
    No. 497-77.
    April 11, 1980
    David J. Mahoney
    
      Walter J. Rockier, attorney of record for plaintiff. Robert J. Jones, of counsel.
    
      Bruce W. Reynolds, with whom was Assistant Attorney General M. Carr Ferguson, for defendant. Michael J. Dennis, of counsel.
   Taxes; income tax; defendant’s offset to plaintiffs claim; when appropriate and when improper. — On April 11, 1980 the court entered the following order:

Before Nichols, Judge, Presiding, Kashiwa and Smith, Judges.

In this income tax case we now have before us defendant’s motion for sanctions, by summary judgment or by order forbidding introduction of evidence, all for alleged noncooperation in discovery, plaintiffs motion for judgment on the pleadings, or in the alternative, for summary judgment, all for defendant’s alleged bad faith in filing false or sham pleadings, and defendant’s cross-motion for summary judgment, based on one of the defenses asserted in its amended answer, and for discovery under Rule 101(g) to aid summary judgment. We are confronted by a welter of charges and counter-charges in which the case is bogged down, and cannot hope to resolve the litigation at this time. The usual cooperation of tax lawyers to put the facts before the court is missing. The most we can accomplish is to get it moving again so that judgment can be entered one way or the other within lives in being.

Plaintiff is a wealthy New Yorker. In the audit of his income tax return for 1971 the Commissioner made only one significant disallowance. He determined the fair market value of property contributed by plaintiff to be $1,218, thereby eliminating part of a claimed charitable deduction to the extent of $67,484, resulting in a tax deficiency of $39,508 plus interest, which plaintiff paid.

Defendant’s answer, as originally filed on December 12, 1977, consisted of denials in standard form. December 5, 1978, almost a year later, defendant filed an amended answer which set up as additional defenses that the Commissioner erroneously failed to disallow the following additional claimed deductions in the 1971 return:

(a) Ordinary income loss of $124,322 claimed for plaintiffs share as a limited partner in Rosewood Manor Apartments.
Ob) A net farm loss of $105,730.
(c) Ordinary income loss of $92,532 claimed for plaintiffs share as a limited partner in "1971 Exploration Program Ltd.”
(d) Ordinary income loss of $72,168 as limited partner in Belco Oil and Gas Fund, Ltd.
(e) Ordinary income loss of $205,357 as limited partner in Austin Funds, Ltd.

Except that the Commissioner erred, defendant does not allege any facts in support of these legal conclusions. Defendant admits that limitations have run on all these five new disallowances. It cannot recover on them as counterclaims, but only use them to the extent it establishes them, as offsets to the plaintiffs claim. Thus, if plaintiff loses on his primary claim, all five are moot. If plaintiff prevails on that, but loses on any one of the offsets, all the others are moot.

On February 13, 1979, a panel of this court denied a request for review under Rule 53(c)(2)(ii) of the trial judge’s order which had allowed the amended answer to be filed (219 Ct. Cl. 624). We said defendant made its motion "after substantial discovery,” the inference being that defendant after discovery knew enough about the five deductions to establish it had some color of entitlement to disallow, and was not embarked on a mere fishing expedition. The true extent of the so-called "substantial discovery” was not known or not adverted to. The above order cites Missouri Pacific R.R. v. United States, 168 Ct. Cl. 86, 338 F.2d 668 (1964). In that case we approved the legitimacy of the assertion of offsets by defendant, simply as offsets, not as counterclaims, after limitations have run, with the proviso, however, as stated, 168 Ct. Cl. at 91, 338 F.2d at 671-72:

However, before the taxpayer has the burden of proving the correctness of the challenged item under situations (1) and (2), we think that the government has the burden of going forward and showing that there is a reasonable basis in fact or in law for its setoff defense. By this we mean that the government has to demonstrate that it has some concrete and positive evidence, as opposed to a mere theoretical argument, that there is some substance to its claim and is not a mere fishing expedition or a method of discouraging taxpayers from seeking refunds on meritorious claims because of the cost that would result in proving each and every item involved in a tax return. In a case where the taxpayer raises specific issues as to a tax, and there is no good reason for the government to challenge the remainder of the items going to make up the tax, the government should not be able to cast the burden on the taxpayer of proving each and every item. The right of allowing an offset under these situations is an equitable right given to the government based on the equitable principles and, as such, should not be abused. If properly used, it should provide the government with a "shield” to prevent the unjust enrichment of a taxpayer, but if used as a "sword” it would under certain circumstances have the contrary effect. * * *

