Tax Court Judicial Conference
Privileges, Waivers & Protecting Taxpayer Information
May 21, 2015
Moderators
Hon. Robert P. Ruwe
Hon. Lewis R. Carluzzo
Panelists
Michael J. Desmond, Law Offices of
Michael J. Desmond, APC
Kevin Gillen, IRS Office of Chief
Counsel
Timothy L. Jacobs, Hunton &
Williams
Kevin Spencer, McDermott, Will &
Emory
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I. General Rules of Privilege in the Tax Court
A. Code § 7453 authorizes the Tax Court to prescribe all rules of practice and
procedure other than rules of evidence. The statute further provides that
proceedings in the Tax Court “shall be conducted . . . in accordance with the
rules of evidence applicable in trials without a jury in the United States
District Court for the District of Columbia.” See also Tax Court Rule 143(a);
Fu Inv. Co. v. Commissioner, 104 T.C. 408, 415 (1995).
B. The Federal Rules of Evidence apply to bench trials in the U.S. District Court
for the District of Columbia. Fed. R. Evid. 1101. The Federal Rules of
Evidence, in turn, incorporate the common law rules of privilege, including
attorney-client privilege. Fed. R. Evid. 501, 1101(c).
C. Pursuant to Fed. R. Evid. 501, questions concerning application of the
attorney-client privilege in the adjudication of federal law are governed by
federal common law. See United States v. Zolin, 491 U.S. 554, 562 (1989).
1. Because the Tax Court’s jurisdiction is provided for under federal law,
federal common law will usually determine resolution of privilege
questions in the Tax Court. There are, however, a limited number of
issues that the Tax Court can be called upon to resolve that turn at least
in part on questions of state law, e.g., transferee liability under Code §
6901. Commissioner v. Stern, 357 U.S. 39, 45 (1958) (“[T]he
existence and extent of [transferee] liability should be determined by
state law.”). In those circumstances, resolution of privilege questions
in the Tax Court can be governed by controlling state law. See Rohn-
Poulenc Rorer, Inc. v. Home Indem. Co., 32 F.3d 851, 861-62 (3d Cir.
1994).
II. Attorney-Client Privilege
A. In General
1. Purpose and Scope. The purpose of the attorney-client privilege is “to
encourage full and frank communications between attorneys and their
clients.” Upjohn Co. v. United States, 449 U.S. 383, 389 (1981); Hartz
Mountain Indus., Inc. v. Commissioner, 93 T.C. 521, 525 (1989).
Because it is an obstacle to discovery, the privilege is “construed as
narrowly as is consistent with its purpose.” United States v. Suarez,
820 F.2d 1158, 1160 (11th Cir. 1987); see also Cavallaro v. United
States, 284 F.3d 236, 245-46 (1st Cir. 2002) (noting that “the doctrine
of construing the privilege narrowly . . . has particular force in the
context of IRS investigations”); Fu Investment, 104 T.C. at 415 (“The
U.S. District Court for the District of Columbia generally takes the
view that all privileges are to be strictly construed.”).
2. Elements of the Privilege. The attorney-client privilege “applies to
communications made in confidence by a client to an attorney for the
purpose of obtaining legal advice, and also to confidential
communications made by the attorney to the client if such
communications contain legal advice or reveal confidential
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information on which the client seeks advice.” Hartz Mountain, 93
T.C. at 525 (citing Upjohn, 449 U.S. at 389); see also Brittingham v.
Commissioner, 57 T.C. 91 (1971) (discussing the elements of the
attorney-client privilege and finding that it did not apply to information
provided to an attorney as a “relay man” who then passed it on to state
tax authorities).
3. Although information need not be confidential in order for a
communication to be protected from disclosure by the attorney-client
privilege, the privileged communication itself must be kept
confidential in order to preserve privilege. Moore v. Commissioner,
T.C. Memo 2004-259 (“’The voluntary disclosure of privileged
communications to third parties (who are not agents of either the
attorney or the client) by the client or the client’s authorized agent
destroys both the communications’ confidentiality and the privilege
that is premised upon it.’” (quoting Rice, Attorney-Client Privilege in
the United States, § 9:27, at 70-71 (2d ed. 1999) (footnotes omitted)).
4. The attorney-client privilege applies to both individual taxpayers and
to business entities. See, e.g., Moore, T.C. Memo 2004-259. For
business entities, the privilege belongs to the entity, not its employees
but because an entity can only act through its agents and employees
their communications can be protected by the entity’s privilege. The
privileged nature of those communications will, therefore, survive
termination of the employee/agent’s relationship with the entity. Fu
Investment, 104 T.C. at 415.
B. Procedures for Asserting and Adjudicating Claims of Privilege
1. The party asserting privilege as a defense to the production of
documents, testimony or other information must prove all elements of
the privilege, including a showing that the privilege has not been
waived. Hartz Mountain, 93 T.C. at 525.
2. Blanket assertions of privilege are not acceptable. Zaentz v.
Commissioner, 73 T.C. 469, 475 (1979); Securities & Exchange
Comm’n v. Gulf & Western Indus., Inc., 518 F. Supp. 675, 682 (D.D.C.
1981). Rather, “[t]he claim of privilege must be made and sustained
on a question-by-question or document-by-document basis.” United
States v. Lawless, 709 F.2d 485, 487 (7th Cir. 1983).
3. In order to adjudicate privilege claims, in litigation before the Tax
Court it is generally necessary for the party asserting privilege to
produce a log describing each document in sufficient detail to establish
each element of a prima facie claim of privilege. See Bernardo v.
