Indiana Department of Revenue may not use Rule of Professional Conduct as a “procedural weapon”

It’s rare to find a rule of professional conduct at the heart of a tax ruling.  But that was the case when the Indiana Tax Court rejected the Department of Revenue’s efforts to disqualify counsel for the taxpayer (Utilimaster) as “necessary witnesses” in a sales and use tax refund appeal.  The Court rebuked the Department’s efforts to invoke a rule of professional conduct as a thinly veiled effort to overcome the Department’s failure to conduct depositions in the time allotted under the Court’s case management plan. The Court admonished:  “The Department has invoked Professional Conduct Rule 3.7 in an attempt to conceal its failure to timely pursue discovery as well as to remove Utilimaster’s attorneys from the case, calling their professionalism into question.” Slip op. at 9-10.

Utilimaster manufactures commercial vehicles, using sealants and adhesives in its manufacturing process during the refund period that required an ambient air temperature of between 60 and 80 degrees Fahrenheit to properly cure.  That required the purchase of natural gas.  Essentially, Utilimaster claimed a refund of sales and use tax paid on its purchases of natural gas that it asserted was predominantly used for manufacturing.  To support its request, Utilimaster’s refund claim relied upon a consultant’s report (a “utility study”) showing that production equipment used more than one-half of the natural gas purchased.  The refund claim was signed by the consultant’s president.  The Department granted a partial refund, and Utilimaster appealed.  Utilimaster’s counsel on appeal to the Tax Court had served as president and vice-president for the consultant.

The Department’s counsel served written discovery but conducted no depositions.  More than a month following the close of discovery, the Department filed a motion to reopen discovery, claiming that three days earlier Utilimaster’s counsel had admitted to preparing the utility study.  The Department wanted an opportunity to depose Utilimaster’s counsel/consultants.  One day later – and without giving the Court a chance to rule on the motion to reopen discovery – the Department filed a motion to disqualify Utilimaster’s counsel under Indiana Professional Conduct Rule 3.7, which provides that a lawyer shall not act as an advocate at a trial in which he or she is likely to be a necessary witness (unless one of three factors irrelevant to this decision are present). 

Rule 3.7’s purpose is to reduce the potential for confusing the trier of fact, which may have difficulty determining whether statements by an advocate-witness should be taken as proof or as an analysis of the proof.  Slip op. at 5.  But that concern, the Court explained, is “more appropriate in the context of a jury trial than in a bench trial.” Id.  The Court further noted that “courts have recognized that litigants sometimes improperly use the rule as a means to gain a tactical advantage in litigation.”  Id. (citing Beller v. Crow, 742 N.W.2d 230, 234 (Neb. 2007)). 

The Tax Court first explained that the threshold question under Rule 3.7 is whether Utilimaster’s attorneys are likely to be “necessary” witnesses.  Slip op. at 6.  That requires a two-prong showing:  (1) the Department must show that the testimony it seeks from taxpayer’s counsel “is more than marginally relevant to the issue or issues being litigated”; and (2) “it must show that [counsel’s] testimony will result in evidence that cannot be obtained elsewhere.”  Id.  Neither prong was met.  The Department argued that it needed to call counsel to elicit testimony about their “subjective mindset” in preparing the utility study and that this evidence could not be obtained from any other source.  This argument, the Court observed, “misses the mark.”  Slip op. at 7.  The utility study provided the square footage of Utilimaster’s facility and the portion thereof used in manufacturing – “information [that is] readily ascertainable, objective numbers.” Id.  Sources other than taxpayer’s counsel/consultants, such as knowledgeable company employees, could prove the accuracy of this information.  Slip op. at 8.  Thus, the counsel/consultants are “not necessary witnesses pursuant to Professional Conduct Rule 3.7.” Id. (emphasis in original). 

The Court also concluded that the Department’s motion to disqualify counsel must fail because Rule 3.7 “has not been used for its intended purpose of preventing the Court from being misled or confused about Utilimaster’s attorneys’ role.” Slip op. at 8.  Rather, the Department’s argument focused on how the Department had been “ambushed” and “unfairly prejudiced” by the counsel/consultants. The facts, however, did not support these claims:  the refund claim had been signed by one of the counsel/consultants, and the refund claim was accompanied by a power of attorney granting the counsel/consultants authority to act on Utilimaster’s behalf.  Slip op. at 9.  The Department’s counsel “had ample evidence to alert him that he may want to conduct depositions to know more.” Id.  The Department chose not to pursue depositions until after discovery closed, and the Court would not allow the Department to correct its mistake through re-opening discovery or disqualifying Utilimaster’s counsel.

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