Opinion
19332-16 27307-16 27314-16 27846-16 2634-19 2636-19 2666-19 2670-19
07-11-2022
JOHN E. VORREYER & MELISSA D. VORREYER, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Travis A. Greaves, Judge
Currently before the Court are the following discovery-related motions: (1) respondent's Motion to Compel Production of Documents, filed May 21, 2021; (2) petitioners' Motion in Limine, filed July 26, 2021; (3) petitioners' Motion to Review the Sufficiency of Answers or Objections to Request for Admissions, filed October 28, 2021; (4) respondent's Motion to Compel the Taking of Deposition, filed October 29, 2021; (5) petitioners' Motion to Compel Production of Documents, filed November 12, 2021; and (6) petitioners' Motion to Impose Sanctions, filed November 19, 2021. We address each motion in turn below.
Petitioners filed a supplement to this motion on June 22, 2022.
Between 2012 to 2014 (years at issue) petitioners operated an Illinois family farming operation individually and through several related entities. For federal income tax purposes each entity was either an Illinois corporation treated as an S corporation or a general partnership that was owned by one or more petitioners and used a cash basis method of accounting during the years at issue.
Following an audit of petitioners' returns for the years at issue, respondent determined more than $14 million in collective deficiencies in petitioners' income taxes and over $2.8 million in penalties for the years at issue. Respondent then issued petitioners notices of deficiency with respect to the deficiencies and penalties for the years at issue which, among other things, collectively adjusted petitioners' income from grain sales by more than $25 million during the years at issue. Petitioners shortly thereafter filed eight petitions with this Court seeking redeterminations of 1 the notices for the years at issue.
The eight consolidated cases do not include the 2013 tax year of petitioners John E. Vorreyer and Melissa D. Vorreyer.
I. Respondent's Motion to Compel Production of Documents
On February 2, 2021, respondent sent petitioners an informal discovery request for certain purchase contracts, settlement statements, and payment information with respect to grain sales between petitioners and grain companies during the years at issue. Following petitioners' objection to the request on the grounds that it lacks relevancy and is unduly burdensome, respondent moved pursuant to Rule 72 that the Court enter an order compelling them to produce the requested documents.
Unless otherwise indicated, all Rule references are to the Tax Court Rules of Practice and Procedure, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times.
The central issue in these eight consolidated cases is which year petitioners, cash-basis farmers, should report income from grain sales: the year in which they fulfilled the terms of grain contracts by delivering grain to grain companies, including whether petitioners could have potentially demanded payment at that time, or the year in which petitioners deposited grain checks from grain companies (constructive receipt issue). Petitioners fail to adequately show how respondent's request for the above-described documents is not relevant to the constructive receipt issue, namely with respect to evidence regarding petitioners' ability to control when grain companies issued payment for petitioners' grain deliveries during one or more of the years at issue. See Rule 70(b); Zaentz v. Commissioner, 73 T.C. 469, 471 (1979) ("For purposes of discovery, the standard of relevancy is liberal.").
With respect to petitioners' other argument, i.e., that the request is unduly burdensome, petitioners contend that respondent's request equates to a "re-audit" for "superfluous" documents which respondent already had the opportunity to examine during audit and which respondent "presumably" already has in his possession. Notwithstanding that petitioners did not produce sufficient evidence to support this claim, we do not believe the requests are unduly burdensome taking into account the issues and needs of the case. See Rule 70(c)(1).
II. Petitioners' Motion in Limine
Petitioners' motion in limine moves for the admission of petitioners' "QuickBooks records" for the years at issue and 2015. Petitioners, however, did not include as part of their request any supporting files, documents, or information for us to consider with respect to their motion, including any associated QuickBooks records, reports, or summaries they want admitted. Nor did petitioners provide an 2 explanation for the lack of such supporting material. As correctly noted by respondent, petitioners' request is tantamount to an advisory opinion as to the admissibility of abstract documents when, like here, the Court does not have any information to evaluate.
III. Petitioners' Motion to Review the Sufficiency of Answers or Objections to Request for Admissions
On August 31, 2021, petitioners sent respondent their Second Request for Admissions (Second Admissions). The Second Admissions, totaling 63 requests, addressed matters of petitioners' farming operations following an October 2020 site visit by respondent's counsel to petitioners' business. Respondent objected to each of the requests on various grounds, including hearsay, relevance, vagueness, and work product privilege.
Petitioners now request as part of their Motion to Review the Sufficiency of Answers or Objections to Request for Admissions (Sufficiency Motion) that this Court (i) treat respondent's objections to the requests in the Second Admissions as either a failure to respond or not made in good faith, and thus deemed admitted under Rule 90(g), and (ii) impose sanctions for alleged legal fees incurred by petitioners to review respondent's responses to the Second Admissions and prepare their Sufficiency Motion.
