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PENN MUTUAL LIFE INSURANCE COMPANY v. UNITED STATES AMERICA AND INTERNAL REVENUE SERVICE </h1> <p class="docCourt"> </p> <p> October 27, 1995 </p> <p class="case-parties"> <b>THE PENN MUTUAL LIFE INSURANCE COMPANY, ET AL., APPELLANTS<br><br>v.<br><br>UNITED STATES OF AMERICA AND THE INTERNAL REVENUE SERVICE, APPELLEES</b><br><br> </p> <div class="caseCopy"> <div class="facLeaderBoard"> <script type="text/javascript"><!-- google_ad_client = "ca-pub-1233285632737842"; /* FACLeaderBoard */ google_ad_slot = "8524463142"; google_ad_width = 728; google_ad_height = 90; //--> </script> <script type="text/javascript" src=""> </script> </div class="facLeaderBoard"> <div class="numbered-paragraph"><p><br> Appeal from the United States District Court for the District of Columbia (No. 94ms00158)</p></div> <div class="numbered-paragraph"><p> Before: Edwards, Chief Judge, Wald and Randolph, Circuit Judges.</p></div> <div class="numbered-paragraph"><p> Wald, Circuit Judge</p></div> <div class="numbered-paragraph"><p> FOR PUBLICATION</p></div> <div class="numbered-paragraph"><p> FOR THE DISTRICT OF COLUMBIA CIRCUIT</p></div> <div class="numbered-paragraph"><p> Argued September 28, 1995</p></div> <div class="numbered-paragraph"><p> Opinion for the Court filed by Circuit Judge Wald.</p></div> <div class="numbered-paragraph"><p> Appellants Penn Mutual Life Insurance Company, Provident Mutual Life Insurance Company, and State Mutual Life Assurance Company of America ("appellants") seek reversal of the district court's denial of their motion to perpetuate testimony by taking depositions pursuant to Rule 27(a) of the Federal Rules of Civil Procedure ("Rule 27(a)"). We hold that the district court erred in finding that appellants' efforts were not in anticipation of litigation as required by Rule 27(a) and in failing to recognize that the age of proposed deponent Werner Marwitz creates a risk that evidence will be lost if not perpetuated. We remand so that the district court may make two determinations: whether Marwitz has sufficient unique knowledge to warrant granting appellants' motion, and if so, whether appellants have made an adequate showing of the substance of the testimony they seek to elicit from Marwitz.</p></div> <div class="numbered-paragraph"><p> I. Background</p></div> <div class="facAdFloatLeft"> <script type="text/javascript"><!-- google_ad_client = "ca-pub-1233285632737842"; /* FACContentLeftSkyscraperWide */ google_ad_slot = "1266897617"; google_ad_width = 160; google_ad_height = 600; //--> </script> <script type="text/javascript" src=""></script> </div class="facLeaderBoard"> <div class="numbered-paragraph"><p> Appellants are involved in an ongoing dispute with the Internal Revenue Service ("IRS" or "Service") over federal income tax treatment of life insurance policies. In the early 1980s, appellants issued "policy updates" which increased benefits payable to policyholders, while policy premiums remained constant. The tax consequences of these updates for the life insurance company issuers depended on whether the IRS classified them as increases in dividends, or as exchanges of one policy for another. Issuing companies would be taxed at an increased rate for policy exchanges, but not for dividend increases.</p></div> <div class="numbered-paragraph"><p> In order to clarify their tax liability, several life insurance companies sought private letter rulings from the IRS regarding tax treatment of these updates. In a private letter ruling, the IRS applies the tax laws to a specific factual problem presented by a particular taxpayer; only that taxpayer may then rely on the ruling. Treas. Reg. Section(s) 601.201(a)(2), (l ); Rev. Proc. 95-1, 1995-1 I.R.B. 13. These private letter rulings stated that the requesters' policy updates were dividends and thus not taxable at an increased rate, citing as authority a 1982 revenue ruling which categorized increased payments to policyholders as dividend distributions ("Rev. Rul. 82-133"). See Private Letter Ruling ("LTR") 84-31-002 (Apr. 30, 1984); LTR 85-22-067 (Mar. 6, 1985); LTR 84-18-030 (Jan. 19, 1984). The IRS later revoked these private letter rulings but did not apply the revocation retroactively to the requesters, in accord with its general practice under Section(s) 7805(b) of the Internal Revenue Code. <a href="#D*fn1" name="S*fn1">*fn1</a> LTR 91-43-004 (Dec. 30, 1990); Tech. Adv. Mem. ("TAM") 92-06-007 (Oct. 25, 1991); TAM 91-21-001 (May 21, 1991); TAM 91-10-002 (Mar. 8, 1991). Appellants did not seek private letter rulings from the IRS on the tax consequences of their policy updates.