Opinion
18842-19
10-25-2023
ACCIPITOR TRADING, LTD., Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Travis A. Greaves, Judge.
The Internal Revenue Service (IRS or respondent) issued to petitioner two notices of deficiency determining deficiencies in income tax and additions to tax for tax years 1998 to 2017 (years at issue). Petitioner timely petitioned this Court in October 2019.
Currently before the Court are two Motions to Impose Sanctions pursuant to section 7456(b) and Rule 104, respectively, filed by respondent on June 23, 2023.Respondent's first motion relates to petitioner's alleged failure to comply with our September 6, 2022, Order (September Order) requiring petitioner to provide the documents requested in respondent's Request for Production of Documents (Documents Motion). Respondent's second motion relates to petitioner's alleged failure to comply with our September Order requiring petitioner to amend its answers to several of respondent's interrogatories (Interrogatory Motion).
Unless otherwise noted, all section references are to the Internal Revenue Code of 1986, as amended, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Background
Petitioner is a foreign corporation, established in the British Virgin Islands (BVI) in 1994. Its sole director is Peter Meier, a Liechtenstein citizen. Petitioner did not file U.S. tax returns related to tax years 1998 through 2017. On May 23, 2019, respondent mailed two notices of deficiency to petitioner. The first notice covered tax years 1998 through 2009 and determined an increase in tax of $747,360, as well as section 6651 and 6655 additions to tax totaling approximately $383,922. The second notice covered tax years 2010 through 2017 and determined an increase in tax of $567,780, as well as section 6651 and 6655 additions to tax totaling approximately $247,911. The increases in tax in the notices are attributable to alleged unreported U.S. rental income pursuant to section 881. In addition, the first notice includes an alternate position asserting that petitioner owes tax on unexplained deposits to bank accounts it owned during 2001 through 2009 totaling $53,194,436.
Unless otherwise agreed by the parties in writing, the appellate venue for an appeal would be the U.S. Court of Appeals for the District of Columbia Circuit. See § 7482(b)(1) (flush language).
On March 30, 2022, respondent filed a Motion to Compel Production of Documents, as well as a Motion to Compel Responses to Interrogatories. In accordance with our April 29, 2022 Order, petitioner filed Oppositions to both of respondent's motions on May 31, 2022. In our September Order, this Court granted respondent's Motion to Compel Production of Documents, and partially granted respondent's Motion to Compel Responses to Interrogatories. We ordered petitioner to provide amended answers to specific interrogatories and to provide respondent with requested documents on or before October 31, 2022.
On October 27, 2022, petitioner filed a Motion for Extension of Time to comply with the Court's September Order. On November 1, 2022, the Court granted petitioner's motion and extended the deadline to comply to November 30, 2022. More than six months later, on June 23, 2023, respondent filed the motions currently at issue.
In the Documents Motion respondent asserts that petitioner failed to adequately respond to 16 of 22 requests in respondent's Request for Production of Documents. In the Documents Motion respondent requested the Court to impose the following sanctions pursuant to section 7456(b):
1. Enter an order rendering a judgment by default that petitioner had unreported gross rental income and is liable for additions to tax in each of the years at issue as set forth in the notice of deficiency; or, in the alternative,
2. Enter an order rendering a judgment by default that petitioner had unreported income in the amount of $53,194,435 and is liable for additions to tax in years 2001-2009 as set forth as the alternative position in the notice of deficiency; or, in the alternative,
3. Enter an order striking the assignment of error in the pleadings that petitioner had income related to "U.S. sourced unexplained deposits" and striking the factual allegation that "any 'U.S. sourced unexplained deposits'" were not income to petitioner in paragraphs 4(c) and 5(e) of the Petition, respectively; or, in the alternative,
4. Enter an order striking the assignment of error in the pleadings that petitioner is subject to penalties under §§ 6651(a)(1) and (a)(2) and 6655 and striking the factual allegation that its failure to file returns
and pay taxes and estimated tax was due to reasonable cause in paragraphs 4(d) and 5(d) of the Petition; or, in the alternative,
5. Enter an order dismissing the Petition in its entirety with prejudice; or, in the alternative,
6. Enter an order dismissing the Petition with prejudice with respect Seto the adjustments determined under the bank deposit analysis; and/or
