Opinion
16017-21 15631-22
09-04-2024
AMGEN INC. & SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Travis A. Greaves Judge
Currently before the Court are the following discovery motions: (1)respondent's Motion to Compel Production of Documents, filed July 8, 2024, (2)petitioner's Motion to Compel Responses to Requests Regarding Non-Core Issues, filed July 8, 2024, and (3) petitioner's Motion to Compel Production of 2002-2009 Administrative Files, filed July 8, 2024. We address each motion in turn below.
Background
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding the motions and not as findings of fact in these cases. See Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
The transactions at issue primarily involve Amgen Inc. (Amgen) and Amgen Manufacturing Limited (AML). AML is a Puerto Rican subsidiary of Amgen. The primary issue in these cases is the Commissioner's allocation of income under section 482 between Amgen and AML. As a result of the transfer pricing adjustments, the Commissioner has also determined accuracy-related penalties for tax years 2013 through 2015. Also at issue in these cases are (1) respondent's rejection of petitioner's change of accounting request related to certain payments, (2) respondent's disallowance of petitioner's charitable contribution deduction related to donations to the Patient Access Network Function and Chronic Disease Fund, and (3) respondent's inclusion of reimbursements from AML for legal settlements in petitioner's gross income. The parties have engaged in informal discovery for approximately two years during which requests were made for the documentation at issue in the motions to compel.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
Discussion
Rule 70 sets forth the general provisions relating to discovery. Rule 70(b)(1) provides that "[d]iscovery may concern any matter not privileged that is relevant to the subject matter involved in the pending case." A party opposing discovery has the burden of establishing that the information sought is not relevant or is otherwise not discoverable. See Rutter v. Commissioner, 81 T.C. 937, 948 (1983); Branerton Corp. v. Commissioner, 64 T.C. 191, 193 (1975). 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. See id. at 471-72.
Rule 72 provides the procedures for requesting documents and seeking sanctions against a party for failure to provide documents in a Tax Court proceeding. Rule 72(b) requires that the party upon which a request is served shall within 30 days serve a written response stating with "respect to each item or category, that inspection and related activities will be permitted as requested, unless the request is objected to in whole or in part, in which event the reasons for objection shall be stated." Discovery requests are not filed with the Court unless it becomes necessary for the serving party to file a motion to compel. Id. To obtain a ruling on a failure to produce a document, the requesting party shall file an appropriate motion with the Court and shall annex thereto the request, with proof of service on the other party, together with the response and objections if any. Id. With these principles in mind, we turn to the parties' motions to compel related to various requests for production of documents (RFPD).
For simplicity, this order will identify each request by the associated RFPD number and the specific request number within such RFPD. For example, RFPD 6.8(a) refers to request 8(a) as contained in Respondent's Sixth RFPD.
I. Respondent's Motion to Compel Production of Documents
On November 28, 2023, respondent served on petitioner Respondent's Sixth RFPD. On April 4, 2024, petitioner served Petitioner's Fourth Response to Respondent's Sixth RFPD, setting forth a complete response to RFPD 6.8(c). On May 21, 2024, petitioner served on respondent Petitioner's Sixth Response to Respondent's Sixth RFPD, setting forth a complete response to RFPD 6.8(b). Petitioner served on respondent Petitioner's Eighth Response to Respondent's Sixth RFPD on July 13, 2024, setting forth complete responses to RFPD 6.6(a) and 6.6(b). In this response, petitioner also objected to RFPD 6.3 and 6.4. On August 13, 2024, petitioner served on respondent Petitioner's Ninth Response to Respondent's Sixth RFPD, setting forth a partial response to RFPD 6.8(a).
On January 3, 2024, respondent served on petitioner Respondent's Seventh RFPD. On January 30, 2024, petitioner served on respondent Petitioner's Response to Respondent's Seventh RFPD in which petitioner indicated that it had previously responded to RFPD 7.3.
On March 15, 2024, respondent served on petitioner Respondent's Eighth RFPD. On June 12, 2024, petitioner served on respondent Petitioner's Tenth Response to Respondent's Eighth RFPD, objecting to RFPD 8.33. On July 9, 2024, petitioner served Petitioner's Twelfth Response to Respondent's Eighth RFPD, stating that petitioner completed discovery for RFPD 8.27 except for documents withheld on privilege grounds. On July 16, 2024, petitioner served on respondent Petitioner's Fourteenth Response to Respondent's Eighth RFPD, which asserted that petitioner provided complete discovery related to RFPD 8.19, 8.20, and 8.35 except for documents withheld on privilege grounds.
