Chief Judge Michael B. Thornton, by press release of July 6, 2012, announced that the United States Tax Court has adopted amendments to its Rules of Practice and Procedure. This statement follows the release, on December 28, 2011, of proposed amendments to the Rules and invitation of comments. In general, the adopted amendments align the Tax Court's Rules more closely with certain provisions of the Federal Rules of Civil Procedure as well as make other technical, clarifying, and conforming changes. Other changes to the Rules pertaining to electronic filing, privacy protection of whistleblower cases and a new form 18 to be used as a substitute for an affidavit for purposes of 28 U.S.C. §1746.
Application of Federal Rules of Evidence as Applied by the U.S. District Court for the District of Columbia. §7453. T.C. Rule 143(a).
Unless the party-litigants agree otherwise, Tax Court decisions may be appealed to the U.S. court of appeals for the circuit where the taxpayer maintains its legal residence or, in the case of a corporation, its principle place of business when the petition is filed, or if no principal place of business (or office) exists when the petition is filed, appellate venue is with the Court of Appeals for the District of Columbia. §7482. Under the Tax Court’s administrative rule of convenience, it will follow the precedent of the appellate court to which venue would lie in the event its determination were appealed by the taxpayer. This is referred to as the “Golsen Rule”, which takes its name from the decision in which this rule of convenience was announced. Golsen v. Comm’r, 54 T.C. 742 (1970), aff'd on another issue, 445 F.2d 985 (10th Cir. 1971). The Court will, at times, be careful in determining whether it is obligated to follow its administrative rule of convenience in a particular case. Decisions of other appeals courts are not binding on the Tax Court but may be persuasive in its decision. Where there is no direct precedent from the applicable jurisdiction to which an appeal would lie, the Tax Court is free to set its own standard in a fully reviewed opinion.
New Amendments to Work Product Protection.
FRCP 26(b)(3)(allows for discovery of work product only where there is a showing “that the party seeking discovery has substantial need of the materials in the preparation of her case and she is unable, without undue hardship, to obtain the substantial equivalent of the materials by other means); Hickman v. Taylor, 329 U.S. 495 (1947)(statements lawyer obtained and notes he made were not protected by the attorney-client privilege); United States v. Nobles, 422 U.S. 225, 238 (1975). The work product doctrine protects from discovery, unless and only to the extent waived, the attorneys preparation of legal theories, strategy, thoughts about the litigation, i.e., “mental work product”. It further protects information and materials prepared by an “agent” on behalf of the lawyer. Diversified Indus. Inc. v. Meredith, 572 F.2d 596, 603 (8th Cir. 1977); United States v. Kovel, 296 F2d 918, 922 (2d Cir. 1961)(accountant prepared workpapers for attorney who was also an accountant, if the agent was performing services for the attorney to provide legal advice it would be protect but not if being provided for services to be rendered by the attorney in preparing the client’s tax return. Attorney-client communications subject to protection from discovery, again, unless waived, are narrower in scope than work product under FRCP 26(b)(3) and under Hickman v. Taylor, supra. and are subject to less protection from the courts since there are a set of exceptions to its application. Work product does not have to be from the lawyer, per se, and protects materials that are not communications that were intended to remain private and were for the purpose of rendering legal advice to the client. See United States v. Adelman, 68 F.3d 1495 (2d Cir. 1996).
Protection for Trial Preparation Materials and Draft Expert Witness Reports.
T.C. Rule 70 Before the Recent Amendments. The Tax Court rules were silent on disclosure of work product based on substantial need and undue hardship. Indeed the Court trail blazed a different path in as much as it stated that the “work product” of counsel and material prepared in litigation or for trial, are generally intended to be outside the scope of allowable discovery under the T.C. Rules and therefore no specific reference to FRCP 26(b)(3) was adopted. Zaentz v. Commissioner, 73 T.C. 469, 478 (1979)(work product of counsel generally not discoverable). But see Hartz Mountain Indus. v. Commissioner, 93 T.C. 521, 529 (1989); Ames v. Commissioner, 112 T.C. 304, 310 (1999); Ratke v. Commissioner, 129 T.C. 45, 53 (2007). See also P.T. & L. Construction Company v. Commissioner, 63 T.C. 404, 408 (1974).
This legal reasoning and evidentiary rulings in this line of case law left an impression, no doubt, that the Tax Court may not let in work product unless there was a waiver or some other alternative ground or basis for which the desired evidence could be produced or admitted into evidence at trial. It would not be admitted based on the exceptions of “substantial need” or “undue hardship”. This impression has a very good source for corroboration, the Tax Court’s commentary to Tax Court Rule 70(b) provided: “With certain exceptions and subject to the limitations of these Rules, the scope of allowable discovery under these Rules is intended to parallel the scope of allowable discovery under the Federal Rules. *** The other areas, i.e., the “work product” of counsel and material prepared in anticipation of litigation or for trial, are generally intended to be outside the scope of allowable discovery under these Rules, and therefore the specific provisions for disclosure of such materials in FRCP 26(b)(3) have not been adopted. Cf. Hickman v. Taylor, 329 U.S. 495 (1947).” See Bernardo v. Commissioner, 104 T.C. 677 (1995).
