DAWSON, Chief Judge:
This matter is before the Court on petitioner's motion to compel production of documents pursuant to Rule 72, Tax Court Rules of Practice and Procedure. Oral arguments on the motion, together with the testimony of three witnesses, were heard on February 5, 1975. Written memoranda of law were filed by both parties. The documents in question were submitted to the Court for its in camera inspection.
The history of this case may be summarized as follows: A statutory notice of deficiency was mailed to petitioner on April 20, 1973. The adjustments therein related to (1) additions to a
Petitioner seeks the production of two revenue agent reports and related audit workpapers; two district conferee reports; an appellate conferee's report; two conference memoranda; and each and every other document prepared by respondent's employees pertaining to the audit of petitioner's Federal income tax returns for taxable years ended March 31, 1967, 1968, and 1969. Respondent has objected to their production on the multiple grounds that portions thereof were prepared in anticipation of litigation; they contain opinions, mental impressions, reasonings, and conclusions which cannot feasibly be separated from facts therein; they are subject to governmental privilege; they are subject to the attorney-client privilege; their relevancy has not been established by petitioner; and, finally, that petitioner's request for each and every other document prepared by respondent's employees regarding the audit of petitioner's returns is so broad, vague, and ambiguous that respondent cannot comply.
Under Rule 72 any party may, without leave of Court, serve on any other party a request to inspect and copy any designated documents to the extent they are in the possession, custody, or control of the requested party. The request may set forth the items to be inspected either by individual item or by category with reasonable particularity. Where an objection is made to part
Petitioner seeks to inspect documents in the possession and control of respondent in an attempt to help substantiate claimed travel, entertainment, tax, depreciation, and other miscellaneous deductions. Petitioner also seeks to show that certain additions to its reserve for bad debts in each year were reasonable. Petitioner has a particularly heavy burden on the latter issue, for not only must it be shown that the addition to its reserve for bad debts was reasonable but also that the adjustment by respondent which reduced its allowable reserve constituted an abuse of discretion by respondent. Westchester Development Co., 63 T.C. 198, 211 (1974); James A. Messer Co., 57 T.C. 848, 864-865 (1972); Massachusetts Business Development Corp., 52 T.C. 946, 951 (1969). The exact mathematical method utilized by the Commissioner's employees to calculate an allowable bad debt reserve may be shown by a taxpayer to be wholly unwarranted and an abuse of discretion where its use violates a regulation promulgated on this subject. In Westchester Development Co., supra at 211, the taxpayer was able to bear the heavy burden of proof on the bad debt reserve issue by pointing to exact calculations used by the Commissioner's employees resulting in the disallowance of the claimed reserve. The discretion in issue was that of individual employees of the respondent; the result of its exercise produced an unwarranted adjustment as found by this Court. Thus, proof of conduct of persons setting up adjustments to claimed bad debt reserves, which may be reflected in the workpapers of such persons, may well be an indispensable element of petitioner's case-in-chief here. Mindful of the distinct and heavier burden of proof which the petitioner must meet on the bad debt reserve issue, we will now consider respondent's objections to petitioner's motion to compel production of the specified documents.
Respondent's first objection to production of the requested revenue agent reports, audit workpapers, district conferee reports, the appellate conferee report, and conference memoranda is that these documents were prepared in anticipation of litigation, or, in other words, that they constitute nondiscoverable "work
The Notes to Rule 70(b) indicate that "work product" is generally intended to be outside the scope of discovery under our new Rules. Respondent states that in each instance the documents sought contain, among other things, statements concerning all issues unresolved between the parties at the audit, district, and appellate levels of review. Moreover, he asserts that these unagreed issues were thereafter reflected in the statutory notice of deficiency issued to petitioner after its preparation by the Appellate Division with a recommendation by the Regional Counsel's Office. Respondent submits that when an issue becomes unresolved at any stage of the administrative processes of the Internal Revenue Service, then litigation is anticipated.
Respondent notes correctly that our opinion in P. T. & L. Construction Co., 63 T.C. 404 (1974), dealt with the issue of work product by emphasizing the lack of proof introduced there by respondent to support this objection to production of a special agent's report and an appellate conferee's report. To avoid this pitfall in the instant case, respondent produced evidence and the testimony of three witnesses. One witness testified that the duties of a revenue agent include assignment of a return to be audited, preparation of work records in connection with that audit, and discussion of the proposed adjustments with the taxpayer or his representative. Thereafter, the revenue agent prepares a report indicating the adjustments to income as reported on the return
Mr. Aaron Mednick was the appellate conferee who conducted the appellate conferences in this case. No agreement was reached with petitioner on any of the issues in dispute. Mr. Mednick then prepared a report based on the revenue agent's report, the district conferee's report, and his own conferences with representatives of petitioner. The general format of his report consisted of a supporting statement, including a statement of the issues, a statement of the settlement proposal, a statement of the facts, argument, and conclusion. The supporting statement need not contain a repetition of the facts where the record is already complete in that respect. Mr. Mednick's report included his analysis, his conclusions, and his recommendation that a statutory notice of deficiency be issued. His report was then forwarded for review to the Assistant Chief of the Appellate Division, and was ultimately forwarded to Regional Counsel, along with the administrative file. Mr. Barry Gordon was the Regional Counsel attorney who reviewed the proposed statutory notice of deficiency and approved its issuance.
