Opinion
17076-21
02-02-2023
J L MINERALS, LLC, BEASLEY TIMBER MANAGEMENT, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Patrick J. Urda Judge
This case is calendared for trial at the Court's special session in Atlanta, Georgia, beginning February 27, 2023. Petitioner, J L Minerals, LLC, Beasley Timber Management, LLC, Tax Matters Partner (JL Minerals), challenges a Notice of Final Partnership Administrative Adjustment (FPAA) that (1) disallowed a charitable contribution deduction with respect to JL Minerals' donation of a conservation easement and (2) determined penalties under sections 6662 and 6662A of the Internal Revenue Code. [Doc. 1.]
"Doc." references are to the documents in Docket No. 17076-21, compiled by this Court. Unless otherwise indicated, all section references are to the Internal Revenue Code (I.R.C.), Title 26 U.S.C., in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure. "Fed. R. Civ. P." references are to the Federal Rules of Civil Procedure.
Before the Court are motions to quash filed by Thiele Kaolin Co. (Thiele) [Doc. 74], KaMin, LLC (KaMin) [Doc. 77], Imerys USA, Inc. and Imerys Minerals USA, Inc. (together, Imerys) [Doc. 83], and Arcilla Mining and Land Co., LLC (Arcilla) [Doc. 92], four nonparties that engage in the mining and processing of kaolin, an alumina-silicate mineral used to produce paper, porcelain, paints, and other products. The Commissioner issued subpoenae to the nonparties, seeking 14 categories of material and trial testimony related to the kaolin industry. We held a hearing on these motions in Atlanta, Georgia, on January 10, 2023, and we will grant them in part and deny them in part.
We will refer to the entities collectively as "the nonparties."
Background
The following facts are derived from the parties' pleadings, motion papers, and declarations and exhibits attached thereto. They are stated solely for the purpose of deciding the pending motions and not as findings of fact in this case.
I. Factual Overview
In December 2015 Jackson Lake Plantation, LLC (Jackson Lake), purchased 644 acres of land in Wilkinson County, Georgia, for $1,600,000. [Doc. 1, ¶9(g), (i); Doc. 54, Ex. C p.4.] Before the purchase, the property had been used primarily for hunting and as timberland. [Doc. 1, ¶9(g), (i).] Later in December 2015, Jackson Lake contributed a 64.7-acre tract (the property) to JL Minerals. [Doc. 1, ¶¶2, 9(g).]
In 2017 JL Minerals donated a conservation easement over the property to Heritage Preservation Trust, Inc., and claimed a charitable contribution deduction of $16,745,000 on its 2017 Form 1065, U.S. Return of Partnership Income. [Doc. 26 at 30.] JL Minerals based this deduction amount on the purported value of kaolin deposits on the property. [Doc. 1, ¶9(k).]
The IRS thereafter investigated JL Minerals' 2017 tax reporting, which culminated in the issuance of an FPAA that disallowed the claimed deduction and determined penalties. [Doc. 1 at 26-30.] The FPAA took the position that, inter alia, the conservation easement had no value. JL Minerals timely challenged the FPAA in this Court. [Doc. 1.]
II. Relevant Tax Court Proceedings
On November 10, 2022, the Commissioner issued to each of the nonparties (1) subpoenae duces tecum and (2) subpoenae ad testificandum (for the trial scheduled to begin February 27, 2023). [Docs. 74, 77, 83, 92.] The subpoenae duces tecum sought three general categories of information from each company relating to its respective work in the kaolin industry from 2016-18: (1) various pieces of financial information, including pricing, costs, and market studies; (2) policies and contracts governing relationships with private landowners; and (3) information about kaolin exploration, as well as land and mineral lease ownership.
The nonparties filed motions to quash pursuant to Rule 147(b), asserting that the subpoenae were unreasonable and oppressive. [Docs. 74, 77, 83, 92.] The nonparties took the position that the subpoenae sought broad swaths of confidential and potentially privileged information that would upend the kaolin market, which is small (there are only three major processors - Thiele, KaMin, and Imerys), secretive, and subject to government scrutiny (as a check against price-fixing). The nonparties asserted that the breadth of the requested information only a few weeks before trial presented a particular burden given that, with one exception, the nonparties had no connection to the issues before the Court. The nonparties finally argued that the information sought was not related to the transaction at issue and that the subpoenae sought to hale the nonparties into Court for compelled expert testimony.