Proposed Revisions to T.C. Rule 70.
In issuing proposed revisions to the discovery rule, T.C. Rule 70, the Court proposed to amend T.C. Rule 70(c)(3) an formally adopt application of the work product doctrine under FRCP 26(b)(3). The Court further proposed amended T.C. Rule 70(c)(4) to include the same work product protections of revised FRCP 26(b)(4) limiting the discovery of draft expert witness reports and certain attorney-expert communications. On the other hand, the government (or the taxpayer) not being able to discover draft expert reports, may make the presentation of the expert’s testimony less reliable. Indeed the court noted in its earlier statement that there are dangers in the presentation of evidence of experts. See, e.g., Neonatology Associates v. Commissioner, 115 T.C. 43, 86 (2000)(expert who advocates the litigation position of a taxpayer does not assist the trier of fact). Note the distinction that under FRCP 26(a)(2)(B) the opposing party is told about the opinions the expert will later testify on at trial. On the other hand, under T.C. Rule 143(g), the expert report is the direct testimony of the expert.
Chief Judge Colvin of the Tax Court has noted that it is “imperative that the parties be able to explore through discovery whether the opinions expressed are those of the expert,” supposedly independent and not tainted by bias or advocacy, and not from counsel. The proposal to revise FRCP 26(b)(4) for protecting draft expert reports and attorney communications was supported on practical grounds based on the perception that seeking impeachment material through the production of the prior draft only rarely reveals useful information. Indeed, there was substantial efforts undertaken to avoid such discovery, e.g., hiring of non-testifying experts as consultants or stipulating around the open discovery of attorney-expert communications” thus increasing costs of litigation. See Report of the Civil Rules Advisory Committee (5/8/2009). Chief Judge Colvin, in his press release of February 27, 2012, stated that the Federal Rules Advisory Committee’s concerns “do not translate neatly” to Tax Court proceedings. The inefficiencies and maneuvering done by lawyers in federal court proceedings as to expert drafts and other communications, is not present in Tax Court litigation. Indeed Colvin writes “[I]t is our experience that expert discovery produces useful information when it discloses attempts by attorneys to exert undue influence in the drafting of expert reports.” Citing Bank One Corp. v. Commissioner, 120 T.C. 274. The proposed rule to T.C. Rule 70(c)(4) Judge Colvin regrets, will limit the parties’ and the court’s ability to detect improper influence in expert witness reports. Still, application of T.C. Rules 70(c)(4)(B)(ii) and (iii) which permit discovery of facts, data and assumptions that an attorney provided to the expert and that the expert considered is helpful, albeit limited. It would not reveal the lawyer’s involving in the drafting of the expert report. Therefore, Chief Judge Colvin concludes that Proposed T.C. Rule 70(c)(4) will likely disrupt the efficient presentation of evidence and could cause confusion on the admissibility of expert reports. Of course counsel can still cross examine experts on the same information and communications that would be protected in discovery, such as cross-examination of the expert’s revisions that would recommended or suggested by counsel.
As an over-arching matter, T.C. Rule 70(c)(4), in following FRCP 26(b)(4), would allow discovery of protected expert work product based on the substantial need exception. Perhaps that outcome is not entirely clear by reading proposed T.C. Rule 70(c)(3) and proposed T.C. Rule 70(c)(4). Note that FRCP 26(b)(4) specifically provides that the work product protections of FRCP 26(b)(3), including the exception of substantial need and also at times, undue hardship (as to mental impression work product), apply to discovery with respect to experts. See Upjohn Co. v. United States, 449 U.S. 383, 400-402 (1981); See, e.g., In re Cendant Corp. Sec. Litig., 343 F.3d 658, 663 (3d Cir. 2003); In re Murphy, 560 F.2d 326, 336 (8th Cir. 1977); but see Duplan Corp. v. Moulinage et Retorderie de Chavanoz, 509 F.2d 730, 734 (4th Cir. 1974) (opinion work product never discoverable); Ratke v. Commissioner, 129 T.C. 45, 53 (2007) Chief Judge Colvin asked that in the final rule revisions the ability to require discovery for work product under the substantial need and undue hardship exceptions be specifically incorporated in the final revisions to T.C. Rule. 70 et al.
Shortly after the amendments to the T.C. Rule 70(c)(4) were made on drafts of expert reports and attorney-expert conversations, in CC-2012-016, the Office of Chief Counsel announced its continued opposition to the revision to T.C. Rule 70(c)(4) citing the potential for undue attorney influence in the drafting of expert Reports.
Revisions to Tax Court Rule 70 (6/12/2012).