Respondent argues that the protection of materials prepared in anticipation of litigation has been extended to materials prepared by nonlawyers. Alltmont v. United States, 177 F.2d 971 (3d Cir. 1949); Almaguer v. Chicago, Rock Island & Pacific Railroad Co., 55 F.R.D. 147 (D. Neb. 1972); Howard v. Seaboard Coastline Railroad Co., 60 F.R.D. 638 (N.D. Ga. 1973). Thus, in Weir Foundation v. United States (S.D.N.Y. 1972, 29 AFTR 2d 72-1225), affd. per curiam (2d Cir. 1974, 35 AFTR 2d 75-538), the District Court held that revenue agents' reports and appellate conferee reports were made in anticipation of litigation. Respondent attempts to distinguish our opinion in P.T. & L. Construction Co., supra, and the decision of the District Court in Peterson v. United States, 52 F.R.D. 317 (S.D. Ill. 1971), as based on a failure of proof. In view of the testimony and evidence presented here, respondent contends that there is an unbroken
Petitioner acknowledges that the documents it seeks are reports prepared at the various levels of the settlement procedure by persons who determine whether a deficiency in tax is warranted. Petitioner submits, however, that several factors demonstrate that these documents were not prepared in anticipation of litigation. First, they are routinely prepared in each case and before the commencement of any law suit. Reports and communications made regarding a subject matter under investigation in the ordinary course of business are not privileged either in the hands of the person who caused such investigation to be made or in the hands of his attorney to whom they have been transmitted. Hence, petitioner argues that they do not fall into the category of work product, citing Hickman v. Taylor, 329 U.S. 495 (1947), and Thomas Organ Co. v. Jadranska Slobodna Plovidba, 54 F.R.D. 367 (N.D. Ill. 1972). Second, petitioner argues that the requested documents are not prepared by or at the direction of an attorney who would try the case if litigation should develop. Third, if the reports are impartial between a taxpayer and the Government, then they are not designed to be adversary in nature. Fourth, the case to be tried would be developed by respondent's trial counsel from all available facts and theories whether or not they were conceived and expressed
The landmark case on what will be considered "work product" is Hickman v. Taylor, supra, and its holding was incorporated in the Note to our Rule 70(b). That case defined "work product" as the files of an attorney as reflected in interviews, mental impressions, personal beliefs, and other materials except for those material facts which are shown to be relevant and nonprivileged. Thus, if materials are prepared by an attorney in anticipation of litigation they will be nondiscoverable. If not so prepared, they are discoverable as a matter of right, assuming relevance and lack of privilege. More recently, as respondent points out, courts have protected documents prepared by persons at the direction of an attorney on the ground that they constitute the attorney's work product. Such is not the case here. Instead, we are presented with facts showing that certain reports were not requested by or prepared for an attorney, and they do not reflect use of an attorney's expertise. See Thomas Organ Co. v. Jadranska Slobodna Plovidba, supra. The reports sought by petitioner more closely resemble documents prepared in the ordinary course of business. The two revenue agent reports and related audit workpapers, the two district conferee reports, memoranda, and the appellate conferee report were not prepared by or at the direction of an attorney. Such documents may under certain circumstances be prepared in anticipation of litigation. But that is not the situation in this case because the preparers were not attorneys acting as counsel, and they were not acting pursuant to the directions of an attorney in preparing the reports. Absent a clear showing of more direct participation by an attorney in the
Respondent's second objection to petitioner's motion to compel production is that the documents sought contain opinions, mental impressions, reasonings, and conclusions which cannot feasibly be separated from the facts therein. We think this objection is substantially similar to the "work product" defense raised by respondent. See 4 Moore, Federal Practice, par. 26.64[3], p. 26-416 (2d ed. 1948); Wright, Federal Courts, ch. 10, sec. 82, p. 360 (2d ed. 1970); P. T. & L. Construction Co., supra at 409-410. Since respondent has not shown that the documents in question are entitled to protection from discovery as "work product," the mere fact that they contain opinions, mental impressions, reasonings, or conclusions is not sufficient in our opinion to warrant protection from discovery. Moreover, as we noted earlier, the scope of discovery under Rule 72 is intended to encompass opinions or contentions relating to facts or the application of law to facts, assuming relevance and lack of privilege. Thus, we will not sustain respondent's second objection to petitioner's motion to compel production.
