Opinion
11581-20
10-24-2023
STEVEN FELLER & LOUISE FELLER, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Christian N. Weiler, Judge
On July 27, 2023, petitioners filed a Motion to Compel Production of Documents (Index No. 43). On August 8, 2023, respondent filed a Motion to Compel Production of Documents (Index No. 48). On September 11, 2023, petitioners filed their Response to Motion to Compel Production of Documents. On September 11, 2023, respondent filed his Response to Petitioner's Motion to Compel Production of Documents. For the reasons explained below, we will deny in part and grant in part petitioners' Motion to Compel Production of Documents (Index No. 43), and grant respondent's Motion to Compel Production of Documents (Index No. 48).
Background
The following facts are derived from the parties' pleadings, motion papers, and exhibits attached thereto. These facts are stated solely for the purpose of deciding the motions before us and not as findings of fact in this case. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
Steven Feller P.E., P.L. (Feller PE), an S corporation, was founded in 1979. Feller PE provides mechanical, electrical, plumbing, and fire safety design and engineering services for commercial and residential construction projects. During tax years 2014 and 2015, petitioners were shareholders of Feller PE. Pursuant to section 41, petitioners claimed qualified research expenses (QREs) on their 2014 and 2015 joint individual income tax returns in the amount of $159,607 and $221,294, respectively. The QREs were computed by Engineered Tax Services, Inc. (ETS). QREs include in-house research expenses paid or incurred by the taxpayer during the taxable year. See I.R.C. § 41(b)(1). In-house research expenses include wages paid or incurred to an employee for qualified services performed by such employee. I.R.C. § 41(b)(2)(A)(1). Qualified services are services consisting of (1) engaging in qualified research or (2) engaging in the direct supervision of direct support of research activities which constitute qualified research. I.R.C. § 41(b)(2)(B). Respondent thereafter issued a notice of deficiency, dated June 17, 2020, disallowing the QRE credits.
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.
In their Response to Motion to Compel Responses to Interrogatories filed August 16, 2023, petitioners indicate that the documents comprising the business components-schematics, drawings, project records, etc.-are in the control of the current owner of Feller PE. In September 2016, petitioners finalized the purchase and sale agreement of Feller PE and petitioner, Steven Feller, was later terminated as an employee of Feller PE and removed as an officer in February 2021. Subsequently, petitioners relinquished all ownership interests in Feller PE, and now represent that they are no longer in possession or control of the documents respondent requests.
However, petitioners filed a First Supplemental Status Report on July 16, 2023, in which they indicate "that they would work with the . . . [current] owner" of Feller PE to turn over design drawings for all projects to identify the business components, and that they would allow respondent to choose a reasonable and representative sample therefrom, if he chooses. Petitioners note that the current owner of Feller PE expressed a "willingness to make his team and the records available to assist both parties with this case, and to meet their burden and to save judicial resources and costs."
The record does not indicate whether petitioners have worked with Feller PE to obtain respondent's requested documents.
Discussion
I. Discovery Standard
Under Rule 70(b), "discovery may concern any matter not privileged and which is relevant to the subject matter involved in the pending case." Bernardo v. Commissioner, 104 T.C. 677, 682 (1995). It is up to the party opposing the production to show that the information is not discoverable. Rutter v. Commissioner, 81 T.C. 937, 948 (1983) (citing Branerton Corp. v. Commissioner, 64 T.C. 191, 193 (1975)). Rule 70(b) directs that the scope of discovery includes all information and responses that concern any nonprivileged matter that is relevant to the subject matter involved in the case. For purposes of discovery the standard of relevancy is liberal: our Rules permit discovery of any material relevant "to the entire 'subject matter' of the case." Zaentz v. Commissioner, 73 T.C. 469, 471 (1979) (quoting Rule 70(b)). A party may seek discovery of information if that information is reasonably calculated to lead to admissible evidence or if it may assist that party in understanding relevant material. Id. at 471-72.
