The Gambler Breaks Even: Tax Court Orders Indiana Department Of Revenue To Answer Discovery Requests But Denies Taxpayer’s Second Motion To Compel In Income Tax Appeal

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The Indiana Tax Court granted one of two motions to compel discovery responses filed by a gambler.

The Indiana Tax Court granted one of two motions to compel discovery responses filed by a gambler against the Department of Revenue.

The Tax Court does not often address discovery issues in published decisions and orders.  In this case, Popovich v. Indiana Department of State Revenue, Cause No. 49T10-1010-TA-53 (April 24, 2014 and June 4, 2014), the Court has issued three orders – the first (Popovich I ) on Taxpayer’s first motion to compel and the Department’s motion for protective order, the second (Popovich II) on Taxpayer’s second motion to compel and the third (Popovich III) on Taxpayer’s motion to reconsider denial of its second motion to compel.  The first two were issued on April 24th, the third on June 4th.

Nick Popovich is a gambler, but not a professional gambler according to the Department of Revenue.  Because of that difference of opinion, the Department concluded that Popovich was not entitled to certain business expense deductions and issued proposed assessments for additional income tax.  The Department rejected Popovich’s protest.

Dealing the discovery cards.  On appeal to the Tax Court, Popovich served the Department with discovery requests, consisting of numerous requests for admission, interrogatories, and requests for production.  The Department objected to several of the requests on grounds the information sought was protected as confidential under Indiana Code § 6-8.1-7-1 or by the work-product, attorney-client, and deliberative process privileges.  Popovich sent the Department a deficiency notice and stated he was willing to meet with the Department to discuss the matter as required by Indiana Trial Rule 26(F).  The Department agreed to supplement its responses, but not within the ten-day deadline requested by the taxpayer.  Popovich again offered to schedule an informal meeting to resolve the dispute.  He later agreed to a new deadline for supplemental responses, if the Department would cure all alleged deficiencies and not raise additional objections or counter arguments without advising Popovich in advance.  Regardless, upon responding the Department added an objection “to the extent [the request] improperly seeks to pry into the hearing officer’s decision-making process, and, therefore, will not lead to the discovery of admissible evidence.”  Popovich objected at length and once more offered to hold an informal meeting.  He further warned that, without a resolution, the filing of a motion to compel was imminent.  The Department believed its responses were complete but agreed to meet with Popovich – but not for approximately one month.  Popovich filed his motion to compel.  After a conference with the Court, the Department raised more objections.  The Department also filed a motion for a protective order.

Rules of the contest.  Discovery is designed “to allow a liberal exchange of information essential to litigate all relevant issues and to promote settlement.”  Popovich I, Slip op. at 6 (citation omitted).  The discovery process is intended to “make a trial less a game of blindman’s bluff and more a fair contest with the basic issues and facts disclosed to the fullest practicable extent.”  Id. (quotation omitted).  Discovery is supposed to be self-executing, but when disputes arise that the parties cannot resolve, Indiana Trial Rule 37 provides that a “party, upon reasonable notice to other parties and all persons affected thereby, may apply for an order compelling discovery.”  Moreover, Trial Rule 26(C) allows the Court, for good cause shown, to make any order which justice requires to protect a party.  The Tax Court has broad discretion in reviewing discovery enforcement motions.

Relevance objections were a bluff.  Was Popovich a professional gambler?  That was the central issue and because Popovich’s requests did not address that issue, the Department asserted, they were irrelevant.  But that was not the only issue raised by Popovich in his petition.  Each of the objectionable requests dealt with at least one issue in dispute.  Because of the Court’s de novo standard of review, the Department further argued that any information specific to the administrative review process was irrelevant because the Court owed no deference to the Department’s decision.  But “discovery requests do not lack relevance just because they are not given deference or are not binding on the Court.  To find otherwise would be antithetic to the broad scope of disclosure directed by Indiana’s discovery rules to prevent trial by ambush.”  Popovich I, Slip op. at 11.  The requests were relevant.  Id.

In proving a deliberative process privilege, the Department was out of aces.  Privileged communications are undiscoverable.  Popovich I, Slip op. at 11 (citing Trial 26(B)(1).)  The Department argued that Indiana recognizes a deliberative process privilege that prohibits the discovery of communications that are part of the Department’s decision-making process.  The privilege provides a “wide shield” which “protects all documents and communications evidencing the thoughts and deliberations of its hearing officers, auditors, and other employees throughout the entire administrative process.”  Popovich I, Slip op. at 11-12.  Because the federal courts recognize such a privilege and Indiana’s rules are modeled on those rules, the Department claimed Indiana too has the privilege.  The Department provided no persuasive Indiana authority (either statutes or case law) supporting its position.  Id. at 12-13.  The “existence of a federal privilege does not necessarily animate a similar state privilege”; without more, the Department failed to show a parallel Indiana exemption existed.  Id. (citation omitted).

