Herrmann v. United States
127 Fed. Cl. 22
| Fed. Cl. | 2016Background
- Plaintiffs Jeffrey and Mina Herrmann seek refund of U.S. income tax and interest tied to an $18,748,838 payment to Mina Herrmann in early 2009 while she worked for Paulson Europe LLP (PELLP); central dispute is whether that payment was a partnership distribution or a non‑partner bonus under I.R.C. § 707(a)(2).
- IRS audited PELLP and later issued a Notice of Computational Adjustment to the Herrmanns based on a Schedule K‑1 classifying the payment as partnership income; plaintiffs paid the asserted deficiency and filed a refund suit in the Court of Federal Claims.
- During discovery plaintiffs sought to depose IRS revenue agent Joseph Scott and requested IRS documents used in assessing the Herrmanns; the government sought to limit Scott’s deposition via Treasury ‘‘Touhy’’ testimony‑authorization rules and refused some document requests as irrelevant to a de novo review.
- Plaintiffs subpoenaed nonparty Paulson & Co./PELLP for employment, compensation, and ownership documents; Paulson produced many documents but redacted compensation/ownership information for persons other than Mina and asserted privilege without a full privilege log.
- The court held (1) Touhy/Treasury Regulations cannot prospectively limit deposition scope when the United States is a party and denied the government’s attempt to bar topics that are otherwise discoverable; (2) IRS internal documents used in the administrative determination are discoverable to the extent relevant to plaintiffs’ claims (including alleged TEFRA notice issues); and (3) Paulson must produce certain compensation/ownership data under protective limitations and must log asserted privileges.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the IRS may use Touhy/Treasury Regulations to preclude or prospectively limit Scott’s deposition topics | Touhy regs do not apply to litigation where the U.S. is a party; the government cannot prospectively block testimony | Treasury regs require a testimony authorization and permit limiting testimony to specified topics to protect return information and agency interests | Court: Touhy/Treasury regs cannot be used to prospectively limit deposition scope when U.S. is a party; gov’t must raise objections during deposition or via court rules |
| Whether IRS internal documents relied on in the administrative assessment are discoverable in de novo tax refund suit | Administrative file and IRS workpapers relevant to what the IRS considered (including notice/exclusion issues) and may lead to admissible evidence | Documents irrelevant because the court performs de novo review and should not ‘‘look behind’’ IRS determinations | Court: Documents are discoverable if relevant to claims/defenses (RCFC 26); deference issues do not bar discovery of administrative records, especially where notice/TEFRA issues exist |
| Scope of nonparty (Paulson) production: compensation and ownership info for employees/partners other than Mina | Plaintiffs need comparative compensation/ownership data to test whether payment was partnership income vs bonus | Paulson: requests unduly burdensome, highly sensitive, not sufficiently probative for nonparty discovery | Court: Paulson must produce limited comparative compensation/ownership info (two PELLP partners and two Paulson individuals by fund), years 2005–2009, under attorneys’‑eyes‑only protections and anonymization option |
| Privilege/redaction log from Paulson | Paulson must identify privileged redactions and provide a privilege log per RCFC 26(b)(5) | Paulson had asserted some redactions were privileged or relevance‑based without logging | Court: Paulson must state privilege claims and supply a privilege log describing withheld material |
Key Cases Cited
- United States ex rel. Touhy v. Ragen, 340 U.S. 462 (Touhy rule and agency testimony regulations)
- United States v. Proctor & Gamble Co., 356 U.S. 677 (when United States is a party it is subject to discovery rules)
- Resource Investments, Inc. v. United States, 93 Fed. Cl. 373 (limits on Touhy when U.S. is party; court may consider motions preemptively where agency has unmistakably invoked regulations)
- Vons Cos. v. United States, 51 Fed. Cl. 1 (discussion of limits on ‘‘looking behind’’ IRS administrative findings in de novo review)
- Wells Fargo & Co. v. United States, 91 Fed. Cl. 35 (de novo review — court gives no weight to subsidiary IRS administrative findings)
- Cook v. United States, 46 Fed. Cl. 110 (taxpayer administrative file relevance and government duty to preserve/produce materials)
- Gulf Grp. Gen. Enters. Co. v. United States, 98 Fed. Cl. 639 (agency regulations cannot displace court’s control over evidence when U.S. is party)