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Designated Orders: 6/5/2017 – 6/9/2017

Posted on June 16, 2017

The Tax Court designated four orders last week, three of which are discussed in this post. Two of the orders discussed here deal with deemed stipulations pursuant to Rule 91(f), which that allows the Court to order that parties stipulate to facts and evidence that are not in dispute prior to trial. Another order, discussed here, deals with the authority of the Tax Court to grant a protective order when some of the evidence is legally protected information.

The Danger of Deemed Stipulations

Docket # 23219-15, Edward Francis Bachner, IV & Rebecca Gay Bachner v. C.I.R. (Order Here)

As a means of promoting efficiency, Tax Court Rule 91 requires parties to stipulate, or agree to, in advance of trial to the fullest extent possible all matters relevant to the case that are not in dispute, including facts, documents, papers and evidence. To further the goal of efficiency, Rule 91(f)(1) allows the party proposing to stipulate to file a motion to order the other party (the “non-proposing party”) to show cause as to why the matters should not be deemed (or treated as) stipulated. Once this motion has been filed, Rule 91(f)(2) permits the Court to grant the order to show cause and require the non-proposing party to respond and show why the matters should not be deemed stipulated. This allows the Court to essentially compel stipulation of certain matters when it determines a genuine dispute does not exist.

If the non-proposing party does not respond in the specified period, or if the response is evasive or not fairly directed to the proposed stipulation, then the Court can also order that the matter is deemed stipulated. This rule gives the Court great power, but does not allow either party, or the Court, to determine genuinely controverted or doubtful issues of fact prior to trial.

This particular case deals with allegedly fraudulent Forms W-2 that were used by petitioner husband to generate large refunds. The Service filed a motion that petitioners show cause as to why 62 different proposed stipulations of facts and evidence should not be accepted as established.

Prior to this order being issued, petitioners tried to invoke their right against self-incrimination but the Court held a hearing and issued a different order stating petitioners had no privilege against self-incrimination in this, the Rule 91(f), matter.

In response to the Court’s order under Rule 91(f)(2), petitioners raised general objections that were not related to the proposed stipulation of facts and also filed a motion that the Court vacate its Order to Show Cause. The Court found that petitioners’ general objections and motion to vacate lacked merit.

Petitioners addressed 61 of the 62 proposed stipulations and the Court determined whether or not each was stipulated or deemed stipulated; of the 62 total stipulations, the Court only determined four items were not stipulated or deemed stipulated.

Petitioners did not dispute eight of the stipulations, and challenged the legal validity of certain documents and other matters, but indicated (as determined by the Court) that they did not dispute the documents themselves. The Court allowed the questions of legal validity to remain unanswered.

Additionally, the Court found that petitioners’ response to seven stipulations were “evasive and not fairly directed to the statement in the paragraph” and those items were deemed stipulated as well.

Many of stipulations were addressed by petitioners in a boiler-plate type fashion using alternating language depending on the nature of the item. Arguably, had petitioners followed the Rule 91(f)(2), which requires petitioners to show the “sources, reasons and basis on which they rely,” more closely they may have convinced the Court to treat more matters as not deemed stipulated.

Take-away point and additional information:

  • Practitioners, should be aware of the significance Rule 91(f) as failure to respond or not responding with enough specificity can cause matters to be deemed stipulated which may impact the practitioner’s trial strategy and chances of success.
  • Although not particularly relevant to this order, petitioner wife was granted innocent spouse relief at a point in the Tax Court proceeding prior to the stipulation process. The IRS repeatedly referred to its concession of the case with respect to her. It is unclear whether or not petitioner wife actively participated in this case.

Respondent Refusing to Stipulate

Docket # 28897-10, 5816-11, and 5817-11, Harvey Birdman & Diane Birdman, et al. v. C.I.R. (Order Here)

This designated order applies to three dockets that were consolidated and also deals with Rule 91(f), but this time it is the petitioners who filed a Motion for an Order to Show Cause Why Proposed Facts and Evidence Should Not Be Accepted as Established pursuant to the rule. An identical, but separate order was issued for all three docket numbers.

