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Судебные дела / Зарубежная практика  / JADE TRADING, LLC, et al., Plaintiffs, v. The UNITED STATES, Defendant., United States Court of Federal Claims., 65 Fed.Cl. 443, No. 03-2164T., May 12, 2005

JADE TRADING, LLC, et al., Plaintiffs, v. The UNITED STATES, Defendant., United States Court of Federal Claims., 65 Fed.Cl. 443, No. 03-2164T., May 12, 2005

24.06.2008  

JADE TRADING, LLC, et al., Plaintiffs, v. The UNITED STATES, Defendant.

United States Court of Federal Claims.

65 Fed.Cl. 443

No. 03-2164T.

May 12, 2005.

David D. Aughtry, Chamberlain, Hrdlicka, White, Williams & Martin, Atlanta, Georgia, and Linda S. Paine, Houston, Texas, for Plaintiffs.

Stuart J. Bassin, U.S. Department of Jus╜tice, Tax Division, Washington, D.C., for De╜fendant. Eileen J. O'Connor, Mildred L. Seidman, David Gustafson, William K. Drew, Matthew C. Hicks, and Michael S. Raum, U.S. Department of Justice, Tax Division, Of Counsel.

Ellis Reemer and Diana Erbsen, DLA Pip╜er Rudnick Gray Cary, New York City, for BDO Seidman, LLP.

ORDER AND MEMORANDUM OPINION DENYING BDO SEIDMAN, LLP'S MOTION TO AMEND OPINION TO CERTIFY FOR INTERLOCUTORY APPEAL

WILLIAMS, Judge.

On May 9, 2005, BDO Seidman, LLP, (BDO) a nonparty, filed a motion to certify an interlocutory appeal of this Court's Order denying BDO's motion to quash a subpoena served by Defendant seeking taxpayer infor╜mation of BDO's nonparty clients. 1 Because BDO has not established that the issues pre╜sented meet the strict criteria for certifica╜tion of an interlocutory appeal, BDO's motion is denied.

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1. ═ The Order in question is reported at 2005 U.S. Claims LEXIS 110 (Apr. 22, 2005). BDO also asked the Court to stay production of the nonpar╜ty taxpayer information pending the Court's con╜sideration of this motion and the conclusion of any interlocutory appeal.

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Background 2

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2. ═ This background is recounted in large part in the Order and Opinion at issue and is set forth here for case of reference. Jade Trading, LLC v. United States, No. 03-2164T, 65 Fed.Cl. 188, 190, 2005 WL 950503, at *2, 2005 U.S. Claims LEXIS 110, at * 1-2 (Apr. 22, 2005).

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Plaintiffs bring this action under Section 6226 of the Internal Revenue Code challeng╜ing the Internal Revenue Service's (IRS) ad╜justment of their tax liability and assessment of penalties for 1999. In the Final Partner╜ship Administrative Adjustment (FPAA) at issue, the IRS disallowed capital losses ap╜proximating $40,000,000 and assessed penalties of some $4,000,000, on the Ervin broth╜ers, the real parties in interest. 3

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3. ═ Plaintiffs in this action are Robert W. Ervin and Laura Kavanaugh Ervin on behalf of Ervin Capital LLC, which was a partner in Jade Trad╜ing. Ervin Capital LLC is an entity solely com╜prised of Robert Ervin and Laura Kavanaugh Ervin. Both of Robert Ervin's brothers, Gary Ervin and Tim Ervin, are also real parties in interest in this action because each has his own limited liability company which was a partner in Jade Trading, and each will be affected by any determination of tax liability rendered by this Court.

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Defendant contends that Jade was formed for the purpose of creating artificial tax loss╜es intended to eliminate federal taxes on unrelated capital gains received by the Er╜vins in 1999. Plaintiffs counter that Jade Trading was a bona fide partnership, formed for the express purpose of making money from trading, and not with a principal pur╜pose of reducing substantially the partners' aggregate federal tax liability.

