In Kapur v. Commissioner, T.C. Memo. 2024-28, GS here, the Court (Judge Pugh) set out the issue as follows (Slip Op. 2, two footnotes omitted):
Before the Court is petitioners' Motion for Protective Order. The parties dispute whether discovery and trial should be limited to a sample of projects at this stage of litigation. We decline to order sampling for the reasons summarized below. n4
n4 This appears to be a recurring issue. See, e.g., Phx. Design Grp., Inc. v. Commissioner, No. 4759-22 (T.C. Aug. 29, 2023) (order); Feller v. Commissioner, No. 11581-20 (T.C. Aug. 10, 2023) (order). Respondent referred us to these orders but of course they are not precedential.
The Court reviews (Slip Op. 5) sampling by agreement of the parties (whether encouraged by the Court or not). The Court then says (Slip. Op. 5-6, bold face supplied by JAT):
Respondent also claims that we do not have discretion to order sampling
at the request of petitioners if respondent objects. We disagree: We do have
authority to limit discovery (including by ordering sampling) over the
objection of a party. See Rule 70(c)(1). Nonetheless, we agree that
exercising our discretion to limit the scope of discovery and trial in 6*6
accordance with petitioners' Motion for Protective Order is improper at this
stage. The only issue in this case is whether petitioners are entitled to the
research credits claimed for the years in issue. Evaluating compliance with
section 41 necessarily involves consideration of the underlying business
components. And petitioners agree that they have the burden of showing
entitlement to the claimed research credits. See Feigh, 152 T.C. at 270.
As we have said previously,
"[a]bsent an agreement between the parties, project sampling improperly
relieves the taxpayer of its burden of proving entitlement to the research
credit claimed." Betz v. Commissioner, T.C. Memo. 2023-84, at
*77 n.30 (citing Bayer, 850 F. Supp. 2d at 538, 545-46).
As I understand the Court said it can order sampling for discovery purposes but cannot order sampling over IRS objection for resolution of the merits on issues as to which the taxpayer bears the burden of persuasion.
It is not clear to me that the final conclusion is consistent with the Court’s earlier rejection of the IRS claim that Court does not have authority to order sampling when the IRS does not agree. Another way of reading the paragraph is that the Court will not order sampling based on the stage of pretrial development right now in Kapur.
This raises some issues for me, but let me start with my understanding of good sampling that permits reasonable inferences about the universe of data that is sampled. Those reasonable inferences can be stated in possibilities or margins of error for the inferences, which generally can be slimmed down by increasing the sample size.
