Opinion
20409-19
09-02-2021
Estate of Lois Horvitz, Deceased, Michael Horvitz, Executor Petitioners v. Commissioner of Internal Revenue Respondent
ORDER
David Gustafson, Judge
By this order the Court will direct the parties to make additional filings on two pending motions.
Background
The initial absence of penalty from this case
Lois Horvitz died in 2015. Her Estate filed a Form 706, "United States Estate (and Generation-Skipping Transfer) Tax Return", with the Internal Revenue Service in 2016. The Internal Revenue Service issued to the Estate a statutory notice of deficiency ("SNOD") in August 2019, determining a deficiency of $7.8 million in estate tax. The SNOD did not determine any penalty or addition to tax. The Estate filed its petition (Doc. 1) in the Tax Court in November 2019, challenging the estate tax deficiency. In January 2020 the Commissioner filed his answer (Doc. 4), which made no mention of any penalty or addition to tax. On July 15, 2021, the Court issued a notice of trial (Doc. 12), setting this case to be tried at the Court's session beginning December 13, 2021.
The Commissioner's motion for leave to plead penalty
On July 23, 2021, the Commissioner filed a motion for leave (Doc. 15) to file a first amendment to his answer (which he lodged that same day, Doc. 16), asking to be permitted to assert a negligence penalty under section 6662(a) and (c). In our reading of the lodged amendment (para. 7(e)), the sole fact on which the assertion of negligence is based seems to be: "If the adjustments set forth in the notice of deficiency are sustained, then petitioner will have been determined to have underreported the value of its taxable estate by $19, 521, 052. Thus, the underpayment in estate tax determined by respondent will be attributable to petitioner's negligence or disregard of rule or regulations in underreporting the value of its taxable estate."
On August 16, 2021, the Estate filed an opposition (Doc. 22) to the motion for leave, in which, among other things, the Estate expressed a concern that "the penalty is * * * a tactic * * * to pressure the Petitioner to waive attorney-client privilege." On August 27, 2021, the Commissioner filed an economical reply (Doc. 24), which made no mention of attorney-client privilege and on which his lengthy signature block fit comfortably on page 2.
The Commissioner's motion for leave to take a deposition
Also on August 27, 2021, the Commissioner filed a "Motion to Take the Deposition of Nonparty Witness" (Doc. 23). (The cover page to the motion states that it is "Pursuant to Rule 74(c)(3)" but the Commissioner apparently relies on Rule 74(c)(2)(B), as the motion itself states.) The proposed deponent is the trustee of QTIP trusts that appear to have been established pursuant to a coordinated estate plan of the petitioner-Estate and the estate of the decedent's previously deceased spouse. The motion explains: "At issue in this case is whether the Decanting was permissible under Ohio law. * * * [The proposed deponent] has the requisite knowledge of and involvement with the Decanting to give testimony and produce documents or electronically stored information that are discoverable within the meaning of Rule 70(b)."
Attached to the deposition motion is the Estate's objection, which states that "[s]ome of the topics identified by Respondent could require disclosure of privileged attorney-client communications" and suggests that the Commissioner ought to undertake informal discovery, including written questions for the proposed deponent. The motion does not discuss attorney-client privilege.
Discussion
Penalty
In a deficiency case in the Tax Court, means exist for either party to plead issues not addressed in the SNOD. Where the Commissioner pleads in his answer a penalty that is not in the SNOD (or when he obtains petitioner's consent or the Court's leave to plead a penalty in an amendment to his answer), then under Rule 142(a)(1) the Commissioner will bear the burden of proof on that issue as "new matter".
If the Estate pleads "reasonable cause" as an affirmative defense to the penalty, then the Commissioner's burden will include the burden to prove that the taxpayer's failure "was not due to reasonable cause or was due to willful neglect", Arnold v. Commissioner, T.C. Memo. 2003-259, 86 T.C.M. 341, 344 (emphasis added).
Rule 36(b) requires that "the answer shall contain a clear and concise statement of every ground, together with the facts in support thereof on which the Commissioner relies and has the burden of proof." (Emphasis added.) The facts in paragraph 7(e) of the proposed amendment seem spare.
We will ask the parties to comment on those generalities and on their applicability to this case.
In addition, where penalty is at issue, the Commissioner's burden of production includes showing compliance with section 6751(b)(1). An amendment to his answer that pleads a penalty would be futile if in fact the IRS was required to comply with section 6751(b)(1) but failed to do so. We will therefore ask him to supplement his motion for leave with a discussion of this issue.
Deposition
We will order the Estate to file a response to the deposition motion and will order the Commissioner to file a reply. In composing those filings, the parties should consider (and should correct any errors in) the following.
Rule 74(c)(1)(B) provides that "[t]he taking of a deposition of a * * * nonparty witness * * * under this paragraph [i.e., Rule 74(c), "Depositions Without Consent of the Parties"] "is an extraordinary method of discovery". The Commissioner seems to argue that the large amount of the proposed deficiency renders this circumstance extraordinary. We are not yet convinced.
The commentary in the Commissioner's deposition motion (quoted above) seems to indicate that the issue about which deposition testimony is sought is legal (i.e., "whether the Decanting was permissible under Ohio law"). We do not see how testimony on that subject would be proper. It would seem that instead we should examine the documents for their objective import and that subjective testimony about the settlor's intentions would be irrelevant.
If and to the extent that the deposition testimony the Commissioner seeks relates to the negligence penalty that he desires to plead, then presumably the deposition should not be allowed if we do not permit the penalty to be pleaded.
If the documents that the Commissioner seeks by means of the deposition subpoena are documents that the proposed deponent holds as a fiduciary for the petitioner-Estate, then pursuant to Rule 72(a)(1) those would apparently be documents "in the possession, custody, or control of" the Estate and therefore would be obtainable by document requests served on the Estate.
It is
ORDERED that, no later than September 15, 2021, the Commissioner shall file a supplement to his motion for leave to file an amendment to his answer. In that supplement
• He shall state whether it is correct (as stated above) that if he is allowed to plead the negligence penalty, then that penalty would be "new matter" as to which he would bear the burden of proof, including the burden of proof as to any "reasonable cause" defense to penalty.
• He shall state whether the deposition testimony he seeks relates to the negligence penalty he proposes to plead.
• He shall state his position as to compliance with section 6751(b)(1), and he shall state whether the Estate disputes his position.
• He shall his position as to the sufficiency of his proposed amendment to comply with the requirement of Rule 36(b) that "the answer shall contain * * * the facts in support thereof".
It is further
ORDERED that, no later than September 29, 2021, the Estate shall file a response to the Commissioner's supplement to his motion for leave to file the amendment to his answer. It is further
ORDERED that, no later than September 29, 2021, the Estate shall also file a response to the Commissioner's deposition motion (Doc. 23). If the Estate objects on grounds of attorney-client privilege, then the Estate shall elaborate on that objection, explaining who is the attorney and who is the client. It is further
ORDERED that, no later than October 13, 2021, the Commissioner shall file a reply to the Estate's response to the Commissioner's deposition motion.