Friday December 8, 2023
Charitable Easement Case Depositions Approved
Excelsior Aggregates LLC et al. v. Commissioner; No. 20608-18; No. 7097-19; No. 7703-19
EXCELSIOR AGGREGATES, LLC, BIG ESCAMBIA VENTURES, LLC, TAX MATTERS PARTNER, ET AL., Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
United States Tax Court
Washington, DC 20217
These consolidated cases are currently calendared for trial at the Court's special session in Atlanta, Georgia, beginning December 5, 2022. The cases involve charitable contribution deductions claimed for the donation of conservation easements and the donation of a fee simple interest in another property. Big Escambia Ventures, LLC (BEV), the petitioner in the three consolidated cases, is the tax matters partner (TMP) of all three partnerships. The Internal Revenue Service (IRS or respondent) largely disallowed the deductions and asserted penalties under sections 6662 and 6662A.1
On September 21, 2022, respondent filed two documents, each titled Motion to Take Deposition Pursuant to Rule 74(c)(3). Respondent seeks to depose two party witnesses, Matthew Ornstein, an indirect owner of BEV, and Frank Schuler IV, managing member of BEV. On October 11, 2022, petitioners filed responses to both Motions.
On October 6, 2022, respondent filed a Motion to Depose Pursuant to Rule 74. In that Motion respondent seeks the opportunity to depose nonparty witness Matthew Kaynard, tax counsel for Large & Gilbert, P.C. Mr. Kaynard supplied legal and accounting services related to the transactions at issue; respondent represents that he also reviewed and provided advice regarding the appraisals on which the easement and fee simple valuations were based. By Order served October 12, 2022, we directed petitioners and counsel for Mr. Kaynard to respond to the Motion. Petitioners filed a timely response. On October 24, 2022, counsel for Mr. Kaynard filed a response echoing petitioners' objections. We will grant all three Motions.
1. Motions to Depose Party Witnesses Matthew Ornstein and Frank Schuler IV
Rule 74(c) provides that nonconsensual depositions are an extraordinary method of discovery, generally available only where the information sought is otherwise discoverable and "cannot be obtained through informal consultation or communication." Rules 70(b), 74(c)(1)(B). The decision whether to permit a nonconsensual discovery deposition is a matter within the discretion of the presiding Judge.
Respondent moved to depose Messrs. Ornstein and Schuler under Rule 74(c)(3), which provides for deposition of a party witness without the consent of all parties. Petitioners do not dispute that Messrs. Ornstein and Schuler, as principals of the TMP, are "parties" within the meaning of Rule 74(c)(3). Nor do petitioners dispute that Messrs. Ornstein and Schuler possess relevant discoverable information, including information regarding: (1) the proper valuation of the easement and fee simple contribution; (2) the taxpayers' satisfaction of the substantiation requirements set forth in section 170(f)(11)(E)(i)-(ii); and (3) petitioners' ability to establish good-faith reliance on professional advice as the basis for a "reasonable cause" defense to certain penalties under section 6664(c).
Messrs. Ornstein and Schuler appear to have been directly involved in structuring, marketing, and promoting the transactions at issue. Their names have been associated with numerous documents that respondent has obtained in discovery from lawyers, accountants, and appraisers. As individuals involved in various aspects of the transactions in question, Messrs. Ornstein and Shuler are in a position to supply testimony that will likely lead to relevant evidence.
Respondent has shown that the evidence he seeks cannot practicably be obtained through informal consultation or communication. As early as June 8, 2022, respondent contacted counsel for Messrs. Schuler and Ornstein requesting that they participate in a "transcribed informal interview." These informal interviews were rejected by Messrs. Schuler and Ornstein when the parties could not agree to specific limits on the scope of the questions to be asked.
Petitioners contend that respondent has not presented a "compelling basis" for taking depositions, urging that "the information that [r]espondent claims to be seeking . . . has already been provided through discovery." We are not persuaded. Respondent's receipt of documents from petitioners does not negate the need for personal testimony. Messrs. Schuler's and Ornstein's thoughts, impressions, and knowledge about these documents may shed light on one or more central issues in these cases. We find that respondent has demonstrated that he is entitled to depose Messrs. Ornstein and Schuler. See, e.g., GWA, LLC v. Commissioner, Docket No. 6981-19 (Order served Apr. 30, 2021) (finding that the IRS had reasonable grounds for deposing the TMP in that case).
2. Motion to Depose Nonparty Witness Matthew Kaynard
Respondent moved to depose Matthrew Kaynard under Rule 74(c)(2), which provides for deposition of a nonparty witness when the testimony sought is relevant, not privileged, and "cannot be obtained through informal consultation or communication." Rules 70(b), 74(c)(1). Although Mr. Kaynard is a "third party" in a technical sense, he is no stranger to these cases. He was hired to provide legal and accounting services for the transactions at issue; he reviewed the appraisals on which the valuations were based; and he provided advice on the structuring of the transactions. We have granted the IRS permission to depose nonparty witnesses in similar situations. See Oconee Landing Property, LLC v. Commissioner, Docket No. 11814-19 (Orders served Nov. 8 and Nov. 24, 2021) (finding that the IRS had reasonable grounds to depose nonparty witnesses who possessed relevant information regarding easement valuation, appraisals, and possible reasonable cause defense).
Petitioners do not dispute that Mr. Kaynard possesses relevant information. Respondent has shown that the information sought cannot be obtained through other means: Respondent asked Mr. Kaynard to participate in an informal interview, but he insisted on limiting conditions that respondent reasonably viewed as unsatisfactory. Petitioners again contend that the information sought has already been provided through document discovery and consensual depositions, but we find this argument unpersuasive for the reasons outlined above.
Upon due consideration, it is
ORDERED that respondent's Motions to Take Depositions Pursuant to Rules 74(c)(3), filed September 21, 2022, are granted in that respondent may take the depositions of Matthew Ornstein and Frank Schuler IV at the IRS Office of Chief Counsel, 401 W. Peachtree Street, NW, Suite 1400, Atlanta, Georgia 30308, or at another location mutually agreed upon, at a time and date to be mutually agreed upon. It is further
ORDERED that respondent's Motion to Depose Pursuant to Rule 74, filed October 6, 2022, is granted in that respondent may take the deposition of nonparty witness Matthew Kaynard at the IRS Office of Chief Counsel, 401 W. Peachtree Street, NW, Suite 1400, Atlanta, Georgia 30308, or at another location mutually agreed upon, at a time and date to be mutually agreed upon. It is further
ORDERED that, in addition to regular service, the Clerk shall serve a copy of this Order on counsel for Matthew Ornstein, Frank Schuler IV, and Matthew Kaynard as follows:
Bryan C. Skarlatos
Kostelanetz & Fink, LLP
7 World Trade Center
New York, New York 10007
Justin A. Thorton
Law Offices of Justin Thorton
One Thomas Circle, NW Suite 1100
Washington, DC 20005
M. Todd Welty
Todd Welty, P.C.
4279 Roswell Road NE Suite 208 #352
Atlanta, GA 30342
1900 Avenue of the Stars, Ste 1225
Los Angeles, CA 90067
Albert G. Lauber
1. All statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
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