Prior to the years at issue, KaMin owned a mineral lease over the property at issue, and the subpoena issued to it sought, inter alia, information about its decisions in this regard. [Doc. 77 at 13- 14.] At the motion hearing, KaMin distinguished the requests about the property at issue from the more general requests about the functioning of the kaolin industry.
Discussion
I. Motions To Quash
A. General Standards
In the Tax Court, a party generally may move to quash (1) a subpoena duces tecum pursuant to Rule 147(b), see Stern v. Commissioner, 74 T.C. 1075, 1084 (1980); or (2) a subpoena ad testificandum pursuant to Fed.R.Civ.P. 45(b) (or through a motion for protective order under Rule 103(a)), see also Amazon.com, Inc. & Subs. v. Commissioner, T.C. Memo. 2014-245, at *7 n.3; Rule 1(b). Rule 147(b) provides that this Court may grant a motion to quash a subpoena that is "unreasonable and oppressive," while Fed.R.Civ.P. 45(d)(3)(A)(iv) speaks in terms of quashing a subpoena that "subjects a person to undue burden." The decision whether to grant a motion to quash is at our discretion, with the moving party bearing the burden of persuasion. See Amazon.com, T.C. Memo. 2014-245, at *8.
Despite the linguistic differences between the governing rules, this "Court has applied essentially the same balancing test when deciding whether to quash or modify" either type of subpoena. See Amazon.com, T.C. Memo. 2014-245, at *8. Generally, this test focuses on the "reasonableness of the subpoena," see Wright & Miller, supra, § 2463.1, which requires the court to "balance the burden upon the subpoenaed party against the value of the information to the serving party," Amazon.com, T.C. Memo. 2014-245, at *8. We have previously considered factors including "the relevance of the information sought, the serving party's need for that information, the breadth of the request, the time period covered by the subpoena, the particularity of the request, and the burden imposed." Id. "The status of the subpoena recipient as a non-party is also a factor that can weigh against disclosure in the undue burden inquiry." Jordan v. Comm'r, Miss. Dep't of Corr., 947 F.3d 1322, 1337 (11th Cir. 2020) (citing Wiwa v. Royal Dutch Petroleum Co., 392 F.3d 812, 818 (5th Cir. 2004)); see also Va. Dep't of Corrections v. Jordan, 921 F.3d 180, 189 (4th Cir. 2019) ("Bystanders should not be drawn into the parties' dispute without some good reason, even if they have information that falls within the scope of party discovery."); In re: Modern Plastics Corp., 890 F.3d 244, 251 (6th Cir. 2018).
Rule 147(b) was modeled on the pre-1991 version of Fed.R.Civ.P. 45(b), see Amazon.com, T.C. Memo. 2014-245, at *7 n.3, and we "look for guidance" from cases interpreting it, see Stern, 74 T.C. at 1084); see also Grandbouche v. Commissioner, 99 T.C. 604, 615 (1992). Although Fed.R.Civ.P. 45(b) received a facelift in 1991, "[t]his modification was purely semantic and not intended to change existing law" and we accordingly are not restricted to pre-1991 caselaw. See Amazon.com, T.C. Memo. 2014-45, at *7 n.4; see also 9A Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 2463.1 (3d ed. 2008). We likewise consider cases decided under Rule 147(b) when determining whether to quash a subpoena ad testificandum. See Amazon.com, T.C. Memo. 2014-45, at *7 n.4.
This Court has previously quashed subpoenae that would have resulted in "great inconvenience for many persons for little or no gain," declining attempts to use subpoenae as "an all-encompassing net in the search for information with which to build a case." Hunt v. Commissioner, T.C. Memo. 1990-248, 1990 WL 66551, at *27; see Durkin v. Commissioner, 87 T.C. 1329, 1403 (1986) ("The processes of this Court are simply not designed to be used to conduct a thorough investigation of a complex tax case."), aff'd, 872 F.2d 1271 (7th Cir. 1989). Thus, when "the Commissioner merely sought to have the persons subpoenaed produce all of its books and records so that the attorney for the Commissioner could examine them to find out whether they contained any helpful records, and when such person was not a party to the case but was only indirectly involved in some of the transactions, the Court refused to support the subpoena on the ground that the request was too burdensome when weighed against its probative value." Durkin, 87 T.C. at 1402 (explaining a decision at an earlier point in the case to quash third-party subpoenae).
