Opinion
7431-19
11-22-2022
CANECO PARTNERS, LLC, TUCKER KNOB, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Emin Toro, Judge
This case involves a charitable contribution deduction claimed by petitioner Caneco Partners, LLC (Caneco), for the donation of a conservation easement (Caneco's easement). Before the Court is Caneco's Motion To Compel Discovery (Doc. 63), which requests information purportedly related to the Internal Revenue Service's historical interpretation and enforcement of Treasury Regulation § 1.170A-14(g)(6)(ii) (Proceeds Regulation), as well as the value of Caneco's easement. The Commissioner opposes Caneco's Motion on the grounds that "[the] requested discovery is irrelevant, overly broad and unduly burdensome, privileged, and prohibited from disclosure by section 6103 . . . ." Resp't's Obj. to Mot. To Compel Disc. ¶ 67.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
We agree with the Commissioner that Caneco's discovery requests generally are irrelevant to the issues in this case, or else are overly broad and unduly burdensome. Accordingly, with one exception described further below, we will deny Caneco's Motion.
I. Discovery Standards
The standards governing discovery of documents are set out in Rule 70. Rule 70(b) provides that "[t]he information or response sought through discovery may concern any matter not privileged and which is relevant to the subject matter involved in the pending case." Information that would be inadmissible at trial is discoverable if the information appears reasonably calculated to lead to the discovery of admissible evidence. Rule 70(b).
Evidence is relevant if it has any tendency to make a fact that is of consequence in determining the action more or less probable than it would be without the evidence. Fed.R.Evid. 401. For purposes of discovery the standard of relevancy is liberal: our Rules permit discovery of any material relevant "to the entire 'subject matter' of the case." Zaentz v. Commissioner, 73 T.C. 469, 471 (1979) (quoting Tax Court Rule 70(b)).
On the other hand, our discovery procedures are to be used "to ascertain facts which have a bearing on the issues before the Court" and not for a "fishing expedition." Estate of Woodard v. Commissioner, 64 T.C. 457, 459-60 (1975), corrected on reconsideration, 64 T.C. 999 (1975). Additionally, our Court will limit requests that are "unduly burdensome or expensive, taking into account the needs of the case," or that seek information "obtainable from some other source that is more convenient." Rule 70(c)(1). The party objecting to discovery has the burden of establishing that the documents sought by the other party are not relevant or that they are otherwise not discoverable. Rosenfeld v. Commissioner, 82 T.C. 105, 112 (1984); Rutter v. Commissioner, 81 T.C. 937, 948 (1983); Branerton Corp. v. Commissioner, 64 T.C. 191, 193 (1975).
II. Application to Caneco's Requests
A. Requests Regarding Historical Approach to Proceeds Regulation
Caneco first requests documents related to the IRS's historical interpretation and enforcement of the Proceeds Regulation. Specifically, Caneco requests (1) unredacted communications between the IRS and the U.S. Department of Agriculture (USDA) or other federal agencies, or between the IRS and the Land Trust Alliance (LTA), "discussing post-extinguishment proceeds or deed terms regarding extinguishment," Pet'r's Mot. To Compel Disc. 37-38, and (2) easement deeds prepared, reviewed, or approved by the USDA or LTA and reviewed or approved by the IRS.
Caneco seeks these materials to show that the Commissioner has interpreted and applied the Proceeds Regulation inconsistently over time, that the Proceeds Regulation is unconstitutionally vague, and that the IRS has violated its duty of administrative consistency. Caneco further asserts that easement deeds prepared by USDA will shed light on Congress's intent in enacting section 170(h).
To begin with, we question whether these materials are relevant to this case.
First, a taxpayer generally cannot avoid liability for a tax by showing that the Commissioner has treated others generously, leniently, or erroneously. See IBM Corp. v. United States, 343 F.2d 914, 919 (Ct. Cl. 1965), cert. denied 382 U.S. 1028 (1966). It has long been the position of this Court that our responsibility is to apply the law to the facts of the case before us and determine the tax liability of the parties before us. Davis v. Commissioner, 65 T.C. 1014, 1022 (1976); Teichgraeber v. Commissioner, 64 T.C. 453, 456 (1975). How the Commissioner may have treated other taxpayers has generally been considered irrelevant in making that determination. Davis, 65 T.C. at 1022.