The reference to equitable principles must be read in light of Dysart v. United States, 169 Ct. Cl. 276, 340 F.2d 624 (1965) which holds that when the alleged offset involves the same tax and the same taxable year, defendant is entitled to assert it as a matter of law and such equitable doctrines as laches are not for application. There defendant had the facts and belatedly changed its mind as to the law. Dysart does not involve, as here, a situation where defendant has no facts and amends its answer to assert offsets in order to qualify itself to search for facts by discovery. The same judge, Laramore, spoke for the court in both cases, saying nothing in Dysart to modify the authority of Missouri Pacific.

The parties here rightly treat Missouri Pacific as stating the law applicable to fishing expeditions conducted in a search for offset defenses. The present case deals with discovery abuse rather than the substantive law of offsets in tax litigation. It appears to be in large part the one foreseen by Judge Laramore in Missouri Pacific.

Defendant now has, and apparently had, reposing in the files of the FHA, when the suit was filed, a considerable volume of documentary evidence concerning only the Rosewood Manor limited partnership. Counsel had been remiss, he says, in not realizing that FHA had in Washington possessed a file on this matter, including many documents he had been belaboring plaintiff to produce in discovery. We think it constitutes the "concrete and positive evidence” that Missouri Pacific requires, without taking the view it is all the evidence we should have to adjudicate the matter. Counsel produced it before the motion to dismiss the alleged setoffs as sham came before us, and in view of a lack of previous decisions as to just when the "concrete and positive evidence” must be in defendant’s hands, we believe if we disapprove of defendant’s handling of the Rosewood Manor deduction, we should not give that disapproval retroactive effect. Defendant will take warning for the future.

It is quite apparent now that when defendant filed its amended answer it did not have "concrete and positive evidence” as to the other four offset issues. Defendant in its brief (on its cross-motion) of July 18, 1979, summarizes what it had:

Specifically, our trial attorney in the instant case has previously worked on tax shelter investments nearly identical to that of the taxpayer’s Taurus cattle program, involving "cattle purchases” from Stratford of Texas, Inc. (Dennis Affidavit, par. 4(b).) Accordingly, he is aware of the typical factual patterns of those investments and that the Government, as a matter of law, disputes the loss deductions. Furthermore, with respect to the remaining three deductions involving oil and gas ventures, our trial attorney is familiar with similar oil and gas tax shelters and that, under their normal business operations, they yield claimed deductions which the Government contends are improper. (Dennis Affidavit, par. 4(c).) [Id. at 47.]

The Dennis Affidavit, in Appendix B to the cross-motion, supplies some added details. As to the Taurus cattle feeding loss deduction, it notes that—

* * * I am familiar with other taxpayers’ cattle investments with Stratford of Texas, Inc., and am aware of tax problems which have resulted from these investments. The Internal Revenue Service takes the position that taxpayers in these investments are not entitled to any feed or other service deductions on various grounds, * * * [stating three]. Thus, it appeared reasonable to conclude that the deductions had been erroneously claimed and allowed. [Id. at 8.]

The affidavit then recites an inability to move for summary judgment because of the taxpayer’s inability to produce any documents. Taxpayer had demonstrated he had almost no information. Taxpayer was under order of the trial judge to request documents but Taurus Corporation has not responded.

As regards the three oil investment deductions:
* * * I was familiar with similar oil and gas tax investments and, furthermore, aware that loss deductions of such investments may be improper on * * * [three alternative grounds which he states]. [Id. at 9.]

There then follows another litany of failure to obtain records of the entities in which plaintiff was a limited partner, by means of discovery demands on plaintiff. It is admitted that—

* * * No inquiry had been made into these matters on audit.* * * [Id. at 10.]

