Opinion
11216-21
04-01-2024
TANYARD FARMS, LLC, TANYARD INVESTORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Elizabeth Crewson Paris, Judge
On December 12, 2023, docket entry 55, petitioner filed a Motion for Protective Order Pursuant to Rule 103 requesting that the Court issue an order that respondent immediately cease contacting investors or, in the alternative, that respondent issue corrected letters with the language approved by the Court in St. Andrews Plantation, LLC, Docket No. 20849-17 (St. Andrews). On January 17, 2024, docket entry 64, respondent filed a Response to Motion for Protective Order.
Unless otherwise indicated, Rule references are to the Tax Court Rules of Practice and Procedure.
This case was called for Hearing on petitioner's Motion for Protective Order at the remote Special Trial Session of the Court on January 18, 2024. At the hearing, the parties agreed to work toward finding language agreeable to both parties to use in a corrected letter. The Court took petitioner's Motion CAV.
The Court held conference calls with the parties on January 25, 2024, and February 21, 2024, to further discuss this matter. On both calls the parties agreed to continue working toward agreement on language to use in the corrected letters.
On March 5, 2024, docket entry 74, respondent filed a Motion for Leave to File First Supplemental Response to Motion for Protective Order and lodged a First Supplemental Response to Motion for Protective Order, docket entry 75. Also on March 5, 2024, docket entry 76, petitioner filed a Motion for Leave to File Response to First Supplemental Response to Motion for Protective Order and lodged a Response to First Supplemental Response to Motion for Protective Order, docket entry 77. The parties' responses indicate that the parties agree with the language in the letter on all but one point.
This case was called for Hearing on respondent's Motion for Leave to File First Supplemental Response to Motion for Protective Order, docket entry 74, and petitioner's Motion for Leave to File Response to First Supplemental Response to Motion for Protective Order, docket entry 76, at the remote Special Trial Session of the Court on March 25, 2024. At the hearing, the Court granted the parties' Motions for Leave to File, docket entries 74 and 76, and filed respondent's First Supplemental Response to Motion for Protective Order, docket entry 83, and petitioner's Response to First Supplemental Response to Motion for Protective Order, docket entry 84.
Background
The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding petitioner's motion and not as findings of fact in this case. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).
This is a syndicated conservation easement case concerning a grant of conservation easement encumbering approximately 137.51 acres of real property in Shelby County, Alabama (property). Beginning in 2010 the property was owned by Merrell Bros., Inc. (Merrell). In Fall 2016, as part of a Membership Purchase Agreement with Strategic Red Mountain, LLC, Merrell contributed the property to Tanyard Farms, LLC (Tanyard).
In August 2017 Tanyard Investors, LLC (Tanyard Investors), solicited investors through a private placement memorandum. At all relevant times Tanyard Investors had 61 members, 59 of which are individuals or single-member LLCs (individual investors). On October 18, 2017, Tanyard Investors purchased a 97% interest in Tanyard. On November 8, 2017, Tanyard granted a conservation easement on the property in favor of the Atlantic Coast Conservancy.
Tanyard filed Form 1065, U.S. Return of Partnership Income, for tax year 2017 claiming a charitable contribution deduction of $24,607,000 for its conservation easement donation. The Internal Revenue Service (IRS) selected Tanyard's return for examination. On March 22, 2021, the IRS issued petitioner a notice of final partnership administrative adjustment disallowing the charitable contribution deduction in full and asserting various penalties. Petitioner timely petitioned this Court for readjustment of partnership items.
The parties in this case are currently engaged in discovery. In an attempt to obtain information related to the conservation easement, respondent sent letters to many of the individual investors (initial letter). The initial letter requested that the individual investors provide respondent information and documents pertaining to the conservation easement that is the subject of this litigation. None of the individual investors are direct partners of Tanyard.