The Government asserts that after Plain╜tiffs received roughly $40,000,000 as a result of the sale of their cable business in 1999, they were approached by tax and financial service providers which presented various stratagems to " 'shelter' those gains from federal income taxation." Defendant's Pre╜liminary Statement of Contentions (Def.'s Cont.) at 4. The Government contends that after considering stratagems presented by financial services professionals, including BDO, the Ervins entered into the transac╜tions at issue. These stratagems, the Gov╜ernment asserts, formed the basis of the Ervins' position that they had realized a capi╜tal loss of $40,000,000, which offset the capi╜tal gains realized from the sale of their cable business.

On September 30, 2004, Defendant served a subpoena on nonparty BDO, which Defen╜dant characterizes as the promoter of the alleged tax shelter, seeking several catego╜ries of documents. On March 11, 2005, BDO moved to quash the subpoena with respect to one narrow category of documents-"all Form 1040 cover pages, Schedule D and Schedule K-1 for the years 1999-2000"-for 46 BDO clients who are not parties here. BDO asserted that the private tax return information of its nonparty clients is protect╜ed from disclosure under Section 6103 of the Internal Revenue Code, and that the subpoe╜na was overly broad and demanded irrele╜vant documents. Defendant argued that it requires the private tax return information of the nonparties because it intends to offer "pattern evidence" to support its position that Plaintiffs' transaction did not "represent routine investment activity undertaken for economic profit." Def. Opp. at 1.

In denying BDO's motion to quash, the Court held that the subpoenaed material was relevant to the underlying action and that no privilege or statute prevented disclosure. The crux of the present motion concerns this Court's ruling in response to BDO's argu╜ment that 26 U.S.C. ╖ 6103 barred the pro╜duction by BDO of confidential third-party tax information to the Department of Justice (DOJ). First, BDO claimed that Section 6103 prohibits the IRS from disclosing confi╜dential tax information to government agen╜cies, and DOJ should not be permitted to do an "end run" around the statute and obtain confidential taxpayer information it could not get directly from the IRS by subpoenaing it from BDO. 4 Second, BDO argued that any third-party information produced to DOJ via the subpoena will have to be turned over to Plaintiffs under the discovery rules-in clear contravention of Section 6103,-which pro╜hibits any officer or employee of the United States from disclosing return information ob╜tained "in any manner." Finally, BDO as╜serted that Section 6103 bars the use and therefore the discovery of the confidential tax information in this proceeding because the statutory exception permitting use of such taxpayer information in judicial and ad╜ministrative proceedings in Section 6103(h)(4) does not apply. The Court rejected each of these arguments and held:

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4. ═ BDO did not claim the taxpayer information is privileged, but it did assert its "fiduciary obli╜gation to prevent the unwarranted and unauthorized disclosure of the Unrelated Party Tax Re╜turns." BDO's Reply at 3, n. 5.

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Because Section 6103 only prohibits disclo╜sure of taxpayer return information as de╜fined by Section 6103 and such definition only encompasses tax information "filed with," "received by, recorded by, prepared by, furnished to, or collected by" the Sec╜retary of Treasury or the IRS,[ ] copies of tax returns given to BDO by its clients do not fall within Section 6103's prohibition. Nor does this statute prohibit DOJ's in╜tended use of this information in this litiga╜tion.

Jade Trading, LLC v. United States, No. 03-2164, 65 Fed.Cl. 188, 191, 2005 WL 950503, at *3, 2005 U.S. Claims LEXIS 110, at *11-12 (2005).

