The litigation process requires parties to adhere to various procedural rules. These rules are intended to ensure fairness and efficiency in the court process.
One of the most critical aspects of this process is the discovery phase, where parties exchange information and evidence relevant to the case. Some litigants may attempt to gain an unfair advantage by withholding crucial evidence until the last minute, a tactic known as “sandbagging.”
This practice not only undermines the integrity of the legal system but also puts the opposing party at a significant disadvantage. Suffice it to say that courts usually do not allow or permit this type of conduct without imposing some sort of consequence.
The United States District Court for the District of Connecticut recently addressed this issue in United States v. Kolade, No. 3:22-cv-00459 (JAM) (D. Conn. 2024), highlighting the consequences of attempting to sandbag the opposing party in a tax dispute.
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Facts & Procedural History
The taxpayers in this case were physicians who worked together at a rehabilitation center. The litigation involved the collection of income taxes reported on their personal income tax returns.
The taxpayers hired accountants to prepare their joint income tax returns from 2011-2019. These returns reported substantial income and corresponding tax liabilities, which the taxpayers failed to fully pay.
In March 2022, the government filed litigation in court action seeking to reduce to judgment assessments exceeding $2.9 million.
The IRS then conducted discovery, which included a request that the taxpayers explain why they believed the IRS assessments were wrong. The taxpayers did not explain that they contended that their original tax returns were incorrect.
About a year later, the IRS filed a motion for summary judgment. One day before filing their response to the IRS’s motion, the taxpayers filed amended returns for 2013-2019.
The taxpayers then attached the amended returns as exhibits to their opposition to the government’s motion for summary judgment, along with an affidavit from an accountant who was an attorney at the law firm that represented the taxpayers. The affidavit asserted that their original returns had mischaracterized certain income and expenses.
About Discovery in Tax Disputes
In tax litigation, discovery disputes often involve complaints about failures by the taxpayer. This is largely because taxpayers are often the parties to tax disputes who have possession or control of relevant records.
As with other civil litigation cases, parties are required to engage in discovery to exchange relevant information and evidence. The Federal Rules of Civil Procedure govern this process.
The FRCP provides for several discovery methods, including requests for admissions, producing documents, and answering interrogatories (see Fed. R. Civ. P. 26, 33, 34, and 36). These rules generally ensure that all parties have access to the information they need to build their case and prevent surprise evidence from being introduced at trial.
Rule 37(c)(1) provides that “[i]f a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at trial, unless the failure was substantially justified or is harmless.”
The Federal Rules of Evidence provide additional rules (see Fed. R. Evid. 403, 803(6)). These rules include a rule that says that items not disclosed during discovery may be inadmissible at trial.
These rules encourage parties to be forthcoming with their evidence and prevent them from ambushing their opponents with unexpected information.
Motion for Summary Judgment
With that background, we also have to pause to consider the motion for summary judgment.
A motion for summary judgment is a procedure available to litigants to test the sufficiency of the evidence before proceeding to trial. The party moving for summary judgment presents evidence and argues that there is no genuine dispute of material fact remaining in the case. Essentially, the movant is asserting that the court can and should decide the case based solely on the undisputed evidence, without need for a trial.
The burden then shifts to the other side to produce evidence negating the movant’s contention and demonstrating the existence of a material factual dispute that requires resolution at trial.
The emphasis here is on “evidence”—the nonmoving party cannot rely on mere allegations or denials, but must come forward with concrete proof showing a genuine issue for trial.
About “Sandbagging” in a MSJ
In the context of summary judgment, “sandbagging” refers to the practice of withholding evidence during discovery and then attempting to use that evidence to defeat the motion.
Sandbagging, in this sense, is a form of gamesmanship that courts do not allow, as it undermines the integrity of the discovery process and the purpose of summary judgment.
The courts have generally chastised taxpayers who have attempted to “sandbag the opposing party with late-disclosed evidence to try to defeat summary judgment.” That is exactly what the court did in this case.
In Kolade, the court admonished the taxpayers for attempting to “sandbag the opposing party with late-disclosed evidence to try to defeat summary judgment,” citing Vanguard Dealer Servs., LLC v. Bottom Line Driven, LLC, 2024 WL 98420, at *9 (D. Conn. 2024). The court factored this into its decision to grant the IRS’s motion for summary judgment.
Sanctions for Sandbagging
The court can factor sandbagging into its decision on a motion for summary judgment. The court can also sanction the offending party.
The rules of civil procedure provide that “[i]n addition to or instead of this sanction, the court, on motion and after giving an opportunity to be heard, . . . may order payment of the reasonable expenses, including attorney’s fees, caused by the failure[,]” as well as “may impose other appropriate sanctions . . . . ” FED. R. CIV. P. 37(c)(1)(A) & (C).
There are numerous examples of this. United States v. Bonadio, 3:13 CV 591 (JBA) (D. Conn. July 17, 2014) is one example. In Bonadio, the court considered the IRS’s motion to strike the taxpayer’s opposition and exhibits outright because of its sandbagging. The court decided to reopen discovery partially. This reopening allowed the IRS to depose the defendant and the accountant who provided an affidavit, with the defendant bearing the costs of these depositions. Additionally, the court granted the IRS the opportunity to file a motion for attorney’s fees and costs incurred due to the taxpayer’s late disclosures and the motion to strike.
The Takeaway
The key takeaway from this case is that taxpayers and the IRS are required to put all their cards on the table during discovery. The parties are to engage in proactive, transparent, and timely disclosure of all evidence supporting your position. Attempting to game the system by withholding evidence is a foolhardy strategy that is likely to backfire. It will result in the exclusion of your evidence, draw the ire of the court, and torpedo the offending party’s credibility. As this case shows, it could even expose the offending party to sanctions.
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