On July 8, 2024, respondent filed Respondent's Motion to Compel Production of Documents. In his motion, respondent seeks an order compelling the production of documents related to RFPD 6.3, 6.4. 6.6, 6.8, 7.3, 8.19, 8.20, 8.27, 8.33, 8.35. In addition to these documents, respondent references various other RFPD but fails to clearly set forth whether he seeks an order to compel production with regards to these requests. Because of the lack of clarity, we determine that respondent did not properly move for an order compelling production regarding these requests. On August 15, 2024, petitioner filed a Response to Respondent's Motion to Compel Production of Documents, setting forth its objections.
Respondent incorrectly refers to this request as RFPD 7.18. Reviewing the Seventh RFPD, it is clear respondent refers to RFPD 7.3.
These requests include RFPD 2.8, 3.3, 6.2, 6.13, and 6.14.
RFPD 6.3 requests that petitioner provide all documents related to negotiations of uncontrolled transactions that reference petitioner's transfer pricing methods or its 2002 structure change. RFPD 6.4 requests all documents reflecting recommendations, instructions, discussions, or suggested terms for uncontrolled transactions. Respondent argues that these documents are relevant because to the extent petitioner entered into uncontrolled transactions for the purpose of establishing arm's length results, the transactions cannot be used as comparable transactions. See Treas Reg. § 1.482-1(d)(4)(iii)(A)(2). Petitioner objected to these requests on the grounds that they were overly broad and burdensome. We agree with petitioner. As respondent explained in his motion, the only documents he deems relevant are those that would disqualify transactions from being considered as comparable transactions. Respondent further narrows his concerns to agreements with two manufacturers. Rather than asking for this subset of documents, respondent casts a wide net that covers all uncontrolled transactions. Therefore, we will deny his motion as it relates to these requests.
RFPD 6.6 and 6.8 request that petitioner provide documents related to the technical transfer and batch records between Amgen and AML. Petitioner represents that it has provided all relevant documents for RFPD 6.6, 6.8(b), and 6.8(c).Petitioner represents that it will provide complete production to RFPD 6.8(a) in 14 days. In accordance with these representations we will grant respondent's motion in relation to RFPD 6.8(a) and deny it in all other respects as to RFPD 6.6 and 6.8.
Petitioner's response is inconsistent with respect to the portions of RFPD 6.6 and RFPD 6.8 that it has fully complied with. Reviewing petitioner's responses, it appears that only RFPD 6.8(a) is outstanding.
RFPD 7.3 requests petitioner produce the amount of product liability reserves maintained by petitioner and documents related to how those amounts are calculated for generally accepted accounting principles purposes. Respondent argues this information is relevant to how petitioner and AML share product liability. Petitioner has provided the amounts of such reserves but objects to the underlying calculations as irrelevant. Petitioner alleges that the allocation of product liability can be determined based on the licensing agreements. We agree with petitioner that the method petitioner uses for accounting purposes to determine product liability reserves is not relevant. We are satisfied that the licensing agreements and information regarding AML will allow us to gauge the comparability of uncontrolled transactions. See Medtronic, Inc. & Consolidated Subsidiaries v. Commissioner, T.C. Memo. 2022-84, at *40-42. Thus, we deny respondent's motion as it relates to RFPD 7.3.
We also note that the rules of financial accounting are not controlling for income tax purposes. See Exxon Mobil Corp. v. Commissioner, 114 T.C. 293, 317 (2000).
RFPD 8.19 and 8.20 request documents related to a recall of Epoetin. Petitioner represents that it has provided all responsive documents. Thus, we will deny respondent's motion as it relates to these requests.
RFPD 8.27 requests all communications between petitioner's tax department and employees regarding the ATO Tax Group's cost plus 15% mark-up applied to Pure Bulk Standard Cost. RFPD 8.35 requests all communication between petitioner's tax department and employees about the pricing of the Eli Lilly supply agreement which is relied upon by petitioner's experts as a comparable transaction. These requests are also the subject of respondent's Motion to Compel Petitioner to Produce Responsive Documents Withheld from Discovery, filed July 8, 2024, and supplemented on August 12, 2024. Because the privilege issue is the parties' main point of dispute, we will hold these requests in abeyance pending resolution of respondent's Motion to Compel Petitioner to Produce Responsive Documents Withheld from Discovery, as supplemented.