Nor did Indiana’s Access to Public Records Act (APRA) prevent disclosure.  Taxpayer’s requests were made under the civil trial rules, not the APRA.  Regardless, the APRA’s statutory exception to disclosure only prohibits disclosure to the general public, not between parties in civil cases.  Popovich I, Slip op. at 13-14.

The Department had to play with the hand it was dealt.  The Court would not modify the rules.  It is up to the legislature “to elevate public policy regarding the protection of deliberative processes into a privilege.”  Popovich I, Slip op. at 14.

Reading the opponentThe Court agreed that a “bar against probing the mental processes of decision-makers applies in limited circumstances like those in which an administrative decision-maker acts in a quasi-judicial capacity, such as presiding over a hearing, rendering an evidentiary ruling, or issuing a final judgment in a particular case.”  Popovich I, Slip op. at 16 (emphasis added, citation omitted).   But the audit process is not quasi-judicial.  Id.  Rather, it is a “fact-finding exercise where a taxpayer is required to give the Department complete access to all its books or records or face possible sanctions.”  Id. (citations omitted).  Consequently, the information or documents regarding Popovich’s audit were not protected from disclosure.  Id.

The Department made only blanket claims that the work-product and attorney-client privileges protected it from answering the discovery requests and regarding other objections.  The Department, however, had the “responsibility of articulating and adequately supporting its assertions of privilege to the Court.”  Popovich I, Slip op. at 17.  (However, the Court sustained the objection to one interrogatory to the extent the Department could sufficiently identify protected communications with counsel, see id. at 18.)

With the one noted exception, the Court denied the Department’s motion for a protective order and directed the Department to fully respond to Taxpayer’s discovery requests.  Popovich I at 19-20.

By sending only a “message in a bottle,” Taxpayer played a losing handPopovich sought production of twenty-seven original documents at a deposition of the Department’s witness.  Via an email sent to the Department on the day before the deposition, Taxpayer agreed that other documents could be copies, after having initially requested originals of all documents.  When the Department’s witness appeared with only copies, Popovich adjourned the deposition and filed a second motion to compel.

Before a motion to compel is filed, Indiana Trial Rule 26(F) requires the parties to make a reasonable effort to resolve their disagreement.  The motion to compel must include information showing how the moving party attempted to reach common ground with the opposing party.  Here, Popovich’s motion focused on the Department’s alleged “bad acts.”  Taxpayer, however, failed to show what informal steps he made to resolve the discovery dispute before filing the motion to compel.  That Popovich had sent an email reducing the number of originals the Department could produce was an insufficient “message in a bottle” communication.  Popovich II, Slip op. at 5.  Taxpayer’s motion did not say whether the lone email “hit its mark” to spark a back and forth exchange with the Department. Id.  And the motion did not report whether any further discussion between the parties took place to resolve the standoff.  With no showing that Popovich had made a reasonable effort to break the bottleneck on this issue with the Department, the Court denied the second motion to compel.  Popovich II, Slip op. at 6.

“Rarely and sparingly” should the Court’s time be spent on discovery issues, the Court observed.  Popovich II, Slip op. at 5 (citation omitted).  When the Court’s time is required, it should be “minimal and well spent” on “sharply focused” issues.  Popovich I, Slip op. at 19 (citation omitted).

In Popovich III, Taxpayer asked the Court to reconsider the denial of its second motion to compel.  First, Popovich asserted that because he issued a subpoena under Indiana Trial Rule 45 he did not have to comply with Trial Rule 26(F).  But Popovich’s motion to compel had invoked Trial Rule 37, which “makes compliance with Trial Rule 26(F) a prerequisite.”  Popovich III, Slip op. at 2-3 and n. 2.

Second, he claimed that the Court should have excused his failure to comply with Trial Rule 26(F) because any effort to comply would have been futile, because the Department “acted repeatedly in a non-cooperative manner.”  Id. at 3.  The Court found that this alternative argument “misses the point” of its earlier ruling. Id. at 4.  Observing that the requirements of Trial Rule 26(F) are “neither discretionary nor onerous,” the Court explained that “litigants are expected to comply with each of the specific requirements of Trial Rule 26(F) before moving to enforce, modify, or limit discovery, even in instances where, like here, the entire discovery process has been imbued with acrimony.” Id. at 4 (citing Popovich II, Slip op. at 6, internal quotes omitted, emphasis in original).  The Court held:  “Popovich’s failure to comply with Trial Rule 26(F) is not cancelled out by the purported bad behavior of its opponent and is not excusable.”   Id.

Topics:  Department of Revenue, Discovery, Income Taxes, Motion to Compel, Request For Information, Tax Returns

Published In: Art, Entertainment & Sports Updates, Civil Procedure Updates, Tax Updates

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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