B. Analysis
With this grounding, we turn to the subpoenae at issue. The Commissioner is pursuing concrete, historical information to establish the workings of the kaolin industry during the year at issue. Information about the industry from the only major players is plainly relevant to one of the primary issues in the case, i.e., the highest and best use of the property at issue. And given the extreme secrecy of the industry, which the nonparties stressed in both their pleadings and at the motion hearing, we believe that source documents and testimony from qualified representatives of the nonparties, unfiltered by experts, will be important for our ultimate determination. The subpoenae here are markedly different from the last-minute fishing expeditions seen in Durkin or Hunt, or the request for cumulative testimony at the end of a long trial in Amazon.com. In sum, the value and need for the information weigh heavily against the motions to quash.
The burden side of the ledger is not empty, however. The subpoenae duces tecum are broadly drawn both in terms of breadth of the requests and the time periods covered. The Commissioner's requests implicate sensitive, potentially privileged, financial and contractual information over a period of three years, implicating (according to the nonparties) thousands of transactions. Assembling this information would constitute a real burden for the nonparties, especially given the proximity to trial. We further recognize that "[p]reparing for and delivering trial testimony is always a burden," Amazon.com, T.C. Memo. 2014-245, at *11, although the "Government has a right to every individual's evidence and . . . every individual has the duty to provide that testimony," Grandbouche, 99 T.C. at 617.
Weighing these considerations together, we believe that the subpoenae should be narrowed and certain interests of the nonparties protected. As to the subpoenae ad testificandum, we will require attendance at trial by a testifying witness from each of the nonparties, but lighten the burden by permitting the testifying representatives to appear virtually by ZoomGov and by imposing time limitations of three hours on the testimony of each (ninety minutes allocated to the Commissioner and ninety minutes to JL Minerals).
We are not persuaded by the nonparties' assertion that the subpoenae represent an attempt by the Commissioner to obtain unretained expert testimony. See, e.g., Wright & Miller, supra, § 2463.1. Although the nonparties are no doubt experts in kaolin mining and processing (as the major industry players), they are being asked to provide information about the prevailing conditions of the kaolin industry in 2017 and their own business practices at that time. The Commissioner ostensibly seeks first-hand knowledge, not expert opinion. If the Commissioner should ask questions at trial that stray into expert opinion, the Court would be willing to revisit this point (and the related subject whether costs for expert testimony should be awarded).
As to the subpoenae duces tecum, we will limit the temporal reach of the subpoenae to 2017, the year at issue. We will likewise narrow the scope of the requests in the subpoenae duces tecum, excusing the nonparties from providing documents showing (1) "the types of contracts you entered into with Private Landowners," (2) "Your policies working with Private landowners," (3) "Your policies relating to working with Private Landowners in Georgia who wanted to mine the kaolin on their property as a 'mom and pop' style mine," and (4) "Your land exploration process and evaluation for locating and mining kaolin in Georgia." Although the nonparties are not required to provide documents on these subjects responsive to the subpoenae duces tecum, the Commissioner may inquire as to these topics at trial and the testifying representatives should be prepared to discuss these points.
The nonparties have demonstrated through affidavits and representations by counsel the need for a protective order pursuant to Rule 103(a) that will cover the confidential information disclosed both in documents and at trial. See Willie Nelson Music Co., Inc. v. Commissioner, 85 T.C. 914, 921 (1985) ("Courts also acknowledge that confidential business information (e.g., pricing information, customer lists, sales volume) requires protection."). We will permit the nonparties and the Commissioner to confer and propose such a protective order within ten days.
II. Costs
Both Rule 147(b) and Fed.R.Civ.P. 45(d)(1), (3)(c)(ii) permit cost-shifting to protect a person subject to a subpoena from the costs of compliance. The Court has discretion to decide whether to allow cost-shifting. Grandbouche, 99 T.C. at 618.
"The Supreme Court has found that the Government has a right to every individual's evidence and that every individual has the duty to provide that testimony." Grandbouche, 99 T.C. at 617. "Compliance with a subpoena . . . will necessarily involve some costs." Stern, 74 T.C. at 1084 "Nonparty witnesses are powerless to control the scope of litigation and discovery, and should not be forced to subsidize an unreasonable share of the costs of a litigation to which they are not a party." Grandbouche, 99 T.C. at 618 (quoting United States v. Columbia Broad. Sys., Inc., 666 F.2d 364, 371-72 (9th Cir. 1982)).