Commissioner, 104 T.C. 677, 679-80 (1995) (describing the process
followed in connection with a motion to compel production of
documents). An inaccurate or incomplete privilege log can result in a
finding that privilege protection has been waived. Employers
Reinsurance Corp. v. Clarendon Nat’l Ins. Co., 213 F.R.D. 422, 428
(D. Kan. 2003) (“The law is well-settled that, if a party fails to make
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the required showing, by not producing a privilege log or by providing
an inadequate one, the court may deem the privilege waived.”).
a. Although a log is generally required in order to assert and
maintain privilege in litigation, in the context of an
administrative audit, the IRS cannot compel a taxpayer to
create a privilege log. Internal Revenue Manual, Privileged
Communication and Summonses, 25.5.5.4.3 (April 30, 1999)
(“If the Service anticipates that the summoned person may raise
any privilege, the Service should ask for a privilege log to
support the claim. The request may be made in the summons,
but it can only be requested because a summons cannot require
a person to create a new document.”).
4. In order to determine whether a document is protected from disclosure
under the attorney-client privilege, the Tax Court will often employ an
in camera review process. See, e.g., Hartz Mountain, 93 T.C. at 524;
Zaentz, 73 T.C. at 476 (directing petitioner to submit documents for in
camera review in order to assert a valid privilege claim). The in
camera review process may involve assignment of the privilege review
to a special trial judge. See, e.g., Securitas Holdings, Inc. v.
Commissioner, Order Dated July 2, 2013, Docket No. 21206-10 (Judge
Buch’s Order resolving motion for reconsideration of Special Trial
Judge Carluzzo’s privilege determinations).
C. Application, Exceptions and Exclusions
1. Tax Planning Advice. Tax planning advice rendered by an attorney
has generally been held to constitute legal advice subject to protection
under the attorney-client privilege. See In re Grand Jury Subpoena
Duces Tecum (Marc Rich), 731 F.2d 1032, 1037 (2d Cir. 1984)
(concerning advice regarding employee compensation plans);
Segerstrom v. United States, 2001 U.S. Dist. LEXIS 2949 (N.D. Cal.
Feb. 6, 2001) (communications regarding estate planning); In re
Federated Dep’t Stores, Inc., 94-2 U.S.T.C. ¶ 50,418, at 85,474-75
(S.D. Ohio 1994) (advice concerning a potential corporate acquisition).
a. Thus, information transmitted to or from an attorney in the
course of rendering tax-planning advice that is not intended to
be disclosed on a tax return is generally protected. See United
States v. Abrahams, 905 F.2d 1276, 1284 (9th Cir. 1990)
(“Although communications made solely for tax return
preparation are not privileged, communications made to acquire
legal advice about what to claim on tax returns may be
privileged.”), overruled on other grounds by United States v.
Jose, 131 F.3d 1325 (9th Cir. 1997); In re Grand Jury
Investigation (Glen J. Schroeder. Jr.), 842 F.2d 1223, 1225
(11th Cir. 1987) (lawyer who prepares a tax return can provide
privileged legal advice on tax matters unrelated to the
preparation of that return).
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2. Underlying Facts. “’[T]he [attorney-client] privilege only protects
disclosure of communications; it does not protect disclosure of the
underlying facts by those who communicated with the attorney.’” Saba
Partnership v. Commissioner, T.C. Memo 1999-359 (quoting Upjohn
499 U.S. at 395), vacated and remanded on other grounds, 273 F.3d
1135 (D.C. Cir. 2001).
3. Work Other Than Providing Legal Advice. The attorney-client
privilege only protects communications with an attorney acting in that
person’s capacity as an attorney. Zaentz, 73 T.C. at 475.
a. Business Advice. Where an attorney is found to have provided
a client with business, rather than legal advice, communications
regarding that advice are not protected by the privilege. Karme
v. Commissioner, 73 T.C. 1163, 1182 (1980) (attorney-client
privilege does not “apply to communications in connection
with an attorney’s business advice to a client”) (citing Olender
v. United States, 210 F.2d 795, 806 (9th Cir. 1954)), aff’d, 673
F.2d 1062 (9th Cir. 1982); Ford v. Commissioner, T.C. Memo
1991-354 (citing lawyer’s “business relationship” with the
taxpayer, Court holds that his testimony “is not barred by the
attorney-client privilege”).
b. Tax Return Preparation. “Materials provided by a taxpayer to
his attorney for tax preparation purposes are intended to be
disclosed to the IRS in the taxpayer’s return. Consequently,
under such circumstances the taxpayer is considered to have
waived the attorney-client privilege as to such information.”
Bernardo, 104 T.C. at 686; see also United States v. Lawless,
709 F.2d 485, 487-88 (7th Cir. 1983); United States v. Cote,
456 F.2d 142, 144-45 (8th Cir. 1972); Colton v. United States,
306 F.2d 633, 638 (2d Cir. 1962); Olender v. United States,
210 F.2d 795, 806 (9th Cir. 1954); Zaentz, 73 T.C. at 475.
4. Communications Not Intended to be Confidential. If legal advice was
not intended to be kept confidential, then it is not protected from
disclosure.
a. In Long-Term Capital Holdings v. United States, 2003 U.S.
Dist. LEXIS 7826, 2003-1 USTC (CCH) ¶ 50,304 (D. Conn.
2003), the court held that a legal opinion regarding the
taxpayer’s basis in certain stock was not protected by the
attorney-client privilege because the taxpayer never intended
the document to remain confidential. Indeed, to sustain the tax
treatment of a transaction the taxpayer was required to establish
the basis of the stock prior to the transaction, and the taxpayer
had intended to furnish the opinion to the IRS for this purpose.
