The opinion of the court was delivered by: RUETER
United States Magistrate Judge
Before this court is plaintiff's motion to compel production of documents. (Docket No. 11).
This court granted plaintiff's request for oral argument on the motion and oral argument was heard on April 1, 1996. For the reasons stated below, the motion is granted in part and denied in part.
In the underlying litigation, plaintiff seeks to recover a refund in the amount of $ 735,067, representing interest it claims was erroneously assessed and collected by the Internal Revenue Service ("IRS") for its taxable year ending December 31, 1983. The following facts are undisputed according to the parties' pleadings. Plaintiff timely filed a consolidated federal income tax return on behalf of itself and its affiliated group of companies for its 1983 tax year on September 17, 1984, pursuant to extensions (the "1983 Return"). In its 1983 Return, as originally filed, plaintiff reported an overpayment of federal income taxes for that year in the amount of $ 7,456,035. Plaintiff indicated on the 1983 Return that the entire amount of the overpayment should be applied to its estimated tax liability for 1984. The 1983 Return was audited by the IRS and a deficiency was found. The IRS and plaintiff reached an agreement regarding the additional amount of 1983 federal income taxes owed by plaintiff. Plaintiff does not challenge its liability for the additional 1983 taxes.
On October 18, 1991, the IRS assessed interest in the amount of $ 14,693,267.38 with respect to the agreed upon 1983 tax deficiency. Plaintiff claims that this interest amount was excessive and erroneous. Plaintiff argues that the overpayment in the 1983 Return should have been applied to the third quarterly installment of its 1984 taxes, due September 17, 1984, because it had already paid in full the first two installments. Therefore, plaintiff claims that the IRS erred because it began to compute deficiency interest on March 15, 1984, whereas the proper starting date was September 17, 1984. In the alternative, plaintiff claims a refund of interest in the amount of $ 39,514, representing interest on the $ 7,456,035 overpayment for the period commencing March 15, 1984 and ending April 16,1984.
The plaintiff filed a Claim for Refund (form 843) seeking a refund of a portion of the interest payment due on the 1983 tax in issue ("Refund Claim"), which the IRS disallowed. Thereafter, plaintiff filed the instant action.
Plaintiff's Motion to Compel. On November 16, 1995, plaintiff served defendant with a request for production of documents relating to Revenue Rulings ("RR") 83-112, 84-58, and 88-98. On December 18, 1995, defendant responded to plaintiff's discovery request by (1) objecting to the production on grounds of relevance; and (2) producing several non-privileged documents. On December 28, 1995, defendant produced several additional documents and provided an index of 149 documents, all of which were withheld on the grounds of the "deliberative process privilege." The index was updated on February 1, 1996 (the "Log"). In addition, defendant also asserted the following privileges to some of the documents: (1) attorney client privilege; (2) work product privilege;
and (3) the privilege for tax return information provided under section 6103 of the Internal Revenue Code ("IRC").
Plaintiff seeks all requested documents except documents withheld by defendant under section 6103 of the IRC. (Plaintiff's Motion to Compel at P 6). Plaintiff also seeks reimbursement of its costs and expenses from defendant.
1. Variance. Plaintiff claims that the documents it seeks are relevant to its contention that the IRS acted improperly by retroactively applying RR 88-98 to tax years prior to its issuance. The tax year involved in this case is 1983. RR 88-98 was not issued until 1988. At the time it filed the 1983 Return, plaintiff contends that RR 83-112 governed the calculation of deficiency interest and would allow it the relief it seeks. Plaintiff further claims that the IRS' decision to apply RR 88-98 retroactively is subject to review by the courts, which review must be based upon the full administrative record before the agency at the time it made its decision. Because the retroactive application of RR 88-98 is at issue in this case, plaintiff argues, discovery of the full administrative record is necessary and appropriate.
Defendant argues that the doctrine of variance prohibits the plaintiff from challenging in this lawsuit the validity and applicability of RR 88-98 and 26 U.S.C. section 7805(b), relating to the retroactivity of rulings and regulations, because it did not raise this claim in its Refund Claim. Since it did not raise this claim in its Refund Claim, documents relating to RR 88-98 and section 7805(b) are irrelevant. Moreover, the defendant claims that it did not invoke section 7805(b) in issuing RR 88-98 because it announced its intention to issue a companion ruling to RR 84-58 in a March 30, 1984 News Release.
The filing of a timely refund claim is a prerequisite to the maintenance of an action to recover taxes alleged to have been improperly assessed or collected. See IRC § 7422(a). See also Hempt Bros., Inc. v. United States, 354 F. Supp. 1172, 1182 (M.D.Pa. 1973), aff'd, 490 F.2d 1172 (3d Cir.), cert. denied, 419 U.S. 826, 42 L. Ed. 2d 50, 95 S. Ct. 44 (1974). The law regarding this requirement has generally been stated as follows:
[The refund claim] must set forth in detail each ground upon which a credit or refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. Treas.Reg. § 301.6402-2(b)(1) (1954). A corollary of the enumerated principles is that a court lacks jurisdiction of an action to recover taxes except upon grounds reasonably encompassed by the claim for refund as originally filed or properly amended; the purpose of this rule is to facilitate administrative determination of claims and to limit litigation to issues which the Commissioner has considered and prepared to defend.
Hempt, 354 F. Supp. at 1182 (footnote omitted) (emphasis added).
In Hempt, the plaintiff argued a theory of recovery in its lawsuit, a tax-benefit theory, which it did not raise in its refund claim. The plaintiff argued that this was irrelevant "since the Commissioner is alleged to have been apprised of all the operative facts upon which the new theory depends and since, in any event, the refund claim is not intended to be a legal brief in which the taxpayer is required to elaborate all theories upon which the claim is based." Id. at 1182-83. The court rejected this argument stating as follows:
To the contrary, the Commissioner is required to examine only those points to which his attention is necessarily directed, and this is especially apposite here because the corporation's amended claim sets forth specific reasons in support of its inventory argument the natural effect of which is to induce the Commissioner to pursue quite a different line of inquiry than is relevant to the theory upon which plaintiff presently seeks to rely. ... Similarly, it is immaterial that facts which might support recovery pursuant to the tax-benefit theory were before the Commissioner when he reviewed the corporation's claim; the mere availability of information is not equivalent to notice that a specific claim based thereon is being made because the Internal Revenue Service cannot be expected to discover every claim which a taxpayer might conceivably assert.
Id. at 1183 (footnote omitted) (citations omitted). See also Pfotzer v. United States, 396 F. Supp. 961, 965 (D.Del. 1975) ("[A] taxpayer is confined to the scope of the grounds asserted in his refund claim filed with the IRS and anything not raised in that claim cannot be raised ...