Missing Transmittal Envelope Was Not The Intentional Spoliation Of Evidence Justifying Indiana Tax Court’s Dismissal Of Income Tax Appeal

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The Indiana Tax Court ruled that the Department of Revenue had no duty to retain the transmittal envelope for an income tax return.

An Indiana gambler lost another hand in the latest ruling by the Tax Court on his continuing discovery disputes with the Indiana Department of Revenue. On September 18th the Court denied Nick Popovich’s motion for default judgment, costs, and attorney’s fees as sanctions for the Department’s alleged spoliation of evidence and discovery abuses. Earlier this year, the Court ordered the Department to respond to certain discovery requests but denied a motion to compel production of documents; a summary of the Court’s prior orders is here.

When was the return filed? At the heart of the present dispute was Popovich’s 2003 individual income tax return.  In 2005, his employee filed the return by regular U.S. mail.  Later, Popovich’s ex-wife filed her individual return with the Department via certified mail, return receipt requested. During his subsequent protest of the Department’s assessment, Popovich argued that the Department’s proposed assessment was untimely; seeking proof, he asked to see the transmittal envelope for his return.  The Department’s hearing officer agreed to notify Popovich once the envelope was retrieved from storage.  The hearing officer never complied, and the Department’s final determination found that the assessment was timely because the envelope showed the return was mailed on February 1, 2005 – the date on which Popovich’s ex-wife had mailed her return.

Taxpayer sought proof of filingOn appeal to the Tax Court, Popovich issued discovery requests seeking the production of his 2003 transmittal envelope. The Department produced a copy of an envelope, but it was the envelope for his ex-wife’s return. The Department claimed it did not have the original envelope and that it was not obligated to retain transmittal envelopes. Popovich failed to inform the Department of his suspicions that it had provided him a copy of the wrong transmittal envelope. Repeatedly asking for the original envelope, he wanted to give the Department an opportunity to “come clean.”

Popovich accused the Department of spoliation, “a particular discovery abuse that involves the intentional or negligent destruction, mutilation, alteration, or concealment of physical evidence.” Slip op. at 8 (citations omitted). According to Popovich, the Department’s spoliation of evidence and misrepresentations regarding his 2003 transmittal envelope, as well as its general discovery abuses throughout the litigation, justified sanctions. The Court “may impose a variety of sanctions pursuant to either Indiana Trial Rule 37 or its inherent authority to deter litigants and their attorneys from engaging in spoliation and to provide relief to aggrieved litigants.” Slip op. at 7 (citations omitted). To prove spoliation, a party must show there was a duty to preserve the evidence and the supposed spoliator negligently or intentionally destroyed, mutilated, altered, or concealed the evidence. Id. (citations omitted).

No duty to retain envelopesThe Department’s retention schedule required it to keep individual income tax returns for six years from the date of filing. It must keep all tax returns for three years.  Slip op. at 10 (citing Ind. Code § 6-8.1-3-6(a) (2009).) But was a transmittal envelope part of the tax return?  “No,” the Court held.  Slip op. at 11. The Court reasoned that the plain meaning of “tax return” included only the forms used to report and compute the taxpayer’s liability, not the transmittal envelopes. Id. And the Department never interpreted its retention schedule to include preservation of the envelopes. The Department had no statutory duty to preserve Popovich’s envelope, the Court held. Slip op. at 12. Moreover, the hearing officer’s statement about the envelope was not a binding declaration of the Department’s retention policy. Slip op. at 12 (citations omitted). The Department had no self-imposed duty to preserve the envelope.  Slip op. at 13.

No proof of intentional destruction or conspiracyPopovich further argued that the Department intentionally offered his ex-wife’s 2003 transmittal envelope to support the timeliness of its proposed assessment. The Court noted that the parties had used the discovery process “as an opportunity for gamesmanship, which engendered secrecy, incivility, and distrust.” Slip op. at 14.  While the Court would not condone the parties’ behavior, it could not “infer from the facts before it that the Department intentionally or even negligently destroyed, mutilated, or altered Popovich’s 2003 transmittal envelope.” Id.  The Court also could not infer that the Department conspired to replace Popovich’s envelope with his ex-wife’s envelope. Id.  Thus, Popovich did not show that the Department’s “discovery misdeeds warrant the entry of a default judgment and an award of all litigation expenses, including attorney’s fees.” Id.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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