Court Asked to Resolve Tax Shelter Penalty Discovery Dispute
Celia R. Clark v. United States et al.
- Case NameCelia R. Clark v. United States et al.
- CourtUnited States District Court for the Southern District of Florida
- DocketNo. 9:21-cv-82056
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- Tax Analysts Document Number2022-22839
- Tax Analysts Electronic Citation2022 TNTF 135-20
Celia R. Clark v. United States et al.
CELIA R. CLARK,
Plaintiff,
v.
UNITED STATES OF AMERICA; THE INTERNAL REVENUE SERVICE,
Defendants.
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF FLORIDA
JOINT DISCOVERY MEMORANDUM
The parties certify that they have complied with the requirements for pre-hearing consultation contained in the Court's Standing Discovery Order. Despite good faith efforts to resolve their differences, the following issues require resolution by the Court:
1. Plaintiff seeks a protective order preventing the Government from issuing and enforcing discovery requests that duplicate the nine-year administrative investigation that the Government's client, the Internal Revenue Service, has already conducted into Ms. Clark and that underlies the IRS's decision to impose the $11,636,929 penalty at issue in this case.
Plaintiff's Position
This case is before the Court on an $11,636,929 penalty assessment against Ms. Clark made by the Internal Revenue Service under I.R.C. § 6700, purportedly for promoting an abusive tax shelter. Before turning to the requested protective order, a brief summary of the parties' respective positions on the merits of the penalty is appropriate to clarify the issues before the Court.
Internal Revenue Code § 6700 authorizes a penalty against any person who assists in the organization of a “plan or arrangement” and who makes or furnishes “a statement with the respect to the allowability of any deduction or . . . other tax benefit” that he or she “knows or has reason to know is false or fraudulent as to any material matter.” Here, the IRS concluded, after a nine-year investigation, that Ms. Clark made such statements with respect to the tax treatment of certain transactions with “microcaptive” insurance companies authorized by Congress at IRC § 831(b).
Plaintiff Celia Clark vehemently disputes that she made any statements that she knew or should have known were false or fraudulent. She has a strong case. She is an attorney with more than thirty years of experience, with a J.D. from the University of Chicago and a Tax LLM from NYU. She has never been subject to professional discipline and, until this matter, had never been subject to IRS penalty. But, most importantly, the IRS rests its conclusion that Ms. Clark “knew or should have known” that her advice concerning the transactions' tax treatment was “false or fraudulent” on a Tax Court decision — Avrahami v. Commissioner, 149 T.C. 144 (2017) — that was decided after Ms. Clark's conduct, and thus simply cannot directly inform what Clark knew or should have known at the time. Two additional facts stand out. First, Avrahami explicitly observed that it addressed a matter of first impression with no clear answer. Second, in direct response to Avrahami and the clarity in the law it provided, Clark discontinued her microcaptive insurance practice. She accordingly did exactly what she should have done.1
Although the IRS's reasoning is poor, its investigation was far-reaching. The IRS has investigative tools that mirror the discovery devices available in this District Court litigation. Specifically, IRC § 7602 authorizes the IRS to obtain documents, written responses to questions, and testimony through Information Document Requests (“IDRs”) and summonses. The IRS made extensive use of these devices during its nine-year investigation into Clark. Specifically, the IRS issued to Clark five sets of IDRs, with which she voluntarily complied. She produced or made available the entire records of her microcaptive practice: 210 GB and 87 boxes of documents. She was deposed. And the IRS gathered documents from dozens of Clark's clients.
We now turn to the meat of Clark's motion for protective order. With its instant discovery requests in this suit, the Government, on behalf of its client the IRS, needlessly duplicates the IRS's own investigation. Indeed, the discovery requests that the Government has already served upon Ms. Clark ask for the same information that the IRS sought — and obtained — through IDRs and other requests during the administrative investigation. Clark points to RPD 1 as an example:
Example Discovery Request | Description of Duplicative Nature |
---|---|
RPD 1: Documents (including correspondence) that advertise, promote, or explain the benefits of participating in the Captive Program, including but not limited to brochures, advertisements, pamphlets, executive summaries, illustrations, newsletters, videos, DVDs, or PowerPoint and similar presentations. | Duplicative of IDR 1, No. 2: “Provide copies of ANY and ALL documents and materials used to PROMOTE, SELL, ADVERTISE, or ADMINISTER any PROPERTY, CASUALTY, and/or LIFE INSURANCE PRODUCT/SERVICE.” Duplicative of IDR 1, No. 3: “Provide ALL documents containing ANY STATEMENTS made with respect to the TAX BENEFITS related to the product/service, such as allowable credits, deductions or other tax benefits.” |
This issue extends to the entirety of the government's requests. For nine years, the IRS investigated Ms. Clark, and she (and her clients) complied with the IRS's requests for information. The IRS felt this information sufficient, and based its penalty upon it. The Government should not now, in this case, be entitled to redo its investigation, and force Clark to duplicate her efforts.
