This past year has seen a number of important developments in the areas of Tax Court procedure, federal court procedure, and privilege and non-disclosure. As the below cases and posts demonstrate, taxpayers’ reliance on experts, their efforts to protect privileged information, and their efforts to limit sweeping government discovery requests continue to be tested and closely scrutinized.
Subpoenas, Discovery, and Summonses
This year, we have been closely following criticisms and challenges to the Tax Court’s allowance of “secret” subpoenas—that is, subpoenas issued to third parties by the IRS without notice to the taxpayer. This policy stands in contrast to the prevailing rules in federal court. We wrote about this issue here and here.
Along those lines, the Tax Court enforced the IRS’s pursuit of non-consensual taxpayer depositions this year, and clarified the circumstances in which they will occur. We discussed this issue here.
Further, as we discussed here, the Tax Court has continued its recognition of predictive coding, an emerging e-discovery tool that promises to reduce the costs of manual, attorney document review.
Practice point: The common thread for all of these trends is that the Tax Court appears to be broadening the discovery available to the parties (and particularly to the IRS), to bring discovery standards closer to what might be expected in federal district court. However, as the “secret subpoenas” demonstrate, the two standards are still not perfectly aligned. It is important to consider the differences between the federal and Tax Court standards throughout litigation, and particularly when choosing a forum for a tax dispute.
Further, here, we discussed the practice of some Tax Court judges to “hot tub” competing experts, that is, to require opposing experts to engage with each other and the judge directly, rather than (or in addition to) through the formal expert reporting and testimony process.
Practice point: Based upon these and other recent cases, federal courts and the Tax Court are continuing to look behind the expert’s report or testimony to examine “how the sausage is made.” Accordingly, it is increasingly important for practitioners to work intensively with experts to ensure that their opinions are sufficiently independent, credible and defensible.
Changes to Court Rules
A number of changes and clarifications to Tax Court and federal court rules have been enacted and proposed in 2016. Effective December 1, 2016, the Federal Rules of Civil Procedure and Appellate Procedure have been updated, as discussed here. We also wrote about proposed revisions to the Tax Court procedural rules regarding e-filing and other matters here, and discussed amendments to the Tax Court’s evidence rules here. This summer, the Tax Court also amended its rules regarding judicial disability, as discussed here.
Early in 2016, a number of important changes to the handling of post-docketing IRS Appeals occurred, as we discussed here. Additionally, as we addressed here, the Guarlnik case, a unanimous reviewed Tax Court opinion, highlighted the need to ensure that filing deadlines are met.
This summer, the IRS updated its list of items requiring National Office review, including issues designated for litigation. We discussed updates to the list here.
Whistleblowers and Shareholders
Here, we discussed a shareholder derivative suit filed in part in reliance on statements made during tax litigation by corporate executives.
Further, we discussed here the potential impact upon waiver of privilege when the IRS accepts information from whistleblowers who have stood in a privileged relationship to a taxpayer.
Privilege and Non-Disclosure
In our post here, we discussed two ongoing tax controversies in which courts are employing “quick peek” procedures to resolve privilege disputes.
We also addressed here a number of ways to protect confidential information of many kinds, including privileged information, in Tax Court.
A number of summons enforcement cases, some of which are still pending in federal court, are testing the bounds of attorney-client privilege, tax practitioner privilege and attorney work product protection.
Here, we discussed the IRS’s summons enforcement case involving Facebook’s offshoring of an Irish affiliate. This case is still ongoing, and the parties are still working out a timetable for production of documents and assertion of privilege claims.
At the end of 2015, the IRS lost a significant challenge to a multi-national’s invocation of tax practitioner privilege and work product protection in Schaeffler v. United States, 806 F.3d 34 (2d Cir. 2015).
In a closely-watched summons enforcement case in the Western District of Washington, the IRS is pursuing tax advice Microsoft received regarding a cost-sharing arrangement, arguing that the advice was not work-product protected or privileged.
Practice point: In the current examination environment, taxpayers are well-advised to consider privilege and work product issues very early, even when a transaction is first contemplated, and to maintain proper confidentiality standards to avoid a potential waiver.
Tax Litigation Guides and Practice Tools
This year, we began publishing a series of tax controversy and tax litigation resources, guides and practice tools, a series we intend to continue in 2017.
Here, we outlined how a Tax Court case is set for trial.
We discussed the typical options for defending a federal tax controversy here.
We also explained the types of Tax Court opinions and their precedential effect here.
Finally, here, we discussed the typical timing of a federal tax controversy.