Opinion
1246-16W
06-27-2023
ESTATE OF DONALD M. ARNDT, DECEASED, KATHY R. ARNDT, PERSONAL REPRESENTATIVE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber, Judge
This is a whistleblower award case. On December 4, 2018, petitioner issued a first request for production of documents (RFP) requesting the IRS's examination files of a taxpayer (Target) for 2010 and 2011. Respondent supplied some but not all of the requested documents. On August 14, 2019, petitioner filed a Motion to Compel Production of Documents, requesting that respondent be directed to produce the withheld documents. Petitioner contended that these documents are relevant to his theory of the case: that he alerted the IRS to a "step transaction" by Target in 2009; that the IRS, while not adjusting Target's income for 2009, did adjust it for 2010 and/or 2011 by challenging subsequent steps of the transaction; and that the IRS would not have made these adjustments but for the information petitioner supplied. Respondent objected to the granting of the Motion.
By Order served December 11, 2019, we granted the Motion and directed respondent to produce certain additional documents from the IRS examination file of Target for 2010 and 2011. We noted that petitioner's initial formulation of his request seemed overbroad, defining "tax returns" to include returns of "all employees, officers, directors, agents, parent companies, subsidiary companies, affiliated companies, and/or successors in interest" to Target. Petitioner subsequently clarified that he was seeking production of documents only with respect to the entities involved in the alleged "step transaction." Following a conference call with the parties, we expressed hope that they would be able to agree "to a properly limited scope of production for 2010 and 2011, commensurate with the volume of production that respondent has already made for 2009."
Following the issuance of our Order, petitioner asked respondent to produce documents that respondent had not produced as part of the first RFP. In particular, petitioner sought certain IDRs (and corresponding responses) created during the 2010/2011 audit cycle, Target's unredacted Schedule UTP for 2010 (showing uncertain tax positions from 2009), and correspondence among members of the IRS team that conducted the 2010/2011 examination. Petitioner also made a second RFP, informed by documents disclosed in response to the first RFP, requesting additional material related to his "step transaction" theory.
Respondent produced some additional documents from Target's 2010/2011 file, but declined to produce others, urging lack of relevance, undue burden, and the taxpayer privacy protections of section 6103. On December 10, 2020, petitioner filed a second Motion to Compel Production of Documents, seeking an order directing respondent to produce the requested records. Proceedings were held in abeyance for several months following the death of Donald M. Arndt, the original whistleblower.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
On February 22, 2021, respondent filed a Response to the second Motion to Compel, contending that section 6103 prohibits him from disclosing the documents petitioner has requested. Section 6103 provides generally that "[r]eturns and return information shall be confidential." But the statute provides an exception under which return information may be disclosed in a judicial or an administrative proceeding "if the treatment of an item reflected on such return is directly related to the resolution of an issue in the proceeding." § 6103(h)(4)(B).
In anticipation of the likelihood that this exception would come into play here, the parties jointly moved for, and we granted on May 27, 2016, a Protective Order under Rule 103(a). This Protective Order was intended to enable respondent to supply to petitioner, on a confidential basis, documents from IRS files that constitute "returns" and "return information" of Target. After we issued the Protective Order, the IRS provided the tax return and related return information from Target's 2009 examination file, and it subsequently produced some documents from Target's 2010/2011 examination file.
The documents that petitioner now seeks appear to satisfy the provisions of section 6103(h)(4)(B). Though they may be Target's "returns" or contain its "return information," they also would seem to contain information "directly related to . . . an issue in th[is] proceeding"-i.e., whether the IRS used the information that petitioner supplied about the transaction to examine Target and collect proceeds from it.
Respondent contends that the documents petitioner seeks are not subject to section 6103(h)(4)(B) because they were not found within the administrative record compiled by the WBO. See Kasper v. Commissioner, 150 T.C. 8, 20-21 (limiting scope of review in whistleblower cases to administrative record barring exceptions). But a document may be "directly related to" an issue in a whistleblower proceeding, see § 6103(h)(4)(B), whether or not it is contained in the WBO's own file. In other words, we do not view our "record rule" for whistleblower cases as limiting what sorts of documents the IRS may disclose pursuant to section 6103(h)(4)(B).
Although the parties do not discuss it in their respective filings, the provisions of section 6103(h)(4)(A) would also seem to permit disclosure of Target's information. Section 6103(h)(4)(A) authorizes the disclosure of a taxpayer's returns or return information in a Federal judicial proceeding pertaining to tax administration if "the proceeding arose out of, or in connection with, determining the taxpayer's . . . liability." Here, the WBO's decision whether to grant petitioner an award-as well as our eventual review of that decision-appears to be inextricably linked with determining Target's liability. Cf. Whistleblower 972-17W v. Commissioner, No. 872-17W, 2022 WL 2718766, at *7-10 (July 13, 2022).
In any event, respondent has already supplied, pursuant to the Protective Order, various documents from Target's examination files covering 2009, 2010, and 2011. Petitioner is now seeking additional documents from Target's 2010/2011 examination file. If section 6103 erected no obstacle to respondent's earlier production, it is hard to see why it poses an insurmountable barrier now.
Respondent also contends that producing the documents petitioner seeks would be unduly burdensome. Under Rule 70(c)(2), "the party from whom discovery is sought must show that the information is not reasonably accessible because of undue burden or cost." In considering whether to order further discovery, we consider the burden or expense of the proposed discovery as compared to its likely benefit. See Rule 70(b)(1).
Respondent represents that he has already produced more than 4,000 pages of documents relating to Target's 2010 and 2011 years, and on that basis contends that he should not have to produce more. But petitioner has shown good cause for requesting the documents reflected in his two RFPs: the requested documents seem targeted and well-defined, and the volume of the requested production does not seem overwhelming. Respondent has not shown that producing these documents would be unduly burdensome.
Although we agree with petitioner that neither section 6103 nor Rule 70 precludes our granting the Motion to Compel, we believe it would be premature to rule on the Motion at this time. The Court recently provided further guidance on "whistleblower discovery requests" in the context of motions to compel. See Berenblatt v. Commissioner, 160 T.C. No. 14 (May 23, 2023). We would find it helpful for the parties to set forth their views as to how (if at all) Berenblatt affects the proper disposition of petitioner's second Motion to Compel.
In consideration of the foregoing, it is
ORDERED that, on or before July 31, 2023, the parties shall file supplemental memoranda addressing the matters discussed above.