7. Enter an order dismissing the Petition with prejudice with respect to penalties; or
8. Such other relief as the Court may deem proper.
In the Interrogatory Motion respondent asserts that petitioner's responses to six of the eight interrogatories (i.e., interrogatories 10, 11, 13, 14, 16, and 17) that this Court ordered petitioner to amend are incomplete, inconsistent, vague, and evasive. In the Interrogatory Motion, respondent asks the Court to impose the following sanctions pursuant to Rule 104:
1. Enter an order that the bank deposit analysis as set forth in the statutory notice of deficiency is established as taxable U.S. sourced income; or in the alternative,
2. Enter an order striking the assignment of error that petitioner had income related to "U.S. sourced unexplained deposits" and striking the factual allegation that "any 'U.S. sourced unexplained deposits'" were not income to petitioner in paragraphs 4(c) and 5(e) of the Petition, respectively; or, in the alternative,
3. Enter an order that petitioner is precluded from offering testimony and documents into evidence to show that it did not have U.S. source rental income and that the unexplained deposits into its foreign accounts as set forth in the statutory notice of deficiency were U.S. source income; and
4. Enter an order striking the assignment of error that petitioner is subject to penalties under I.R.C. §§ 6651(a)(1) and (a)(2) and 6655 and striking the factual allegation that failure to file returns and pay taxes and estimated tax was due to reasonable cause in paragraphs 4(d) and 5(d) of the Petition; and
5. Such other relief as the Court may deem proper.
Discussion
I. Documents Motion
Respondent's Documents Motion moves for an order, pursuant to section 7456(b), imposing sanctions on petitioner for failure to comply with our September Order requiring petitioner to produce documents responsive to certain of respondent's Requests for Production of Documents. Section 7456(b) concerns the production of records in the case of foreign corporations, foreign trusts or estates and nonresident alien individuals. In relevant part, section 7456(b) provides:
[i]f the petitioner fails or refuses to comply with any of the provisions of [an order issued under 7456(b)], after reasonable time for compliance has been afforded to him, the Tax Court or any division thereof, upon motion, shall make an order striking out pleadings or parts thereof, or dismissing the proceeding or any part thereof, or rendering a judgment by default against petitioner.
In Aruba Bonaire Curacao Trust Co. Ltd. v. Commissioner, 777 F.2d 38, 46 (D.C. Cir. 1985), the D.C. Circuit noted that:
All of the language in §7456(b) regarding orders is directory. Once a court has found good cause for the production of documents, the court must order production of the documents. After a reasonable time for compliance, the court must order one of the three sanctions listed in §7456(b). Each of these sanctions focuses on full or partial dismissal. Under this section, then, the court's discretion is limited to finding good cause, and should the taxpayer not comply with an order to produce, choosing between the three available sanctions: striking pleadings, dismissing the proceeding, or rendering a default judgment.
Thus, if we find that petitioner did not comply with our September Order requiring petitioner to produce documents responsive to respondent's Requests for Production of Documents, we must order sanctions.
Petitioner maintains that it has produced all the documents in its possession in response to respondent's document requests. Respondent counters that documents responsive to several of his requests "should exist" but have not been turned over. For example, respondent asserts that because the Internal Revenue Code and BVI law include certain record keeping requirements, petitioner should have books and records required to be kept under these laws. Respondent also argues that financial statements produced by petitioner for 2009-2017 indicate that petitioner had business activity, but petitioner failed to produce records of such business activity. Respondent further questions how petitioner can produce financial statements, such as profit and loss statements for 2009 through 2017, without possessing the underlying documents supporting such statements. With respect to petitioner's over $53 million in bank deposits, respondent maintains that petitioner should have documents that explain their source and character, but has not produced them. Finally, respondent points to numerous other facts contained in the documents that petitioner produced and the testimony of Mr. Meier in a deposition from a separate proceeding that appear to contradict petitioner's assertions that it has produced all the requested documents that it possesses.