What all this adds up to is that counsel was suspicious of these kinds of deductions because his experience as a tax lawyer, led him to believe that often they were improperly claimed, but it does not appear he attached any weight to the allowance of them, in plaintiffs case, by the Commissioner.

Neither the label "tax shelter” nor the fact that a partnership may produce losses in a given year which appear to be out of proportion to the partner’s investment necessarily indicate that the resulting loss deductions are improper. The Commissioner himself has just recently acknowledged this explicitly in IRS Letter Ruling 8006079, 80(10) CCH-Standard Federal Tax Reports, ¶ 6970H (Oct. 19, 1979). Defendant’s plea that the Commissioner of Internal Revenue "erroneously” failed to disallow the additional claimed deductions merely highlights the fact that if any impropriety is involved in such losses of a limited partnership it would most likely be discovered in an examination of the operating general partners, something defendant is in a much better position to accomplish than the investing taxpayer who merely holds a limited interest. Since our order of February 13,1979, entered because of our standing reluctance to interfere unnecessarily in the trial process, defendant has had ample opportunity to confirm suspicions of its counsel and has produced virtually nothing of substance on these proposed offsets. While on February 13, 1979, we were in no position to say defendant’s defenses were unfounded, now we are. That they might still prove founded on some theory if all the facts were known, is a speculation we are not required to indulge in. They were unfounded when the answer was filed.

Defendant had, undoubtedly, information returns filed by the general partners of the entities in which plaintiff suffered his-no doubt desired-losses, and could have audited them with results equitable to all partners alike. Instead, plaintiff is singled out because he filed a suit in the Court of Claims, and is required seven years after to obtain documents for us at secondhand. If these documents prove what counsel hopes they will prove, plaintiff will suffer a tax detriment apparently not suffered by other limited partners in the same ventures. Cf. International Business Machines Corp. v. United States, 170 Ct. Cl. 357, 343 F. 2d 914 (1965), cert. denied, 382 U.S. 1028 (1966).

It is well known that present day litigation has become extremely time consuming, burdensome, and costly, and that a large, perhaps the largest, portion of this is attributable to discovery rather than trial. This is not less true in a tax case such as this, where defendant seeks to explore six alternative routes to the same goal. Rather, it is more than six, for it has in mind three alternative routes that may lead to disallowance of the Taurus deduction alone, and corresponding alternatives exist for all the other proposed disallowances.

We think, in view of the foregoing, defendant must possess "concrete and positive evidence” before it initiates discovery into matters relevant only as to establishment of offsets. Massive discovery on the basis of the suspicions entertained here is exactly the "mere fishing expedition or method of discouraging taxpayers from seeking refunds” which the Missouri Pacific decision disapproved. As to fishing, every fisherman lowers his hook where he thinks there are most likely to be fish, but his opinion is not "concrete and positive evidence” that fish are there. If the methods employed against plaintiff are not intended to discourage him and others from suing for refunds of taxes, this must, if tolerated, be their inevitable effect. In deciding as we do, to eliminate the four offset defenses, other than the one relating to Rosewood Manor, we do not question counsel’s good faith, but we challenge his priorities, and we call on the tax division to take notice of the fact that, under Missouri Pacific, in setting up offsets it is asserting equitable principles which must not be abused, to prevent unjust enrichment, and it must use its offsets as a shield, not as a sword.

It follows that defendant’s discovery demands represent an abuse of the discovery privilege in a "fishing expedition.” We think that plaintiff also has abused discovery. As a sanction, we direct that no further discovery be had in this case by either side, except as we direct hereinafter. We think our trial division has played entirely too passive a role in the management of this case hitherto. Even if relevant, and based on solid leads, discovery demands should be held to moderate volume, which cannot be said of those before us. Discovery by defendant cannot be regarded as a means of conducting a reaudit, as defendant seems to wish to do here. Discovery in the course of litigation is a costly and cumbersome substitute for a true audit, and is abused if employed to that end. The revenue agent can poke into everything without being required to have even a suspicion that anything is not as it should be. A taxpayer should not be subjected to this more than once. Counsel here must use the very different tools he is given for the very different purposes of adversary litigation.