Respondent's third objection is that the documents requested are protected from discovery by an attorney-client privilege. The attorney-client privilege protects only "work product" of an attorney. The privilege applies to material obtained by or at the direction of an attorney, and only if the material was obtained in preparation for trial. Wright, Federal Courts, sec. 82, p. 365 (2d ed. 1970). A document already in existence or prepared without reference to the obtaining of legal advice is not protected by the attorney-client privilege. Routine reports of employees which are not prepared primarily for purposes of legal advice or for litigation are generally conceded not to be privileged. The documents sought by petitioner, as we discussed earlier, do not fall into the category of "work product." They were not prepared by or at the direction of an attorney, but were in fact in existence prior to any review of them by an attorney in the Regional Counsel's office. Since the documents are not the work product of an attorney, we will not sustain respondent's objection that the district conferee, appellate conferee, or memoranda of conference reports are protected by an attorney-client privilege.
Respondent submits that to allow petitioner to inspect these documents will thwart effective operations of the Internal Revenue Service which require free and candid expression of reasoning, opinions, and conclusions so that reviewers and ultimate decision makers have all the information necessary to make a given decision. He urges that the long range public interest is best served by protecting internal documents from discovery. Several cases are cited in which documents were protected because they contained recommendations, opinions, and conclusions subject to governmental privilege. Simons-Eastern Co. v. United States, 354 F.Supp. 1003 (N.D. Ga. 1972); Weir Foundation v. United States (S.D.N.Y. 1972, 29 AFTR 2d 72-1225); Environmental Protection Agency v. Mink, 410 U.S. 73, 86 (1973); ISI Corp. v. United States (N.D. Cal. 1972, 31 AFTR 2d 73-635), affd. (9th Cir. 1974, 34 AFTR 2d 74-5770); Kaiser Aluminum & Chemical Corp. v. United States, 157 F.Supp. 939, 946 (Ct. Cl. 1958). Respondent also points to the Freedom of Information Act, 5 U.S.C. section 552(b)(5), and cases thereunder, as an example of the general judicial and legislative acceptance of governmental privilege.
Although respondent makes a persuasive argument for protecting the requested documents, we see the uniquely heavy burden of proof petitioner bears on the bad debt reserve issue as striking a balance in favor of limited discovery in the instant case. As a general rule, this Court will not look behind a deficiency notice to examine the propriety of respondent's administrative policy or procedures. Greenberg's Express, Inc., 62 T.C. 324 (1974); Estate of David Smith, 57 T.C. 650 (1972), affd. 510 F.2d 479 (2d Cir. 1975). However, this general rule is subject to exceptions, e.g., where such procedures might involve violation of constitutional rights. Efrain T. Suarez, 58 T.C. 792 (1972). In our opinion the instant case presents another exception, where procedures utilized by respondent in
Respondent's fifth objection is that the relevancy of the requested documents has not been established by petitioner. As to the T-letters and the audit workpapers of the revenue agent, we find this objection unsupported by the exhibits submitted for our in camera inspection. These documents contain information highly relevant to petitioner's case, particularly on the bad debt reserve issue. We need not decide whether the relevancy of the district conferee's report, appellate conferee's report, or
To summarize, we sustain respondent's objection to production of the reports of the district conferee, the appellate conferee, and memoranda of conference on the sole ground that they are protected from discovery by governmental privilege. On the other hand, we hold that the petitioner is entitled to inspect and copy the T-letters and audit workpapers prepared by the revenue agent because it has shown a compelling need for data contained therein in view of its heavy burden of proof on the bad debt reserve issue.
A separate objection to production is raised by respondent with respect to the request for each and every other document prepared by respondent's employees in the audit of petitioner's tax returns for the years in issue. Respondent contends that this request is so broad, vague, and ambiguous that he cannot comply. He also contends that these remaining documents in its administrative file are not relevant to the development of the facts in petitioner's case.
Rule 72(b) sets forth the procedure to be used thereunder by a requesting party. It provides in part: "The request shall set forth the items to be inspected, either by individual item or by category, and describe each item and category with reasonable particularity." (Emphasis supplied.) Petitioner clearly has not set forth its request in terms of individual items. Moreover, the only "category" utilized to describe the requested documents is by way of association with respondent's audit of petitioner's relevant tax returns. We find such a description by association too broad, vague, and ambiguous to meet the requirement of Rule 72 that all requests thereunder be categorized with "reasonable particularity." Certainly there are more specific delineations available to a requesting party. In addition to the lack of particularized description, we are not persuaded that "each and every other document" prepared by respondent's employees in auditing petitioner's returns is necessarily relevant to the ultimate issues framed by the pleadings in this case. Documents concerning issues resolved between and agreed upon by the parties prior to the issuance of the statutory notice of deficiency and the filing of the petition herein are not now relevant to the
Therefore, we will sustain respondent's objection to petitioner's motion to produce each and every other document in its administrative file compiled in this case.
An appropriate order will be entered.
Comment
User Comments