II. Analysis
Pursuant to Rule 72, the answering party shall serve a written response, and objections, if any, within 30 days after service of the request. Rule 72(a)(1) requires a person to produce items that "are in the possession, custody, or control of the party on whom the request is served." Rule 72(a)(1); see Marsh v. Commissioner, 62 T.C. 256, 258 (1984). By its terms, this rule is not limited to actual possession. We have previously required parties to obtain information from advisors or entities that have actual possession when the party has sufficient control to be able to obtain the documents. See Rosenfeld v. Commissioner, 82 T.C. 105, 116-18 (1984); see also Coventry Capital U.S. LLC v. EEA Life Settlement, Inc., 334 F.R.D. 68,72-73 (S.D.N.Y. 2020) (finding a party to have sufficient control over requested documents when it has demonstrated the ability to obtain them in the ordinary course of business).
The party objecting to discovery has the burden of establishing that the documents sought by the other party are not relevant or that they are otherwise not discoverable. See Rosenfeld, 82 T.C. at 116-18 (1984); Rutter v. Commissioner, 81 T.C. 191, 193 (1975). We have also concluded that any claim that a party is not in possession, custody, or control of documents constitutes an objection to the production of documents. Gaw v. Commissioner, T.C. Memo. 1995-531, 1995 WL 664592, at * 31 (citing Henderson v. Zurn Indus., Inc., 131 F.R.D. 560 (S.D. Ind. 1990) (construing analogous provision of Federal Rules of Civil Procedure)).
A. Petitioners Motion to Compel Production of Documents (Index No. 43)
Petitioners move pursuant to Rules 72(b) and 104(b) that the Court enter an order compelling respondent to produce for inspection and copying the documents set forth in their First and Second Request for Production of Documents, served on respondent on July 25, 2022, and November 8, 2022, respectively. Petitioners also move pursuant to Rule 104, requesting that we order that the "designated facts shall be taken to be established for the purposes of the case" should respondent fail to produce the relevant and discoverable information pursuant to an order from this Court.
In petitioners' First Request for Production of Documents, Request No. 1 asks respondent to produce the Excel files that were provided to and received from IRS Computer Audit Specialist Joseph Alford. Request No. 2 asks respondent to produce any and all communications, reports, workpapers, analysis, or any other records, produced or prepared by or considered by any IRS employee with respect to the statistical sampling identified in Request No. 1. Request No. 3 asks respondent to produce the IRS's administrative file for each IRS employee who worked on the underlying audit in the case at hand.
In petitioners' Second Request for Production of Documents, Request No. 1 asks respondent to provide the records identified on Page 10 of the Examining Officer's Activity Record in the entry dated March 12, 2019. Request No. 2 asks respondent to produce unredacted records from the previous IRS production, which included documents that were redacted with blue highlighting and other documents with various words redacted that appear to contain references to Freedom of Information Act (FOIA) exemptions. For production Request Nos. 3 and 4, petitioners repeat their requests for the Excel files that were provided to and received from IRS Computer Audit Specialist Joseph Alford and the IRS email and other communications that were previously requested in Petitioners' First Request for Production.
Respondent has repeatedly represented that the administrative file has already been provided to petitioners through their prior FOIA request. Nevertheless, we will direct respondent to make a comprehensive search in responding to the requested documents contained in petitioners' First and Second Request for production of Documents, providing petitioner with the administrative file and the other requested documents. To the extent respondent asserts that the requested information does not exist or cannot be secured, he must certify that he made a reasonable search and/or request for the information and that, to the best of his knowledge, the response is complete. See Dynamo Holdings v. Commissioner, T.C. Dkt. Nos. 2685-11 and 8393-14, 2016 WL 4204067, at *5 (Aug. 15, 2016) (Order) ("[T]he Tax Court Rules require that the responding party make a 'reasonable inquiry' before submitting the response.").
Moreover, if respondent determines that he is not able to produce the requested information on the basis of a claimed privilege, he must provide the Court with a detailed privilege log. See Rule 70(d); Pac. Mgmt. Group v. Commissioner, T.C. Memo. 2015-94, at *2 ("Without an adequately detailed privilege log, neither a requesting party nor a court can adequately assess whether the privilege has been properly claimed or what the proper scope of the claimed privilege is."). Accordingly, we will overrule respondent's objections to petitioners' Motion to Compel Production of Documents.
Lastly, the relief sought by petitioners under Rule 104 is premature at this point, and we will deny petitioners' motion as it relates to the establishment of any facts in this case.
