The Tax Court recently denied the Internal Revenue Service's ("IRS") motion to compel the production of electronically stored information by Petitioner, Dynamo Holding Limited Partnership, which was not delivered as part of a discovery response based on the mutually agreed-upon use of "predictive coding." Dynamo holdings, Ltd. v. Comm'r, Docket Nos. 2685-11, 8393-12. Predictive coding is an electronic discovery method that involves the use of keyword search, filtering and sampling to automate portions of an e-discovery document review. This method attempts to reduce the number of irrelevant and non-responsive documents that need to be reviewed manually.

The IRS and Petitioners had agreed that Petitioners would run a search for terms determined by the IRS on the potentially relevant documents. Petitioners used the predictive coding model to provide the IRS with a selection of documents that the model determined to be relevant.

The IRS, believing the response to be incomplete, served Petitioners with a new discovery request asking for all documents containing any of a series of search terms under a simple keyword or Boolean search, speculating that these documents were "highly likely to be relevant." Petitioners objected to this new discovery request as duplicative of the previous discovery responses made through the use of predictive coding. Petitioners contended that the predictive coding algorithm worked correctly, and that the 765 documents excluded as not relevant by the predictive coding algorithm, were properly excluded because they were outside the relevant time frame or otherwise are not relevant. The IRS thereafter filed a motion to compel the production of these documents.

The Tax Court denied the motion, asserting that it was predicated on two myths. The first of these stated myths was the "myth of human review" that "manual review by humans of large amounts of information is as accurate and complete as possible – perhaps even perfect – and constitutes the gold standard by which all searches should be measured." The second myth was "the myth of a perfect response," which is beyond the requirements of the Tax Court Rules. The Tax Court found that that the Tax Court Rules and the Federal Rules of Civil Procedure require only that the responding party make a "reasonable inquiry" when making a discovery response. The court explained that "when the responding party is signing the response to a discovery demand, he is not certifying that he turned over everything, he is certifying that he made a reasonable inquiry and to the best of his knowledge, his response is complete." As this standard was satisfied by Petitioners in their utilization of predictive coding to locate the relevant documents, the IRS's attempt to expand e-discovery beyond the agreed upon predictive coding was unsuccessful.

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