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D. Waiver of the Attorney-Client Privilege
1. The attorney-client privilege can be lost through an express or implied
waiver. The taxpayer is the holder of the privilege, and can expressly
waive it. United States. v. Juarez, 573 F.2d 267, 276 (5th Cir. 1961).
a. If the taxpayer is a corporation, the authority to waive the
privilege resides with the corporation’s officers and directors
acting in accordance with their fiduciary constraints. See
CFTC v. Weintraub, 471 U.S. 343, 348-49 (1985).
b. Because affiliated entities are all deemed to be the “client,” and
not considered separate legal entities for this purpose,
disclosing privileged communications to parent, subsidiary, and
affiliated corporations generally will not waive privilege. See
United States v. American Tel. & Tel. Co., 86 F.R.D. 603, 616
(D.D.C. 1979).
2. Generally, a disclosure to facilitate communication between an
attorney and a client does not waive privilege. See Green v. Beer,
2010 U.S. Dist. LEXIS 65974 (S.D.N.Y. 2010) (no waiver for emails
from attorney sent through son to ensure timely communication with
technologically unskilled parents).
3. A taxpayer’s voluntary disclosure of a confidential attorney-client
communication, even in part, can result in a broad waiver of an
otherwise applicable privilege defense. Williams & Connolly v.
Securities & Exchange Comm’n, 662 F.3d 1240, 1244 (D.C. Cir. 2011)
(“It is true that if a party voluntarily discloses part of an attorney-client
conversation, the party may have waived confidentiality—and thus the
attorney-client privilege—for the rest of that conversation and for any
conversations related to the same subject matter.”); Bernardo, 104 T.C.
at 684 (“The attorney-client privilege is waived by any voluntary
disclosure to a third party.”).
4. Scope of the Waiver. With respect to a voluntary disclosure, courts
generally hold that a waiver as to one document can act as a waiver of
the privilege with respect to all documents concerning the “same
subject matter.” See Standard Chartered Bank v. Ayala Int'l Holdings,
Inc., 111 F.R.D. 76, 85 (S.D.N.Y. 1986).
a. Subject matter waiver prevents a party from “cherry-picking”
otherwise protected information that might be helpful to that
party’s case while preventing disclosure of unfavorable
communications.
b. Courts differ in determining the scope of subject matter waiver.
For example, some courts have applied a fairness test to
determine the appropriate scope of the subject matter waiver.
See, e.g., Consolidated Litig. Concerning Int’l Harvester’s
Disposition of Wisconsin Steel (II), 1987 U.S. Dist. LEXIS
10912, *15 (N.D. Ill. 1987) (no subject matter waiver when
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disclosure was made to non-litigant because adverse party was
in no worse position); United States v. Rockwell Int’l, 897 F.2d
1255, 1265 (3d. Cir. 1990) (acknowledging disagreement as to
the extent of waiver resulting from disclosure to auditor).
c. Some courts limit the waiver to reasonably contemporaneous
documents, choosing not to extend the scope of the waiver to
legal advice rendered at a later date. See, e.g., In re Pioneer
Hi-Bred International, Inc., 238 F.3d 1370 (Fed. Cir. 2001);
Long-Term Capital v. United States, 2003 U.S. Dist. LEXIS
7826, 2003-1 USTC (CCH) ¶50,304 (D. Conn. 2003).
d. Generally, subject matter waiver is selective. Because the
purpose of the subject matter waiver rule is to prevent selective
disclosures, courts limit the waiver to “communications about
the matter actually disclosed,” as opposed to lifting the
privilege for all documents that touch on the general legal
questions involved in the advice. See Chevron Corp. v.
Pennzoil, 974 F.2d 1156, 1162 (9th Cir. 1992) (citing In re Von
Bulow, 828 F.2d 94, 102-03 (2d Cir. 1987). “Even if the
document at issue is privileged and inadvertently disclosed, if
the ‘disclosure is not excused by the application of Rule 502 [of
the Federal Rules of Evidence], then the privilege protecting it
from production is gone.’” Williams v. District of Columbia,
806 F. Supp.2d 44, 48 (D.D.C. 2011) (quoting Amobi v. D.C.
Dep’t of Corrections, 262 F.R.D. 45, 51 (D.D.C. 2009), aff’d in
part and rev’d in part on other grounds, 755 F.3d 980 (D.C.
Cir. 2014)).
e. An unauthorized disclosure of a privileged communication will
generally not act as a waiver of the attorney-client privilege.
Petrie v. Commissioner, T.C. Memo 1990-168 (unauthorized
disclosure by an employee of the IRS Office of Chief Counsel
“does not abrogate the privilege”). However, “[a]n attorney or
other agent of the client may possess the implied authority to
waive the attorney-client privilege on behalf of his client.”
Moore, T.C. Memo 2004-259.
5. If a taxpayer waives the attorney-client privilege, the waiver is with
respect to all adversaries, including parties in an unrelated action. See
United States v. Bergonzi, 216 F.R.D. 487 (N.D. Cal. 2003);
McMorgan & Co. v. First Cal. Mortg. Co., 931 F. Supp. 703 (N.D.
Cal. 1996).
6. Disclosure of the fact of a privileged communication alone, without
disclosing its substance, will generally not trigger a waiver. Exxon
Corp. v. Commissioner, T.C. Memo 1992-92. “’A client does not
waive his attorney-client privilege “merely by disclosing a subject
which he had discussed with his attorney.” In order to waive the
privilege, the client must disclose the communication with the attorney
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itself.’” Id. (quoting United States v. O’Malley, 786 F.2d 786, 794 (7th
Cir. 1986)).