</p></div> <div class="numbered-paragraph"><p> In the course of ongoing audits, the IRS proposes to treat appellants' past policy updates as taxable exchanges rather than nontaxable dividends, arguing that the facts of Rev. Rul. 82-133 are distinguishable from those presented by appellants. Government's Br. at 32. Appellants, facing a sizable bill for back taxes, disagree. They contend that Rev. Rul. 82-133, issued in 1982, set forth a general position on the tax treatment of policy updates which clearly extends to their cases, and the Service's current, more restrictive view of the ruling represents a modification of the IRS's public position. As with private letter rulings, the Service generally exercises discretion under Section(s) 7805(b) to protect taxpayers who have reasonably relied on a revenue ruling from retroactive revocation or modification, and accordingly appellants claim protection from taxes now sought to be levied on their old policy updates. The IRS, on the other hand, contends that the scope of Rev. Rul. 82-133 was never as broad as appellants suggest and plainly does not apply to their scenarios. Thus, the IRS concludes, appellants did not reasonably rely on the ruling and do not now qualify for relief from its retroactive application under Section(s) 7805(b).</p></div> <div class="numbered-paragraph"><p> Because the IRS and appellants are in conflict about the Service's former interpretation of the scope of Rev. Rul. 82-133, appellants are looking for independent support for their version. They want to obtain testimony from individuals employed in key positions at the Service during the period when Rev. Rul. 82-133 was initially issued and subsequently applied in the private letter rulings issued to other life insurance companies. Appellants have identified two retired IRS employees, Werner Marwitz and Joseph Ryals, who they claim can provide this critical information. Since they are not yet involved in litigation before a federal court and cannot invoke routine discovery, appellants filed a petition to depose the two employees under Rule 27(a). Unlike other discovery rules, Rule 27(a) allows a party to take depositions prior to litigation if it demonstrates an expectation of future litigation, explains the substance of the testimony it expects to elicit and the reasons the testimony is important, and establishes a risk that testimony will be lost if not preserved. Appellants claimed that they would soon be involved in litigation over the IRS audits, and requested permission from the district court to depose Marwitz and Ryals, arguing that the two witnesses might not be available at trial, given their age, residence, and status as retired employees.</p></div> <div class="numbered-paragraph"> <p> The district court denied appellants' petition, finding that they had failed to satisfy several of Rule 27's prerequisites. The court first characterized appellants' petition as amounting to no more than "mere[ ] observ[ation] that the officers' recollections of certain facts might fade by the time they filed their anticipated suit in court," New England Mutual Life Ins. Co. v. United States, No. 94-158, slip op. at 5 (D.D.C. Aug. 1, 1994), rather than more specific allegations that the would-be deponents are seriously ill, so old that they likely would not be available at trial, or imminently leaving the country for an extended time. Thus, the court concluded, appellants had not shown a sufficient necessity to perpetuate their testimony as required by the third element of Rule 27(a)(1). Second, the court found appellants had not alleged that no other IRS employee could provide the same testimony. New England Mutual Life Ins. Co., slip op. at 6. Third, the court noted that appellants' audits are still pending before the Service <a href="#D*fn2" name="S*fn2">*fn2</a> and thus concluded that appellants had not fulfilled ...</p> </div> </div> </div> <div id="caseToolTip" class="caseToolTip" style="display: none;"> <div class="toolTipHead"> </div> <div class="toolTipContent"> <p> Our website includes the first part of the main text of the court's opinion. To read the entire case, you must purchase the decision for download. With purchase, you also receive any available docket numbers, case citations or footnotes, dissents and concurrences that accompany the decision. Docket numbers and/or citations allow you to research a case further or to use a case in a legal proceeding. Footnotes (if any) include details of the court's decision. 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