Opinion
7118-19
11-07-2023
DANIEL S. JACOBS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Emin Toro Judge
This case concerns petitioner Daniel Jacobs' motion for litigation costs pursuant to I.R.C. § 7430. On May 5, 2021, we entered decision in this case denying the claimed costs. Mr. Jacobs then appealed our decision to the U.S. Court of Appeals for the Ninth Circuit.
Unless otherwise indicated, statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and Rule references are to the Tax Court Rules of Practice and Procedure.
On November 4, 2022, the Ninth Circuit issued an opinion vacating our prior decision and remanding for the purpose of considering Mr. Jacobs' claim that the Commissioner's litigation position at the time he filed the Answer was unreasonable "in light of the information the [Commissioner] had received in the administrative proceedings." Jacobs v. Commissioner, No. 21-71211, 2022 WL 16707186, at *2 (9th Cir. Nov. 4, 2022). Specifically, the Ninth Circuit said that "evaluating the reasonableness of the [Commissioner's] litigation position, as reflected in the [A]nswer, requires some review of the administrative proceedings." Id. The Ninth Circuit also said that "the 'reasonableness' of the [Commissioner's] [A]nswer here depends on what the [Commissioner] learned, or should have learned, from the preceding administrative proceeding." Id. But, on the Ninth Circuit's review of the record,
it [was] not clear whether the Tax Court interpreted case law separately analyzing administrative and judicial proceedings as precluding [the Tax Court] from considering the merits of Jacobs' assertion that the [Commissioner's] answer to his petition was unreasonable. But [the
Ninth Circuit] read [its] precedent as allowing the Tax Court, in ruling on a request for litigation costs under [section] 7430, to consider the administrative proceedings, not to determine the propriety of the proceedings, but as informing the reasonableness of the [Commissioner's] answer in the Tax Court. Accordingly, [the Ninth Circuit vacated and remanded] for the Tax Court to consider the merits of Jacobs' claim that, in light of the information the [Commissioner] had received in the administrative proceedings, the [Commissioner's] litigation position was unreasonable.Id.
This case is now calendared for an evidentiary hearing during the Court's January 31, 2024, Los Angeles, California, special session. On October 18, 2023, Mr. Jacobs filed a Motion to Shorten Time of Formal Discovery and to Take Depositions (Doc. 63). In his Motion, Mr. Jacobs seeks an order to compel the Commissioner to respond, within 14 days, to his Second Set of Interrogatories and his Second Request for Production of Documents, copies of which he attached to the Motion. Mr. Jacobs also seeks to depose six of the Commissioner's employees. On October 26, 2023, the Commissioner filed a Response to Mr. Jacobs' Motion along with a Declaration of Laura J. Mullin (Doc. 66). For the reasons discussed below, we will deny Mr. Jacobs' Motion.
As Mr. Jacobs' Motion requesting depositions is relevant to his other discovery requests, we turn to that matter first.
I. Motion to Take Depositions of the Commissioner's Employees
A. Nonconsensual Depositions
Nonconsensual depositions are an "extraordinary method of discovery" that can only be taken upon an order from this Court. Rule 74(c)(1)(B). Our Rule 74(c)(1)(B) permits the taking of a nonconsensual deposition only under the following circumstances:
if a party, nonparty witness, or an expert witness can give testimony or possess documents, electronically stored information, or things which are discoverable within the meaning of Rule 70(b) and if the testimony, documents, electronically stored information, or things practicably cannot be obtained through informal consultation or communication (Rule 70(a)(1)), interrogatories (Rule 71), a request for production of documents, electronically stored information, or things (Rule 72), or by a deposition taken with the consent of the parties (Rule 74(b)).
Discovery by deposition "may concern any matter not privileged that is relevant to the subject matter involved in the pending case." Rule 70(b)(1). Taking a deposition must also be "proportional to the needs of the case." Id. In considering proportionality, we consider "the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit." Id.
We may limit the use of depositions if, in relevant part, we determine that "the discovery sought is unreasonably cumulative or duplicative, or is obtainable from some other source that is more convenient, less burdensome, or less expensive" or that the deposition is "outside the scope of Rule 70(b)(1)." Rule 70(c)(1).
