Opinion
12752-23
07-30-2024
POINT72 ASSET MANAGEMENT, L.P., POINT72 CAPITAL ADVISORS, INC., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Elizabeth A. Copeland, Judge.
This case is calendared for trial at the November 12, 2024, Trial Session of the Court in New York, New York. Pending before the Court is Petitioner's Motion to Compel Responses to Interrogatories, filed July 15, 2024.
On March 21, 2024, Petitioner sent to Respondent its First Informal Discovery Request, consisting of 30 questions. Unsatisfied with Respondent's subsequent responses, on May 2, 2024, Petitioner sent to Respondent its First Interrogatories, consisting of six questions, to which Respondent responded on May 31, 2024. Still not satisfied with Respondent's answers, Petitioner now moves the Court to compel Respondent "to provide a complete response to Questions 1 through 6 of the First Interrogatories."
Background
In 2015 and 2016, Point72 Asset Management, L.P. (PAM), had two partners. Point72 Capital Advisors, Inc., Tax Matters Partner (Advisors) was the general partner and was wholly owned by Steven A. Cohen. Point72 Capital Holdings, L.P. (Holdings), was the limited partner. Holdings' only general partner was Advisors, and its only limited partner was Mr. Cohen.
On May 15, 2023, Respondent issued to Petitioner two Notices of Final Partnership Administrative Adjustment (FPAAs), determining that for 2015 and 2016 PAM should have reported approximately $124.7 million and $219.3 million, respectively, of net earnings from self-employment, rather than the zero dollars actually reported on Form 1065, U.S. Return of Partnership Income, for each year. Attached to each FPAA is Form 886-A, Explanation of Adjustments, which states the determination but does not provide any factual or legal basis for it.
Petitioner's First Interrogatories read, in relevant parts, as follows:
1. The FPAA for the tax year ending December 31, 2015 states the following as the basis for the disallowance:
It is determined that net earnings (loss) from self-employment is $124,748,743 and not $0 as shown on your return. Accordingly, the amount reported as net earnings (loss) from self-employment is increased by $124,748,743.
Similarly, the FPAA for the tax year ending December 31, 2016 states the following as the basis for the disallowance:
It is determined that net earnings (loss) from self-employment is $219,314,741 and not $0 as shown on your return. Accordingly, the amount reported as net earnings (loss) from self-employment is increased by $219,314,741.
a. Identify the legal basis for the FPAAs' determinations.
b. Identify the factual basis, including documents relied upon, for the FPAAs' determinations.
2. Identify and explain what you contend is the "functional analysis test" or "functional test" described in Soroban Capital Partners, L.P. v. Commissioner, 161 T.C. No. 12.
3. Identify and explain how you contend the "functional test" applies in this case . . . .
4. Identify the activities that you contend Holdings engaged in during 2015 and 2016 with respect to or on behalf of PAM which support the determinations made in the FPAAs . . . .
5. Identify the activities that you contend Steve Cohen undertook on behalf of PAM during 2015 and 2016 which support the determinations made in the FPAAs . . . .
6. Identify the activities that you contend Steve Cohen undertook on behalf of Holdings during 2015 and 2016 with respect to or on behalf of PAM which support the determinations made in the FPAAs . . . .
Discussion
In response to Interrogatory No. 1, Respondent stated that he "has provided a copy of the administrative file relating to the examination of [PAM's] 2015 and 2016 tax years (excluding privileged or protected documents)." He also indicated that Petitioner was given not only the Forms 886-A but also a "Memorandum provided by the [Internal Revenue Service's (IRS)] Global High Wealth Team 1256 to Appeals Division and Petitioner during the examination and Appeals Process on or about June 10, 2022." It stands to reason that the administrative file indicates whatever "legal basis" and "factual basis" Respondent actually relied upon in issuing the FPAAs, and Petitioner has not challenged the content of the administrative file provided. Under Rule 71(e) a party may, in certain instances, produce business records in lieu of responding directly to an interrogatory. Given the nature of an IRS examination, the administrative file and the aforementioned Memorandum provided in response to Interrogatory No. 1 should be sufficient disclosure of the factual and legal basis on which the FPAAs were issued. We do however note that Respondent has excluded privileged and protected documents, without disclosing whether a privilege log was created and delivered to Petitioner. To the extent documents were excluded from the administrative file, such a log should be produced and will be compelled. Therefore, we will grant Petitioner's Motion to Compel as to Interrogatory No. 1 to the extent that a privilege log was not provided.
All Rule references are to the Tax Court Rules of Practice and Procedure.