The Court originally ordered production of the subpoenaed documents by May 5, 2005. However, on May 2, 2005, BDO advised the Court of its intention to file the instant mo╜tion and therefore the Court extended that deadline until May 13, 2005. In addition, the Court directed BDO to notify its 46 clients of the Court's ruling and inform them that the Court would entertain their motions to inter╜vene in this action for the limited purpose of objecting to disclosure of their taxpayer in╜formation, if such motions were filed by May 4, 2005. No BDO client has sought to inter╜vene. The Court also authorized the parties and BDO to submit a proposed Protective Order covering these nonparty taxpayer doc╜uments, and the parties and BDO anticipate jointly requesting such an order shortly. Trial in this action is scheduled to commence on June 6, 2005, in Atlanta, GA, but Defen╜dant has requested a continuance for an un╜specified time due in part to the difficulties presented by the controversy over these non╜party documents.

Discussion

Discovery orders are not final deci╜sions and are therefore not generally appeal╜able until final judgment. See Connaught Labs, Inc. v. SmithKline Beecham P.L.C., 165 F.3d 1368, 1370 (Fed.Cir.1999); Micro Motion, Inc. v. Exac Corp., 876 F.2d 1574, 1575-76 (Fed.Cir.1989) ("the nonappealability of orders requiring the production of evi╜dence from witnesses has long been estab╜lished"). This includes appeals from discov╜ery orders aimed at nonparties to a litigation. See Connaught, 165 F.3d at 1370 ("This final╜ity rule is also applicable where discovery orders are made upon witnesses who are not parties to a suit"); Micro M otion, Inc., 876 F.2d at 1576 (Fed.Cir.1989); cf. Cobbledick v. United States, 309 U.S. 323, 326, 60 S.Ct. 540, 84 L.Ed. 783 (1940) ("the requirement of finality will be enforced not only against a party to the litigation but against a witness who is a stranger to the main proceeding"). Notably, the Supreme Court has held on numerous occasions that an order denying a motion to quash, with limited exception, is not final and not appealable. E.g., United States v. Nixon , 418 U.S. 683, 690-91, 94 S.Ct. 3090, 41 L.Ed.2d 1039 (1974) ("In ap╜plying this principle [of the necessity of final╜ity prior to appeal] to an order denying a motion to quash and requiring the production of evidence pursuant to a subpoena duces t ecum, it has been repeatedly held that the order is not final and hence not appealable" (internal citations omitted)); see also Micro Motion, 876 F.2d at 1577 ("the Supreme Court has repeatedly held that an order de╜nying a motion to quash, or an order compel╜ling testimony or production of documents is not final and, hence, is not appealable re╜gardless of how the matter is raised.") (cita╜tions omitted). The Federal Circuit in Micro Motion noted that generally an order refus╜ing to quash a subpoena becomes appealable only after the subpoenaed entity fails to com╜ply and is held in contempt, because the contempt citation becomes an appealable or╜der. 876 F.2d at 1577 5 ; accord, Connaught, 165 F.3d at 1370, ("nonparties may secure review of a discovery order by refusing to comply with it and appealing a consequent contempt order, which is considered final"). 6

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5. ═ The Federal Circuit explained:

We are mindful of the harshness inherent in requiring a witness to place [himself] in con╜tempt to create a final appealable decision. . . . However, it is all too certain that the conse╜quences of recognizing a right to appeal all orders refusing to quash a subpoena, even where such an order ends ancillary proceed╜ings against a non-party, would be to 'consti╜tute the courts of appeals as second-stage mo╜tion courts reviewing pretrial applications of all nonparty witnesses alleging some damage because of the litigation.' . . . Thus, the courts, with rare exceptions, have opted to require that the contempt route be followed.

Micro Motion, 876 F.2d at 1577-78.

6. ═ The Connaught Court noted that the collateral order doctrine and a writ of mandamus could operate as exceptions to the finality rule but were inapplicable there since a refusal to comply with the order and subsequent contempt citation pro╜vided an effective review of the discovery order. 165 F.3d at 1370.