Respondent replied to each of petitioners' requests in the Second Admissions by offering a specific objection, and offered further clarity for his reasoning in his response to petitioners' Sufficiency Motion. Following a review of these responses we do not believe respondent's objections and explanations were made in bad faith or constitute a failure to properly respond as alleged by petitioners. See Rule 90(c), (e) (setting forth conditions for compliance when answering or objecting to a requested admission); see also Putnam v. Commissioner, T.C. Memo. 2015-160, at *11-12 (recognizing that a party must set forth "legitimate objections or grounds for refusing to answer each request for admissions . . . and "demonstrate a good-faith attempt to respond").
IV. Respondent's Motion to Compel the Taking of Deposition
Respondent moves pursuant to Rule 74(c)(2) for an order of this Court (Deposition Motion) authorizing respondent to conduct depositions of The Scoular Company (Scoular), CHS, Inc. (CHS), Archer Daniels-Midland Company (ADM), Tate and Lyle Grain, Inc. (Tate and Lyle), and Growmark, Inc., formerly known as Sunrise Ag Service Co. (Sunrise Ag), (collectively, deponents) to seek both testimony and documents regarding the deponents' grain delivery processes as it applied to petitioners during the years at issue, including the settling of contracts and the 3 issuance of payments to petitioners.
Respondent served each of the deponents with a notice of deposition in October 2021 in accordance with Rule 74(c)(2)(A) for nonparty witnesses.
The taking of a deposition of a nonparty witness is "an extraordinary method of discovery." Rule 74(c)(1)(B). It may be used only where: (i) the nonparty witness can give testimony or possesses documents that are discoverable within the meaning of Rule 70(b); and (ii) the moving party cannot practicably obtain the desired testimony or documents through informal means under Rule 70, interrogatories under Rule 71, a request for documents under Rule 72, or a consensual deposition under Rule 74. Id. This Court has recognized three additional factors to be weighed in making this determination: (i) whether the movant has established "a specific and compelling basis" for the deposition; (ii) whether the movant intends for the deposition to serve as more than a substitute for cross-examination at trial; and (iii) whether the movant has had a prior opportunity to obtain the desired information (or could have obtained it through other means or from another source). See K&M La Botica Pharmacy, Inc. v. Commissioner, T.C. Memo. 2001-33, 2001 WL 117701, at *3-4 (interpreting the predecessor to Rule 74). The moving party bears the burden of demonstrating that these conditions are present where the opposing party objects to the taking of the nonconsensual deposition. See Rule 74(c)(2)(B).
Recognizing that a nonconsensual deposition is an "extraordinary method of discovery," Rule 74(c)(1)(B), that should be used in only the rarest of circumstances during a Tax Court proceeding, DeLucia v. Commissioner, 87 T.C. 804, 810 (1986) (interpreting the predecessor to Rule 74), we do not believe respondent has met this burden, K&M La Botica Pharmacy, Inc., T.C. Memo. 2011-33, 2001 WL 117701, at *3. Respondent, however, has demonstrated satisfaction of the conditions of Rule 74 with respect to at least some portion of his Deposition Motion that pertains to document requests in that the deponents are the only remaining source from which respondent is likely to retrieve such information.
Some of the requested documents in respondent's Deposition Motion overlap with respondent's Motion to Compel Production of Documents, filed May 21, 2021, pursuant to Rule 72. As discussed supra, we will grant this latter motion.
V. Petitioners' Motion to Compel Production of Documents and Motion to Impose Sanctions
Petitioners move pursuant to Rules 72 and 104 for an order from this Court compelling respondent to produce his "entire audit file" with respect to petitioners for the years at issue, as well as sanctions against respondent for his alleged failure to provide such documents to petitioners.
A. Production of Documents Motion
In April 2019 petitioners sent respondent an informal discovery request for, 4 among other things, respondent's "[e]ntire audit file," "[r]evenue [a]gent's internal workpapers," "[c]orrespondence between any [r]evenue [a]gent and other IRS personnel or third parties," "[r]evenue agent's notes from conversations or meetings with other IRS personnel or third parties," and "[a]ll documents related to [petitioners'] examinations" for the years at issue. In response to this informal request respondent produced two volumes of documents and stated that the information represented the "administrative file."