7. Inadvertent Disclosures. Rule 502 of the Federal Rules of Evidence
was amended in 2008 to address growing concerns regarding
inadvertent waivers of the attorney-client privilege in an era of
electronically stored information (“ESI”) and expansive and often
cumbersome discovery of ESI.
a. Under Fed. R. Evid. 502, inadvertent disclosure of an otherwise
privileged communication will not trigger a subject matter
waiver, if it can be shown: (1) that reasonable steps were taken
to prevent the disclosure, (2) that the disclosure was
inadvertent, and (3) that the disclosing party took prompt steps
to rectify the error.
8. Non-Wavier Agreements.
a. A litigant may enter into a binding agreement with an opposing
party in order to limit the scope of a waiver of the privilege.
See Eutectic Corp. v. Metco, Inc., 61 F.R.D. 35, 42-3 (E.D.N.Y.
1973). Such agreements are not binding on non-parties to the
agreement unless the agreement is incorporated into a court
order issued pursuant to Fed. R. Evid. 502(e).
b. Under Fed. R. Evid. 502(d), “[a] federal court may order that
the privilege or protection is not waived by disclosure
connected with the litigation pending before the court – in
which even the disclosure is also not a waiver in any other
federal or state proceeding.” Under Fed. R. Evid. 502(e), “[a]n
agreement on the effect of disclosure in a Federal proceeding is
binding only on the parties to the agreement, unless it is
incorporated into a court order.”
c. The Advisory Committee Note to Fed. R. 502(d) identifies
“quick peek” arrangements as one form of non-waiver
agreement envisioned by the Rule:
For example, the court order may provide for return of
documents without waiver irrespective of the care taken
by the disclosing party; the rule contemplates
enforcement of “claw-back” and “quick peek”
arrangements as a way to avoid the excessive costs of
pre-production review for privilege and work product.
d. The amendments to Rule 502 made in 2008 codified a practice
that some, but not all courts had previously recognized could
help to streamline discovery in an electronic age. “Even prior
to the adoption of Rule 502, the civil litigation process,
especially n the most complex of cases, was trending towards
‘quick peek’ or ‘clawback’ agreements [that] might . . .
enable[e] the party seeking discovery earlier access to
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discovery material . . . without risk of being found to have
waived [privilege].’” Good v. American Water Works Co.,
Inc., 2014 U.S. Dist. LEXIS 154788 (S.D.W. Va. 2014)
(quoting Charles A. Wright, et al., Federal Rules of Practice
and Procedure § 2016.2 (3d ed. 2014)).
e. Notwithstanding the 2008 amendments to Rule 502, in the
administrative context, the IRS has expressed a reluctance to
enter into non-waiver agreements. In August 2009, the IRS
Office of Chief Counsel issued Notice CC-2009-023, citing
concerns with the binding nature of non-waiver agreements and
the effect they could have on later litigation, including refund
litigation.
9. Waiver Exception: “Clawback” Agreements. “Clawback” agreements
have been used in Tax Court proceedings to streamline discovery by
allowing a party producing documents to request the return of certain
documents later determined to be protected by privilege without
triggering subject matter waiver. See Dynamo Holdings v.
Commissioner, 143 T.C. No. 9, slip. op. at 2 & n. 2 (2014).
a. Clawback arrangements are also contemplated by the 2008
amendments to Fed. R. Evid. 502. Advisory Committee Note
to Fed. R. 502(d). In a change to prior law, if adopted by a
court order, the protection afforded by these arrangements can
continue to apply in later, unrelated proceedings. Compare See
In re Columbia/HCA Healthcare Corp. Billing Practices
Litigation, 293 F.3d 289 (6th Cir. 2002) (rejecting, in a case
arising prior to the 2008 amendments to Fed. R. Evid. 502,
“selective waiver” argument and finding that disclosure of
otherwise protected documents in a prior proceeding triggered a
subject matter waiver).
10. “At Issue” Waiver. The attorney-client privilege can be waived when
the client asserts a claim that places the advice of the attorney “at
issue” in the litigation. See Ideal Elec. Sec. Co. v. Int’l Fid. Ins. Co.,
129 F.3d 143, 151 (D.C. Cir. 1997); Shukh v. Seagate Technology,
LLC, 872 F. Supp. 2d 851 (D. Minn. 2012) (“At issue waiver is
commonly found where either proof of a party’s legal contention
implicates privileged information (as in, for example, a legal
malpractice case), or a client’s testimony refers to a specific privilege
communication”). Merely denying allegations made in pleadings,
however, does not place privileged information “at issue.” See, e.g.,
Baker v. General Motors, Corp., 209 F.3d 1051, 1055 (8th Cir. 2000).
a. In a similar context, using legal advice as a “sword” in
litigation can act as an implied waiver. For example, a
taxpayer waives privilege when it claims that it acted
reasonably by following counsel’s advice. See Chevron Corp.
v. Pennzoil, 974 f.2d 1156 (9th Cir. 1992) (privilege was
waived when defendant argued that a representation on a SEC
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schedule was reasonable because it was based on legal advice).
But see Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 32
F.3d 851 (3d Cir. 1994) (no privilege waiver; taxpayer had not
relied on legal advice as an essential element of a claim).
b. “At issue” waiver generally requires that the party claiming the
privilege affirmatively raise the issue as to “its own knowledge,
intent, state of mind or the reasonableness of its actions.”