"[T]he power to exact reimbursement as the price of enforcement is soundly exercised only when the financial burden of compliance exceeds that which the party ought reasonably be made to shoulder." Stern, 74 T.C. at 1084. In determining whether the financial burden is unreasonable, we consider, inter alia, whether the expenses incurred in producing the records are reasonably incident to the party's normal business, and "whether the subpoena is vague or overbroad or impossible to perform." Grandbouche, 99 T.C. at 618-19.
The Court has modified both the subpoenae duces tecum and the subpoenae ad testificandum in ways that will limit the costs on the nonparties to comply. As to documents, the nonparties are required to produce only a limited set of historical information reasonably incident to their normal businesses. As to testimony, the nonparties are required to make available via ZoomGov a testifying representative for a limited period of time. At this stage, we believe that the compliance costs to the nonparties are not unreasonable given the nature of their businesses, and we will deny without prejudice their request for costs.
Conclusion
For the reasons set forth above we will grant in part and deny in part the motions to quash filed by Thiele, KaMin, Imerys, and Arcilla Mining. Accordingly, it is
ORDERED that Thiele's motion to quash or modify subpoena and to issue a protective order, [Doc. 74], filed on December 20, 2022, as supplemented [Doc. 106] on January 13, 2023, is granted in part and denied in part. Thiele shall make available for trial in this matter a testifying witness consistent with the limitations set forth in this Order. Thiele's request for compensation to the testifying witness at the same hourly rate as the Commissioner's expert witness is denied without prejudice. Thiele shall also comply with the Commissioner's subpoena duces tecum consistent with the limitations set forth in this Order. It is further
ORDERED that KaMin's motion to quash or modify subpoena or in the alternative motion for protective order from nonparty subpoenas [Doc. 77], filed on December 27, 2022, is granted in part and denied in part. KaMin shall make available for trial in this matter a testifying witness consistent with the limitations set forth in this Order. KaMin shall also comply with the Commissioner's subpoena duces tecum consistent with the limitations set forth in this Order. It is further
ORDERED that Imerys's motion to quash or modify subpoena and issue a protective order [Doc. 83], filed on December 29, 2022, is granted in part and denied in part. Imerys shall make available for trial in this matter a testifying witness consistent with the limitations set forth in this Order. Imerys shall also comply with the Commissioner's subpoena duces tecum consistent with the limitations set forth in this Order. It is further
ORDERED that Arcilla's motion to quash or modify subpoena [Doc. 92], filed on January 3, 2023, is granted in part and denied in part. Arcilla shall make available for trial in this matter a testifying witness consistent with the limitations set forth in this Order. Arcilla shall also comply with the Commissioner's subpoena duces tecum consistent with the limitations set forth in this Order. It is further
ORDERED that the nonparties and the Commissioner shall confer and propose a protective order within 10 days after the service of date this Order. It is further
ORDERED that in addition to regular service, the Clerk of the Court shall serve a copy of this Order on Thiele Kaolin Company, c/o Anson H. Asbury and Scott St. Lifer, Asbury Law Firm, 133 Peachtree Street, NE, Suite 4900, Atlanta, GA 30303. It is further
ORDERED that in addition to regular service, the Clerk of the Court shall serve a copy of this Order on KaMin, LLC, c/o Harry Teichman, Taylor English Duma, LLP, P.O. Box 147, Tampa, FL 33601. It is further
ORDERED that in addition to regular service, the Clerk of the Court shall serve a copy of this Order on Imerys USA Inc. and Imerys Minerals USA, Inc., c/o George Abney, Alston & Bird, LLP, One Atlantic Center, 1201 West Peachtree Street, Atlanta, GA, 30309 and on Imerys USA Inc. and Imerys Minerals USA, Inc., c/o Laura Gavioli, Alston & Bird, LLP, 90 Park Avenue, New York, NY 10016. It is further
ORDERED that in addition to regular service, the Clerk of the Court shall serve a copy of this Order on Arcilla Mining and Land Co., LLC, c/o Harry Teichman, Taylor English Duma, LLP, P.O. Box 147, Tampa, FL 33601.