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Despite this authority outlining the proper procedure for securing appeal of non╜party discovery orders, BDO asks this Court to certify for interlocutory appeal its Order denying BDO's motion to quash. The statute which sets forth the mechanism for this trial court to certify appeals of interlocutory or╜ders, 28 U.S.C. ╖ 1292(d)(2), provides in rele╜vant part:

when any judge of the United States Claims Court [United States Court of Fed╜eral Claims], in issuing an interlocutory order, includes in the order a statement that a controlling question of law is in╜volved with respect to which there is a substantial ground for difference of opinion and that an immediate appeal from that order may materially advance the ultimate termination of the litigation, the United States Court of Appeals for the Federal Circuit may, in its discretion, permit an appeal to be taken from such order, if application is made to that Court within ten days after the entry of such order.

28 U.S.C. ╖ 1292(d)(2).

In substance, this statutory provision pro╜vides for a three-prong test for certification that is analogous to the provision which pro╜vides for certification of interlocutory appeals by the district courts. See 28 U.S.C. ╖ 1292(b); Marriott Int'l Resorts, L.P. v. United States, 63 Fed.Cl. 144, 145 (2004); American Mgmt. Sys., Inc. v. United States, 57 Fed.Cl. 275, 276 (2003). These statutory provisions " 'reserve interlocutory review for "exceptional" cases while generally retaining for the federal courts a firm final judgment rule. ' " Marriott, 63 Fed.Cl. at 145, citing Caterpillar Inc. v. Lewis, 519 U.S. 61, 74, 117 S.Ct. 467, 136 L.Ed.2d 437 (1996) (internal citations omitted); see also Swint v. Cham╜bers County Comm'n, 514 U.S. 35, 46, 115 S.Ct. 1203, 131 L.Ed.2d 60 (1995) (stating that Congress accorded district courts "cir╜cumscribed authority to certify for immediate appeal interlocutory orders deemed pivotal and debatable").

A Controlling Question of Law is Not Pre╜sented

A question of law is controlling when it " 'materially affect[s] issues remaining to be decided in the trial court.' " Marriott, 63 Fed.Cl. at 145 (citing Pikes Peak Family Housing, LLC v. United States, 40 Fed.Cl. 673, 686 (1998)). The overarching issue to be decided in this tax case is whether the IRS properly disallowed the claimed losses. The parties have raised a number of subsid╜iary issues they claim are necessary to the resolution of this case: 1) whether Jade as a partnership carried on a business, financial operation or venture; 2) whether the IRS properly disregarded Jade's transactions un╜der the step transaction, economic substance, or sham transaction theories; and 3) wheth╜er IRS' imposition of penalties was proper. Plaintiffs also urge the Court to invalidate Treas. Reg. 1.701-2 on grounds that it con╜flicts with judicial precedent, statute and regulation and is unconstitutionally vague.

Resolution of the Section 6103 question would not materially advance resolution of these tax issues, which depend on the facts and circumstances surrounding Plaintiffs' in╜vestment activities, their intentions and the bona fides of their transactions. Rather, the issue sought to be appealed, the Court's re╜fusal to quash a nonparty subpoena on statu╜tory grounds, covers a narrow spectrum of documents-nonparty taxpayer informa╜tion-which Defendant seeks to use as "pat╜tern evidence." Specifically, Defendant seeks taxpayer information of 46 BDO clients in an effort to demonstrate that the Ervins purchased an off-the-shelf tax shelter and executed it as other BDO purchasers did. Defendant argues that such pattern evidence would show that the Ervins' and nonparties' transactions were designed and executed to produce tax losses, not economic benefits. Thus, this pattern evidence appears to be secondary evidence intended by Defendant to bolster its argument that the Ervins' transac╜tions lacked economic substance and business purpose, with the primary evidence being what the Ervins themselves intended and did.

Plaintiffs have filed a motion in limine seeking to exclude this nonparty taxpayer information at trial. The Court has not yet ruled on whether this "pattern evidence" is admissible. Thus, it is possible that this issue will be rendered moot when the Court addresses Plaintiffs' motion in limine or rules on objections to this pattern evidence at trial. A question of law that may be ren╜dered moot by virtue of pre-trial or eviden╜tiary rulings is not controlling.

