Author: Stephen Daniels

Case Citation: Dynamo Holdings v. Comm’r of Internal Revenue, Docket No. 2685-11, 8393-12 (T.C. July 13, 2016).

eLesson Learned: Judicial bodies are trending towards acceptance of computer-assisted discovery techniques, perhaps even bordering on embracing it, like in the Dynamo Holdings decisions.

Tweet This: The IRS loses yet another battle against technology assisted review.

The US Tax Court, located in Washington, DC, is the latest judicial body to contribute to the legitimacy of TAR as a technique for complying with discovery requests. For the second time in the last two-plus years, the US Tax Court has rebuffed the IRS’ arguments against the use and efficacy of TAR in Dynamo Holdings v. Comm’r of Internal Revenue.

Back in 2014, the US Tax Court in Dynamo Holdings I had to decide whether predictive coding was a viable method of responding to discovery requests for electronically-stored information (“ESI”). In that case, the IRS filed a formal request for Dynamo Holdings and other related parties (“Dynamo”) to provide certain ESI. Dynamo was hesitant to comply with the IRS’ formal request due to the time and cost involved in reviewing all of the requested documents, as well as removing privileged information contained in the ESI.

As an alternative to producing all the requested ESI manually, Dynamo requested that the US Tax Court allow them to use TAR, or predictive coding. Predictive coding would allow Dynamo, via computer software, to efficiently and economically identify non-privileged information. Over the IRS’ argument that predictive coding should not be allowed due to it being an ‘unproven technology’, the US Tax Court decided that its use would be acceptable. Loss number one for the IRS.

The Court left it to the parties to make it work between themselves, and left the possibility open for the IRS to file another discovery request if they were unhappy with the results of the predictive coding. And sure enough the IRS was not satisfied with the results, which led to Dynamo Holdings II in July 2016. This forced the US Tax Court to publish another decision regarding TAR, but this time relating to its effectiveness.

After Dynamo Holdings I, Dynamo and the IRS worked together to produce the ESI using predictive coding. However, after much collaboration, the parties ran into problems. The parties created a model to produce the ESI, but the IRS doubted its accuracy and performance. In its view, the software was not delivering all the documents it should have. The parties could not agree, so the IRS filed a motion to compel production of the documents that it thought the predictive coding should have turned up.

This time, the US Tax Court’s task was to evaluate the usefulness of the predictive coding. It held that the mere fact that a responding party uses predictive coding does not result in holding TAR to a higher standard than manual review. The use of TAR does not require any more than manual review in order to be considered a complete response.

Overall, the US Tax Court held that Dynamo satisfied its obligation in responding to the IRS’ request by producing any and all documents that the predictive coding deemed relevant. Loss number two for the IRS.

From the Dynamo Holdings cases, it is clear that not only is TAR widely accepted by judicial bodies, but it is given deference. In Dynamo Holdings II, the US Tax Court placed a surprising amount of trust in the predictive coding software. Within the decision, the US Tax Court did not go anywhere near evaluating the predictive coding software itself. The Court’s lack of skepticism was unexpected but perhaps telling as to its level of faith in TAR.

Stephen Daniels, a Seton Hall University School of Law student (Class of 2017), focuses his studies in the area of corporate taxation. He is the Treasurer of the Sports Club, as well as a member of the Corporate Law Society and Tax Law Society. Prior to law school, Mr. Daniels graduated magna cum laude from the Seton Hall University Stillman School of Business, where he earned a B.S. in Business Administration with concentrations in Finance and Management. He also minored in Legal Studies and received a certificate in Leadership Development. After graduating from law school, he will be working in International Tax at KPMG.

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