T.C. Memo. 2001-33
UNITED STATES TAX COURT
K & M LA BOTICA PHARMACY, INC., ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 10500-99, 17346-99, Filed February 12, 2001.
17725-99.
Held: Petitioners’ motions to compel taking of a
deposition under Rule 75, Tax Court Rules of Practice
and Procedure, denied.
Dennis N. Brager and Howard Rosenblatt, for petitioners.
Ron S. Chun and Angelique M. Neal, for respondent.
1
Cases of the following petitioners are consolidated
herewith: Khaled Ahmed, docket No. 17346-99, and Khaled Ahmed,
docket No. 17725-99.
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MEMORANDUM OPINION
NIMS, Judge: This matter is before the Court on
petitioners’ motions, filed pursuant to Rule 75, to compel taking
of the deposition of Hussein Darwish. Unless otherwise
indicated, all Rule references are to the Tax Court Rules of
Practice and Procedure, and all section references are to
sections of the Internal Revenue Code.
Background
The facts stated herein are as represented in papers
submitted in connection with the parties’ discovery efforts, and
are taken as true solely for the purpose of deciding petitioners’
motions.
The petitioners in these consolidated cases are an
individual, Khaled Ahmed, and a corporation solely owned by Mr.
Ahmed, K & M La Botica Pharmacy, Inc. (La Botica). Mr. Ahmed is
a licensed pharmacist in the State of California. Throughout the
years at issue, La Botica was engaged in the business of
operating pharmacies which sold prescription and over-the-counter
medications and treatments. Mr. Ahmed is also alleged to have
been involved in the operation of medical service clinics and a
medical laboratory through various nominee entities.
At some time prior to March of 1999, respondent began an
examination regarding the income taxes of Mr. Ahmed and the
related La Botica corporation. Thereafter, on March 11, 1999,
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respondent issued a notice of deficiency with respect to La
Botica’s 1995 taxable year. The notice reflected a deficiency
attributable in large part to a determination of unreported
income and a penalty under section 6663(a) on account of fraud.
Then, on June 24, 1999, respondent issued to Mr. Ahmed and
his wife in their individual capacities notices of jeopardy
assessment pursuant to section 6861 for the taxable years 1995
through 1998. Section 6861(a) provides for immediate assessment
of taxes in the event that the Secretary believes assessment or
collection of a deficiency will be jeopardized by delay. In
contesting this action, Mr. Ahmed subsequently filed a complaint
in the U.S. District Court for the Central District of California
seeking judicial review of the jeopardy assessment. A hearing on
the matter was held by the District Court judge in August of 1999
and culminated with oral findings of fact and conclusions of law
wherein the court found and concluded that the assessment met the
criteria of section 7429(b)(3). In connection with this
proceeding, Hussein Darwish filed an affidavit, was called as a
witness on behalf of respondent, and was subjected to cross-
examination by counsel for Mr. Ahmed. Mr. Darwish was employed
by Mr. Ahmed at La Botica from August of 1996 until April of
1998, and his testimony related primarily to his experiences with
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Mr. Ahmed’s business practices, particularly Mr. Ahmed’s
purported dealings in cash and unauthorized use of others’
signatures.
Also in August of 1999, respondent issued notices of
deficiency to Mr. Ahmed and his wife with respect to 1995, 1996,
1997, and 1998. For each year, respondent determined tax
deficiencies based on unreported income and penalties for the
filing of fraudulent returns. The unreported income alleged by
respondent for 1995 largely took the form of constructive
dividends stemming from payment by La Botica of Mr. Ahmed’s
personal expenses, from imputed interest on loans made by Mr.
Ahmed to La Botica, and from retention by Mr. Ahmed of the
proceeds of corporate checks cashed on his behalf at check
cashing services. For 1996 through 1998, the principal ground
underlying the determined deficiencies was unreported cash sales
by various clinics and pharmacies which respondent characterized
as nominee entities or alter egos of Mr. Ahmed.
Following the filing of petitions with this Court in
response to each of the above notices of deficiency, these cases
were initially calendared for trial beginning on October 16,
2000. The cases were later continued, and outstanding discovery
motions, including motions to compel taking of Mr. Darwish’s
deposition, were denied as moot. At present the cases are set
for the Court’s March 19, 2001, trial calendar, and petitioners
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have once again filed motions to compel taking of Mr. Darwish’s
deposition, to which are attached the notices of objection
thereto that were previously served by respondent on petitioners.
It is these motions and objections which we consider in the
instant Memorandum Opinion.
Lastly, we note that concurrently with certain of the tax
proceedings detailed above, a separate civil suit was pending
against Mr. Ahmed in California Superior Court. On January 4,
1999, Mr. Darwish had filed a complaint naming as defendants Mr.
Ahmed, La Botica, and various other entities. The complaint
contained causes of action for intentional concealment,
intentional misrepresentation, conspiracy, dissolution of
corporation and accounting, declaratory relief, injunction, and
appointment of receiver. The factual allegations made in the
complaint parallel in many respects those underlying Mr.
Darwish’s affidavit and testimony in the jeopardy proceeding.
This civil suit was apparently settled out of court, as the
parties thereto requested that it be dismissed in January of
2000.