An issue might be deemed serious and weigh in favor of certification if the trial court's decision, without an appeal, would have an immediate irreparable impact. on nonparties. The Court here has taken pre╜cautions to protect the confidential taxpayer material at issue and to prevent prejudice to BDO's clients, including authorizing a protec╜tive order and giving each entity the oppor╜tunity to move to intervene for the purpose of raising additional particularized arguments objecting to disclosure. None of the BDO clients have sought to intervene, and counsel are finalizing a Protective Order covering these nonparty documents. As such, order╜ing production will not prejudice these non╜parties, a factor which might otherwise have militated in favor of proceeding with certify╜ing an interlocutory appeal.

In support of its argument that a control╜ling question of law is at issue, BDO con╜tends:

Clearly, where, as here, the Federal Cir╜cuit's decision on the Section 6103 issue will not only control the course of trial in this proceeding, but will even have broader applicability to all future tax administra╜tion proceedings in the Court of Federal Claims, the Section 6103 issue sought to be certified for interlocutory appeal is a con╜trolling question of law.

BDO's Mot. at 8. BDO's prediction that the Federal Circuit might have an opportunity to "make law" on the Section 6103 issue for future litigants does not outweigh this Court's paramount consideration-whether the 6103 i ssue is controlling for the instant case.

There is Not A Substantial Difference of Opinion on the Statutory Interpretation of "Return" or "Return Information."

The second requirement for certifying an interlocutory appeal is that there be "a sub╜stantial ground for difference of opinion" on the disputed question. 28 U.S.C. ╖ 1292(d)(2); see Marriott, 63 Fed.Cl. at 146. Noting that the statute only prohibits disclo╜sure of a "return" or "return information," this Court interpreted those statutory defini╜tions to conclude that Section 6103's prohibi╜tion applied exclusively to tax information "filed with the Secretary" or "received by, recorded by, prepared by, furnished to, or collected by, the Secretary"-not to taxpayer information voluntarily given by the taxpayer to a nongovernmental entity such as BDO. As is evidenced in the Opinion, the Court found no cases in any Circuit that read Sec╜tion 6103 in the manner BDO advocated. In contrast, the Court cited opinions from the Fifth, Ninth and Eleventh Circuits which uniformly interpreted these statutory defini╜tions in the same way as this Court. Al╜though the Federal Circuit has not addressed the precise issue, there is no persuasive sup╜port for the proposition that there is a sub╜stantial difference of opinion on the defini╜tional issue. 7

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7. ═ In a footnote, BDO points to an unpublished discovery Order in Coltec Industries, Inc. v. Unit╜ed States , No. 01-72T, Fed.Cl. slip op. (May 14 , 2003) for support of its contention that a "sub╜stantial ground for a difference of opinion ex╜ists." See BDO's Mot. at 10 n. 7. This decision is not precedential for either the Circuit or this Court. Moreover, the Court in Coltec did not rely on the Section 6103 objection of a third party to prevent disclosure of nonparty tax re╜turn information. Rather, the Coltec Court con╜cluded that Defendant had failed to meet its burden of "demonstrating why the [] requested documents are 'relevant' or 'likely to lead to admissible evidence' (Rule 26(b)(1)), or why the 'burden or expense of the proposed discovery outweighs its likely benefit' (Rule 26(b)(2))." Id. at 8. Although BDO points out that the Coltec Court stated in dicta that "the Government offers no reason why the Court should issue an Order permitting discovery which Congress by statute has forbidden," that statement was made in the context of a different provision of Section 6103-Section 6103(h)(2)-which is not implicated here. That section does not define return or return information, but deals with exceptions permitting disclosure of such information to DOJ employees engaged in grand jury or court pro╜ceedings. Thus, the Coltec Court appears to have assumed "return" or "return information" was at issue and concluded that the (h)(2) exception authorizing disclosure did not apply.

