If you are litigating a case with the IRS in the U.S. Tax Court, can you fail to produce records and then show up with them for the first time on the day of trial?
The answer to this question is a clear “no” in most courts as this type of conduct is unfair to the other parties. This is not necessarily the case in the U.S. Tax Court.
The recent Brooks v. Commissioner, T.C. Memo. 2022-122, case provides an example of this.
Facts & Procedural History
This case involves a conservation easement. The IRS has continued to challenge conservation easements on audit.
The taxpayers invested in a conservation easement. The entity was structured as a partnership and the charitable deductions flowed through to the taxpayer’s individual income tax returns for 2010, 2011, and 2012.
The IRS proposed to disallow the deductions and it proposed gross valuation misstatement penalties. The case ended up in the U.S. Tax Court. The court set the case for trial and issued its Standing Pretrial Order.
This article is about the IRS’s effort to introduce evidence for the first time at trial without first providing the record to the taxpayer as required by the Standing Pretrial Order.
About the Standing Pretrial Order
The tax court’s Standing Pretrial Order sets out the rules the court expects the parties to follow as they start preparing the case for trial. It is more commonly known as a Docket Control Order in court cases outside of the tax court.
The Standing Pretrial Order sets out various deadlines and expectations. One such deadline and expectation involves the 14-day rule. This rule obligates the parties to exchange exhibits they intend to use at trial:
It is ORDERED that any documents or materials which a party expects to use (except solely for impeachment) if the case is tried, but which are not stipulated, shall be identified in writing and exchanged by the parties at least 14 days before the first day of the trial session.
The order goes on to say that:
The Court may refuse to receive in evidence any document or material that is not so stipulated or exchanged, unless the parties have agreed otherwise or the Court so allows for good cause shown.
The authority for this rule is found in Tax Court Rule 131(b), which references Rules 104, 123, and 202. Rule 104 sets out the following sanctions that the court may order:
- An order that the matter regarding which the order was made or any other designated facts shall be taken to be established for the purposes of the case in accordance with the claim of the party obtaining the order.
- An order refusing to allow the disobedient party to support or oppose designated claims or defenses, or prohibiting such party from introducing designated matters in evidence.
- An order striking out pleadings or parts thereof, staying further proceedings until the order is obeyed, dismissing the case or any part thereof, or rendering a judgment by default against the disobedient party.
- In lieu of the foregoing orders or in addition thereto, the Court may treat as a contempt of the Court the failure to obey any such order, and the Court may also require the party failing to obey the order or counsel advising such party, or both, to pay the reasonable expenses, including counsel’s fees, caused by the failure, unless the Court finds that the failure was substantially justified or that other circumstances make an award of expenses unjust.
This allows the court to ensure the orderly operation of the court and litigation process.
Failure to Comply & Exclusion of Evidence
The court has also held that the court can refuse to admit the evidence if there is an unexcused failure to comply with the 14–day rule.
This case is an example of an unexcused failure to comply. For the first time at trial, the IRS attorney sought to introduce an IRS form it needed to produce to support assessing penalties. This directly violates the 14-day rule. Worse yet, the document was dated nine months earlier–meaning that the IRS attorney had the record for quite some time and still failed to produce it.
The taxpayers argued that the IRS attorney’s violation of the 14-day rule prevented them from raising the absence of this form as a defense. The court did not agree. The court cited prior cases that allowed the IRS to produce this form late. According to the court, this “serves the interest of justice and is not prejudicial.”
The court reached this conclusion on the basis that the taxpayer had apparently received the record prior to the 14-day period, but did not raise this as a defense.
This case shows that strict compliance with the 14-day rule is not always required. A party can present records for the first time on the day of trial in the U.S. Tax Court. To do so, the rule seems to be that the party seeking to introduce the record in court just needs to show that the record was previously provided to the other party, such as during the audit or the administrative appeal.