The case cited in the dissent says no more than that pleaded facts are taken as true on a motion to strike. Kelly v. Kosuga, 358 U.S. 516 (1959). Here the amended answer pleads no facts, only legal conclusions. An amended answer that pleaded facts would present a case not now before us.

As regards defendant’s proposed summary judgment on the Rosewood Manor loss deduction, we are reluctant to pass on it now but continue to believe that summary judgment may be the best way to dispose of it. It requires us to pass on the tax accounting of a party whose tax return is not before us, Rosewood Manor Apartments, a partnership. The parties stipulate to nothing. They cannot even agree whether the partnership was on a cash or accrual basis, or whether the construction loan was replaced by a permanent loan. Nevertheless, we are not convinced that there are genuine fact issues requiring trial. We hold that plaintiff should be and is allowed to cross-move for partial summary judgment on this issue, to inspect and copy papers relevant to Rosewood Manor which defendant states it has but has not filed, and to file any papers it chooses, usable under our rules, in support of its cross-motion. The dispositive facts probably depend on documents of unchallengeable authenticity, not on oral testimony which may or may not be believed. The facts are nevertheless complex and intertwined. We believe it appropriate to, and we do call on the trial division under Rule 54(b) to consider the pending motion and the cross-motion if one is filed, and recommend a disposition. If the trial division cannot recommend a disposition that will dispose of the case, it will schedule a trial on triable issues without awaiting our disposition of its Rule 54(b) recommendation.

There seems to be no dispute but that the original issue, the charitable gift disallowance, requires trial. There is, as stated, to be no discovery concerning that.

Accordingly, upon consideration of the various motions before us, the record, the briefs, and oral argument, the said motions are granted to the extent indicated in the foregoing paragraphs, and otherwise denied. Judgment will be entered for plaintiff on the four offset defenses other than Rosewood Manor. The Rosewood Manor Apartments motion for summary judgment is referred to the trial division for a recommendation under Rule 54(b), as is any cross-motion hereafter filed dealing with the same topic. No further discovery is to be had by either party except as stated.

IT IS SO ORDERED.

Defendant’s motion for rehearing and suggestion for rehearing en banc were denied May 30, 1980. See 224 Ct. Cl.

Kashiwa, Judge,

dissenting:

On December 26,1978, the trial judge in this case allowed defendant’s motion to assert the five setoffs now in issue. Plaintiff then, under our Rule 53(c)(2)(ii), challenged the correctness of the trial judge’s action. This court in its order of February 13, 1979, denied plaintiffs request for review, holding the trial judge’s action to be proper. The net effect was defendant’s being allowed to assert five setoffs.

A majority of this panel would now enter judgment for plaintiff removing four of defendant’s five setoffs from this action. Plaintiffs alternative motions to strike these setoffs were, as stated by the majority, founded on "defendant’s alleged bad faith in filing false or sham pleadings * * *.” Yet they also point out that "we do not question [defendant’s] good faith [in asserting these four setoffs] * * By pointing out the lack of bad faith, it is implicit that plaintiff is being granted relief under neither of his motions. The only logical explanation for the majority’s action must be its, sua sponte, striking these setoffs under some other ground. However, the majority cannot seem to make up its mind as to just what this ground is. All that is clear is that its result hinges on our decision in Missouri Pacific Railroad v. United States, 168 Ct. Cl. 86, 338 F. 2d 668 (1964).

The majority at one point views Missouri Pacific as approving the legitimacy of defendant’s assertion of setoffs subject to a proviso removing defendant’s right to do so. The proviso apparently is that defendant must have "concrete and positive evidence” that there is some substance to each setoff it attempts to assert. Support for such a proviso ostensibly comes from a rather extensive quotation from Missouri Pacific. The majority declares at a later point that "[i]t is quite apparent now that when defendant filed its amended answer it did not have 'concrete and positive evidence’ as to the other four offset issues.” In view of these four setoffs being stricken, one might intelligently view the majority as enunciating a rule that this court will strike a defense raised by way of setoff unless defendant at some point prior to trial makes a showing of "concrete and positive evidence” with respect to such setoff. The seeming logic underlying such a rule appears to be that if defendant raises a setoff and this court subsequently determine that such "concrete and positive evidence” was lacking then, in accordance with the above proviso, defendant never in fact had the right to assert the setoff. In the absence of this right, the only proper action is thus for this court to strike the setoff.

