Tax Court Sanctions Use Of Predictive Coding During ESI Discovery

On September 17, 2014, the U.S. Tax Court issued its first opinion regarding the discovery of electronically stored information (ESI).  In Dynamo Holdings, Ltd. vs. Commissioner, 143 T.C. No. 9 (Sept. 17, 2014), the Tax Court permitted a taxpayer to use "predictive coding" as a first-level review of a large pool of documents.  The court's opinion is important for taxpayers faced with requests for a substantial amount of ESI, and has the potential to reduce the burden and cost of complying with such requests.

Background

Most documents today originate in electronic form, and taxpayers may have a duty to preserve ESI.  ESI has traditionally been subject to discovery requests, but it was only recently that the judicial system amended its rules to specifically address ESI.  The case law and procedural laws emphasize that e-discovery should be a cooperative and reciprocal process, and that parties should not be subject to undue burden or cost.  Failure to comply with