The Mescalero Apache Tribe is back in Tax Court, fighting about discovery of third-party information. The Mescaleros made what Judge Holmes (honorifics to follow) called an “unusual discovery motion that would benefit from some more research.”

Now when was that? Well, see my blogpost “Informal,” 4/29/16.

And exactly what did the Mescaleros want? Well, see 148 T. C. 11, filed 4/5/17, written, after no doubt “some more research,” by The Great Dissenter, a/k/a The Judge Who Writes Like a Human Being, s/a/k/a The Implacable, Inveterate, Illustrious, Ineluctable, Ineffable, Irrefragable, Incontrovertible, Indefatigable, and Insuperable Foe of the Partitive Genitive, and Old China Hand, Judge Mark V. Holmes.

The Mescaleros employed people. IRS says every one of them was an employee; the Mescaleros said “Nope, some are contractors.” IRS stuck to the “all are employees” line, and reclassified them.

“The Tribe still contests the Commissioner’s reclassification of those it called contractors, but it’s really fighting the major consequence of that reclassification–a large tax bill.  Reclassification would make the Tribe liable for taxes for its workers whom it improperly labeled as contractors.  But it sees a way out:  Section 3402 lets an employer in this situation escape tax liability if it can show the workers whom it labeled independent contractors paid income tax on their earnings.  See also sec. 31.3402(d)-1, Employment Tax Regs.  One way to do this would be for the Tribe to ask each worker to complete Form 4669, Statement of Payments Received.  Internal Revenue Manual pt. 4.23.8.4 (Oct. 26, 2015).  The Tribe tried to do just that, but it was only partly successful because many of the Tribe’s former workers have moved, and some live in hard-to-reach areas where they lack cell-phone service and even basic utilities.  The Tribe was in the end unable to find 70 of these workers and thus could not secure executed Forms 4669 from them.” 148 T. C. 11, at pp. 3-4. (Footnote omitted, but it says Tax Court can decide what tax is due, if any, per Section 7436(a)).

Well, the Mescaleros want IRS to disclose the tax returns of the 70 to show whether or not they paid SE on their Mescalero payments. If any did, the Mescaleros are off the hook for withholding on that taxpayer for each such tax year.

Permitted tax disclosure under the terms of Section 6103 is a tangled web. Fifth Cir. seems to permit disclosure only to government officials in a tax proceeding, but Tenth Cir., where the Mescaleros roam, lets parties to a common transaction (and employer-employee is a common transaction) take a peek.

After much legal flubdubbery, Judge Holmes cuts cleanly to the cliché: “We also shouldn’t overlook the big issue here:  If the Tribe’s workers did indeed pay their tax liabilities, then the Tribe’s section 3402(d) defense would be proved and would be entirely resolved.” 148 T. C. 11, at p. 14. (Emphasis by the Court).

IRS claims the Tribe is trying an under-the-table burden-shift. The Tribe has the burden of proof; they’re trying to make the IRS prove their case.

Burden of proof has nothing to do with discovery. Rule 70(b) says so. All the information sought has to be is relevant, and there’s no doubt this is.

IRS claims that the burden placed upon them to produce the information is “tremendous,” but Judge Holmes says IRS doesn’t fully explain why, and anyhow, “(T)he Tribe has already exhausted its own ability to find its workers, and a request for return information about only 70 payees is not particularly voluminous.” 148 T. C. 11, at p. 15, footnote 7.

Rule 70(c) shields parties from discovery where it is unreasonably cumulative or unduly burdensome or if the information is more easily obtained from another source. But the Mescaleros’ request is none of the above.

I’ll say it again, coming up with the information disposes of the case. Whether or not the reclassified EEs paid SE while they were treated as ICs, in either case it’s game over.

And in support of the Taishoff “Oh please!” I hereby award to IRS, Judge Holmes has a bit of encouragement to IRS to stop playing games.

“The Fifth Circuit has gone so far as to grant a taxpayer attorney’s fees where proof that the taxpayer did not owe FICA and withholding taxes was in the IRS’s own records.  Jones v. United States, 613 F.2d 1311 (5th Cir. 1980).  We don’t need to go that far here.” 148 T. C. 11, at p. 15, footnote 6.