Opinion
8792-20
02-10-2023
DONALD W. THOMPSON, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber Judge
This case is calendared for trial at a special session in Atlanta, Georgia, beginning on August 28, 2023. The case involves a charitable contribution deduction claimed by petitioner for a conservation easement in 2013, which generated carryforward deductions on his 2016-2018 tax returns. On March 20, 2020, the Internal Revenue Service (IRS or respondent) issued petitioner a notice of deficiency disallowing the carryforward deductions and determining deficiencies and accuracy-related penalties for 2016-2018. Petitioner timely petitioned this Court for redetermination.
On December 2, 2022, respondent served on petitioner, pursuant to Tax Court Rules 71 and 72, Respondent's Interrogatories and Respondent's Second Request for Production of Documents, each enumerating specific requests in an attempt "to es-tablish the facts for the entire transaction-from the transaction's inception through 2019, when the petitioner exchanged the subject property. . . ." Petitioner did not respond adequately to informal discovery.
On February 1, 2023, respondent filed a Motion to Compel Production of Documents and a Motion to Compel Responses to Interrogatories. In these Motions respondent represents that petitioner failed to produce responsive documents and failed to "fully and meaningfully" answer respondent's interrogatories. Respondent represents that these failures to respond leave him "with a clouded view of the transaction and prevent him from narrowing the issues and preparing for trial." See Zaentz v. Commissioner, 73 T.C. 469, 478 (1979) ("[T]o prepare properly for trial, it is necessary for each party to know the position of the other party, and discovery may be used to clarify that position.") We agree and will grant both Motions.
A party opposing discovery has the burden of establishing that the information sought is not relevant or is otherwise not discoverable, e.g., because it is protected by privilege. 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, 73 T.C. at 471 (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. Id. at 471-72.
The primary issues in this case are whether petitioner satisfied the requirements for a charitable contribution deduction, including proper valuation of the easement, and whether accuracy-related penalties apply. Respondent's requests for information seeking "to establish the facts for the entire transaction" are relevant to these inquiries.
In response to these discovery requests petitioner asserts various privileges "including, without limitation, information protected by the attorney-client privilege, work product privilege, and the Internal Revenue Code section 7525 privilege." Notwithstanding this objection, petitioner has failed to back these claims by a privilege log. See Pac. Mgmt. Group v. Commissioner, T.C. Memo. 2015-97, 109 T.C.M. (CCH) 1505, 1506 ("Without an adequately detailed privilege log, neither a requesting party nor a court can adequately assess whether the privilege has been properly claimed or what the proper scope of the claimed privilege is.") If petitioner withholds responsive documents based on a claim of privilege, he must supply a detailed privilege log establishing the basis for each privilege claimed.
Claims of privilege apart, petitioner has not supplied forthright and comprehensive responses to the IRS's discovery requests. First, petitioner has failed to provide documents and information relating to such critical issues as the underlying appraisal and tax return information. Petitioner appears to contend that he cannot produce these documents and information because they are not in his "custody or control." But petitioner cannot decline to produce responsive documents held by his agents, advisors, contractors, or affiliates.
Rule 72(a)(1) requires production of items that "are in the possession, custody, or control of the party on whom the request is served." Rule 72(a)(1); see Marsh v. Commissioner, 62 T.C. 256, 258 (1984). By its terms, this Rule is not limited to actual physical possession. We have previously required parties to obtain information from advisors or entities that have actual possession when the party has sufficient control to be able to obtain the documents. See Zaentz, 73 T.C. at 473 ("[D]ocuments in the possession of a party's attorney, accountant, or other agent are in the that party's possession, custody, or control."); Rosenfeld v. Commissioner, 82 T.C. 105, 116-18 (1984); see also Coventry Cap. U.S. LLC v. EEA Life Settlement, Inc., 334 F.R.D. 68, 72-73 (S.D.N.Y. 2020) (finding a party to have sufficient control over requested documents when it has shown the ability to obtain them in the ordinary course of business).
Accepting arguendo petitioner's assertion that certain documents are not currently in his physical possession, he has the ability to secure this material from his agents and affiliates, including appraiser(s), accountant(s), and return pre-parer(s). Petitioner is legally entitled to copies of these documents, and he is therefore required to obtain and provide them to respondent. See In re Bankers Trust Co., 61 F.3d 465, 469 (6th Cir. 1995) (stating that documents are within a party's "possession, custody, or control" if the party has actual possession or control "or has the legal right to obtain the documents on demand").
Second, respondent cites numerous examples where petitioner has failed to produce any documents or information, then promised to "supplement" his production once responsive documents are obtained. Under Rule 71 (governing interrogatories) and Rule 72 (governing production of documents), the answering party must serve a written response and objections (if any) within 30 days after service of the request. The answering party must "make reasonable inquiry and ascertain readily obtainable information." Rule 71(b). Petitioner cannot persist in delaying production past the 30-day deadline by claiming that he is still seeking to gather the requested information and documents. Petitioner is represented by a large team of capable and experienced lawyers. They must ensure that the search for responsive documents is completed promptly and that the documents are supplied to respondent immediately.
Third, respondent represents that petitioner has yet to provide any e-mail correspondence in response to the IRS discovery requests. That is so even though petitioner has apparently admitted that he "primarily corresponded" about the easement transaction "via e-mail." All responsive emails must be provided to IRS counsel. If relevant emails were deleted, petitioner must explain when those deletions occurred and the circumstances surrounding the deletions (e.g., whether the deletions were selective or pursuant to a general standard practice). And if relevant emails were deleted, petitioner must explain whether they could now be recovered with the assistance of an e-discovery expert.
For these reasons it is
ORDERED that respondent's Motion to Compel Production of Documents, filed February 1, 2023, is granted in that petitioner shall produce to respondent's counsel, on or before March 6, 2023, for inspection and copying, the documents set forth in respondent's Second Request for Production of Documents served on petitioner on December 2, 2022. If petitioner objects to any particular document request, he shall file a response to this Order by March 6, 2023, stating his specific objections and the legal and factual support for his objections. It is further
ORDERED that respondent's Motion to Compel Responses to Interrogatories, filed February 1, 2023, is granted in that petitioner shall complete and serve upon respondent's counsel, on or before March 6, 2023, forthright and comprehensive responses to those interrogatories served on petitioner on December 2, 2022. If petitioner objects to any particular interrogatory, he shall file a response to this Order by March 6, 2023, stating his specific objections and the legal and factual support for his objections.
In the event petitioner does not fully comply with the provisions of this Order, the Court will be strongly inclined to impose sanctions pursuant to Tax Court Rule 104, which may include deeming certain facts to be established for purposes of trial and prohibiting petitioner from introducing designated matters into evidence. If respondent reasonably concludes that petitioner has not fully complied with this Order, respondent may file, within 30 days of receiving petitioner's production, a Motion for Sanctions requesting specific and targeted sanctions for petitioner's noncompliance.