119 T.C. No. 8
UNITED STATES TAX COURT
SCHNEIDER INTERESTS, L.P., RUSS SCHNEIDER FARMS, L.L.C., TAX
MATTERS PARTNER, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 200-02. Filed September 30, 2002.
Four months after the instant case was docketed, R sent
P a so-called Branerton letter consisting of 68 pages of
questions and requests for documents. Thirty-five days
later, R instituted formal discovery by serving upon P 77
pages of interrogatories and 78 pages of requests for
production of documents. R rejected P’s suggestion that
compliance with formal discovery be postponed until the
parties held a conference, stating that the instant case is
"a good candidate for designation for litigation under IRM
35.3.14." P then filed a Motion for Protective Order
seeking to stay compliance with formal discovery. Held, a
protective order shall be issued. R’s service of formal
discovery is inconsistent with Rule 70(a)(1) and with the
cases, such as Branerton v. Commissioner, 61 T.C. 691
(1974), which direct the parties to utilize informal
consultation or communication before employing the formal
discovery procedures.
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Scott G. Miller, N. Jerold Cohen, and Thomas A. Cullinan,
for petitioner.
Michael Zima and John J. Comeau, for respondent.
OPINION
WELLS, Chief Judge: The instant case is before us on
Petitioner’s Motion for a Protective Order, Motion to Strike, and
Motion for Leave to File Reply to Respondent’s Objection to
Petitioner’s Motion for Protective Order.
Background
During August 2001, the tax matters partner (TMP) of
Schneider Interests, L.P. (the partnership), received notice from
respondent that the partnership’s tax year ended December 31,
1997 (taxable year in issue), was being audited. Three weeks
later, respondent mailed a notice of final partnership
administrative adjustment (FPAA) to the TMP. The FPAA was dated
September 13, 2001, 2 days before expiration of the time period
within which respondent could issue an FPAA for the partnership’s
taxable year in issue. The mailing of the FPAA to the TMP took
place the day before respondent received on the prescribed Form
872-P the TMP’s timely consent to extend the period of
limitations for issuance of an FPAA for the partnership’s taxable
year in issue. On November 26, 2001, a revenue agent wrote to
petitioner’s counsel Scott Miller. The agent apologized for the
precipitate mailing of the FPAA but explained that the Office of
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Chief Counsel, in Washington, D.C., had decided that the FPAA,
once issued, could not be withdrawn. On January 2, 2002,
petitioner filed its petition in this Court seeking a review of
the adjustments set forth in the FPAA, and respondent filed an
answer on March 7, 2002.
On May 10, 2002, respondent’s counsel sent to petitioner a
so-called Branerton letter (Branerton letter). The Branerton
letter stressed that the case is "not ripe for consideration" by
the Internal Revenue Service’s Appeals Division. The Branerton
letter further stressed that factual development of the case was
necessary because this Court might set the case for its October
session in Tampa, Florida. The Branerton letter consists of 68
pages of questions and requests for production of documents.
According to petitioner, the Branerton letter contains 155 parts
and 450 subparts and sought a response by June 12, 2002. On June
14, 2002, respondent served formal discovery (formal discovery)
on petitioner’s attorney Scott G. Miller. The formal discovery
consists of 77 pages of Respondent’s Interrogatories and a 78-
page Request for Production of Documents. The formal discovery
appears to represent a recasting of the requests made in the
Branerton letter in a form meant to comply with the Rules1 for
formal discovery. See Rules 71 and 72.
1
All section references are the Internal Revenue Code of
1986, as currently in effect. All Rule references are to the Tax
Court Rules of Practice and Procedure.
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There is some dispute about the timing of a related
development. Petitioner’s attorney N. Jerold Cohen called
respondent’s counsel on behalf of petitioner. Petitioner
contends that the telephone conversation left Mr. Cohen with the
impression that the parties would continue with informal
discovery. Mr. Cohen’s subsequent correspondence indicates that
he placed the call on June 11, 2002, the day before the response
to the Branerton letter was due. Respondent maintains that the
telephone conversation took place "a day or two" after June 14,
2002, the day respondent sent the formal discovery.
On June 17, 2002, Mr. Cohen wrote to respondent’s counsel.