Our Rules require that a party responding to discovery make a "reasonable inquiry" before submitting a response. Specifically, Rule 70(g) requires the attorney to certify, to the best of their knowledge formed after a "reasonable inquiry," that the response is consistent with our Rules, not made for an improper purpose, and not unreasonable or unduly burdensome given the needs of the case. Rule 104(d) provides that "an evasive or incomplete * * * response is to be treated as a failure to * * * respond". However, when counsel for a responding party signs a response to a discovery request, they are not certifying that every document has been produced. They are certifying that they made a reasonable inquiry and the response is complete to the best of their knowledge. Here, as evidenced by Exhibit 1 to the declaration of respondent's counsel Lindsey D. Stellwagen regarding the Documents Motion, petitioner's counsel made the certifications required by Rule 70. Further, in its Opposition to the Documents Motion, petitioner repeatedly states that it has produced all responsive documents and that no further responsive documents exist.
While we appreciate respondent's view that additional documents "should exist", it does not mean that such documents do exist. Petitioner's alleged failure to comply with BVI record keeping requirements is an issue to be addressed by the BVI authorities. Further respondent may address petitioner's alleged failure to comply with Internal Revenue Code record keeping laws at trial. Because we cannot find that petitioner failed to comply with our September Order with respect to producing documents, we will not impose any sanction listed in section 7456(b) against petitioner.
II. Interrogatory Motion
Respondent's Interrogatory Motion moves for an order, pursuant to Rule 104, imposing sanctions on petitioner for failure to comply with our September Order instructing petitioner to amend certain responses to respondent's interrogatories. Rule 104 allows the Court to impose sanctions on a party for failing to comply with discovery rules or a discovery order of this Court. On motion, this Court may issue such order as it deems just with respect to the failure of a party or designated representative of a party to appear for such person's deposition, to serve answers or objections to interrogatories, or to serve a response to a request for production.
Respondent asserts that petitioner's responses to six interrogatories are incomplete, inconsistent, vague, and evasive. Respondent again points to facts contained in produced documents and the testimony of Mr. Meier in a deposition from a separate proceeding to argue inconsistencies in petitioner's interrogatory responses. In response, petitioner argues that much of Mr. Meier's testimony that is relied on by respondent is taken from a deposition in a different case that relates to different matters than the current case. Petitioner further argues such testimony is taken out of context or misinterpreted by respondent.
We agree that some of petitioner's interrogatory responses appear to be inconsistent with produced documents and/or Mr. Meier's deposition testimony from a separate proceeding. For example, interrogatory number 10 asked petitioner to identify any investments petitioner acquired or considered acquiring between January 1, 1994, and December 31, 2017, other than the Sobey Road Properties. Petitioner responded that it did not acquire or think about acquiring U.S. or foreign investments during this period. Documents attached as Exhibit 4 to Ms. Stellwagen's declaration regarding the Interrogatory Motion, however, appear to show that related entities made two payments on behalf of petitioner for "mortgage payback" and one for "mortgage interest" during June of 2011.
Another example relates to interrogatory 13, which asked petitioner to explain the original character and source of each deposit into its Liechtenstein Global Trust accounts for the tax years 2001-2009 as reflected in Exhibit 1 of Respondent's First Set of Interrogatories. In its amended response, petitioner stated that the deposits shown in Exhibit 1 of Respondent's First Set of Interrogatories were all foreign "loans or repayments of loans to petitioner from the related identified entity (unless otherwise noted)." Mr. Meier, however, testified in a separate proceeding that most deposits were "distributions" from a related entity.
These apparent inconsistencies, however, are not sufficiently developed to draw adequately informed conclusions that petitioner's amended responses violated our September Order. Respondent's inconsistency assertions are based on a limited number of documents and the testimony of Mr. Meier in a completely different proceeding. The testimony upon which respondent relies consists of excerpts from less than 20 pages of a 475-page deposition transcript. While this information raises questions, it does not provide enough information or context to conclude that petitioner violated our September Order. We thus decline to impose sanctions that would result in dismissal, default, or have an equivalent effect on petitioner's case.
Respondent will have the opportunity at trial to address petitioner's alleged inconsistent statements or positions with respect to the interrogatory responses and their effect on respondent's case.
It is therefore, ORDERED that respondent's Motion to Impose Sanctions regarding the Request for Production of Documents filed June 23, 2023, is denied. It is further
ORDERED that respondent's Motion to Impose Sanctions regarding the First Set of Interrogatories filed June 23, 2023, is denied.