When business writers and commentators talk about future-focused and innovative industries, they don’t tend to put law on the list. Maybe on the “slower to change” list (examples of why include wigs in court (outside of the US), lace-up wingtips as office attire (in the US), and the ongoing unresolved discussion of what to do about the billable hour system). There are people and places looking to bring law into an efficient, tech savvy 21st century (such as the Michigan State University College of Law’s Reinvent Law Laboratory) but law, especially tax law, tends towards traditional processes and structures.
However, in true case of first impression (and 21st Century impression), the United States Tax Court has authorized the use of predictive coding in replying to an IRS request for taxpayers to produce electronically stored information (ESI) contained on backup storage tapes. USTC Opinion for Dynamo Holdings LP v. Commissioner, 143 T.C. No. 9 (Sept. 17, 2014) is here.
The Commissioner and taxpayer ran into disagreement over how ESI would be sorted and produced based on the taxpayer’s estimation that it would “take many months and cost at least $450,000 to fulfill [the IRS request] because they would need to review each document on the tapes to identify what is responsive and then withhold privileged or confidential information.”
Predictive coding is a computer-aided search and document review process that allows one or more parties to select search criteria (names, dates, other key words, etc.) from sample representative documents and then search larger data fields for patterns of potential relevance. The taxpayer in Dynamo Holdings believed that use of predictive coding would allow it to respond to the IRS at a cost substantially less than $450,000 and without inadvertent disclosure of confidential information.
The Tax Court, in light of its mandate to construe its Rules “to secure the just, speedy, and inexpensive determination of every case” considered the taxpayer’s request to use predictive coding “to efficiently and economically identify the non-privileged [responsive] information” and permitted it, finding a “potential happy medium” in the use of this new “form of computer-assisted review that allows parties in litigation to avoid the time and costs associated with the traditional, manual review of large volumes of documents.”
While this is one opinion, the USTC’s recognition of the technical and efficiency value of predictive coding is big news in and of itself. Maybe not to tax law, but to efficient and modern practice of law in a time where clients want faster, cheaper, better service.