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Alternatively, BDO asserts that a substan╜tial ground for difference of opinion can exist when the issue sought to be certified is one of first impression. This is not such a case. The question of whether Section 6103 pre╜vents disclosure of tax return information that comes from a source other than the IRS has been squarely addressed by three Cir╜cuits and this Court, and these tribunals have uniformly answered this question in the neg╜ative. See Jade Trading, 2005 WL 950503, at * 3, 65 Fed.Cl. at 191, 2005 U.S. Claims LEXIS 110, at *15-18; see also Shell Petroleum, Inc. v. United States, 46 Fed.Cl. 719, 722 (2000) ("The Plaintiff makes several ar╜guments that start with the premise that the Defendant violated Section 6103, but these arguments completely miss the point that Section 6103 does not prohibit the disclosure of tax return information that comes from a source other than the IRS"). Thus, while this issue has never been addressed directly by the Federal Circuit, it is not one of first impression, and BDO points to no circuit which has given Section 6103 the expansive reading advocated here.

An Interlocutory Appeal on the Eve of Trial Would Impede Ultimate Termination of this Litigation

The third requirement for certification of an interlocutory appeal is whether the ques╜tion "may materially advance the ultimate termination of the litigation." 28 U.S.C. ╖ 1292(d)(2); see Marriott, 63 Fed.Cl. at 146. BDO argues that this requirement is met because "[t]he production of the Unrelated Party Tax Returns by BDO to Defendant may result in additional discovery and/or tri╜al testimony depending on how the Court rules on Plaintiffs' motion in limine, which motion itself would only need to be consid╜ered if the Federal Circuit declines to hear the interlocutory appeal or sustains the posi╜tion of the Court." See BDO's Mot. at 12. Certifying an interlocutory appeal would de╜rail this case for no apparent gain since the issue BDO raises may well be rendered moot by pretrial or evidentiary rulings. Moreover, an interlocutory appeal even under BDO's proposed tack, would result in disruption and delay. BDO suggests that this court could certify the appeal, stay BDO's production of the nonparty taxpayer information pending resolution of the appeal, proceed to trial, and have the Court defer its decision until com╜pletion of the appeal process with respect to the Section 6103 issue. If necessary after the appeal, BDO would have the Court re╜convene the trial. Understandably, Defen╜dant vigorously objects to such a piecemeal trial, which would be costly, inefficient, and disruptive and result in unnecessary delay. On balance, the interests of a nonparty in maintaining confidential taxpayer informa╜tion can be adequately protected by a Protec╜tive Order, while the interests of the parties to this litigation to proceed to trial in an efficient manner would be seriously compro╜mised by BDO's suggested approach.

In sum, the Court will not violate the general rule of finality, which "embodies a congressional policy against piecemeal re╜view, and against obstructing or impeding an ongoing judicial proceeding by interlocutory appeals." Nixon , 418 U.S. at 690, 94 S.Ct. 3090. Because the Court finds that none of the criteria for certification of an interlocu╜tory appeal have been met, the Court denies certification and need not consider BOD's request for a stay.

Conclusion

1. BDO's motion to certify an interlocu╜tory appeal is DENIED. BDO shall produce the subpoenaed documents no later than May 16, 2005, in accordance with this Court's April 22, 2005, Opin╜ion.

2. BDO also argues that an appeal as of right, pursuant to Federal Rules of Appellate Procedure 4(a)(5), may be available under the collateral order doctrine and asks this Court for an extension of time to file a protective notice of appeal. Without addressing whether such an appeal could be prop╜erly taken, the Court denies BDO's request for an enlargement as unnec╜essary, given that BDO has cited no reason why it is unable to file its notice of appeal within the prescribed time under the Federal Rules of Appellate Procedure.

The CLERK of the Court is directed to serve a copy of this order on counsel for the subpoenaed entity, BDO:

Ellis L. Reemer

DLA PIPER RUDNICK GRAY CARY

1251 Avenue of the Americas

New York, N.Y. 10020

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