After expressly stating that the quotation from Missouri Pacific limits defendant’s right to assert setoffs, the majority declares that:

The parties here rightly treat Missouri Pacific as stating the law applicable to fishing expeditions conducted in a search for offset defenses. The present case deals with discovery abuse rather than the substantive law of offsets in tax litigation. It appears to be in large part the one foreseen by Judge Laramore in Missouri Pacific.

In saying this, the majority again relies on this very same quotation. At a later point, they state that:

* * * [Defendant must possess "concrete and positive evidence” before it initiates discovery into matters relevant only as to establishment of offsets. Massive discovery on the basis of the suspicions entertained here is exactly the "mere fishing expedition or method of discouraging taxpayers from seeking refunds” which the Missouri Pacific decision disapproved.

Since the majority feels defendant lacked such "concrete and positive evidence” with respect to four of the setoffs, and these were in fact stricken, it is reasonable to read the majority as relying on Missouri Pacific in support of a rule allowing imposition of sanctions for defendant’s abuse of discovery with respect to setoffs. The rationale arguably is that defendant has the right to discovery concerning a setoff only if it first shows by "concrete and positive evidence” that there is some substance to the setoff. If it seeks discovery in the absence of such evidentiary showing, then it has abused its discovery rights, allowing this court to impose sanctions, including striking the setoff.

There being no other cohesive threads of logic in the order, the majority must be striking the four setoffs under either or both of these two approaches. The difficulty is that the majority’s reliance on Missouri Pacific is misplaced. The case did not approve the legitimacy of defendant’s assertion of setoffs or articulate a proviso limiting defendant’s right to do so. Nor did it articulate a rule allowing this court to impose sanctions for defendant’s seeking of discovery in the absence of "concrete and positive evidence.” These were not even issues presented to the court. The sole issue in the case was the proper allocation at trial of the burden of proof with respect to the setoffs asserted. This is clear from the procedural posture of Missouri Pacific. As stated at the outset of the opinion, the case came before us pursuant to the Government’s requesting us to "review the Order of [the] Commissioner * * * granting taxpayer’s motion to fix the burden of proof of the government’s setoff defense upon the government * * *.”168 Ct. Cl. at 88, 338 F. 2d at 669.

Preliminary to reaching this issue, the opinion did state that defendant had the right to assert time-barred defenses by way of setoffs. (It was for just this narrow proposition that Missouri Pacific was cited in our February 13, 1979, order.) In doing so, however, we were not stating some new concept of tax jurisprudence. In recognizing defendant’s right to assert setoffs, we were simply applying the law as articulated in Lewis v. Reynolds, 284 U. S. 281 (1932). The Supreme Court having approved the legitimacy of defendant’s assertion of setoffs, there was nothing for us to approve. There is thus no merit to the majority’s insistence that Missouri Pacific "approved the legitimacy of the assertion of offsets by defendant * * * after limitations have run * * *.”

As above indicated, in support of their assertion that a proviso exists limiting defendant’s right to assert setoffs, the majority relies on an extensive quote from Missouri Pacific. They are in fact reading this portion of the opinion out of context. The quoted portion actually deals solely with the issue of allocation at trial of the burden of proof. It is not at all directed to a limitation on the right to assert setoffs. Nor could it be in view of the narrow issue in Missouri Pacific. In addition, it would be impermissible to extend this language beyond the issue of allocation of burden of proof. Reduced to its essentials, in the portion of the case quoted, we there held that the burden of proof would shift to plaintiff only after defendant first demonstrates that it has some concrete and positive evidence that there is some substance to its setoff claim. It is also clear from the majority’s quote that this burden of proof shifting rule was founded on equitable principles. The majority, by relying on this rule as justification for a proviso limiting defendant’s right to assert setoffs, is therefore making defendant’s right to do so hinge on equitable considerations. Yet, subsequent to Missouri Pacific, this court stated that:

* * * [T]he right to raise a setoff is not subject to equitable considerations as taxpayers contend. We believe that * * * the government * * * [has] the legal right to raise a setoff without having to appeal to the court’s discretion or to its evaluation of the particular equities.
*****
The Supreme Court has never suggested that-in a refund suit in which the setoff involves the same tax, the same year, and the same taxpayer — the court may, or should, weigh "equities” to decide whether it would be fair, in the individual circumstances, to permit the government to assert the defense. [Dysart v. United States, 169 Ct. Cl. 276, 281-283, 340 F. 2d 624, 627-628 (1965).]