Discussion
Rule 75 governs the taking of depositions of nonparty
witnesses in instances where the parties cannot or will not agree
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to permit a consensual deposition. Specifically, Rule 75(b) sets
forth the standards controlling the availability of this
discovery device, as follows:
The taking of a deposition of a nonparty witness
under this Rule is an extraordinary method of discovery
and may be used only where a nonparty witness can give
testimony or possesses documents or things which are
discoverable within the meaning of Rule 70(b) [any
matter which is not privileged and which is relevant to
the subject matter involved in the pending case] and
where such testimony, documents, or things practicably
cannot be obtained through informal consultation or
communication (Rule 70(a)(1)) or by a deposition taken
with consent of the parties (Rule 74). If such
requirements are satisfied, then a deposition may be
taken under this Rule, for example, where a party is a
member of a partnership and an issue in the case
involves an adjustment with respect to such
partnership, or a party is a shareholder of an electing
small business corporation (as described in Code
Section 1371(b) prior to the enactment of the
Subchapter S Revision Act of 1982), and an issue in the
case involves an adjustment with respect to such
corporation. * * *
The comments accompanying promulgation of the Rule similarly
reiterate that:
The new Rule 75 provides an extraordinary method of
discovery which may be used only where the information
sought cannot be obtained by informal consultation or
by other discovery methods. For example, if the other
requirements of the Rule are satisfied, a deposition
might be taken under the Rule in a case involving the
tax liability of a limited partner who does not have
access to the books and records of the partnership, or
where a bank or other person possesses records which
are relevant to the tax liability of a party and are
otherwise unavailable. [79 T.C. 1141-1142 (1982).]
In the instant proceeding, petitioners assert that they are
entitled to depose Mr. Darwish on the following grounds:
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Petitioner wishes to depose Darwish to test the extent
of his knowledge and his veracity with respect to the
allegations he has previously made, and to determine
whether he claims to know of additional information
regarding the issues in this case. Petitioners also
wish to depose Darwish to determine whether he has any
information, including the names of other potential
witnesses, who can shed light on the allegations he has
made.
We, however, are satisfied that these reasons are insufficient in
the circumstances of these cases to meet the standard imposed by
Rule 75 for nonconsensual depositions.
First, underlying Rule 75 is the principle that it provides
for an extraordinary method of discovery and therefore should be
available only where there exists a specific and compelling basis
for its use. The examples contained in the Rule itself and in
the above-quoted comments support such an interpretation. In
each illustration given, the requesting party was seeking
specific and precise factual information essential to that
party’s case. Conversely, none of the examples was premised on
an inchoate hope of uncovering some vaguely defined form of
potentially useful information. It follows that Rule 75 does not
sanction “fishing expeditions”.
In a similar vein, we are satisfied that Rule 75 is not
intended to serve as a substitute for cross-examination at trial.
Rule 75 is an appropriate vehicle for obtaining particular
information from the sole source where that information is likely
to be found; it does not afford an opportunity to question a
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witness merely for the purpose of probing veracity and
credibility. As this Court previously stated with disapproval in
another proceeding involving Rule 75: “It does not appear that
any purpose would be served by deposing Nick except to get Nick’s
testimony before the trial.” DeLucia v. Commissioner, 87 T.C.
804, 813 (1986).
Hence, we conclude that before the Court will order a
deposition pursuant to Rule 75, the requesting party must allege
with a greater degree of specificity than has been shown in this
proceeding the nature of the information sought and the grounds
for the party’s belief that such will be forthcoming from a
particular deponent. Here, the first of petitioners’ reasons for
deposing Mr. Darwish, to test the extent of his knowledge and his
veracity, amounts to little more than a request to cross-examine
Mr. Darwish before trial. The second reason, to determine
whether Mr. Darwish is aware of any further information or
witnesses which can shed light on his allegations, merely seeks
to interrogate Mr. Darwish generally in the imperfectly formed
hope that something might turn up.
In addition, from a practical standpoint, we note that there
exists even less justification for such unarticulated probing in
the unique circumstances of this case than might be present in
other scenarios. Petitioners have already had the opportunity to
review the substance of Mr. Darwish’s allegations in three forms,
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two of which entailed sworn statements. Mr. Darwish’s civil
complaint, his affidavit in the previous jeopardy proceeding, and
his testimony at the jeopardy trial have all served to alert
petitioners of his claims regarding what took place at Mr.
Ahmed’s businesses.
Even more importantly, petitioners have in fact already been
afforded a chance to cross-examine Mr. Darwish under oath on
matters such as Mr. Ahmed’s cash dealings and unauthorized use of
signatures. These issues, highly pertinent to the jeopardy
assessment, will be equally relevant in the deficiency context.
Lastly, we observe that when the primary substantive
questions to be decided in the deficiency cases involve whether
Mr. Ahmed had unreported income and engaged in fraudulent
behavior, the essential information determinative of his tax
liability, as well as of Mr. Darwish’s veracity, is within Mr.
Ahmed’s own knowledge and control.
For the above reasons, petitioners’ motions to compel taking
of Mr. Darwish’s testimony will be denied.
To reflect the foregoing,
Appropriate orders will be
issued denying petitioners’ Motions
to Compel Taking of Deposition of
Hussein Darwish.