Our Court has applied a three-part test to determine whether or not a nonconsensual deposition is proper. See K & M La Botica Pharmacy, Inc. v. Commissioner, T.C. Memo. 2001-33, 2001 WL 117701, at *3-*4. Specifically, we held that taking a nonconsensual deposition is permitted only when (1) "there exists a specific and compelling basis for its use," (2) it is not intended merely as "a substitute for cross-examination at trial," and (3) the party seeking to take the deposition has not had other opportunities to obtain the information or can obtain it through another source. Id. (emphasis added). We will not permit depositions when their only purpose is to acquire a witness's "testimony before the trial." DeLucia v. Commissioner, 87 T.C. 804, 813 (1986).
B. Application to this Case
In his Motion, Mr. Jacobs explains that he seeks to take depositions of the Commissioner's employees for the following reasons:
Here, the IRS has patently failed to cooperate in informal consultation and its lack of cooperation in this case to date strongly suggests that it is unlikely ever to provide in formal discovery (other than depositions) much of the evidence to which Professor Jacobs is entitled under the Ninth Circuit's decision. Due to the current summary judgment and trial deadlines, depositions should be permitted at this time rather than awaiting the IRS anticipated inadequate responses to formal interrogatories.Pet'r's Mot. 6-7. In so moving, Mr. Jacobs seeks the discovery of the following information:
• "what information the [Commissioner] would have learned if his agents had made reasonably [sic] inquiry into the allegations contained in the Petition," Pet'r's Mot. 7;
• "exactly what, if anything, the [Commissioner's] agent(s) did by way of review and investigation beyond reliance on the Notices of Deficiency and examiners' working notes," Pet'r's Mot. 7;
• "what information was actually available to [the Commissioner's agent] but was disregarded" and "what information could have been provided to the Chief Counsel's office attorneys but was not," Pet'r's Mot. 7; and
• "whether the [Commissioner's] agents in the Chief Counsel's Office who answered the Petition conducted interviews with the key actors involved in the matter" and "what information was provided . . . [or] would have been provided in such interviews," Pet'r's Mot. 8.
Mr. Jacobs also says in his Motion that he seeks "to elicit evidence relevant to the reasonableness of the [Commissioner's] conduct during the administrative proceedings." Pet'r's Mot. 3. Upon reviewing his Motion and the Commissioner's Response, we will not permit the proposed depositions on multiple grounds.
1. The Scope of the Ninth Circuit's Decision
We begin by noting that much of the information Mr. Jacobs seeks is beyond the scope of our review on remand. See Mendez-Gutierrez v. Gonzales, 444 F.3d 1168, 1172 (9th Cir. 2006) ("a district court is limited by this court's remand in situations where the scope of the remand is clear"). Specifically, the Ninth Circuit's opinion questions whether, in our prior decision, we "appreciate[d] that evaluating the reasonableness of the [Commissioner's] litigation position, as reflected in the answer, requires some review of the administrative proceedings." Jacobs, 2022 WL 16707186, at *2. Specifically, the opinion agrees with us that the "nature of the government's actions during the administrative proceedings is not directly relevant to litigation costs," and that "whether the [Commissioner] should have issued an initial notice of deficiency or should have held an in-person meeting during the administrative proceedings does not control the inquiry as to the reasonableness of the answer the [Commissioner] filed in the Tax Court." Id. But the opinion questions whether we considered "the information provided to the [Commissioner] during the administrative proceedings" and whether that information "made it unreasonable for the [Commissioner] to file an answer denying the allegations in [the] petition." Id. The Ninth Circuit therefore remanded the case to us solely to consider whether, "in light of the information the [Commissioner] received in the administrative proceedings, the [Commissioner's] litigation position was unreasonable." Id. (emphasis added).
As the Commissioner's Response suggests, all of the information pertinent to our review as defined by the Ninth Circuit (i.e., the information the Commissioner received in the administrative proceedings) should be included in the administrative file for this case. While Mr. Jacobs identifies certain documents that he says should be in the administrative file, but are not, Mr. Jacobs may already have those documents in his possession. See Pet'r's Mot. 6 n.5. And if he seeks to identify any other such documents, interrogatories and other discovery methods should be sufficient to the task, as discussed further below.