RFPD 8.33 requests that petitioner produce all agreements between Amgen and contract manufacturers throughout history. Petitioner objects to this request on the grounds that it is unreasonably overbroad, burdensome, and duplicative. We agree with petitioner that this request is overbroad. This request would require petitioner to review over 40 years of contracts, many of which are unlikely to be relevant to this litigation. Therefore, we will deny respondent's motion as it relates to RFPD 8.33.
Respondent also moves pursuant to Rule 104, requesting that petitioner be prohibited from introducing any documents that are relevant to the following RFPD: 3.3, 6.2, 6.13, and 6.14. Respondent has not otherwise moved to compel petitioner to produce these documents, nor have we previously issued an order covering these requests. Rule 104 provides for sanctions for failure to comply with a court order. Because we have not issued such order, we will not impose the requested sanctions on petitioner. Respondent's motion is denied with respect to sanctions.
II. Petitioner's Motion to Compel Responses to Requests Regarding Non-Core Issues
On February 11, 2024, petitioner served on respondent Petitioner's First RFPD. On March 13, 2024, respondent served on petitioner Respondent's Response to Petitioner's First RFPD. In this response, respondent objected to RFPD 1.1, 1.2, 1.8, and 1.10. Respondent further represented that he was in the process of reviewing documents and creating a privilege log related to RFPD 1.4, 1.5, and 1.9. On April 24, 2024, respondent served on petitioner Respondent's Third Response to Petitioner's First RFPD. Respondent produced nonprivileged documents related to RFPD 1.5 and 1.9 and appended a privilege log setting forth the applicable privilege for withheld documents. On June 26, 2024, respondent served on petitioner Respondent's Fourth Response to Petitioner's First RFPD. Respondent produced nonprivileged documents related to RFPD 1.4 and appended a privilege log setting forth the applicable privilege for withheld documents.
On July 8, 2024, petitioner filed Petitioner's Motion to Compel Responses to Requests Regarding Non-Core Issues. Therein, petitioner seeks an order compelling production related to RFPD 1.1, 1.2, 1.5, 1.9, 1.8, and 1.10. Petitioner also alerted the Court to the possible need for Court intervention with respect to RFPD 1.4. Petitioner's motion also mentioned requests for admissions 20 through 23 from Petitioner's First Request for Admissions and interrogatory 3 from Petitioner's First Request for Answers to Interrogatories. However, petitioner failed to analyze these requests to any meaningful degree and therefore, we determine that petitioner did not properly move for an order to compel these requests. On August 15, 2024, respondent filed a Response to Petitioner's Motion to Compel Production of Documents Regarding Non-Core Issues, setting forth his objections.
A. Change of Accounting Method Requests
RFPD 1.5 requests respondent to provide all IRS documents related to respondent's denial of petitioner's request to change accounting methods. RFPD 1.9 requests all documents relied upon, considered, excerpted, or otherwise used in preparation of the NOPA YY-25. Respondent provided a portion of the relevant documents and withheld others on the basis of deliberative process privilege. Petitioner contests respondent's claim of deliberative process privilege on the grounds that (1) the privilege is inapplicable because respondent's decision making process is at issue, (2) the privilege was asserted by trial counsel rather than a high level agency official that personally reviewed the documents, (3) respondent has improperly shielded entire documents without segregating the information not protected by the privilege, and (4) even if the privilege applies, petitioner's overwhelming need for the documents outweighs the government's interest in nondisclosure.
The deliberative process privilege shields from disclosure "documents reflecting advisory opinions, recommendations and deliberations comprising part of a process by which governmental decisions and policies are formulated." NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 150 (1975); U.S. Fish & Wildlife Serv. v. Sierra Club, Inc., 141 S.Ct. 777, 785 (2021). The rationale behind the privilege "does not apply, of course, to documents that embody a final decision, because once a decision has been made, the deliberations are done." U.S. Fish & Wildlife Serv., 141 S.Ct. at 785. Accordingly, only agency documents that are both "predecisional" and "deliberative" are protected by the privilege. See id. at 785-86. The privilege does not protect documents in their entirety. See Karnoski v. Trump, 926 F.3d 1180, 1204 (9th Cir. 2019). Instead, the government has an obligation to segregate and disclose non-privileged information within a document. Id.
