A New York State Administrative Law Judge has issued an order rejecting a motion by the Department of Taxation and Finance seeking to modify or withdraw a subpoena duces tecum issued for the production of certain departmental e-mails. Matter of Glenna Michaels, DTA No. 823370 (N.Y.S. Div. of Tax App., June 23, 2011). As a result, the Department must turn over to the taxpayer various intradepartmental e-mails.

The substantive case involved the issue of when gain from the sale of real property accrues to an individual who becomes a resident of New York State prior to disposing of the real property. The outcome of the case hinged in part upon the application of the so-called “accrual rule.”

The taxpayer claimed that the Department had inconsistently applied the accrual rule, and therefore did not provide a rational basis for its tax assessment. To support her argument, the taxpayer had the Division of Tax Appeals issue a subpoena duces tecum seeking all of the Department’s e-mails from senior management, including all personnel in the Offices of Counsel and Tax Policy Analysis, concerning the application or interpretation of the accrual rule.

The Department filed a motion to withdraw or modify the taxpayer’s subpoena on the grounds that the e-mails are not relevant, and that the information sought is covered by the secrecy provisions of the Tax Law or is otherwise privileged as attorney-client communications. The Department also claimed that production of the voluminous e-mails — 165 in total, of approximately 1,000 pages — would be unduly burdensome.

The ALJ addressed each objection in turn. First, regarding the relevance of the documents requested, the ALJ found that the proper standard to be applied to a motion to modify or withdraw a subpoena duces tecum was whether the requested information is “‘utterly irrelevant to any proper inquiry.’” The ALJ concluded that, based on the record, the request was not “utterly irrelevant.” Second, regarding the issue of privilege, the ALJ found that the Division could produce the e-mails using discretion with regard to sensitive taxpayer information and privileged communications. Finally, the ALJ was not convinced that producing 165 e-mails was unduly burdensome, stating that “a review of 165 e-mails does not facially appear to be beyond the capabilities of the Division of Taxation.” Accordingly, the ALJ ordered the Department to produce the e-mails, using its discretion with regard to sensitive taxpayer information or privileged communications, which it could either redact or omit, with an explanation of each omission.

The ALJ did emphasize that his Order did not ensure the admission into evidence of the documents produced. The ALJ explained that a subpoena merely directs the party to make the subpoenaed documents available to the court so that the court may decide on the appropriate use of such documents. He noted that should the case proceed to hearing, he would need to rule on the admissibility of the documents.

Additional Insights. The ability of a taxpayer to subpoena not just documents directly connected with its own audit file but also the general internal e-mails of the Department may level the playing field somewhat by revealing more information regarding the Department’s thought process in setting its policies. While usually it is the taxpayer that must comply with potentially burdensome document production requests, the ALJ’s ruling is a reminder that a taxpayer has the ability to request the production of documents from the Department, even when their production may be somewhat burdensome, as long as they are not “utterly irrelevant.”

While certain of the e-mails may still be protected from disclosure (for example, to the extent they represent advice from counsel), it is likely that there are fewer impediments to disclosure under the ALJ’s Order than there would be under the Freedom of Information Law. The ALJ’s Order is appealable to the Tax Appeals Tribunal.