IT-Lex followers know that spoliation can lead to an adverse inference, but the Stocker case is a 2013 example where the court found no grounds for an adverse inference despite an “internal policy g[iving] rise to an obligation to preserve…”

In Robert W. Stocker, II & Laurel A. Stocker [the “Stockers”] v. United States of America [“IRS”], the Sixth Circuit confirmed a lower court’s decision to, among other things, deny the Stockers’ adverse inference request against the IRS and dismiss the case for lack of subject matter jurisdiction.  Even though the Stockers did not file their tax returns electronically (gasp), this case is a good review of an adverse inference for spoliation and the low threshold thereof.  

The Stockers claim to have timely filed an amendment to their 2003 tax return requesting a $64,000 refund on the very day it was due in 2007.  However, “[t]he Stockers . . . failed to take the necessary steps to ensure that they obtained the date-stamped receipt of certified mailing that would establish timely filing under § 7502(c).”  The IRS claimed they received the amended return 5 days late and unfortunately “the IRS did not retain the envelope that possibly could have enabled the Stockers to establish timely filing . . . .”  Alas, without a timely filed return there is no subject matter jurisdiction and the case was dismissed in the lower court.

Enter the adverse inference claim.  The Stockers wanted the court to “draw an adverse inference of timely filing against the Government as a spoliation sanction . . . .”  The 12 page appellate case details the Stockers’ complaints against the district court including “the district court’s failure to impose spoliation sanctions against the Government arising from the IRS’s failure to retain the envelope in which they sent this return.”

The Sixth Circuit explained the requirements for adverse inference:

“a “party seeking an adverse inference instruction based on the destruction of evidence must establish (1) that the party having control over the evidence had an obligation to preserve it at the time it was destroyed; (2) that the records were destroyed with a culpable state of mind; and (3) that the destroyed evidence was relevant to [a] party’s claim or defense such that a reasonable trier of fact could find that it would support that claim or defense.””

The court further stated that a culpable state of mind “may be established through a “showing that the evidence was destroyed knowingly, even if without intent to breach a duty to preserve it,” but even negligent conduct may suffice to warrant spoliation sanctions under the appropriate circumstances.” Note the low threshold.

The Stockers argued that “a provision in an IRS internal policy manual that seemingly require[d] the agency to retain the envelopes in which amended returns [we]re received” triggered the first element, the duty to preserve.  While the court did recognize “that spoliation sanctions may properly be imposed even for lesser degrees of fault such as negligence,” it did not agree in this case:  

“Here, the record discloses no culpable conduct beyond the negligent failure to preserve an envelope in accordance with internal agency regulations . . . . [and] conclude[d] that the [district] court acted within its discretion when it declined to impose such sanctions here.”

Is it worth the risk to send documents to the IRS by regular mail as opposed to registered or certified mail?  Would this case have been different if the Stockers had filed their amended tax return electronically?