To assist the Court in resolving the issues surrounding these requests, the Chief Judge has approved assignment of this motion as it relates to RFPD 1.5 and 1.9 to a Special Trial Judge of this Court to consider and rule upon these requests. The assigned Special Trial Judge shall have access to the Court's files and any other documents held by the undersigned to assist in his rulings, and he shall have authority to direct or order the parties to provide information, including the submission of additional documents, in connection with his review, which may include an in camera review.
RFPD 1.8 requests documentation related to other taxpayers that requested a similar change in accounting method that was discussed, analyzed, evaluated or compared to petitioner's request. RFPD 1.10 requests all documentation related to other taxpayers in the pharmaceutical industry that requested a similar change of accounting method and those documents that pertain to such approval. Respondent objects to these documents on the grounds that these documents are not relevant and that the documents are tax return information protected from disclosure by section 6103.
We agree with respondent that this third-party tax information is not relevant. It is the longstanding position of this Court that "how the Commissioner may have treated other taxpayers has generally been considered irrelevant in making that determination." Davis v. Commissioner, 65 T.C. 1014, 1022 (1976). An exception to this general rule is when the taxpayer alleges that it has been singled out for disparate treatment based on an impermissible consideration. Estate of Campion v. Commissioner, 110 T.C. 165, 170 (1998), aff'd without published opinion sub nom. Tucek v. Commissioner, 198 F.3d 259 (10th Cir. 1999), affd. without published opinion sub nom. Drake Oil Tech. Partners v. Commissioner, 211 F.3d 1277 (10th Cir. 2000). Petitioner makes no such allegation. Therefore, these documents related to third party taxpayers are not relevant to the current case. We deny petitioner's motion with respect to RFPD 1.8 and 1.10.
B. Charitable Deduction Requests
Two of petitioner's RFPD relate to the disallowance of charitable contributions to the Patient Access Network Function and Chronic Disease Fund: RFPD 1.1 and 1.2. RFPD 1.1 requests all documents related to any IRS examination of the Chronic Disease Fund for any year that petitioner made a charitable contribution. RFPD 1.2 requests the same documents with regards to the Patient Access Network Function. Petitioner contends that these documents are relevant to determine whether these organizations are charitable organizations within the meaning of section 170(c)(2). Respondent objects to these requests on the grounds that the information is not relevant and that providing such information is a violation of section 6103. Respondent represents that he does not contest that the Patient Access Network Function and Chronic Disease Fund are charitable organizations within the meaning of section 170. With this concession, the information sought by petitioner is not relevant. Therefore, we will deny petitioner's motion as it relates to RFPD 1.1 and 1.2.
C. Settlement Requests
Petitioner's RFPD 1.4 requests documents contained in petitioner's administrative file related to AML's reimbursement of certain legal expenses paid by Amgen. Respondent has reviewed the request and is producing documents on a rolling basis. Petitioner does not object to this rolling production but instead asks the Court to order a joint status report within 30 days to update the Court on respondent's progress and whether Court intervention is required. Because petitioner did not move for an order compelling production, we will not order respondent to produce the documents responsive to RFPD 1.4. If there is a subsequent issue with production, petitioner may file a motion for leave to file the proper discovery request. Thus, we deny petitioner's motion with respect to RFPD 1.4.
III. Petitioner's Motion to Compel Production of 2002-2009 Administrative Files
Petitioner and respondent have been engaged in informal discovery regarding the 2002-2009 administrative files since February 2024. After failing to reach an agreement on broad production of the entire file, on May 21, 2024, petitioner proposed narrowing the scope of the request to documents retained by specified document custodians, narrowed down by search terms. Respondent rejected this request.
A copy of petitioner's letter is attached to Petitioner's Motion to Compel Production of 2002- 2009 Administrative Files as exhibit 6.
On March 15, 2024, petitioner served Petitioner's Second RFPD. In RFPD 2.1 petitioner requests that respondent provide all of the 2002 through 2009 administrative files. On April 15, 2024, respondent served Respondent's Response to Petitioner's Second RFPD in which he objected to RFPD 2.1 on the grounds that it was overbroad, irrelevant, and included privileged documents. Respondent also indicated that he previously provided documents he determined were most likely to contain relevant information. Respondent served several other responses related to RFPD 2.1 and maintained his objections while providing some responsive documents. In addition to turning over certain documents, respondent served on petitioner privilege logs related to withheld documents. Respondent asserted attorney-client privilege, deliberative process privilege, and that the documents were protected under section 6103.