Since the date petitioner filed its Motion, the parties have worked toward agreement on language to use in a revised letter. Respondent included a copy of the latest version of its revised letter as Exhibit C to respondent's First Supplemental Response to Motion for Protective Order, docket entry 83. The parties agree to the contents of this revised letter on all but one point: petitioner urges that respondent should add one word to further explain the purpose of reissuing the letters.
Discussion
Petitioner argues that respondent's initial letters are an overreaching and improper attempt to obtain discovery and information from individual partners of the donor partnership. Petitioner primarily moves the Court to order respondent to cease contacting the individual investors. Petitioner argues that (1) the letters are an abuse of the Court's discovery procedures, and (2) the initial letters are misleading and abusive because they do not clarify what respondent means by "more formal measures to obtain this information," do not clarify that respondent is adverse to the individual investors, and request documents that may be privileged. In the alternative, petitioner moves the Court to order respondent to reissue corrected letters that use language substantially similar to letters respondent sent to investors in St. Andrews. Petitioner included a copy of the St. Andrews form letter as Exhibit B to its Motion.
Respondent asserts that a protective order is not proper because (1) Rule 103 does not apply to informal requests for information, (2) petitioner has not established good cause because it has not shown that the letter has caused either petitioner or any of the individual investors "annoyance, embarrassment, oppression, or undue burden or expense," (3) the requests for information and documents are consistent with the Court's discovery rules and seek information relevant to this case, and (4) the initial letters were not misleading or abusive.
"The purpose of discovery in the Tax Court is to ascertain facts which have a direct bearing on the issues before the Court." Ash v. Commissioner, 96 T.C. 459, 463 (1991). Under Rule 103(a) the Court may, for good cause, issue an order "to protect a party or other person from annoyance, embarrassment, oppression, or undue burden or expense." The burden to establish good cause is on the party seeking the protective order. Estate of Yaeger v. Commissioner, 92 T.C. 180, 189 (1989). "Conclusory or unsupported statements" are not sufficient to establish good cause. Id.
Generally speaking, informal requests for information or interviews "are not subject to restriction under Rule 103" because they "do not fall within our discovery procedures." Fu Inv. Co. v. Commissioner, 104 T.C. 408, 410 (1995). Respondent has made informal requests for information to the individual investors in the transaction. The individual investors are not represented by petitioner's counsel, and their cooperation is voluntary.
Under these circumstances, it is hard to see how respondent's requests could be "subject to restriction under Rule 103." Id. Because respondent's requests have been directed to the individual investors rather than petitioner, the requests would not impose on petitioner any "annoyance, embarrassment, oppression, or undue burden." See Rule 103(a). And because the individual investors are free (directly or through their attorney if represented) to decline respondent's overture, it is not clear how respondent's request could be thought to impose oppression, undue burden, or undue expense on them.
Even so, discovery is not limitless, and respondent's initial letter requested broad categories of information and documents, which were seemingly not limited to any specific time period or to unprivileged information and documents. The Court has reviewed the revised letter as provided in Exhibit C to respondent's First Supplemental Response to Motion for Protective Order, docket entry 83. The Court is satisfied that the revised letter is substantially similar to the St. Andrews letter. Additionally, the Court is satisfied that the revised letter is clear that respondent is adverse to the individual investors; that respondent is not requesting any privileged information or documents; that the individual investors may disregard respondent's initial letter; and that the individual investors are free to decline to provide respondent with any documents or information requested in the second letter.
After due consideration, it is
ORDERED that petitioner's Motion for Protective Order Pursuant to Rule 103, filed December 12, 2023, docket entry 55, is denied, in part, to the extent it seeks to prohibit respondent's counsel from contacting individual investors. It is further
ORDERED that petitioner's Motion for Protective Order Pursuant to Rule 103, filed December 12, 2023, docket entry 55, is granted, in part, in that respondent shall limit any reissued letters to individual investors to the form set forth in Exhibit C to Respondent's First Supplemental Response to Motion for Protective Order, filed March 25, 2024, docket entry 83. It is further
ORDERED that respondent's potential future letters to individual investors shall contain the same types of limiting explanations as set out above.