Case Law

Tax Court Gets on Board With Predictive Coding

The United States Tax Court just issued its first opinion endorsing predictive coding as an efficient method for searching for responsive documents during discovery.  The case arose out of the IRS’s production requests for electronically stored information (“ESI”) stored on the plaintiff-corporation’s backup tapes.

The plaintiff claimed that production of the ESI would costs at least $450,000.  And it would take months to search the backup tapes for responsive documents and then to cull them for privileged and confidential information. Plaintiff argued defendant was merely conducting a “fishing expedition,” in search of new issues to raises. However, in the alternative, plaintiff requested that it be allowed to employ predictive coding in its search for responsive documents.

The IRS—and likely world’s most unsympathetic defendant—responded that it was entitled to tax-related information on the backup tapes.  The Agency also argued that the plaintiff’s cost concerns could be dismissed because the defendant could review the backup tapes and return all confidential and privileged information back over through a “clawback agreement.” Finally, the IRS claimed that predictive coding was “unproven technology” and should not be allowed.

The court then explained the discovery rules with regard to ESI in the tax court.  It noted that the rules it was applying corresponded to the Federal Rules of Evidence 26 and 34.  The court then began to point out the benefits of predictive coding, calling the technology an “expedited and efficient form of computer-assisted review that allows parties in litigation to avoid the time and costs associated with the traditional, manual review of large volumes of documents.”

The court then explained how predictive coding worked and rejected defendant’s argument that predictive coding was “unproven.”  Although this court had never officially sanctioned predictive coding, it recognized that predictive coding has become more “acceptable.”  Finally, the court understood “that the technology industry now considers predictive coding to be widely accepted for limiting e-discovery to relevant documents and effecting discovery of ESI without an undue burden.”  Consequently, the court allowed plaintiff to employ the use of predictive coding in searching for ESI on its backup tapes that were responsive to defendant’s request.

To read the full opinion, see Dynamo Holdings P’ship v. C.I.R., 143 T.C. No. 9 (T.C. 2014).  The case has been digested and added to the eDiscovery Assistant under Case Law — to find it, filter using the title in the search box.

Our Takeaway: The United States Tax Court seems to have embraced predictive coding as an acceptable means to search for ESI located on backup tapes, thus hopefully allowing the parties to reduce costs and increase the efficiency of electronic discovery. Come to court prepared to discuss the process to be used in predictive coding, not to challenge its use. 

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