The majority’s extension of Missouri Pacific is therefore directly contrary to Dysart. In light of Dysart’s being decided such a short time after Missouri Pacific, both being authored by the same judge and both being decided by this court sitting era banc, the conclusion is inescapable that this court specifically meant for Dysart to be a bar to any such extension of Missouri Pacific. It is therefore improper for the majority to rely upon Missouri Pacific as support for a limitation of defendant’s right to assert setoffs.

The majority seeks to meet this criticism by attempting to distinguish Dysart from the situation now before this court. They somehow feel this is possible because "Dysart [did] not involve, as here, a situation where defendant has no facts and amends its answer to assert offsets in order to qualify itself to search for facts by discovery.” I do not agree. As discussed, infra, I feel defendant does have sufficient facts in support of the stricken setoffs. Nor do I understand how defendant’s motive for raising the setoffs affects Dysart’s application to our case. Examination of motive would involve us in an inquiry as to the equities of allowing defendant to assert the setoffs. Since Dysart itself rejected such inquiry into equitable considerations, motive is not a valid point of distinction. The majority also attaches weight to Dysart’s containing no language modifying the authority of Missouri Pacific. Without addressing the implications of this statement, the short answer is that there was no reason for Dysart to modify Missouri Pacific. The two cases involved totally different issues. As previously indicated, Missouri Pacific was concerned only with allocation at trial of the burden of proof with respect to setoffs. The sole issue in Dysart was whether:

* * * in a suit for refund where both the taxpayers’ claim and the government’s setoff concern the same tax for the same year by the same taxpayers, the right of the government to assert such a defense is an unconditional right (as the government contends), or whether, as taxpayers contend, such a right is subject to the court’s discretion after evaluating the "equities” involved in each particular case. [169 Ct. Cl. at 278-279, 340 F. 2d at 626 (footnote omitted).]

Contrary to the majority’s belief, Dysart is thus applicable to the facts of this case and does bar extension of Missouri Pacific’s burden of proof rule in the manner attempted by the majority.

Missouri Pacific’s lack of support is not the sole difficulty with the purported rule allowing striking for abuse of discovery. As an initial matter, the majority seems to misapprehend the proper scope of discovery in the context of setoffs. At one point they state that "[djiscovery by defendant cannot be regarded as a means of conducting a reaudit, as defendant seems to wish to do here.” This is simply incorrect. As we stated in Missouri Pacific:

The Supreme Court in Lewis v. Reynolds * * * established the right of the government to reaudit a return and challenge by way of a defense, in the nature of a setoff, in a refund suit, the validity of the tax treatment accorded any item in taxpayer’s return * * *.
* * * * *
* * * [Taxpayer’s assertion of a refund claim] of necessity puts in issue every credit or deduction found in the particular tax return for which refund is sought * * *. [168 Ct. Cl. at 88-90, 338 F. 2d at 670-671.]

Once defendant asserts a setoff, it therefore does have the right to use discovery as a means of conducting a reaudit.

Although not clearly expressed, in articulating its rule limiting discovery and imposing sanctions for abuse thereof, the majority was also influenced by a number of other factors. Among these are (1) the Commissioner’s previous opportunity to impose assessments with regard to the items now sought to be raised as setoffs, (2) the fact that allowing discovery would make this litigation time consuming, burdensome and costly, and (3) the complexity surrounding the four stricken setoffs. This court has previously declared that:

* * * There is no room, in this situation, to deny the government its right of setoff because the taxpayers’ claim is relatively small, or the government’s counter-demand will put them to a burdensome trial, or because the underlying facts * * * are old and complex, or the Internal Revenue Service had a previous opportunity to assess the underpaid tax. * * * [Dysart, 169 Ct. Cl. at 282, 340 F. 2d at 628.]