The Tax Court officially adopting the test of the work product doctrine in FRCP Rule 26(b)(3) and added a new amendment to T.C. Rule 70(c), in following the rules set forth in FRCP Rules 26(b)(3)(A) and (B).
Amended T.C. Rule 70(c)(3).
“(3) Documents and Tangible Things:
(A) A party generally may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent), unless, subject to Rule 70(c)(4),
(i). they are otherwise discoverable under Rule 70(b); and
(ii)the party shows that it has substantial need for the materials to prepare its case and cannot, without undue hardship, obtain their substantial equivalent by other means.
(B) If the Court orders discovery of those materials, it must protect against disclosure of mental impressions, conclusions, opinions, or legal theories of a party's counsel or other representative concerning the litigation.”
Amended T.C. Rule 70(c)(4).
(A) Rule 70(c)(3) protects drafts of any expert witness
report required under Rule 143(g), regardless of the form in
which the draft is recorded.
(B) Rule 70(c)(3) protects communications between a
party’s counsel and any witness required to provide a report
under Rule 143(g), regardless of the form of the
communications, except to the extent the communications:
(i) relate to compensation for the expert’s study or testimony;
(ii) identify facts or data that the party’scounsel provided and that the expert considered in forming the opinions to be expressed; or
(iii) identify assumptions that the party’s counsel provided and that the expert relied on in forming the opinions to be expressed.
(C) A party generally may not, by interrogatories or depositions, discover facts known or opinions held by an expert who has been retained or specially employed by another party in anticipation of litigation or to prepare for trial and who is not expected to be called as a witness at trial, except on a showing of exceptional circumstances under which it is impracticable for the party to obtain facts or opinions on the same subject by other means.” (italics added for emphasis).”
Implications of Amended Tax Court Rules 70(c)(3) and 70(c)(4)
Impact of Amendments
The Tax Court's rule changes may have an impact on choice of forum for litigating a tax case. Generally, the benefits of litigating in the Tax Court are: (i) not needing to pay the tax alleged to be owed in full before qualifying for judicial review which is required in a tax refund suit; (ii) the informal discovery procedures under Branerton Corp. v. Commissioner, 61 T.C. 691 (1974); Schneider Interests, L.P. v. Commissioner, 119 T.C. 151 (2011) reduce trial time and added costs of discovery present in other courts; (iii) the jurists are all tax law experts who have hundreds of years of collective experience in the tax law and tax jurisprudence; (v) the emphasis of the Tax Court on national uniformity of result, subject to application of the Golsen rule; and (vi) generally the Tax Court affords a taxpayer a less cumbersome and expensive venue for a case to be tried on the merits. In addition, it was generally agreed that prior to the recent amendments to T.C. Rule 70(c), that the government would not be able to ask for the petitioner’s counsel or its agent’s work product without regard to the exceptions of “substantial need” and “undue hardship”. Now, under the amended Rule 70(c), respondent-Commissioner may be able to obtain work product based on need and undue hardship as applied under FRCP 26(b)(3). Could this extend to opinion work product? At this time that seems to be a stretch.
Certainly there will be motions and proceedings in the Tax Court on objections to produce work product so that sufficient care must be exercised by petitioners’ counsel to understand how the amended rules work and can be applied by the Service. One question that a recent commentator had on this subject is whether the Tax Court will decide disputes over work product by looking to the case law of the D.C. Circuit or the circuit in which an appeal would normally lie. A few cases on this subject indicate that there is no clear answer. Until the Tax Court issues an opinion that elaborates on the new rule, counsel should evaluate both the work product cases in the D.C. Circuit Court of Appeals as well as the appeals court where venue would lie.
The “good news” of course is the amended rule denying the discoverability in Tax Court proceedings of drafts of expert reports and communications between experts and counsel for petitioner. Still, the government may, at trial or by motion in limine, find a creative means by which to cause such information or testimony to be part of the record. Of course, cross examination of an expert at trial is one such method.
(The Tax Court is an Article 1 court and allows taxpayers to dispute a proposed assessment of tax by the IRS without requiring payment of the amount in dispute. The Tax Court was established as an executive branch agency in 1924 as the Board of Tax Appeals (Revenue Act of 1924, ch. 234, section 900(k)). It became the “Tax Court of the United States” in 1942 and its members became judges (Revenue Act of 1942, ch. 619, section 504(a)). It then became the United States Tax Court in 1969 when it also became a legislative court under Article 1 of the U.S. Constitution. See Freytag v. Comm’r, 501 T.C 868, 887 (1991). Refund litigation, which includes consideration of the “full payment rule” as a jurisdictional pre-requisite, can be maintained in the U.S. district court where the taxpayer resides at the time of filing or in the U.S. Court of Claims. Both courts follow the Federal Rules of Evidence but each have a separate set of procedural rules, including for U.S. district court, certain local rules.)