtained through the informal procedures required by Rules

70(a), 90(a), and our Branerton opinion.    See Branerton Corp. v.

Commissioner, supra.    Indeed, we believe that informal discovery

would be particularly useful to respondent, where, as here, the

examination phase of respondent’s inquiry was truncated by a

premature issuance of the FPAA.    Under such circumstances,

respondent may well be able to use informal discovery procedures

to complete the administrative investigation that presumably

would have been undertaken if the period for issuance of the FPAA

had been extended.2    The actions of respondent’s counsel in the

instant case lead us to believe that he does not fully appreciate

the importance of our Branerton opinion.    His insistence on

compliance with his formal discovery requests in advance of any

conference between the parties does not effectively present an

opportunity for the "discussion, deliberation, and an interchange

of ideas, thoughts, and opinions between the parties" that our

rules contemplate.    See Intl. Air Conditioning Corp. v.

Commissioner, supra at 93.

     2
      Informal discovery will provide respondent with a basis to
decide whether respondent may pursue unconsented deposition
testimony under Rule 75--a procedure which, respondent indicates,
may be necessary.
                              - 10 -

     We conclude that, under the circumstances of the instant

case, a protective order should be issued.   The order will direct

the parties to participate, in good faith, in informal

conferences during the next 90 days.   The conferences shall be

directed to developing stipulated facts for purposes of the

instant litigation.   After that time, if there are matters still

unsettled, the parties may resort to the formal discovery

provisions of the Tax Court Rules.

     There are two other motions to consider.   One is

petitioner’s Motion for Leave to File a Reply to Respondent’s

Objection to Petitioner’s Motion for Protective Order, which we

shall deny as moot.   The other is petitioner’s Motion to Strike,

as unnecessarily argumentative, certain paragraphs in

Respondent’s Objection to Petitioner’s Motion for Protective

Order, which we shall also deny.   A description of the parties’

positions is necessary to our consideration of a request for a

protective order.   To the extent that respondent may have

provided more exposition than may have been necessary (obviously

missing the point of petitioner’s objection to proceeding with

formal discovery), we shall ignore it.   When and if this case is

submitted, we shall base our decision on the facts agreed to or

developed at trial and upon the arguments set forth in the

posttrial briefs.
                              - 11 -

     To date, the parties have expended considerable resources

and involved this Court in controversies that they should have

resolved quickly between themselves.   From this point forward, we

expect the parties to develop this case in a spirit of

cooperation and good faith.

     In view of the foregoing,

                                         An appropriate order

                                   will be issued.