On July 8, 2024, petitioner filed Petitioner's Motion to Compel Production of 2002-2009 Administrative Files, seeking an order to compel respondent to turn over all the administrative files. In the alternative, petitioner asks the Court to order production of the administrative files narrowed down by the parameters set forth in its May 21, 2024, letter. Petitioner argues that these documents are relevant in determining whether respondent "specifically approved" petitioner's transfer pricing methods in prior years. This is one factor we consider in determining whether transfer pricing adjustments are excluded from the determination of a substantial valuation misstatement penalty under section 6662(e)(3)(B)(i) and Treas. Reg. § 1.6662-6(d)(2)(ii)(A). Petitioner argues that the specific approval does not need to be contained in the closing agreement and may be given in the course of an audit.
On August 15, 2024, respondent filed Respondent's Response to Petitioner's Motion to Compel Production of 2002-2009 Administrative Files. Therein, respondent objects to the request on the grounds that the documents are irrelevant and overbroad. Respondent argues that he can only "specifically approve" a taxpayer's transfer pricing methodology by express wording in the closing agreement.
As noted above, relevance is broadly defined as any information that is reasonably calculated to lead to admissible evidence or if it may assist that party in understanding relevant material. See Zaentz, 73 T.C. at 471. Both parties make extensive legal arguments regarding the interpretation of "specifically approved." However, neither party cited binding precedent as to the meaning. Because the definition has yet to be fixed it would be improper to make such determination in this order. Instead, we invite the parties to advance their interpretive positions at trial. Therefore, these documents may be relevant to petitioner's penalty defense.
However, petitioner's request for the 2002 through 2009 administrative files in their entirety is overbroad for the purpose of developing the penalty defense. In the alternative to the entire administrative file, petitioner has set forth a list of relevant document custodians and search terms that should capture the information relevant to the penalty defense. We are satisfied that this narrowed request strikes an appropriate balance. Therefore, we will grant petitioner's motion as it relates to RFPD 2.1 narrowed down to the document custodians listed in attachment A and the search terms listed in attachment B of petitioner's May 21, 2024, letter to respondent. We will reserve judgment on respondent's claimed deliberative process privilege and protection under section 6103 until production under the above criteria is made. We remind respondent of his obligation to segregate and disclose non-privileged information from documents over which he claims the deliberative process privilege. See Karnoski, 926 F.3d at 1204.
Upon due consideration, it is
ORDERED that respondent's Motion to Compel Production of Documents, filed July 8, 2024, is granted in part with respect to RFPD 6.8(a). Petitioner shall, on or before 14 days, serve documents related to this request. It is further
ORDERED that respondent's Motion to Compel Production of Documents, filed July 8, 2024, is held in abeyance insofar as it relates to RFPD 8.27 and 8.35. It is further
ORDERED that respondent's Motion to Compel Production of Documents, filed July 8, 2024, is denied in all other respects. It is further
ORDERED that petitioner's Motion to Compel Responses to Requests Regarding Non-Core Issues, filed July 8, 2024, is denied in part with respect to RFPD 1.1, 1.2, 1.4, 1.8 and 1.10. It is further
ORDERED that petitioner's Motion to Compel Responses to Requests Regarding Non-Core Issues, filed July 8, 2024, is held in abeyance with respect to RFPD 1.5 and 1.9. It is further
ORDERED that a Special Trial Judge shall be assigned to consider and rule upon petitioner's Motion to Compel Responses to Requests Regarding Non-Core Issues, filed July 8, 2024, as it relates to RFPD 1.5 and 1.9. It is further
ORDERED that petitioner's Motion to Compel Production of 2002-2009 Administrative Files, filed July 8, 2024, is granted in part to the extent stated herein. Respondent, on or before 30 days, shall serve documents related to this request. If respondent is unable to produce all documents within this time period, respondent shall file a status report setting forth a rolling production schedule for the remaining documents. It is further
ORDERED that petitioner's Motion to Compel Production of 2002-2009 Administrative Files, filed July 8, 2024, is denied in all other respects.