What discovery methods apply in Federal Tax Litigation?

Each federal court has its own discovery rules and procedures.

TAX COURT – DEFICIENCY ACTIONS

The Tax Court strongly encourages and requires the voluntary exchange of facts, documents and other information between the parties through informal means of communication. A great deal of information can be obtained from the IRS through a Freedom of Information Act (FOIA) request. Where information is needed beyond that included in a FOIA request it is normally acquired through the use of a Branerton letter. A Branerton letter is a written request to the opposing party listing in detail the information and documents desired. The parties are expected to meet to discuss and exchange information and documents without the Tax Court’s supervision or involvement.

Discovery is the formal legal process that allows the parties to obtain solely relevant information. Discovery is limited by the concept of relevancy so that information sought that has no possible bearing on the issues in the case will not ordinarily be discoverable. Formal discovery methods that can be used in deficiency actions include:

• written interrogatories
• a request for the production of documents and
• depositions (Questions posed to the other party under oath and in front of a court reporter who prepares a written transcript of the deposition)

The use of depositions is highly restricted by the Tax Court. In addition, requests for admissions (statements as to facts that are not in dispute) are not used as frequently in the Tax Court.

INTERROGATORIES DEFINED

Interrogatories are written questions served on the opposing party that must be answered unless a defense or privilege applies. Interrogatories are often used to obtain as much information as possible to sufficiently prepare the case and avoid adverse surprise at trial.

The answering party has 30 days after the interrogatories are served to answer or object to each question. All answers must be supplied in good faith and be as complete as possible within reason. Each objection must state the reason for the opposition to the questions and the objection must be signed by the party or his counsel. Upon a party’s objection or failure to answer an interrogatory, the serving party can file a motion with the court for an order compelling a response. The objecting party in the face of a motion to compel has the burden of convincing the court that he or she does not have to answer because of an applicable defense such as relevancy, privilege, or improper form of question.

DISCOVERY DEFENSES

The burden is on the party opposing discovery to establish that the documents or responses sought via interrogatories are not discoverable due to the existence of an applicable privilege or defense. Commonly, the party opposing discovery files a motion for a protective order after being served with an objectionable discovery request.

The most common discovery defenses, and protections (privileges) available in all three Federal Courts that hear tax litigation are listed below.

• Duplicative or burdensome: Discovery can limited where a court determines that the requested discovery is unreasonably duplicative or could be obtained from another source that is more convenient, less burdensome, or less expensive to the party from which discovery is sought.
• Lack of relevancy: Discovery requests that are irrelevant are protected from discovery and are not permitted. This is a difficult burden to meet because discovery is usually allowed unless it is clear that the information sought can have no possible bearing on the subject matter of the action.
• Work product privilege: Materials that are specifically prepared for trial, or in anticipation of going to trial, are considered attorney work product and thus are not discoverable. The work product doctrine protects documents, correspondence, briefs, mental impressions, interviews, statements, memoranda, and tangible things that have been prepared by an attorney in anticipation of litigation or trial. The Tax Court has consistently held in case law that reports of special agents and revenue agents as well as technical advice memorandums and private letter rulings are not protected under the work product doctrine.
• Attorney-client privilege: The attorney-client privilege protects communications made in confidence by a client to an attorney for the purpose of obtaining legal advice. If the attorney-client privilege applies to an item included in a discovery request then the information sought as to that item is protected from discovery. For a complete discussion of Attorney Client Privilege see: Attorney Client Privilege Discussion
• Federally authorized tax practitioner privilege: Communications made in confidence by a taxpayer to a federally authorized tax practitioner (CPA, E.A.) for the purpose of obtaining tax advice may be protected from discovery but this privilege has some very broad limitations. The practitioner privilege only applies in noncriminal tax matters before the IRS and noncriminal tax proceedings in federal court brought by or against the United States. These limitations are a very persuasive reason why an experience Tax Attorney should be engaged early on to represent a taxpayer in Tax Litigation. A CPA or EA can be brought under the much broader Attorney Client and Attorney Work Product Privileges by the Attorney hiring the CPA or EA under a contract called a Kovel letter.

Enforcement: A party that improperly refuses to respond to a request for discovery risks sanctions by the court. Moreover, an evasive or incomplete answer or response is considered a failure to answer or respond.

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