B. Respondent's Motion to Compel Production of Documents (Index No. 48)
Pursuant to Rules 72 and 104(b), respondent seeks to compel production Request Nos. 1 through 12, and 31, as set forth in his First Request for Production of Documents, which was served on petitioners on May 26, 2022.
Although petitioners contend that the requested Feller PE documents are not currently in their physical possession, petitioners have previously represented to the Court that they have the ability to secure this material from Feller PE. Courts have construed "control" broadly to include the "practical ability to obtain the materials sought upon demand." See S.E.C. v. Credit Bancorp, Ltd., 194 F.R.D. 469, 471 (2000).
On June 26, 2022, petitioners filed their Response to Motion to Compel Production of Documents, declining to produce Request Nos. 1 through 12, and 31. Request No. 1 asks petitioners to produce Feller PE's organizational chart for each of the base years. Request Nos. 2, 3, and 4 ask petitioners to provide copies of Feller PE's federal income tax return for each of the base years, copies of all of Feller PE's Forms 6765, and copies of all Forms W-2 Feller PE issued during the base years, respectively. Request No. 5 asks petitioners to produce all minutes from meetings of Feller PE's board of directors conducted during the tax years 2013 through 2016. Request No. 7 asks petitioners to produce copies of all Forms W-2 issued to employees by Feller PE for the tax years 2014 and 2015. Request Nos. 8 and 9 seek payroll detail reports for all employees for the tax years 2014 and 2015 (e.g., the report at pages 42-43 of the 2014 Study) and all documents which substantiate that the contract research expenses were paid or incurred, respectively. Request No. 10 asks petitioners to produce all contracts and agreements between Feller PE and the Contract Research Firms. Request No. 11 asks petitioners to produce all documents reflecting communication between Feller PE and the Contract Research Firms during the tax years 2014 and 2015. Request No. 12 asks petitioners to produce the research credit study prepared by ETS for Feller PE for the tax year 2013. Request No. 31 asks petitioners to produce the fixed-price contracts pursuant to which Feller PE's purported research was performed.
Petitioners objected to Requests Nos. 1 through 5, 7, 10 through 12, and 31 on the grounds that the documents are not in petitioners' possession, custody, or control. Defining "control" as other courts have, we believe petitioners have the practical ability to contact Feller PE and obtain the documents requested. As stated above, Feller PE expressed a willingness to provide the information that either party needs for the case at hand, and the facts do not show that petitioners have contacted Feller PE for this purpose yet. Therefore, we will order petitioners to supplement their responses to these requests.
Request No. 6 asks petitioners to produce project detail reports for all projects discussed in the 2014 research credit study, and Request No. 8 asks for the production of payroll detail reports for the tax years 2014 and 2015. Petitioners objected Request Nos. 6 and 8, stating that the requests for "project detail reports" and "payroll detail reports" are unclear. We agree. Consequently, with respect to these two requests, we will order respondent to supplement the requests to provide clarity and detail.
Lastly, petitioners objected to Request No. 9 on the grounds that the request is overbroad and already in respondent's possession. However, petitioners note that "business records for Feller PE are in the possession, custody and control of Feller PE and that [they] will takes steps to obtain them and has sought out [r]espondent's cooperation in coordinating the effort to gather information from Feller PE." Again, we believe that petitioners have the practical ability to obtain the documents requested. Accordingly, petitioners are to supplement their response to this request.
As with respondent, to the extent petitioners assert that the requested information does not exist or cannot be secured, they must certify that they made a reasonable search and/or request for the information and that, to the best of their knowledge, the response is complete.
Considering the foregoing, it is
ORDERED that petitioners' Motion to Compel Production of Documents (Index No. 43), filed July 27, 2023, is granted, in part, as it relates to the requested documents, and is denied, in part, as it relates to the establishment of any facts in this case for failing to comply with this Order. It is further
ORDERED that respondent shall supplement his responses and produce the requested documents, on or before November 20, 2023. It is further
ORDERED that respondent's Motion to Compel Production of Documents (Index No. 48), filed August 8, 2023, is granted. It is further
ORDERED that respondent shall supplement and clarify the documents being sought in Request Nos. 6 and 8, on or before November 3, 2023, and petitioners shall serve supplemental or amended answers on or before November 20, 2023.