In two opinions issued March 7, 2016, the Indiana Tax Court dealt another hand in the ongoing (and seemingly never-ending) discovery dispute between Gambler Nick Popovich and the Department of Revenue, awarding Popovich $24,963 and the Department $5,175.25 in attorney’s fees.
For background on the appeal, review my prior posts here and here. Ten days before its hearing on Popovich’s first motion to compel, the Tax Court ordered the Department to produce a “discrete and numbered list” of the items it sought to be protected in discovery. In response, the Department identified 418 separate objections. The Court in April 2014 rejected the Department’s claims as to relevancy, the deliberative process privilege, the general bar against probing the mental processes of administrative decision-makers, the work-product privilege, and the attorney-client privilege, as well as other blanket objections. Subsequently, the Court held a hearing under Trial Rule 37(A)(4) to determine reasonable expenses incurred by Popovich in obtaining the discovery order, including attorney’s fees.
When a discovery motion is granted or denied, the award of expenses to the prevailing party is mandatory “unless the losing party either demonstrates that he was substantially justified in making or opposing the motion or shows that other circumstances make an award of expenses unjust.” Order on Petitioner’s Request, at 4 (citing Penn Cent. Corp. v. Buchanan, 712 N.E.2d 508, 511 (Ind. Ct. App. 1999), trans. denied). “A person is ‘substantially justified’ in seeking to compel or in resisting discovery, for purposes of avoiding the sanctions provided by Trial Rule 37(A)(4), if reasonable persons could conclude that a genuine issue existed as to whether a person was bound to comply with or entitled to the requested discovery.” Id. (quoting Ledden v. Kuzma, 858 N.E.2d 186, 189 (Ind. Ct. App. 2006).)
The Court concluded that the Department was substantially justified in asserting the first three claims identified above (even if the Court rejected these objections); in fact, the Department cited persuasive and binding authority on these points. But the Department improperly asserted blanket objections as to work-product and attorney-client privileges, even if such objections were “common practice.”
Court awards nearly one-half of Gambler’s requested expenses. The Court awarded Popovich $24,963 of his requested $51,210.29 of expenses incurred in successfully prosecuting his first motion to compel. The Court refused to award attorney’s fees for time spent by Popovich’s counsel on the same issue in another case. However, the Court agreed Popovich could be reimbursed for his counsel’s efforts to review, respond to, and attempt to resolve the discovery dispute, including preparing the motion to compel and opposing the Department’s motion to stay discovery.
The Department claimed Popovich’s request was unreasonable because the Department established the general bar against probing the mental processes of administrative decision-makers. The real issue, however, was whether Indiana recognized a deliberative process privilege – a claim for which the Department throughout the proceedings exhibited an “unfaltering inattention to precision” that prolonged resolution of the issue. The Department was claiming “successes where there were none.”
Court also awards Department its expenses. The Court granted $5,175.25 to the Department for expenses incurred to defeat Popovich’s second motion to compel. The motion was denied because Popovich did not document his attempts to resolve the matter informally as required by Indiana Trial Rule 26(F). Popovich claimed his second motion was substantially justified because he was trying to recover the cost of the deposition he cancelled when the Department failed to produce subpoenaed documents. Popovich argued that he likely would have prevailed if he had “couched” his second motion to compel as a Trial Rule 45(F) motion for contempt for failure to obey the subpoena.
The Court rejected Popovich’s arguments, first noting that Popovich cannot “walk away from the requirements of the remedy he sought” on the basis that he meant to file a different motion. Order on Respondent’s Request, at 5. Moreover, “Popovich cannot evade the requirements of Trial Rule 26(F) by pointing his finger at the Department.” Id. He had a clear duty to attempt to informally work out the discovery dispute and to document those efforts. No reasonable person could not conclude that the Department’s “mulish behavior relieved Popovich from complying with the requirements of Trial Rule 26(F).” Id. The Court awarded the Department expenses based on the affidavit of its counsel.
Court dismisses untimely 2003 assessment, but declines to find Popovich was a professional gambler. On April 14, 2016, the Tax Court reached the merits of what until then must have felt like a train bound for nowhere. Of the three years at issue, 2003 to 2005, Popovich claimed that the Department’s 2003 assessment was untimely.
Affidavit admissible, report excluded. The Department argued that Popovich’s supporting affidavit was conclusory and contradictory. But the Department did not identify “a single instance where statements in Popovich’s Affidavit contradicted his discovery statements, were internally inconsistent, were improperly conclusory, put his credibility at issue, or improperly attempted to create a genuine issue of material fact.” Summary Judgment Order, at 4. The affidavit was admissible.
The Court, however, refused to consider an expert report offered by Popovich, because he failed to lay a sufficient foundation to show that the purported expert, who owned and managed casinos for nearly thirty years, was an expert on gambling and professional gamblers.
2003 assessment untimely; late-filed return not the same as a non-filed return. The Department asserted that the certified mail transmittal envelope showed it issued the proposed assessment notice within three years of Popovich’s filing of his return for the 2003 tax year. But that envelope belonged to Popovich’s former wife. And Popovich provided an affidavit explaining that his return was filed on January 10, 2005, more than three years before the Department issued its proposed assessment notice on January 28, 2008. The Court further rejected the Department’s position that a late-filed return was tantamount to never having filed a return. For purposes of the three-year statute of limitations, the Indiana Code treated a late return the same as a timely filed one. Summary Judgment Order, at 7. Accordingly, the Department’s assessment notice for the 2003 tax year was untimely and void. Id. at 8.
Court would not decide whether Popovich was a professional gambler on summary judgment. The Department contended that Popovich could not claim as above-the-line deductions from his income the expenses he incurred while playing blackjack. The Court explained that whether a taxpayer is engaged in a professional business (e.g. gambling) or a hobby has frequently been litigated in federal courts. Reference to the hobby loss rules in the Internal Revenue Code is typical in these cases. Those rules are “focused on whether the taxpayer was engaged in the activity with the objective of making a profit.” Summary Judgment Order, at 9. The Court observed: “Treasury Regulation § 1.183-2 provides that the determination of whether a taxpayer is engaged in an activity with the objective of making a profit is a question of fact to be resolved based on all the facts and circumstances in a specific case.” Id. While a taxpayer’s subjective intent is germane, greater weight should be given to the objective facts in the case. The regulation provides a non-exhaustive list of factors that should be weighed. According to the Court, “The very nature of these inquires make[s] it highly unlikely that this determination could ever be resolved by summary judgment.” Id. at 10. The Court “will not grant summary judgment to any party when the evidentiary presentations require it to resolve factual disputes and conflicting inferences, assess a witness’s credibility, or determine where the preponderance of the evidence lies before it has been fully presented.” Id. (citing Elmer v. Indiana Dep’t of State Revenue, 42 N.E.3d 185, 197 (Ind. Tax Ct. 2015).) The Court, therefore, declined to make judgment calls regarding the relevant factors and rejected the Department’s summary judgment request. Thus, it remains to be seen who ultimately will have the winning hand.
The Court’s March orders regarding attorney’s fees can be viewed here and here. Its April order on the summary judgment can be viewed here.