Mr. Jacobs' requests for information beyond the parameters set by the Ninth Circuit (for example, regarding "what information the [Commissioner] would have learned if his agents had made reasonably [sic] inquiry" or had interviewed examiners) simply are not relevant to this case. Similarly, "the reasonableness of the [Commissioner's] conduct during the administrative proceedings," Pet'r's Mot. 3, is not relevant, as the Ninth Circuit specifically stated. Whether or not Mr. Jacobs was treated unfairly during the administrative proceedings is of no consequence to his request for litigation costs, the only issue before us.
In short, in our view, the depositions do not appear designed to serve a purpose beyond acquiring a witness's "testimony before the trial," DeLucia, 87 T.C. at 813, or merely eliciting impeaching testimony. In such circumstances, we have declined to authorize depositions in the past and continue to do so here.
2. Other Rule 70 Considerations
Next, even if we assume the information Mr. Jacobs seeks does not exceed the scope of our review on remand, we do not see a specific and compelling reason for taking depositions in this matter. Undercutting the rationale Mr. Jacobs provides in his Motion, the Commissioner's responses to his informal discovery appear adequate. For example, in the response to Mr. Jacobs' prior requests concerning what the Commissioner reviewed or did in preparing the Answer to the Tax Court Petition, the Commissioner has said that "all pertinent documentation is within the administrative file" and that his Counsel "reviewed the administrative file in preparing the Answer." Pet'r's Mot. Ex. D, at 2. On their face, these are direct responses to Mr. Jacobs' questions, and Mr. Jacobs has provided us with no reason to think that they are incomplete, evasive, or misleading.
To the extent Mr. Jacobs seeks any documents not in the administrative file that he believes were in the Commissioner's possession at the time of the Answer, he has not shown that he cannot obtain them from other sources. He admits that he still has outstanding discovery requests that are not yet due from the Commissioner, and he has obtained many documents through his own Freedom of Information Act request. Additionally, we do not see how taking depositions will help Mr. Jacobs obtain documentation he has already requested in these other forms. Granting the request for depositions would result in needlessly cumulative and duplicative discovery.
Finally, we do not believe that taking depositions is proportional to the needs of this case. See Rule 70(b)(1). First, as we have already discussed, Mr. Jacobs' discovery requests go beyond the scope of review contemplated by the Ninth Circuit. Relatedly, we do not think that this "extraordinary method of discovery" will help resolve the issues in the case given that Mr. Jacobs may already have the information he seeks, may be able to obtain it by other means, or merely seeks testimony from the Commissioner's employees. For the reasons already discussed, we believe that the burden and expense of the proposed depositions will far outweigh any likely benefit.
Accordingly, we will deny Mr. Jacobs' Motion in so far as he seeks to depose the Commissioner's employees.
II. Motion to Shorten Time to Respond to Discovery Requests
Next, we consider Mr. Jacobs' Motion as it relates to compelling the Commissioner to respond to his interrogatories and document production requests within 14 days.
The procedures for response to interrogatories and document production requests are found in Tax Court Rules 71 and 72, respectively. Each of Rule 71 and 72 provides the party on whom discovery is served with 30 days to respond to the discovery requests or to state an objection. Rule 71(c) and Rule 72(b)(2). The decision to shorten the timeframe by which a party must respond to discovery falls within the sole discretion of this Court. See Rule 71(c) and Rule 72(b)(2).
In his Motion, Mr. Jacobs states that he sent the formal discovery requests on October 17, 2023, essentially because "the IRS has failed for the last nine months to answer [his informal discovery] requests in good faith." Pet'r's Mot. 4-5. Mr. Jacobs now seeks an order to compel the Commissioner to respond to his discovery within a shortened period of time in order to have the information "in advance of [his proposed] depositions." Pet'r's Mot. 5. Because we are denying Mr. Jacobs' Motion to take depositions, his reason for needing responses sooner than our Rules' 30-day timeframe is now moot. Accordingly, we will deny his Motion.
We also note that nothing prevented Mr. Jacobs from seeking formal discovery sooner. Our rules generally permit interrogatories and document production requests after "the expiration of 30 days after joinder of the issue (see Rule 38)." Rule 70(a)(2). That Mr. Jacobs has not received responses because discovery requests were not issued until mid-October 2023 is not a reason to shorten the otherwise applicable deadline.
Accordingly, for the reasons set out above, it is hereby
ORDERED that petitioner's Motion to Shorten Time of Formal Discovery and to Take Depositions (Doc. 63) is denied.