On July 8, 2016, Judge Buch of the US Tax Court (Tax Court) granted the Internal Revenue Services (IRS) motion to compel depositions of six individuals in Dynamo Holdings Ltd. P’ship v. Commissioner. That case involves the question of whether certain transfers between related entities are disguised gifts or loans. The IRS has been attempting to take sworn testimony of individuals relating to its examination of Dynamo for several years, which was part of the Supreme Court’s opinion in United States v. Clarke, 135 S.Ct. 2361 (2014). That summons’s enforcement action is still proceeding. (See United States v. Clarke, lead case: 15-11663). As a subject of the ongoing discovery disputes, the IRS filed a motion to compel the depositions of six witnesses from Dynamo in the Tax Court. We have previously discussed the Tax Court’s prior opinion in this case regarding the use of predictive coding in responding to the IRS’s discovery requests for electronically stored information.
The Tax Court recognized its longstanding position that nonconsensual depositions are an extraordinary method of discovery. In ruling on the motion to compel depositions, the court explained the two requirements necessary under the Tax Court Rules of Practice and Procedure (Tax Court Rules) to consider such a motion and three factors to consider in deciding whether to grant such a motion. To request nonconsensual depositions, the movant must show: (1) the testimony that the movant seeks to obtain through the depositions is discoverable under Rule 70(b) of the Tax Court Rules; and (2) the testimony sought practicably cannot be obtained through informal consultation or communication, interrogatories, requests for production of documents, or consensual depositions.
If the movant can establish the two requirements, the court will weigh the movant’s: (1) basis for the deposition; (2) purposes of the depositions other than having a substitute for cross-examination; and (3) prior opportunities to obtain the information sought through the depositions.
Judge Buch found that the two requirements were met because the testimony sought was central to this case, and the IRS could only obtain the information through the examinations, which four of the six witnesses refused to attend. Additionally, he found that all three factors weighed in favor of compelling the depositions because the information was directly related to the witnesses’ knowledge, which was hard to access through other means, and the IRS has not had a chance to obtain the information because of the witnesses’ refusals to appear when summoned.
Practice Note: Historically, depositions in the Tax Court were rare. Since the Tax Court Rules were amended in recent years, this discovery practice has increased dramatically. In the last five years we have seen the IRS increasingly and routinely request depositions. This discovery tool, although not at the level that is experienced in district court, is one of the IRS’s new techniques to solidify the taxpayer’s position prior to trial. We expect this practice to continue for the foreseeable future. What does this mean to taxpayers? The costs of litigating in Tax Court may increase because of the more intensive discovery that the IRS is now employing. Importantly, it is vital to understand the facts of your case earlier than ever before, and to maintain a consistent theme throughout controversy, from audit to litigation.