This holds true especially for third-party discovery. The Government has also subpoenaed at least 40 of Ms. Clark's former clients in this case. These subpoenas are also duplicative of IDRs that the IRS served (or in some cases could have served) in the IRS investigation. Now, Ms. Clark's clients will be forced to respond again, to no practical end. At least one former client has already retained counsel and is litigating a motion to quash on this basis.
Rule 26(c) authorizes this Court to enter protective orders ensuring that discovery will be non-abusive, not unduly burdensome, and proportional to the needs of the case. Accordingly, Plaintiff Clark asks this Court to enter a protective order that requires the Government, before issuing discovery requests, to do the following: (1) certify that (a) it has reviewed the documents and information gathered during the administrative investigation of Ms. Clark or otherwise in its possession; and (b) the request does not duplicate this information; and (2) set forth good cause for the IRS's failure to obtain the requested information during the administrative investigation.
Defendant's position
Clark filed this lawsuit demanding a refund of penalties that the IRS assessed against her for promoting an abusive “micro-captive” insurance tax shelter that resulted in her customers taking hundreds of millions of dollars in improper tax deductions. She now asks the Court for blanket protection from any discovery — including not only requests for documents, but also, apparently, interrogatories2 and depositions. Clark claims she is entitled to this extraordinary relief because the IRS already investigated her and did a poor job, and the United States should be stuck with the IRS's analysis, conclusions, and supporting documents. Clark's attempt to draw the Court's attention away from her own conduct and onto the alleged flaws in the IRS's investigation is a common tactic employed by tax shelter promoters. Unfortunately for Clark, even if her contentions about the inadequacy of the IRS's investigation are true (and they are not), they are irrelevant.
As even Clark's own counsel has acknowledged (see ECF No. 28 at 3), this is a de novo proceeding. Accordingly, the Court will determine Clark's liability for penalties without evaluating the procedures or evidence used by the IRS in making an assessment. See Lemay v. Comm'r of Internal Revenue, 119 T.C.M. (CCH) 1389, 2021 WL 3930279, at *17 (T.C. 2020); Mayes v. United States, 1986 WL 10093, at *2 (W.D. Mo. 1986); Capstone Associated Services, Ltd. v. United States, 2022 WL 601379, at *2 (Fed. Cl. 2022) (“[The taxpayer's] assertion that [the IRS] is already in possession of all relevant information misstates the nature of this case, which is not a review of agency action on an established administrative record, but rather a de novo proceeding[ ].”) (quotation omitted).
The relief that Clark seeks — that the United States be prohibited from taking any discovery without a showing of “good cause” as to why the information or documents were not previously obtained by the IRS — is entirely at-odds with the de novo standard that governs this case. The United States is not bound to accept that Clark's productions to the IRS contained all documents relevant to the claims and defense at issue in this case, or even that Clark actually complied with the IRS's requests when she made her prior productions. Nor is the United States bound by any of the factual or legal determinations reached by the IRS in its examination. By requiring the United States to show “good cause” to seek any documents or other discovery beyond those gathered by the IRS, Clark is asking this Court to evaluate the IRS's decisions — eviscerating the de novo standard that applies here.
Moreover, Clark's motion for a protective order is also meritless for at least three other reasons. First, the law is clear that Clark's earlier productions in an administrative proceeding do not absolve her of civil discovery obligations. See Capstone Associated Services, Ltd., 2022 WL 601379, at *2 (“Despite the IRS's prior review and determination of Plaintiff's claims, Plaintiff is not relieved of its obligation to participate in discovery.”); Ghahan, LLC v. Palm Steak House, LLC, 2013 WL 12095557, at *3 (S.D. Fla 2013) (“A party is entitled to the production of documents even where the requesting party is in possession of the documents.”). Even if the Government seeks certain documents that Clark previously provided to the IRS, the Federal Rules of Civil Procedure require her to reproduce them and identify which documents are responsive to each of the United States' requests. Fed. R. Civ. P. 34(b)(2)(B), (E); see Paxton v. Great Am. Ins. Co., 2009 WL 10667080, at *6 (S.D. Fla. 2009) (“Defendant must identify those specific documents responsive to each document request.”); Unlimited Res. Inc. v. Deployed Res., LLC, 2009 WL 1563489, at *2 (M.D. Fla. 2009) (ordering plaintiff to “identify by bates numbers each of its own documents that are responsive to each request” given that “Plaintiff is in the best position to identify its own documents”). Clark, not the government, is in possession of the facts and relevant evidence about her own conduct. As such, Clark is in the best position to determine which of her own documents are responsive to each individual request for production.