Bernardo, 104 T.C. at 690. Asserting a reasonable cause
defense to penalties is the most common illustration in tax
cases. See also Johnston v. Commissioner, 119 T.C. 27, 36
(2002), aff’d, 461 F.3d 1162 (9th Cir. 2006) (finding an “at
issue” waiver where the taxpayers alleged, in their reply to the
Commissioner’s answer in a fraud case, that that they had
relied upon “advice of qualified experts”).
c. In partnership cases subject to TEFRA, since 1997 an important
jurisdictional distinction has been drawn between penalty
defenses asserted at the partnership versus the individual
partner level. I.R.C. § 6112; Treas. Regs. § 301.6221-1(c) and
-1(d). This distinction is relevant in the context of privilege
because asserting an entity-level (i.e., partnership-level)
reasonable cause defense to penalties should generally not act
to waive attorney-client privilege for independent partner-level
reasonable cause penalty defenses and any privileged legal
advice unique to a particular partner that might be relevant to
such defenses.
d. In AD Inv. 2000 Fund LLC v. Commissioner, 142 T.C. 248
(2014), the Tax Court considered a partnership’s assertion of
entity-level penalty defenses in a TEFRA proceeding and found
that assertion of those defenses waived the attorney-client
privilege:
[B]y placing the partnerships’ legal knowledge and
understanding into issue in an attempt to establish the
partnerships’ reasonable legal beliefs in good faith
arrived at (a good-faith and state of mind defense),
petitioners forfeit the partnerships’ privilege protecting
attorney-client communications relevant to the content
and the formation of their legal knowledge,
understanding and beliefs.
Id. at 257.
e. In In re G-I Holdings, Inc., 218 F.R.D. 428 (D.N.J. 2003), the
taxpayer/debtors filed a motion to bifurcate the case “into
substantive tax and penalty phases so that they can delay
disclosure of confidential communications with their legal
counsel until a penalty phase.” Id. at 431. Finding that the
taxpayer/debtor had already placed their legal advice “at issue”
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in the case by referencing a reasonable cause defense in an
interrogatory response, even though it did not specifically
reference reliance on advice of counsel as part of that defense.
Id. at 433-34. The District Court denied the motion and
granted the government’s cross motion to compel production of
otherwise protected legal advice, finding that the protection had
been waived. Id. at 440.
f. Determining when otherwise protected legal advice has been
placed “at issue” can be difficult but the issue is generally
raised only when a taxpayer asserts a reasonable cause defense
to penalties under Code § 6664 and Treas. Reg. § 1.6664-4. In
TIFD III-E, Inc. v. United States, 8 F. Supp.3d 142 (D. Conn.
2014) (“Castle Harbour V”), no reasonable cause defense was
asserted and the government did not argue that there was an “at
issue” waiver. Rather, the only penalty defense asserted was
that the taxpayer’s reporting position had a reasonable basis
and was therefore not negligent (thereby negating the
negligence penalty). In an effort to place the taxpayer’s legal
advice “at issue,” the government suggested that the advice was
relevant to the Court’s reasonable basis inquiry, and that in
deciding this issue, asked the Court to “draw an adverse
inference from the fact that TIFD did not waive the attorney-
client privilege with respect to the tax advice it received.” The
Court rejected this position, holding that the taxpayer’s
subjective state of mind, and any legal advice that may or may
not have affected its subjective state of mind, was not relevant
to its consideration of the objective reasonable basis issue. Id.
at 151.
11. Disclosure to Financial Statement Auditors. Information relating to the
determination of tax reserves for financial reporting purposes, if
requested by the IRS, generally cannot be withheld on privilege
grounds. See Arthur Young, 465 U.S. 805, 815-21 (1982) (holding that
an accountant’s tax accrual work papers are not privileged); United
States v. El Paso Co., 682 F.2d 530, 541-42 (5th Cir. 1982) (finding
that an accountant’s tax pool analysis was not privileged; the privilege
was undermined in several ways including taxpayer’s failure to
distinguish between papers prepared by accountants and those prepared
by attorneys).
a. An attorney’s analysis of the prospects of litigation will
generally be privileged. See United States v. Rockwell Int’l,
897 F.2d 1255, 1264 (3d Cir. 1990). However, summarizing
this confidential legal advice for an auditor can give rise to a
privilege waiver. For example, in In re Pioneer Hi-Bred Int’l,
Inc., 238 F.3d 1370 (Fed. Cir. 2001), the court held that the
privilege was waived when the taxpayer disclosed in a proxy
statement that it had received favorable tax opinions.
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b. Although the threshold elements for application of attorney-
client privilege may exist, when communications with an
attorney are disclosed to an independent auditor in connection
with establishing a tax reserve, that disclosure may waive the
attorney-client privilege. United States v. Textron Inc., 507 F.
Supp. 2d 138, 150, 155 (D.R.I. 2007), vacated and remanded
on other grounds, 577 F.3d 21 (1st Cir. 2009) (en banc).
“While voluntary disclosure waives the attorney-client
privilege, it does not necessarily waive work-product
protection.” United States v. Deloitte LLP, 610 F.3d 129, 139
(D.C. Cir. 2010); see also Gutter v. E.I. DuPont De Nemours
and Co., 1998 U.S. Dist. LEXIS 23207 (S.D. Fla. 1998);
Samuels v. Mitchell, 155 F.R.D. 195 (N.D. Cal. 1994); In re
Pfizer Inc. Sec. Litig., 1993 U.S. Dist. LEXIS 18215 (S.D.N.Y.
1993); Gramm v. Horsehead Indus., Inc., 1990 U.S. Dist.
LEXIS 773 (S.D.N.Y. Jan. 25, 1990).
12. Waiver Exception: Kovel Agreements. The attorney-client privilege
can extend beyond work done by the attorney to include
“communications ‘with one employed to assist the lawyer in the
rendition of professional legal services.’” Bernardo, 104 T.C. at 683
(quoting Linde Thomson Langworthy Kohn & Van Dyke, P.C. v.
