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State agencies claim information protected by deliberative process privilege

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An acrimonious fight between an Indiana businessman and the Indiana Department of Revenue has not only forced the Indiana Tax Court to take the unusual step of getting involved in the discovery process but also created a case of first impression.

The dispute, Nick Popovich v. Indiana Department of Revenue, 49T10-1010-TA-53, was sparked after the Department of Revenue assessed additional income tax, interest and penalties on Nick Popovich for 2002 through 2004.

Popovich, current owner of Sage-Popovich Inc., claimed he was entitled to deduct certain business expenses because he was a professional gambler. The Department of Revenue disagreed and upheld the proposed assessments after a 2010 hearing.

Next, Popovich appealed to the Tax Court and the contentious discovery process began in June 2011. The businessman filed two motions for discovery requests but the department objected, saying much of the information was protected, in part, by the deliberative process privilege.

The deliberative process privilege is part of the Federal Rules of Civil Procedure and has been raised on the federal level in other cases. However in Indiana state courts, this procedural issue as far as its application and scope has not been addressed.

auberry Auberry

Brent Auberry, partner at Faegre Baker Daniels LLP, said the use of deliberative process privilege could impact other taxpayers.

Every year, tax cases seem to be getting more litigious as taxpayers contest rulings on property taxes and income, he explained. The guidance given by the Tax Court on this privilege is important as plaintiffs determine what information they want in discovery.

Randal Kaltenmark, partner in the Barnes & Thornburg LLP tax department, agreed.

He noted parties involved in tax litigation in the last five to seven years have been doing more discovery than in the past. Taxpayers have the burden of proof so they are engaging in discovery to find out the Department of Revenue’s basis for making the adjustment to their tax liability.

Access to information is important, Kaltenmark said. Using the deliberative process privilege could hamper a taxpayer’s discovery.

The Department of Revenue argued Indiana has deliberative process privilege and that privilege provides a “wide shield” to protect certain documents and communications. It invoked this privilege to prevent the disclosure of all documents and communications regarding the thoughts and decision-making process of hearing officers, auditors and other employees involved in the administrative process.

In support of its contention that the state does have such a privilege, the Department of Revenue pointed to the privilege in Federal Rules and noted Indiana uses those rules as a model for its Trial Rules.

The Tax Court dismissed the department’s privilege claims.

“Accordingly, the Court fails to find that Indiana recognizes a deliberative process privilege applicable to the discovery rules and leaves it to the Legislature to elevate public policy regarding the protection of deliberative process privilege,” Judge Martha Wentworth wrote.

James Gilday, of Gilday & Associates P.C., represents Popovich. Both he and the Office of the Indiana Attorney General, representing the Department of Revenue, declined to comment on the case issues.

The Department of Revenue did not appeal Wentworth’s ruling. However, the agency could still contest the decision after the court issues a final opinion on Popovich’s appeal.

Tax attorneys doubt the court’s finding on the deliberative process privilege will have much impact outside of tax circles. However, one attorney has recently encountered the defense in his litigation against another state agency.

Irwin Levin, managing partner at Cohen & Malad LLP, said the Indiana Bureau of Motor Vehicles is invoking the privilege to bar discovery in a second lawsuit his firm has filed against the agency. Plaintiffs claim the bureau overcharged for certain fees and have been trying to ascertain, through the discovery process, how the bureau found out about the incorrect fees and how it handled the problem.

irwin levin Levin

The BMV, Levin said, maintains that information is protected by the deliberative process privilege.

According to Levin, by using the privilege, the BMV is essentially saying, “We citizens have no right to know how it came to overcharge us and why it continued to overcharge us.”

More broadly, Levin worried the privilege could be used to cloud government transparency and hide wrongdoing. And he hoped the Legislature would not pass any measures that would ultimately prohibit the public’s right to know.

Since the Tax Court specifically noted the decisions regarding privilege are the purview of the General Assembly, Auberry expects the issue will come up in the Statehouse. He said he would not be surprised if the Department of Revenue makes an effort to get statutory language passed to address the issue of deliberative process privilege.

The chair of the Senate Tax and Fiscal Policy Committee, Sen. Brandt Hershman, R-Buck Creek, was unavailable for comment as to whether the Legislature would take up this issue.

The Popovich case is continuing in the Tax Court. A hearing is scheduled for July 31 on a motion filed by Popovich for Trial Rule 37 sanctions.

In May, the attorney general’s office filed a motion to temporarily withdraw appearances as counsel for the Revenue Department. However, the issue became moot when the attorney general rescinded the request and continued its representation without interruption

According to Bryan Corbin, spokesman for the AG’s Office, the Department of Revenue asked the attorney general to withdraw. He did not elaborate why the request was made and later rescinded.

“While docket entries on such housekeeping matters can appear confusing absent context, when government agencies are litigants, it is not uncommon over the duration of a case for an attorney to appear for an agency, serve for a time, then withdraw and a different attorney appear,” Corbin said.•

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