Mr. Cohen questioned the scope of the requests made in the
Branerton letter and suggested that the case proceed to
respondent’s Appeals Office. Because other parties had engaged
in similar transactions, Mr. Cohen suggested exploring a "global"
settlement, and he proposed an informal conference during August
2002 between the parties’ representatives. Mr. Cohen did not
indicate in the June 17, 2002, letter whether he was then aware
of respondent’s formal discovery requests.
On June 19, 2002, respondent’s counsel replied, stating
that, although a conference is not a necessary predicate to
informal discovery, counsel nevertheless would "welcome a
telephonic conference any time you and Mr. Miller are available."
The June 19, 2002, letter further stated, however: "We do expect
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petitioner to respond to our discovery." The letter explained
that factual development was needed not only for purposes of this
case, but also "to set the factual predicate for third party
discovery." Respondent’s counsel suggested that petitioner might
wish to cooperate in depositions of nonparty witnesses under Rule
74. The June 19, 2002, letter further stated:
We are interested in developing the facts in this
case because we believe it is a good candidate for
designation for litigation under IRM 35.3.14.
Accordingly, we do not believe that postponing
discovery until August, as you suggest, is an
appropriate course of action for this case.
On July 5, 2002, petitioner filed the instant motion for a
protective order, seeking a stay of formal discovery "until the
parties have had sufficient time to confer and have engaged in
meaningful informal discovery." On July 11, 2002, this Court
entered an order staying compliance with respondent’s
interrogatories and request for production of documents pending
consideration of the instant motion for a protective order. The
Court subsequently received respondent’s Notice of Objection to
Petitioner’s Motion for a Protective Order. Respondent’s
objection is 23 pages long, exclusive of 6 additional charts and
11 other attachments. Ten days later, on August 1, 2002,
petitioner responded to respondent’s objections by sending to
this Court both a Motion to Strike and a separate Reply to
Respondent’s Objection to Petitioner’s Motion for Protective
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Order together with a motion for leave to file that reply. We
address the 3 motions herein.
Discussion
Congress has provided this Court with its own rulemaking
authority. Section 7453 of the Internal Revenue Code states
that, with the exception of certain small tax cases, proceedings
before this Court are to be conducted in accordance with such
rules of practice and procedure as this Court may prescribe.
Pursuant to that grant of authority, this Court promulgated Rule
70(a)(1), which states, in part: "the Court expects the parties
to attempt to attain the objectives of discovery through informal
consultation or communication before utilizing the discovery
procedures provided in these Rules." In 1979, the Court
emphasized its insistence upon informal discovery by adding the
language quoted above to Rule 90(a), which applies specifically
to Requests for Admissions. See Odend’hal v. Commissioner, 75
T.C. 400, 403 (1980).
A principal purpose of the requirement for informal
discovery is to save the time and resources of the Court and of
the parties before it in the development of relevant and
undisputed facts. In Branerton Corp. v. Commissioner, 61 T.C.
691, 692 (1974), we explained:
The discovery procedures should be used only after the
parties have made reasonable informal efforts to obtain
needed information voluntarily. For many years the
bedrock of Tax Court practice has been the stipulation
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process, now embodied in Rule 91. Essential to that
process is the voluntary exchange of necessary facts,
documents, and other data between the parties as an aid
to the more expeditious trial of cases as well as for
settlement purposes. The * * * discovery procedures
were not intended in any way to weaken the stipulation
process. * * * [Fn. Ref. omitted.]
We amplified upon these principles in Intl. Air Conditioning
Corp. v. Commissioner, 67 T.C. 89, 93 (1976), where we said:
Rule 70(a)(1) contemplates "consultation or
communication," words that connote discussion,
deliberation, and an interchange of ideas, thoughts,
and opinions between the parties. Petitioners’ refusal
to enter into any informal discussion prior to
receiving responses to interrogatories-–whether
formally submitted under Rule 71, or informally
submitted in a letter-–"sharply conflicts with the
intent and purpose of Rule 70(a)(1) and constitutes an
abuse of the Court’s procedures." Branerton Corp.,
supra at 692 * * *.