Following a review of those documents, petitioners issued a formal discovery request pursuant to Rule 72 to respondent in August 2020 seeking, among other things, "a complete copy of the administrative file for this matter," "native file of all Excel spreadsheets," "native file of all One Note spreadsheets and notes," "all emails, faxes, or correspondence of any kind between or among the members of the exam team," and "recordings, tapes or files of any meetings between or among the members of the exam team or with third parties." In a September 2020 response to petitioners' formal discovery request respondent objected to most of the requests on the grounds that such requests were premature in that petitioners did not previously request such information informally and that the requested information was also potentially nondiscoverable as it possibly entailed privileged information. In addition to these objections respondent also stated that he "had already produced the entire administrative file which contains all information relied upon in making the determinations at issue in this case." Notwithstanding this assertion respondent conceded in the same response that respondent: (i) had "became aware" that some of the discoverable "administrative file" had been "inadvertently excluded" from petitioners; (ii) was in the process of obtaining those documents for production to petitioners; and (iii) would confirm that there were "no additional documents [that may have been] excluded from the administrative files." Respondent again admitted in his July 7, 2022, First Supplemental Objection to Petitioners' Motion to Compel Production of Documents that there is still "data that has not been previously produced to petitioners." In light of respondent's own recognition of possible outstanding documents we will require respondent to provide petitioners with all relevant, discoverable information pertaining to either the administrative or audit files that petitioners have previously requested for the years at issue with respect to any outstanding issue in these eight consolidated cases.
Respondent maintains that his "administrative files" are different from his "audit file" and any associated electronically stored information. Respondent, however, has not demonstrated a meaningful distinction between these terms for purposes of discovery in these consolidated cases.
Respondent requested as part of his July 7, 2022, First Supplemental Objection to Petitioners' Motion to Compel Production of Documents that we narrow the scope of petitioners' document request. Although we appreciate the magnitude of petitioners' document request we also recognize that respondent has had over three years to fulfill petitioners' request. We do, however, agree that any material that may form a part of an active grand jury proceeding does not fall within the purview of petitioners' document request at this time. See Rule 6(e) of the Federal Rules of Criminal Procedure.
B. Sanctions Motion
In conjunction with their Motion to Compel Production of Documents, 5 petitioners filed a Motion to Impose Sanctions asking this Court to enter judgment by default in petitioners' favor with respect to the eight consolidated cases and award petitioners attorney fees on the basis that "[r]espondent has been intentionally withholding and concealing discoverable documents, namely a significant portion of [r]espondent's audit file, . . . and submitted false statements to [p]etitioners and to this Court in an effort to conceal such withholding."
Petitioners' request is unwarranted. Petitioners assert that the "only sufficient remedy" for respondent's alleged behavior is entry of a judgment by default against respondent, but "dismissal is a sanction of last resort, not to be used indiscriminately." Dusha v. Commissioner, 82 T.C. 592, 605 (1984). Even if respondent has not provided all discoverable material in his possession to petitioners following their initial requests, we are not convinced that any such oversight was the result of "evasive or incomplete answer[s] or response[s]" as that term is commonly recognized by this Court in the Rule 104(d) context, especially in light of the voluminous record that comprises these eight consolidated cases. See e.g., Cochrane v. Commissioner, 107 T.C. 18, 24-26 (1996) (applying Rule 104(d) against "time-worn tax protestor" responses following a Court order).
Upon due consideration, it is therefore
ORDERED that respondent's Motion to Compel Production of Documents, filed May 21, 2021, is granted. Petitioners shall provide the requested information to respondent on or before August 8, 2022. It is further
ORDERED that petitioners' Motion in Limine, filed July 26, 2021, is denied. It is further
ORDERED that petitioners' Motion to Review the Sufficiency of Answers or Objections to Request for Admissions, filed October 28, 2021, is denied. It is further
ORDERED that respondent's Motion to Compel the Taking of Deposition, filed October 29, 2021, is denied with respect to the request to depose the deponents and partially granted with respect to the request to obtain discoverable documents from the deponents as specified in the subpoenas (including all riders) except for the following document requests: requests 1n, 3a, 3b, 3c, 3h, 3i, 3m, 3o, 3p, 3q, 4a, 4b, and 4c from deponent Scoular; requests 1d, 1e, and 1f from deponent ADM; and requests 1t, 1u, 1v, 1w, 1x, 1y from deponent CHS. If respondent disputes either previous receipt or lack of prior request of any of the subpoena document requests identified in the immediately preceding sentence, he shall show cause as to such nonreceipt or prior request on or before August 8, 2022. It is further
ORDERED that petitioners' Motion to Compel Production of Documents, filed 6 November 12, 2021, and supplemented on June 22, 2022, is granted in that respondent shall provide to petitioners on or before August 8, 2022, any remaining non-privileged, relevant, and discoverable information within his possession or control, including electronically stored information, that may be responsive to petitioners' prior requests for respondent's audit and administrative files for the years at issue with respect to the outstanding issues in these cases. On or before September 8, 2022, petitioners shall file a status report with this Court as to any relevant material they believe may remain outstanding and potentially discoverable within respondent's control or possession with respect to such files and the reasoning for that belief. It is further
ORDERED that petitioners' Motion to Impose Sanctions, filed November 19, 2021, is denied. 7