Second, the determination of whether a rule is unconstitutionally vague is an objective inquiry that considers if the rule "fails to provide a person of ordinary intelligence fair notice of what is prohibited, or is so standardless that it authorizes or encourages seriously discriminatory enforcement." See FCC v. Fox Television Stations, Inc., 567 U.S. 239, 253 (2012) (quoting United States v. Williams, 553 U.S. 285, 304 (2008)). This is a question of law, and Caneco's discovery requests are unlikely to bear on its proper resolution. In particular, the views of certain individuals at the IRS, USDA, and LTA regarding the Proceeds Regulation at various times are not facts of consequence in applying the standard, nor do they tend to establish any facts of consequence for applying the standard. Cf. Armco, Inc. v. Commissioner, 87 T.C. 865, 867 (1986) ("[N]o one's personal views can be accepted as a pronouncement of the intended meaning of the regulation.").
Caneco argues that, in Fox Television Stations, Inc., the Supreme Court considered the FCC's inconsistent enforcement history in concluding that the standards it had established were unconstitutionally vague. But the history the Court considered consisted of the FCC's published policy statements, memorandum opinions, and orders. See Fox Television Stations, Inc., 567 U.S. at 245-48. These materials functioned as precedent for the agency's future decisions and guidance for the regulated community. See id. at 249, 254. The documents Caneco seeks here are not analogous.
Third, the views of individuals at USDA regarding the requirements of section 170(h) do not shed light on Congress's understanding of that provision. That Congress directed USDA to comply with section 170(h) when undertaking certain activities does not suggest that deeds drafted or approved by USDA reflect Congressionally sanctioned language or that USDA's views would otherwise illuminate the requirements of section 170(h).
Even assuming, however, that the materials requested by Caneco are relevant, we still will deny its Motion. The Commissioner has no way of knowing who at the IRS might have such materials, which could have been generated at any time during the last 35 years. Considering the materials' limited probative value, therefore, Caneco's related requests are overly broad and unduly burdensome taking into account the needs of this case. See Rule 70(c)(1).
For the foregoing reasons we will deny Caneco's requests for communications between the IRS and USDA or LTA and easement deeds prepared, reviewed, or approved by the USDA or LTA and reviewed or approved by the IRS.
B. Requests Regarding the Value of Caneco's Easement
Caneco's Motion also requests documents and information that it contends tend to show the value of the easement in this case. Specifically, the Motion requests (1) easement deeds the IRS appraiser in the examination underlying this case relied on to value Caneco's easement, (2) valuations or appraisals prepared by the IRS from 2010 to 2018 that value conservation easements or real property within 100 miles of Caneco's easement, (3) the appraisal prepared by the IRS in Little Horse Creek Property, LLC v. Commissioner, No. 7421-19 (T.C. 2019), and (4) all other appraisals prepared by the IRS appraiser who valued the conservation easement in Little Horse Creek. Caneco further moves the Court to compel responses to interrogatories requesting lists of valuation information for (5) IRS valuations or appraisals of conservation easements or real property within 100 miles of Caneco's easement, and (6) appraisals prepared by the IRS appraiser who valued the conservation easement in Little Horse Creek. In the alternative, Caneco requests the Court to draw various inferences adverse to the Commissioner.
1. Easement Deeds Underlying the IRS Appraisal
The potential relevance of the eight easement deeds underlying the IRS appraisal of Caneco's easement seems obvious to the Court-the easement deeds tend to show whether purportedly comparable easements sales are in fact comparable to the easement. This in turn is relevant (or at least potentially relevant) to establishing the easement's value.
The Commissioner contends that he is not required to produce the deeds because they are "not in [his] possession, custody, or control . . . in the administrative file" (emphasis added) and because they are publicly available information. Resp't's Obj. to Mot. To Compel Disc. ¶ 37-39. And indeed, since filing its Motion, Caneco has obtained one of the eight deeds from public sources.
