Opinion
5071-21
06-15-2023
SEABROOK PROPERTY, LLC, SEABROOK MANAGER, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Emin Toro Judge
This case involves a charitable contribution deduction claimed by Seabrook Property, LLC (Seabrook), for the donation of a conservation easement (Seabrook's easement). Before the Court is petitioner Seabrook Manager, LLC's Motion To Compel Discovery (Doc. 83), filed on June 2, 2023, which requests information purportedly related to the value of Seabrook's easement and asserted penalties for Seabrook's alleged valuation misstatement. The Commissioner opposes the Motion on the grounds that the requested discovery is "irrelevant, privileged .. ., prohibited from disclosure pursuant to LR.C. § 6103 and... disproportionate to the needs of this case." Resp't's Obj. to Mot. To Compel Disc. (Objection) ¶ 20 (filed on June 5, 2023).
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, and all Rule references are to the Tax Court Rules of Practice and Procedure.
Petitioner filed a Reply to the Objection (Doc. 92) on June 7, 2023.
For the reasons we describe below, we agree with the Commissioner that petitioner's discovery requests are overly broad and unduly burdensome or request material that is protected from disclosure by section 6103 or is irrelevant to the issues in this case. Accordingly, we will deny the Motion.
L Discovery Standards
The standards governing discovery of documents are set out in Rule 70. Rule 70(b)(1) provides that "[d]iscovery may concern any matter not privileged that 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)(2).
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, "[d]iscovery must be proportional to the needs of the case, considering the importance of the issues at stake in the action, .. . the importance of the discovery in resolving the issues, and whether the burden or expense of the proposed discovery outweighs its likely benefit." Rule 70(b)(1). Moreover, 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). 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 Seabrook's Requests
The Motion requests documents and information that it argues tend to show the value of the easement in this case, the unreasonableness of the IRS's approach to valuing the easement, and Seabrook's reasonableness in relying on the value determined by its own appraisal. The requests concern another easement case, Little Horse Creek Property, LLC v. Commissioner, No. 7421-19 (T.C. 2019), where an IRS appraiser valued an easement located approximately 30 miles from Seabrook's easement. Petitioner obtained the IRS appraisal from that case (Little Horse Creek appraisal) and now seeks certain related information. Specifically, the Motion requests (1) all correspondence within the IRS regarding the Little Horse Creek appraisal, (2) the work file for the Little Horse Creek appraisal, and (3) all tax returns relating to the conservation easement deduction at issue in Little Horse Creek. Petitioner further moves the Court to compel responses to interrogatories requesting confirmation of whether the IRS appraiser who valued the Seabrook easement was informed of the Little Horse Creek appraisal, as well as some related information.
The Commissioner objects to the Motion on multiple grounds, including relevance, undue burden, the potential application of certain privileges, and section 6103. As we describe below, we agree with several of the Commissioner's stated grounds and will deny the Motion.
In light of our decision, we need not address every argument raised by the Commissioner.
To begin with, we have some doubts about the degree of relevance to this case of the materials petitioner requests. 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. CI. 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. And 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).
Moreover, and as the Commissioner points out, section 6103(a) provides that returns and return information generally must be kept confidential unless disclosure is specifically authorized by the Code. See Whistleblower 972-17W v. Commissioner, No. 972-17W, 159 T.C, slip op. at 10 (July 13, 2022) (citing Mescalero Apache Tribe V. Commissioner, 148 T.C. 291, 294 (2017)). The statute broadly defines "return information" to include, among other things, the following:
a taxpayer's identity, the nature, source, or amount of his income, payments, receipts, deductions, exemptions, credits, assets, liabilities, net worth, tax liability, tax withheld, deficiencies, over assessments, or tax payments, whether the taxpayer's return was, is being, or will be examined or subject to other investigation or processing, or any other data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof of any person under this title for any tax, penalty, interest, fine, forfeiture, or other imposition, or offense ....Section 6103(b)(2)(A); see also I.R.C. § 6103(b)(1) (defining "return"). Return information "does not include data in a form which cannot be associated with, or otherwise identify, directly or indirectly, a particular taxpayer." I.R.C. § 6103(b) (flush text).
Taken together, we find these principles sufficient to deny the Motion.
First, the request for all internal IRS correspondence that concerns the Little Horse Creek Appraisal is overly broad and unduly burdensome given the needs of this case and the dubious relevance of the information requested. See Rule 70(b)(1), cf. Avedisian v. Commissioner, 53 T.C.M. (CCH) 503, 505 (1987). Moreover, discussions of the Little Horse Creek Appraisal, even in the context of unrelated proceedings, would generally be return information-e.g., a taxpayer's identity and data collected or prepared by the Secretary with respect to the possible existence of a taxpayer's liability-and thereby protected from disclosure by section 6103, unless an exception applies. See, e.g., Mallas v. United States, 993 F.2d 1111, 1118-19 (4th Cir. 1993). We agree with the Commissioner that petitioner has not identified an applicable exception.
Similarly, the work file for the Little Horse Creek appraisal and the tax returns related to the deduction in Little Horse Creek are returns and return information that must be kept confidential under section 6103. Petitioner's argument that some of the material in the work file might not be return information falls flat in this context. Specifically, given that the work file was assembled as part of the examination of Little Horse Creek, the information is by definition associated with a particular taxpayer, and it comprises, at a minimum, "data, received by, recorded by, prepared by, furnished to, or collected by the Secretary with respect to a return or with respect to the determination of the existence, or possible existence, of liability (or the amount thereof) of any person under this title for any tax [or] penalty. . .." I.R.C. § 6103(b)(2); see also Landmark Legal Found, v. IRS, 267 F.3d 1132 (D.C. Cir. 2001) (noting that the definition of return information "has . .. evolved to include virtually any information collected by the [IRS] regarding a person's tax liability" (internal quotations omitted)). Petitioner's suggestion that redactions will resolve any concern fares no better. See Church of Scientology v. United States, 484 U.S. 9, 18 (1987) ("[A]s with a return itself, removal of identification from return information would not deprive it of protection under § 6103(b).").
Third, we will not compel responses to the interrogatories because the information sought is irrelevant to the issues in this case. There is no indication that the Commissioner intends to call the IRS appraiser who initially valued the Seabrook easement as a witness. And, in general, "[t]his Court will not look behind a deficiency notice to examine the evidence used or the propriety of respondent's motives or of the administrative policy or procedure involved in making his determinations." Greenberg's Express, Inc. v. Commissioner, 62 T.C. 324, 327 (1974). The Court will determine the value of Seabrook's easement, as well as the potential application of penalties, de novo, and the process the Commissioner used to make the underlying determination is irrelevant to this analysis.
Additionally, to the extent petitioner seeks information only to show that the Commissioner's position is not substantially justified under section 7430, any such request is premature. See Rules 70(a)(2), 143(a), 233.
Based on the foregoing and upon due consideration, it is hereby
ORDERED that petitioner Seabrook Manager, LLC's Motion To Compel Discovery filed on June 2, 2023, is denied.