It is thus clear that these factors cannot be considered in determining defendant’s right to assert setoffs. It is accordingly incorrect to attach any weight to them in defining the scope of discovery. Any other conclusion would produce the anomalous result that such factors would not bar defendant’s right to assert setoffs but might prevent defendant from obtaining discovery with respect thereto. Yet, as a practical matter, what good is it to allow defendant to assert a defense and at the same time not allow any discovery? It is implicit in this court’s discovery rules that a party should be allowed discovery with respect to any defense which he asserts.

There is also a certain illogic to the majority’s approach with regard to discovery. Prior to allowing discovery with respect to a setoff, they would require defendant to make a showing by "concrete and positive evidence” that there is substance to the setoff. Yet very often discovery is the only way that defendant could hope to obtain such evidence. The majority thus places defendant in a "Catch-22” situation. They deny defendant discovery for failure to first make the evidentiary showing which can only be made on the basis of the results of discovery.

The final difficulty is that the striking of these setoffs for abuse of discovery is an unduly harsh result. If the majority feels defendant’s discovery attempts are overbroad or that defendant should first make a showing of "concrete and positive evidence,” the proper course would be to not strike, but instead enter an order limiting discovery and/or requiring defendant to make such a preliminary showing. If defendant failed to comply with this order, the court would then be justified in imposing sanctions for abuse of discovery. At the present stage of this litigation, defendant’s not having failed to comply with any discovery order of this court, striking is totally inappropriate. See Rule 76 of the Rules of the United States Court of Claims. I note in this regard that Rule 37 of the Federal Rules of Civil Procedure, which is broader than our Rule 76, would also not allow an order imposing sanctions under the present state of facts. The inappropriateness of the majority’s result is especially true in light of the fact that this order is the very first time that such a discovery rule with respect to setoffs has ever been articulated by this court. How could defendant possibly be expected to comply with a rule which heretofore never existed? The majority also points out that both defendant and plaintiff have abused the discovery privilege. Why then is only defendant being singled out for the imposition of sanctions?

The majority’s two "justifications” for striking are for all the above reasons incorrect approaches to use. The correct rule to be applied in determining whether to strike is to be deduced from examination of the essential nature of setoffs. As recognized by this court in Missouri Pacific and as previously referred to, "[t]he Supreme Court in Lewis v. Reynolds, 284 U. S. 281 (1932), established the right of the Government to reaudit a return and challenge by way of a defense, in the nature of a setoff, the validity of the tax treatment accorded any item in [the] taxpayer’s return * * *.” 168 Ct. Cl. at 88-89, 338 F. 2d at 670. [Emphasis supplied.] Setoffs of the type here at issue are, therefore, to be regarded as equivalent to all other defenses pleaded by defendant. The same rule governing the striking of all other defenses should thus determine when setoffs are to be stricken. This court’s Rule 38(f) pertains to motions to strike. It provides that "the court may order stricken * * * any insufficient defense.” In deciding whether a defense is insufficient, those facts asserted in defendant’s answer which pertain to such defense and in any supplemental documents filed in support thereof must be accepted as true. A setoff should thus be stricken by this court only if, even after accepting defendant’s factual allegations as correct, it is an insufficient defense. This was in essence the very test adopted in our order of February 13,1979.

In sustaining the trial judge’s action, we there pointed out that:

The Government has a settled right to raise such defenses, regardless of the amount of the plaintiffs original claim, as long as the setoff involves the same kind of tax, the same taxpayer, and the same taxable year as the plaintiffs claim. * * * We are in no position now to say that defendant’s defenses in this case are unfounded. [Emphasis supplied; citations omitted.]

It is thus apparent that our refusal to strike the setoffs was based upon their not being unfounded. This, however, was tantamount to holding they were not insufficient defenses. Implicit in our prior holding was our accepting as true the facts pleaded by defendant prior to the date of this order.