The specialized scope of cases before this Court makes the
informal discovery procedures mandated by Rules 70(a) and 90(a)
especially useful. For example, the requirement in section 6001
that taxpayers maintain adequate records promotes the informal
development of much relevant evidence. Additionally, under
sections 7602 and 7609, the Commissioner, who is always a party
to cases before us, possesses broad statutory authority to compel
the production of documents and testimony by the use of
administrative summonses even before a case is filed in our
Court. See Ash v. Commissioner, 96 T.C. 459 (1991).
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Many years of experience with the use of informal discovery
in a variety of circumstances have demonstrated to our
satisfaction the efficacy of that procedure. We see no reason to
modify that procedure because here respondent proposes to develop
a test case. Respondent’s correspondence contemplates that the
instant case will involve a "designated issue" under Internal
Revenue Manual sec. 35.3.14., "Designation for Litigation
Procedures." That section provides:
In order to resolve recurring significant issues,
establish judicial precedent, conserve resources, or
reduce litigation costs for the Service and taxpayers,
it is appropriate to designate that an issue in a case
be litigated rather than settled. In a case in which
an issue has been designated for litigation, it is the
position of the Office of Chief Counsel that the
designated issue is not to be settled without a full
concession by the taxpayer * * *. [Id. at sec.
35.3.14.2.]
As a general proposition, we agree that the Commissioner is
entitled to all relevant information regarding the matters in
issue before this Court, and we agree that the Commissioner is
entitled to that information without undue delay. The purpose of
our discovery rules, however, is not to assist respondent in
developing a test case. As we have explained: "The purpose of
discovery in the Tax Court is to ascertain facts which have a
direct bearing on the issues before the Court." To that end, "we
have the power to uphold the integrity of the Court’s process by
enforcing the limited discovery that, by rule, we have adopted."
Ash v. Commissioner, supra at 463, 470-471.
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In the instant case, respondent has not demonstrated that
most, if not all, of the information respondent needs could not
be obtained through the informal procedures required by Rules
70(a), 90(a), and our Branerton opinion. See Branerton Corp. v.
Commissioner, supra. Indeed, we believe that informal discovery
would be particularly useful to respondent, where, as here, the
examination phase of respondent’s inquiry was truncated by a
premature issuance of the FPAA. Under such circumstances,
respondent may well be able to use informal discovery procedures
to complete the administrative investigation that presumably
would have been undertaken if the period for issuance of the FPAA
had been extended.2 The actions of respondent’s counsel in the
instant case lead us to believe that he does not fully appreciate
the importance of our Branerton opinion. His insistence on
compliance with his formal discovery requests in advance of any
conference between the parties does not effectively present an
opportunity for the "discussion, deliberation, and an interchange
of ideas, thoughts, and opinions between the parties" that our
rules contemplate. See Intl. Air Conditioning Corp. v.
Commissioner, supra at 93.
2
Informal discovery will provide respondent with a basis to
decide whether respondent may pursue unconsented deposition
testimony under Rule 75--a procedure which, respondent indicates,
may be necessary.
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We conclude that, under the circumstances of the instant
case, a protective order should be issued. The order will direct
the parties to participate, in good faith, in informal
conferences during the next 90 days. The conferences shall be
directed to developing stipulated facts for purposes of the
instant litigation. After that time, if there are matters still
unsettled, the parties may resort to the formal discovery
provisions of the Tax Court Rules.
There are two other motions to consider. One is
petitioner’s Motion for Leave to File a Reply to Respondent’s
Objection to Petitioner’s Motion for Protective Order, which we
shall deny as moot. The other is petitioner’s Motion to Strike,
as unnecessarily argumentative, certain paragraphs in
Respondent’s Objection to Petitioner’s Motion for Protective
Order, which we shall also deny. A description of the parties’
positions is necessary to our consideration of a request for a
protective order. To the extent that respondent may have
provided more exposition than may have been necessary (obviously
missing the point of petitioner’s objection to proceeding with
formal discovery), we shall ignore it. When and if this case is
submitted, we shall base our decision on the facts agreed to or
developed at trial and upon the arguments set forth in the
posttrial briefs.
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To date, the parties have expended considerable resources
and involved this Court in controversies that they should have
resolved quickly between themselves. From this point forward, we
expect the parties to develop this case in a spirit of
cooperation and good faith.
In view of the foregoing,
An appropriate order
will be issued.