In their motion, petitioners stated that respondent’s Counsel indicated she will not stipulate to any of the factual assertions contained in their draft stipulation. The Court granted the motion and ordered respondent to show why the facts and evidence set forth by petitioners should not be deemed stipulated and why referenced exhibits should not be accepted as admissible without reservation for purposes of the case.

Take-away points:

  • Petitioners can also utilize Rule 91(f) in the (perhaps, unusual) scenario when respondent is unwilling to stipulate to undisputed facts and evidence.
  • The Court reviewed the proposed stipulation before ordering respondent to respond which suggests the Court did not find that the petitioner’s proposed stipulation lacked merit. In situations where the Court finds a proposed stipulation lacks merit, the result may be different.
  • If you seek enforcement of a Rule 91(f) motion, it is generally helpful to provide the Court with details of your unsuccessful efforts to engage the other party in the stipulation process. Perhaps as funding of the IRS continues to decline the Chief Counsel attorneys will lack resources to promptly and adequately respond to informal discovery requests and requests to stipulate.  Although a high percentage of these types of cases involve unresponsive petitioners, this case serves as a good reminder that the government sometimes fails to respond as well.

Protecting Private Information in Tax Court

Docket # 4806-15, Continuing Life Communities Thousand Oaks LLC, Spieker CLC, LLC, Tax Matters Partner v. C.I.R. (Order Here)

Generally, all evidence received by the Tax Court is a matter of public record, however, there are certain circumstances where information relevant to a case can be protected and not publicly disclosed. Individual private health information protected by the Health Insurance Portability and Accountability Act of 1996 (better known as HIPAA), or protected by other state and federal laws, is one such circumstance.

In this case, respondent made informal discovery requests and planned to issue a subpoena duces tecum compelling petitioner trustee (hereafter, “petitioner”) to disclose information needed to allow respondent to prepare for trial. The main issue in the case, and reason the information was needed, involves evaluating petitioner’s method of accounting.

Petitioner, mindful of his fiduciary duties, was concerned the information was protected by HIPAA and other state and federal laws. Petitioner agreed to disclose the information in response to the subpoena, but also requested that the information be protected.

The parties jointly moved for a protective order under Tax Court Rule 103, which allows either party, or other affected person, to move the Court to issue a protective order when justice requires it “to protect a party or other person from annoyance, embarrassment, oppression, or undue burden or expense.”

Judge Holmes granted the parties’ joint motion for a protective order and described the terms that governed the disclosure of the confidential information.

The terms themselves cover a range of details, including the manner in which the protected information should be designated, the remedies available if there is a failure to designate it, the limited purpose for which the information can be used, the other parties to whom the information can be disclosed and the responsibilities of those parties, and how the information will be protected during and after depositions and trial. The terms also outline respondent’s responsibilities for keeping track of the information and the steps required before respondent can contact any of the individuals whose information is protected, in addition to other details governing respondent’s, petitioner’s and other parties’ duties with respect to the information.

The Court also retained jurisdiction over the parties and recipients of the information even after the trial concludes and the decision of the Tax Court becomes final.

In a separate, unopposed motion respondent had moved the court to set the case for trial on a special trial session in San Francisco to enable respondent to issue the subpoena duces tecum to the petitioner. The Court granted that motion in this order, but also mentioned that it expected all records to be produced before the special trial session.

Take-away points:

  • If the Service’s informal discovery requests are ignored, IRS counsel will normally turn the informal request into a formal request and seek to enforce the discovery; however, they can issue a subpoena duces tecum to command the production of the evidence before the Court at the time of trial. The disadvantage to the IRS (or any party using a subpoena duces tecum) is that the information arrives at a time when the attorney receiving the information has little opportunity to react to it.
  • Fiduciary responsibilities should not be disregarded even when the government is compelling the production of information. Tax Court Rule 103 balances the need to comply with fiduciary duties while allowing the requested information to be produced.
  • As mentioned above, Tax Court Rule 103 can be used to “protect a party or other person from annoyance, embarrassment, oppression, or undue burden or expense,” so there may be other circumstances in which this rule can be utilized even when the information is not protected by law.
  • Always check your citations. In this order the Court gently reminded the parties that their protected health information citations were incorrect, but such reminders may not always be as gentle.
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