I continue to feel not only that our prior order set forth a proper test to use in deciding whether to strike setoffs under Rule 38(f) but that viewing all the facts asserted by defendant to date, and assuming them to be correct, defendant’s five setoff defenses are not unfounded. The majority, however, takes the position that we are now in a position to say that the four setoffs which they are striking are unfounded. They do this by attaching insufficient weight to the affidavit filed by defendant’s trial attorney in this case, Michael J. Dennis (the "Dennis affidavit”). This affidavit, though filed after the date of the amended answer (in which the setoffs were asserted), nevertheless sets out defendant’s reasons for asserting these setoffs. As such, it is only appropriate to view it as a supplemental document filed in support of the amended answer. In deciding whether to strike, it is therefore appropriate to look to the Dennis affidavit as well as the amended answer.

The majority order contains some quotations from this affidavit. However, the portions excerpted set forth an incomplete picture of defendant’s foundation for asserting the setoffs which are now being stricken. With regard to the setoff based on the Taurus cattle feeding loss deduction, the trial attorney states as follows:

With respect to the Taurus cattle-feeding loss deduction, my examination of the administrative files indicated that taxpayer had entered into an agreement whereby Stratford of Texas, Inc., would purchase cattle for taxpayer and would provide quantities of feed and other services. The administrative files further indicate that, pursuant to the transaction, the risk of loss was nominal and a prepayment for feed was involved. I am familiar with other taxpayers’ cattle investments with Stratford of Texas, Inc., and am aware of tax problems which have resulted from these investments. The Internal Revenue Service takes the position that taxpayers in these investments are not entitled to any feed or other service deductions on various grounds, among which are: (1) the taxpayers are not the owners of the cattle, but, in reality, have simply made loans to the corporate agent * * *; (2) the taxpayer’s payments are, in reality, deposits * * *; and (3) the expenditure for feed results in the creation of an asset having a useful life extending substantially beyond the close of the taxable year * * *.

Regarding the other three stricken setoffs, the affidavit declares that:

With respect to the investments in the 1971 Exploration Program, Belco 1971 Oil and Gas Fund, Ltd., and Austin Funds, Ltd., I was familiar with similar oil and gas tax investments and, furthermore, aware that loss deductions of such investments may be improper on any of the following grounds: (1) the partnership does not acquire an economic interest in wells * * *; (2) the payments for intangible drilling and development expenses are made as a deposit or alternatively result in the creation of an asset having a useful life extending substantially beyond the close of the taxable year * * *; (3) the allocation to intangible drilling costs under the drilling contract may not represent a reasonable allocation between the total drilling contract price and other items of expense.

These more extensive quotes establish in my mind sufficient facts for us to say that those setoffs were not unfounded. Contrary to the majority’s belief, defendant is not making generalized allegations that tax shelters are somehow intrinsically evil or that loss deductions generated by them are always improper. Rather, defendant is explicitly indicating exactly why it believes the losses flowing from these specific shelters are improper and give rise to valid setoffs. This should be adequate to avoid striking under Rule 38(f). These four setoffs should therefore not be stricken.

The majority’s mistaken reliance on Missouri Pacific, its articulation of unsupported and erroneous rules, its failure to rely upon Rule 38(f), and its reaching an erroneous result compel me to respectfully dissent from this order. 
      
       Footnote 11 of Missouri Pacific provides as follows:
      "We recognize that the right of the government to challenge items found in unrelated tax returns (situations (3) and (4)) is not present in every case. See Rothensies v. Electric Storage Battery Co., 329 U. S. 296, 301 (1946). We are concerned in this case only with establishing who has the burden of proof once it is determined that the government can properly challenge the item by way of a setoff defense.” [168 Ct. Cl. at 91, 338 F. 2d at 671.]
      I note that certain language in the second sentence of this footnote might be construed as indicating our concern with defendant’s generalized right to assert setoffs. However, as is clear from the first sentence of this note, the language in question was limited to situations where the item which gives rise to the taxpayer’s refund claim and the item which gives rise to the setoff are not found in the same tax return of plaintiff. (There denominated situations "3” and "4.”) This is a situation where defendant does not have the automatic and absolute right to assert setoffs.
      The present case, however, involves setoffs arising out of items found in the same tax return with respect to which plaintiff seeks a refund. There is thus no way that the language of this note could be read as imposing in this case a limitation on defendant’s right to assert setoffs.
     