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The Practice of Secret Subpoenas in Tax Court: Tax Court Out of Step with Other Courts and IRS Itself

Posted on Dec. 6, 2016

I read with interest blogger Lew Taishoff, whose blog Taishoff Law mainly covers the Tax Court. Last week in The Stealth Subpoena is Alive and Well Lew discussed Tangel v Commissioner. Tangel reveals an odd practice that distinguishes Tax Court litigation apart from other federal courts.  Rule 45(a)(4) of the Federal Rules of Civil Procedure requires parties who issue subpoenas to third parties compelling the production of documents or other evidence to notify the opposing party of the subpoena issuance. Tax Court rules do not explicitly require a party to notify the other side. The absence of an explicit notice requirement with respect to subpoenas creates the possibility of surprise. In addition to being out of step with other federal courts, it is inconsistent with the Tax Court’s general approach of encouraging parties to communicate and cooperate.

Tangel involves a series of motions that the taxpayers filed relating to IRS counsel having issued subpoenas to third parties under Tax Court Rule 147(a) or 147(b). We have not discussed Rule 147(a) or (b) but the Tax Court rules give the process for which a party may compel attendance of a person or of evidence at a trial or Tax Court proceeding. Essentially 147(a) applies to people required to give testimony; 147(b) extends the reach to commanding a person to bring documents or other evidence, with the Tax Court retaining discretion to quash or modify the latter subpoena if it is “unreasonable or oppressive.”

On their face, Tax Court Rules 147(a) and (b) do not mention of notice, and the subpoena is not filed with the court. It is thus not subject to the general Tax Court rules on notice, found in Rule 21(a). That rule provides that parties serve on other parties or other persons involved in the matter all filed paper including “pleadings, motions, orders, decisions, notices, demands, briefs, appearances, or other similar documents or papers relating to a case….”.

In Tangel, IRS counsel issued subpoenas to third parties and did not notify the Tangels. The order is brief and I have not read (nor can I unless I were to head down to DC) the underlying motions but the Tangels objected to the issuance of the subpoenas in part on the grounds that Counsel failed to notify them of their actions. Judge Chiechi, the judge in Tangel, dismissed that argument, noting that “[a] party that issues a subpoena under Rule 147(a) and/or (b) is not required to give prior notice to the other party.”

Tax Court practice is not always in lock step with federal court practice but not giving notice of a subpoena compelling the production of documents or other evidence seems wrong. Attorney Taishoff has discussed this aspect of Tax Court practice in a prior post called Judge Holmes’ Vendetta, where he discussed an order earlier this year in Ryder v Commissioner, which also involved the issuance of a subpoena under Rule 147(b). Unlike the outcome in Tangel, in Ryder, Judge Holmes explicitly disapproved of the practice of issuing subpoenas without notifying the taxpayer. In so doing, Judge Holmes gave a history lesson on why it is likely that Tax Court rules differ from the federal rules of civil procedure:

We do have to disagree with the Commissioner, however, that this absence of a rule creates an implication that secret subpoenas are favored. We promulgated our Court’s Rule 147, which governs subpoena practice, back in 1973. Tax Court Rules of Practice and Procedure, 60 T.C. 1057, 1137 (1973). At that time, we said that our goal was a rule substantially similar to FRCP 45. Id. Back then, FRCP 45 didn’t require notice for subpoenas. Fed. R. Civ. Proc. 45 (1970). The notice requirement was added in 1991 to give parties the same opportunity to challenge nonparty subpoenas for documents that they had to challenge subpoenas for depositions (since FRCP 30 and 31 already provided notice protection in these circumstances). See Fed. R. Civ. Proc. 45 advisory committee’s note (1991). We have never publicly stated that we intended to deviate from Article III practice — it’s just an example of the two sets of rules drifting apart over time.

We think that the current federal rule is a good one in litigation that is, as in these cases, especially hard-fought. The Court will therefore adopt the notification requirement of Federal Rule 45 as a modification to the pretrial order that governs this case.

Mr. Taishoff suggests perhaps that the judges in Ryder and Tangel get together and “discuss bringing Tax Court into the last decade of the Twentieth Century, if not into the second decade of the Twenty-First.” An earlier post of his suggested the Ryder approach find its way in a published opinion. Another thought is perhaps it is time for the Tax Court to modify its rules and coordinate Tax Court practice with that in other federal courts through a rule change.

It is interesting as well that the Tax Court practice is somewhat inconsistent with the IRS’s administrative practice. Consider the related issue of the notice that is required to be given when the IRS contacts third parties in an examination. As of 1998, Section 7602(c) provides that an employee of the Internal Revenue Service may not contact any person other than the taxpayer with respect to the determination or collection of the tax liability of such taxpayer without providing reasonable notice in advance to the taxpayer that contacts with persons other than the taxpayer may be made.”

This RRA 98 notice of third party contact rule has generated some controversy. The statute fails to define reasonable notice for these purposes, and IRS and taxpayers have fought about whether the IRS’s inclusion of generic notice in its Publication 1 at the start of an exam constitutes “reasonable notice” of a third party contact. For example, earlier this year a district court in California in Baxter v US that found that Publication 1 was insufficient as a matter of law to constitute the advance notice that Section 7602(c) contemplates. That resulted in the district court finding that the IRS did not meet the prima facie good faith requirement under US v Powell and to the court’s quashing of a summons IRS served on a third party.

TAS in its 2015 annual report flagged IRS third party contact procedures as one of its most serious problems, making the sensible point that advance adequate notice allows taxpayers the possibility of themselves providing the IRS what it needs without the possible damage to a taxpayer’s business or reputation that may follow IRS third party contacts. That report criticizes the IRS use of generic notice, finding them “ineffective because they do not identify the information the IRS needs, inform the taxpayer the IRS will make a [third party contact] in the taxpayer’s particular case, or provide the taxpayer with enough advanced notice to deliver the information before the contact.” TAS 2015 Annual Report MSP # 12, at p. 123 (note omitted).

It seems to me that similar taxpayer interests are implicated when considering notice rules for subpoenas at trial, with possibly more at stake in terms of both taxpayer reputation and damage and a heightened need to know what the other side is gathering as a trial looms. It seems prudent for the Tax Court to modify its approach and require both parties to give notice consistent with the Federal Rules of Civil Procedure. This will reduce surprise and provide another chance for the taxpayer himself (if the government is seeking the information) to serve up what is needed, all at rather minimal costs to the government.

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