Resolution Trust Corp., 5 F.3d 1508, 1514-15 (D.C. Cir. 1993)). This
extension of the privilege traces back to the Second Circuit’s decision
in United States v. Kovel, 296 F.2d 918 (2d Cir. 1961) and has been
analogized to an attorney obtaining assistance from a translator whose
unique skills are required in order for the attorney to render legal
advice.
a. In Bernardo, 104 T.C. 683-84, the Tax Court cited case law
recognizing “Kovel” arrangements between an attorney and a
psychiatrist hired to assist in presenting an insanity defense,
United States v. Alverez, 519 F.2d 1036, 1046-46 (3d Cir.
1975), an accountant hired by an attorney to assist in rendering
tax advice, United States v. Cote, 456 F.2d 142, 144 (8th Cir.
1972), and an accountant who prepared a statement regarding a
client’s net worth. United States v. Judson, 322 F.2d 460, 462-
63 (9th Cir. 1963).
b. To invoke the Kovel rule, it must be shown that the third party
to whom a disclosure was made was engaged by and assisting
the lawyer, not the client. In explaining this limitation, the Tax
Court has noted:
In the instant case, the record shows that Mr. Ryan [an
accountant] was performing accounting services on
behalf of petitioners, and that such services included
representing petitioners before the IRS. If we were to
allow petitioners to cloak the services of their
accountant in the robe of the attorney-client privilege in
the instate case merely because the accountant
12
communicated with petitioners’ attorneys during the
course of an audit (an audit which the accountant was
responsible for conducting), the privilege would be
expended beyond the parameters of its logic.
Bernardo, 104 T.C. at 685. “Conversely, if the attorney is the
primary representative of the taxpayer, and the attorney-
accountant communications are incidental to the attorney’s
representation of the client, the attorney-client privilege may
attach and protect such communications from discovery.” Id.
at 685, n.8 (citing Kovel, 296 F.2d at 922); see also Cavallaro,
284 F.3d at 248 (rejecting common interest argument where
accountants were found to have been hired to provide financial
advice, rather than to assist lawyers in providing legal advice).
13. Waiver Exception: Common Interest and Joint Defense Agreements
a. In certain cases, the scope of the attorney-client privilege can
be extended to third parties so that disclosure of otherwise
privileged information does not trigger a subject matter waiver.
Haines v. Liggett Group, Inc., 975 F.2d 81, 90 (3d Cir. 1992).
This “common interest” exception applies where:
i. All of the participants are pursuing a common defense
in existing or anticipated litigation;
ii. The communication relates to a common issue;
iii. The communication furthers a common legal defense,
rather than a common business objective;
iv. The communication must be made with an expectation
of confidentiality; and
v. Privileged has not been waived by disclosure outside
the common defense group.
Id.; see also Weinstein’s Federal Evidence § 503.21[1] (2d ed.
2002).
b. Courts have recognized that the common interest doctrine can
apply in the context of mutually beneficial tax planning advice.
See United States v. United Techs. Corp., 979 F. Supp. 108 (D.
Conn. 1997). In United Technologies, the court found a valid
common interest between co-venturing companies in the
context of tax planning for the co-venture. “Although, in the
area of taxation, it is often difficult to determine where business
ends and the law begins, the court finds that nearly all the
documents pertain to the development of a common legal
strategy regarding the tax structure of [the joint venture.” Id. at
112.
13
c. To document and effectively assert a common interest
privilege, it is advisable to draft and implement a common
interest agreement. See United States v. Weissman, 195 F.3d
96, 99 (2d Cir. 1999); Aiken v. Texas Farm Bureau Mutual Ins.
Co., 151 F.R.D. 621, 624 (E.D. Tex. 1993).
III. Work Product Doctrine
A. In General. The work-product doctrine, described in the Supreme Court’s
seminal decision in Hickman v. Taylor, 329 U.S. 495 (1947), bars compelled
disclosure of documents prepared in anticipation of litigation unless the party
seeking such disclosure shows a substantial need for the documents and is
unable to obtain the substantial equivalent of the information by other means
without undue hardship. Id. at 509; see also P.T.&L. Construction Co. v.
Commissioner, 63 T.C. 404, 407-08 (1974). The doctrine is now codified, in
part, in Fed. R. Civ. P. 26(b)(3).
1. The Tax Court Rules regarding work product are now in Tax Court
Rule 70(c)(3), which states:
(3) Documents and Tangible Things:
(A) A party generally may not discover documents and tangible things
that are prepared in anticipation of litigation or for trial by or for another party
or its representative (including the other party’s attorney, consultant, surety,
indemnitor, insurer, or agent), unless, subject to Rule 70(c)(4),
(i) they are otherwise discoverable under Rule 70(b); and
(ii) the party shows that it has substantial need for the materials to
prepare its case and cannot, without undue hardship, obtain their substantial
equivalent by other means.
(B) If the Court orders discovery of those materials, it must protect
against disclosure of mental impressions, conclusions, opinions, or legal
theories of a party's counsel or other representative concerning the litigation.
2. In the Tax Court, some uncertainty exists as to whether the work
product doctrine is a “rule of evidence” controlled exclusively by
interpretations of the doctrine from the D.C. Circuit under Code §
7453. If not a “rule of evidence,” the Tax Court would apply the
Golsen rule and follow interpretations of the doctrine from the circuit
to which the case would be appealed. Golsen v. Commissioner, 54
T.C. 742 (1970), aff’d, 445 F.2d 985 (1971).
B. Threshold Requirements. In order to be protected from disclosure as work
product, “[a] litigant must demonstrate that the documents were created ‘with
a specific claim supported by concrete facts which would likely lead to the
litigation in mind,’ not merely assembled in the ordinary course of business or
for other nonlitigation purposes.” Bernardo, 104 T.C. at 687 (quoting Linde
Thomson, 5 F.3d at 1515).