Second, many of the documents sought by the United States were never requested by the IRS. For example, see RFP Nos. 3, 4, 7, 22, 34, 52, 53, and 57, to name just a few. Even the IDR that Clark references above is not entirely duplicative of the United States' RPD 1. That IDR was issued on August 29, 2012. But the time period applicable to the RPDs issued by the United States extends through December 31, 2016. As such, RPD 1 is not duplicative of the referenced IDR to the extent it seeks documents from August 29, 2012 through December 31, 2016.
Third, Clark has provided no explanation why producing the requested documents or responding to other discovery requests would be unduly burdensome or disproportionate to the needs of this case. The United States' requests are proportional to the needs of this case, considering the highly complex nature of the issues to be resolved and the amount in controversy: over $11 million for the penalty claim. Clark structured a complex series of transactions intended to generate tax deductions for more than 100 customers, which included (among other items) the formation of more than 300 individual captive insurance companies. Needless to say, the Court's determination as to Clark's liability for penalties for promoting this scheme will be a fact-intensive and document-heavy inquiry. See, e.g., Capstone Associated Servs., 2022 WL 601379, at *2 (recognizing the need for significant discovery in cases involving microcaptive tax shelters, given the “fact-intensive nature” of the determining whether a transaction amounts to insurance for tax purposes). Clark cannot shield herself from discovery in this complex civil lawsuit that she initiated.3
At bottom, it is not the United States' obligation to show that its requests are not unduly burdensome. Fed. R. Civ. P. 26(b)(1) (governing general bounds of permissible discovery); 26(c) (outlining standard for movant seeking protective order). By seeking an order foreclosing any discovery from Clark unless the United States makes a showing of good cause, Clark is asking this Court to flip the discovery paradigm on its head.
Accordingly, the Court should deny Clark's motion for a protective order and issue an order under Rule 26(c)(2) compelling the discovery sought in the United States' First Requests for Production of Documents and First Set of Interrogatories.
Dated: July 12, 2022
Respectfully submitted,
DAVID HUBBERT
Deputy Assistant Attorney General
By: JOHN P. NASTA, JR
Fla. Bar. No. 1004432
Trial Attorney, Tax Division
U.S. Department of Justice
717 N. Harwood St., Ste. 400
Dallas, TX 75021
Telephone: (214) 880-9728
Facsimile: (214) 880-9741
john.nasta@usdoj.gov
LAUREN A. DARWIT
Fla. Special Bar No. A5502814
VIRGINIA GIANNINI
Fla. Special Bar No. A5502881
Trial Attorneys, Tax Division
U.S. Department of Justice
P.O. Box 7238
Washington, D.C. 20044
Telephone: (202) 307-5892 (Darwitt)
Telephone: (202) 307-5892 (Giannini)
Facsimile: (202) 514-6770
lauren.a.darwit@usdoj.gov
virginia.giannini2@usdoj.gov
Of Counsel:
JUAN ANTONIA GONZALEZ
United States Attorney
Southern District of Florida
Attorneys for Defendants
MARCUS NEIMAN RASHBAUM & PINEIRO LLP
Jeffrey Neiman
Florida Bar No. 544469
jneiman@mnrlawfirm.com
Derick Vollrath
Florida Bar No. 126740
dvollrath@mnrlawfirm.com
100 Southeast Third Avenue
Suite 805
Fort Lauderdale, FL 33394
Telephone: (954) 462-1200
Facsimile: (954) 688-2492
Attorneys for Plaintiff
FOOTNOTES
1Notably, Clark has never had the right to proactively obtain the clarity that Avrahami provided, because the Tax Anti-Injunction Act prohibits suits for declaratory judgment on tax issues.
2Clark's responses to the United States' first set of interrogatories and first requests for production of documents were due on Friday, July 8, 2022. She did not serve objections or responses to either discovery request.
3In addition, requiring the United States to rely on — and seek to admit — documents that it received from the IRS, which the IRS received from Clark, creates potential authenticity issues for trial.
END FOOTNOTES
- Case NameCelia R. Clark v. United States et al.
- CourtUnited States District Court for the Southern District of Florida
- DocketNo. 9:21-cv-82056
- Code Sections
- Subject Area/Tax Topics
- Jurisdictions
- Tax Analysts Document Number2022-22839
- Tax Analysts Electronic Citation2022 TNTF 135-20