Penn-Field Industries, Inc. v. Commissioner, 75 T. C. 728 (1980)

Discovery requests must be relevant and not unduly burdensome, especially in claims of selective enforcement by the IRS.

Summary

In Penn-Field Industries, Inc. v. Commissioner, the petitioner sought extensive discovery from the IRS to support its claim of selective enforcement regarding the deductibility of compensation paid to shareholder-employees. The Tax Court denied the request, finding it irrelevant and unduly burdensome. The court reasoned that the IRS’s selection of taxpayers for audit is not unconstitutional unless based on impermissible criteria. This decision highlights the court’s discretion in managing discovery and the high burden on taxpayers alleging selective enforcement.

Facts

Penn-Field Industries, Inc. , a corporation based in Pennsylvania, sought a redetermination of its income tax deficiencies for fiscal years ending March 31, 1974, and March 31, 1975. The petitioner alleged that the IRS practiced invidious discrimination in its audits and litigation concerning the deductibility of reasonable compensation paid to shareholder-employees of closely held corporations. To support this claim, Penn-Field served the IRS with 248 interrogatories seeking detailed statistical data on corporate audits from 1968 to 1977. The IRS objected, stating that gathering such information would be unduly burdensome and irrelevant to the case at hand.

Procedural History

Penn-Field filed a motion under Tax Court Rule 71 to compel the IRS to answer its interrogatories. The IRS responded with a motion for a protective order under Rule 103. A hearing was held on April 28, 1980, in Philadelphia, where both parties presented oral arguments. The petitioner also submitted a brief addressing the IRS’s objections.

Issue(s)

1. Whether the petitioner’s interrogatories seeking statistical data on IRS audits are relevant to its claim of selective enforcement.
2. Whether the interrogatories impose an undue burden on the IRS.

Holding

1. No, because the interrogatories do not establish a colorable claim of selective enforcement based on impermissible criteria.
2. Yes, because gathering the requested information would be unduly burdensome in terms of time, money, and personnel.

Court’s Reasoning

The Tax Court emphasized that discovery in tax cases should be focused on facts directly relevant to the issues at hand. The court cited Estate of Woodard v. Commissioner, stating that the purpose of discovery is to ascertain facts bearing directly on the case’s issues. The court accepted the IRS’s argument that it does not maintain the detailed statistical data requested by the petitioner. Complying with the interrogatories would require examining millions of corporate tax returns, which would be astronomically burdensome. The court also found the petitioner’s allegations of constitutional violations irrelevant, as the petitioner failed to show that the IRS’s audit selection was based on impermissible criteria like race or religion. The court relied on Oyler v. Boles, which held that selective enforcement is not unconstitutional unless based on an unjustifiable standard. The petitioner needed to demonstrate both that it was singled out for audit while others were not, and that this selection was based on impermissible grounds. The court concluded that the petitioner’s failure to meet these requirements rendered its discovery request irrelevant and burdensome.

Practical Implications

This decision sets a high bar for taxpayers seeking discovery in allegations of selective enforcement by the IRS. It underscores the court’s discretion in managing discovery and the need for taxpayers to establish a colorable claim before pursuing extensive discovery. Practitioners should be aware that broad discovery requests may be denied if they are unduly burdensome or not directly relevant to the case’s issues. The ruling also reinforces the IRS’s discretion in selecting taxpayers for audit, as long as this selection is not based on impermissible criteria. Future cases alleging selective enforcement will need to provide strong evidence of both discriminatory selection and impermissible criteria to justify extensive discovery. This case may influence how courts in other jurisdictions handle similar discovery disputes in tax litigation.