1. In Schaeffler v. United States, 22 F. Supp. 3d 319 (S.D.N.Y. 2014), the
District Court denied a petition to quash a third-party record keeper
14
summons where the taxpayer sought to protect from disclosure under
the work product doctrine (and on other grounds) a tax opinion from
Ernst & Young regarding a corporate debt restructuring plan. The
Court found that the document was not created “because of” litigation
since the taxpayer had not shown a definitive connection to litigation,
citing among other factors Circular 230’s limitation on considering
audit risk in evaluating the merits of a transaction.
C. Scope. The scope of work product protection is broader than the protection
afforded by the attorney-client privilege. Bernardo, 104 T.C. at 687. Unlike
attorney-client privilege, however, work product protection is qualified and
may be overcome by an appropriate showing of need. Ames v. Commissioner,
112 T.C. 304, 310 (1999). This qualification, does not extend to “the
attorney’s legal strategy, his analysis of the viability of the case, or outlines of
his intended lines of proof . . . .” Gergacz, Attorney-Corporate Client
Privilege, ¶7.02[2][a][i], at 7-36 to 7-37 (2d ed. 1990); see Fed. R. Civ. P.
26(b)(3) (protecting against “disclosure of the mental impressions,
conclusions, opinions, or legal theories of an attorney or other representative
of a party concerning the litigation”); see also Upjohn, 449 U.S. at 400-02
(recognizing special protection for work-product revealing the attorney’s
mental processes); United States v. Nobles, 422 U.S. 225, 238 (1975) (“At its
core, the work-product doctrine shelters the mental processes of the attorney,
providing a privileged area within which he can analyze and prepare his
client’s case.”). The qualified scope of protection applies to materials such as
witness statements that the opposing party can show are otherwise
unavailable. In contrast, core work product is not discoverable unless “the
need for the material is compelling.” Holmgren v. State Farm Mut. Auto Ins.
Co., 976 F.2d 573, 577 (9th Cir. 1992).
1. The protection afforded by the work product doctrine is not limited to
the specific litigation that material was prepared in anticipation of.
Ratke v. Commissioner, 129 T.C. 45, 52 (2007) (“’[I]t appears that
every circuit to address the issue has concluded that, at least to some
degree, the work product doctrine does extend to subsequent
litigation.’” (quoting Frontier Refining Inc. v. Gorman-Rupp Co.,, 136
F.3d 695, 703 (10th Cir. 1998)); see also Bernardo, 104 T.C. at 688
n.14 (“The work product doctrine also protects documents prepared in
anticipation of another trial or litigation, regardless of whether the
documents are directly related to the case at bar.”).
D. Application to Non-Attorneys. The protection afforded by the work product
doctrine extends to materials provided by or for a party and that party’s
representative, including the party’s attorney, consultant or agent. See Fed. R.
Civ. P. 26(b)(3); United States v. Adlman, 134 F.3d 1194, 1196-1200 (2d Cir.
1998); Wessel v. Albuquerque, 2000 WL 1803818 *3 (D.D.C. Nov. 30, 2000)
(“Work product is not limited to documents prepared by an attorney; it
includes documents prepared by or for others, including representatives of a
party, for use by an attorney.”).
E. Application in Tax Cases. The work product doctrine can be asserted against
the IRS to defend against an IRS summons. See Adlman, 134 F.3d at 1194-95
15
(upholding the use of the work-product doctrine as a defense earlier this year);
Upjohn, 449 U.S. at 397; Rockwell Int’l, 897 F.2d at 1265; El Paso, 682 F.2d
at 542.
F. Materials Prepared “In Anticipation of Litigation.” Tax return preparation
materials are generally not treated as prepared in anticipation of litigation. See
United States v. Davis, 636 F.2d 1028, 1040 (5th Cir. 1980); Fisher v. United
States, 86-2 U.S.T.C. (CCH) ¶ 9524, at 85,117 (S.D.N.Y. 1986). Even if
litigation with the IRS is not a certainty, work-product prepared by an attorney
or the attorney’s agent relating to a course of action that may result in an audit
of the taxpayer may, depending on the attendant facts and circumstances, be
entitled to protection under the work-product doctrine. See Adlman, 134 F.3d
at 1202-03.
G. Waiver of Work Product Protection. Waiver of work product protection is
different than under the attorney-client privilege. For example, the work
product privilege belongs to the attorney, and there is no automatic waiver rule
for disclosure to third parties. Generally, waiver of work product occurs only
when the disclosure is inconsistent with the purpose of maintaining secrecy
from adversaries and “substantially increases the opportunity for potential
adversaries to obtain that information.” Samuels v. Mitchell, 155 F.R.D. 195,
200-01 (N.D. Cal. 1994) (party’s disclosure of information to accountants it
had retained, where the accountants served as consultants to the party rather
than as a certified public accounting firm with duties to the public at large,
was not “at odds with a guarantee of confidentiality” and did not constitute a
waiver); see also United States v. Mass. Inst. of Tech., 129 F.3d 681 (1st Cir.
1997) (work product protection waived; university’s disclosure of documents
to Defense Department’s audit agency was disclosure to potential adversary
because controversy over expense submissions could occur during audit).
1. The work-product privilege may also be waived if a party uses a
privileged document in court or uses it to refresh the recollection of a
witness. See Sporck v. Peil, 759 F.2d 312, 317-19 (3d Cir. 1985);
Salem Financial, Inc. v. United States, 102 Fed Cl. 793 (Fed. Cl. 2012)
(taxpayer waived work product protection by putting tax advisor’s
advice at issue in defense of penalties); United States v. Nobles, 422
U.S. 225 (1975) (counsel’s testimonial use work product constituted
waiver with respect to the matters testified).