As Caneco points out, however, compiling all eight deeds from public sources will require some effort-effort that the IRS appraiser presumably has expended already. And the party on whom a document request is served must make reasonable inquiry of and obtain documents under his control, including documents under control of his agents. See Rosenfeld, 82 T.C. at 116-17. Apparently, the only inquiry the Commissioner has made in response to Caneco's request is reviewing the administrative record. In other words, the Commissioner has not taken the seemingly obvious (and reasonable) step of asking the IRS appraiser who prepared the report if he has copies of the remaining deeds. We will order the Commissioner to make this inquiry.
2. Materials Related to Little Horse Creek Property, LLC
Next we turn to Caneco's requests relating to Little Horse Creek Property, LLC v. Commissioner, No. 7421-19 (T.C. 2019). We will deny all three requests.
To begin with, we question the relevance of the IRS appraisal in Little Horse Creek to this case. Even assuming its relevance, however, the appraisal is publicly available information that Caneco may request from our Court. See Rule 70(c)(1) (our Court will limit discovery "that is obtainable from some other source that is more convenient").
Caneco also requests all other appraisals prepared by the IRS appraiser who valued the conservation easement in Little Horse Creek, as well as lists of valuation information for such appraisals. We note that "[our] Court is especially careful to require a showing of relevancy where . . . the discovery seeks confidential information relating to third parties." 3K Investment Partners v. Commissioner, 133 T.C. 112, 115 (2009). And in any event, these requests are too far afield from this case to be reasonably calculated to lead to the discovery of admissible evidence. See Rule 70(b). There is no reason to think that all the appraisals prepared by a particular IRS appraiser will shed light on the issues before us. For the same reason, the requests are overly broad and unduly burdensome taking into account the needs of this case. Rule 70(c)(1); see also Bernardo v. Commissioner, 104 T.C. 677, 695-96 (1995) (requests for all appraisals prepared by IRS Art Advisory panel were overly broad, unduly burdensome, and not reasonably calculated to lead to the discovery of admissible evidence).
Relatedly, the Commissioner points out that section 6103 prohibits him from disclosing tax returns or return information except in limited circumstances. In the Commissioner's view, the information requested regarding appraisals in other audits is return information that he is not authorized to provide. In light of our conclusion, we need not address this argument.
3. Materials Related to Easements and Real Property Within 100 Miles of Caneco's Easement
In terms of relevance, a slightly better case can be made for IRS valuations and appraisals of conservation easements and real property within 100 miles of Caneco's easement, as well as lists of valuation information for such appraisals. But here too Caneco overreaches.
The Commissioner explains some of the difficulties he would face in responding to Caneco's requests as follows:
The Commissioner also raises the section 6103 concerns described in footnote 3.
There is no IRS system for searching or mechanism for gathering this category of documents. Therefore, respondent has no means to identify IRS appraisals of property within 100 miles of the subject property without reviewing every case respondent examined involving the eight-year period identified. To the extent the examinations have closed, the files may have been transmitted for storage to the Federal Records Center. To respond to petitioner's request, respondent would need to identify every case examined involving the eight tax years specified, retrieve a plethora of files, and individually review each file to analyze which ones contain the information and documents petitioner seeks.Resp't's Obj. to Mot. To Compel Disc. ¶ 47. In similar circumstances, we have found that discovery requests are overly broad and unreasonably burdensome. See Bernardo, 104 T.C. at 695-96; see also 3K Inv. Partners, 133 T.C. at 118 n.8. We reach the same conclusion here and will not order the Commissioner to produce the requested materials.
Based on the foregoing and upon due consideration, it is hereby
ORDERED that the Commissioner shall contact the IRS appraiser who prepared the appraisal of Caneco's easement to request the easement deeds underlying the appraisal. It is further
ORDERED that the Commissioner shall produce to Caneco's counsel, on or before December 23, 2022, for inspection and copying, any materials discovered as a result of the actions described in the first ORDERED paragraph. It is further
ORDERED that the parties shall file with the Court, on or before January 6, 2022, a joint report (or, if that is not expedient, then separate reports) describing the status of this case. The report shall include an update on the results of the search described in the first ORDERED paragraph. It is further
ORDERED that Caneco's Motion To Compel Discovery is denied in all other respects.