Interrogatory No. 2 requests Respondent's explanation of a general legal principle rather than of how Respondent believes that principle applies to this case. Although a party generally may discover another party's "opinion or contention that relates to fact or to the application of law to fact," Rule 70(b)(3), it may not discover another party's understanding of "abstract principles of law." Zaentz v. Commissioner, 73 T.C. 469, 477-78 (1979). Moreover, as we stated in Zaentz, id. at 478:
[U]nder the Tax Court Rules, the work product of counsel is not discoverable. P. T. & L. Construction Co. v. Commissioner, 63 T.C. [404,] 407-08 [(1974)]. The statement of the legal authorities on which the Commissioner relies appears to come withing the category of work product. Hickman v. Taylor, [329 U.S. 495 (1947)]. For these reasons, we conclude that the Commissioner is not required to furnish [the taxpayer] with a statement of cases, regulations or statutes, on which he relies . . . .
Petitioner here is perfectly capable of reviewing the relevant legal precedent, including Soroban Capital Partners LP v. Commissioner, No. 16217-22, 161 T.C. (Nov. 28, 2023), and Renkemeyer, Campbell & Weaver, LLP v. Commissioner, 136 T.C. 137 (2011), to determine the parameters of the "functional test" as it applies to this case. Therefore, we will deny Petitioner's Motion to Compel as to Interrogatory No. 2.
Interrogatory No. 3, unlike No. 2, seeks Respondent's contentions regarding the application of law to fact. In response, Respondent provided two pages of assertions, including the following:
In 2015 and 2016, neither Advisors nor Holdings functioned like passive investors. Ultimately through his control of Advisors and Holdings, Mr. Cohen ran PAM's service business .....
. . . .
PAM was controlled by Advisors and Holdings, who were controlled by Mr. Cohen. . . . He directly and indirectly owned all of Holdings' partnership interests .....
. . . .
Mr. Cohen set PAM's "overall vision and goals," oversaw its officers, and provided "consultation and advice" to PAM's senior management .....
Mr. Cohen participated in PAM's business. PAM marketed his involvement to investors. . . . He spent considerable time on PAM's enterprise's affairs. . . . PAM's financial success was dependent on Mr. Cohen's service to PAM.
Advisors' and Holdings' distributive shares do not reflect returns on investment. As explained above, PAM's gross receipts were from providing services .....
Respondent supported these assertions with citations to documents (which we omit here).
Respondent's answers to Interrogatory No. 3 are substantive, and we see no reason to think that he is withholding any of his present contentions regarding the application of the functional analysis test in this case. In the Motion to Compel, Petitioner objects that "Respondent fails to identify what Holdings did to make it pass or fail his unnamed limited partner test." However, this objection is more in the nature of a doubt about the legal sufficiency of Respondent's cited facts and documents. Furthermore, Respondent reserved the opportunity to clarify his legal position and responses, as the discovery process is ongoing. With regard to this Interrogatory, we will not compel Respondent to present a better argument than he has put forward thus far. If and when the occasion arises, we will address in the future Respondent's reservation of right to supplement his responses should there be newly discovered evidence.
As to Interrogatory Nos. 4 through 6, Respondent has provided responses by cross-referencing his detailed response to Interrogatory No. 3. We further note that these Interrogatories seem critically dependent upon making Mr. Cohen available for an interview or deposition. Based on contentions in the recently filed Motion to Compel the Taking of Deposition of Steven A. Cohen such an interview has not yet occurred. As we stated in Zaentz, 73 T.C. at 479, and as is apt here: "[T]here is merit to the Commissioner's objection that he should not be required to reveal facts he knows before [the taxpayer] has responded to his requests for discovery."
Filed on July 24, 2024.
We note that Petitioner further objects that Respondent, in his response to Interrogatory Nos. 3 through 6 has failed to answer the following questions (among others):
[W]hat does it mean to "function like a passive investor?" What steps cause a partner to lose their status as a "passive investor"? Can a partner be a "passive investor" in one year and not another? What businesses are included in "service businesses"? What entity performed which services? What is the level of services vs. capital that categorizes a business as a service business? What law allows the actions of PAM's 1,000+ employees to be attributed to Holdings, or Mr. Cohen as the owner of Holdings?
These questions were not specifically asked of Respondent in the First Interrogatories, and we will not compel answers to interrogatory questions that were not presented formally. In addition, we note that these questions appear to impermissibly ask for Respondent's statement of "abstract principles of law," which we do not condone. See Zaentz, 73 T.C. at 477-78.
In conclusion, we will order Respondent to produce a privilege log related to documents removed from the administrative file, but we will otherwise deny Petitioner's Motion without prejudice in order to allow discovery to continue and appropriate documents to be exchanged as applicable.
To reflect the foregoing, it is
ORDERED that Petitioner's Motion to Compel Responses to Interrogatories, filed July 15, 2024, is granted in part in that Respondent shall provide Petitioner by August 29, 2024, a privilege log identifying all privileged or protected documents that were excluded from the administrative file produced during informal discovery as cross-referenced in response to Interrogatory No. 1, and is denied in all other respects without prejudice.