2. Disclosure to an Outside Financial Auditor. Courts disagree as to
whether disclosing work product to financial auditors waives privilege.
For example, in United States v. Deloitte LLP, 610 F.3d 129 (D.C. Cir.
2010), the court held that disclosure of communications protected by
work-product to a financial auditor does not automatically result in
waiver of the protection. The court’s analysis focused not on who
created the document, but on whether the document contains work
product, which is the thoughts and opinions of the taxpayer’s outside
counsel and developed in anticipation of litigation. The court also
concluded that a putatively privileged document can contain protected
work product material even though it serves multiple purposes, so long
as the protected material was prepared because of the prospect of
16
litigation. Compare United States v. Textron, Inc., 577 F.3d 21 (1st
Cir. 2009) (en banc) (holding protected work product must be prepared
“in anticipation of litigation or for trial” and not for some other
purpose). See also Merrill Lynch & Co., Inc. v. Allegheny Energy,
Inc., 229 F.R.D. 441 (S.D.N.Y. 2004) (court explained that disclosure
to a third party only results in waiver of work-product protection if the
disclosure substantially increases the opportunity for potential
adversaries to obtain the information); Regions Financial Corp. v.
United States, 2008 U.S. Dist. LEXIS 41940 (N.D. Ala. 2008); In re
Pfizer, Inc. Sec. Litig., 1993 U.S. Dist. LEXIS 18215 (S.D.N.Y. 1993).
3. On the other hand, in Medinol Ltd. v. Boston Scientific Corp., 214
F.R.D. 113 (S.D.N.Y. 2002), the court held that the disclosure to an
independent auditor waived work-product protection because the
auditor, in order to perform its independent function, cannot share a
common interest with the company it audits. See also Samuels, 155
F.R.D. at 201 (“[T]he relationship between public accountant and
client is at odds with such a guarantee [of confidentiality] because the
public accountant has responsibilities to the creditors, stock holders,
and the investing public which transcend the relationship with the
client…. Because it appears that Arthur Young was acting as a public
consultant in this case we find the work product protection is
inapplicable to these documents.”).
IV. Tax Practitioner Privilege Under Code Section 7525
A. In General. Code § 7525 was enacted by the Internal Revenue Service
Restructuring and Reform Act of 1998, Pub. L. 105-206, § 3411(a). Prior to
1998, no privilege existed for communications between taxpayers and non-
lawyer professionals authorized to practice before the Internal Revenue
Service. See United States v. Arthur Young & Co., 465 U.S. 805 (1984).
B. Section 7525.
1. I.R.C. § 7525(a)(1) – General Rule: “With respect to tax advice, the
same common law protections of confidentiality which apply to a
communication between a taxpayer and an attorney shall also apply to
a communication between a taxpayer and any federally authorized tax
practitioner to the extent the communication would be considered a
privileged communication if it were between a taxpayer and an
attorney.”
2. I.R.C. § 7525(a)(3)(A) - Federally Authorized Tax Practitioner. “The
term ‘federally authorized tax practitioner’ means any individual who
is authorized under Federal law to practice before the Internal Revenue
Service if such practice is subject to Federal regulation under section
330 of title 31, United States Code.”
a. Federally authorized tax practitioners generally include
attorneys (whose communications are already protected by
attorney-client privilege), certified public accountants, enrolled
17
agents, and enrolled actuaries. Treasury Department Circular
230, § 10.2(a)(5).
3. I.R.C. § 7525(a)(3)(B) – Tax Advice. “The term ‘tax advice’ means
advice given by an individual with respect to a matter which is within
the scope of the individual’s authority to practice described in
subparagraph (A).”
a. I.R.C. § 7525 allows taxpayers to consult with other qualified
tax advisors in the same manner they currently may consult
with tax advisors that are licensed to practice law. H. Conf.
Rept. 105-599, 1998-3 C.B. 747, 1022.
b. I.R.C. § 7525 does not apply to information and
communications relating to the preparing of tax returns. H.
Conf. Rept. 105-599, 1998-3 C.B. at 1022.
c. Accounting advice, even if given by an attorney, is not
privileged.
4. Code § 7525 does not modify the attorney-client privilege. H. Conf.
Rept. 105-599, 1998-3 C.B. at 1022.
5. Privilege under Code § 7525 applies in the same manner and with the
same limitations as the attorney-client privilege. Accordingly, the
privilege does not apply if the communication would not have been
privileged between an attorney and the attorney’s client or prospective
client. H. Conf. Rept. 105-599, at 1022; see United States v. BDO
Seidman, LLP, 337 F.3d 802, 810 (7th Cir. 2003) (“Because the scope
of the tax practitioner-client privilege depends on the scope of the
common law protections of confidential attorney-client
communications, we must look to the body of common law
interpreting the attorney-client privilege to interpret the § 7525
privilege.”)
6. Privilege does not protect work product and does not adopt a work
product privilege for accountants and other tax practitioners. United
States v. Frederick, 182 F.3d 496, 502 (7th Cir. 1999); United States v.
KPMG LLP, 237 F. Supp. 2d 35, 39 (D.D.C. 2002); Evergreen
Trading, LLC v. United States, 80 Fed. Cl. 122, 135 (2007).
C. I.R.C. § 7525(a)(2) - Limitations: “Privilege may only be asserted in—(A)
any noncriminal tax matter before the Internal Revenue Service; and (B) any
noncriminal tax proceeding in Federal court brought by or against the United
States.”
1. Privilege does not apply to criminal tax proceedings.
2. Privilege does not apply to other regulatory bodies (e.g., Securities and
Exchange Commission). H. Conf. Rept. 105-599, 1998-3 C.B. at
1023.
18
3. Privilege does not apply to private-party litigants. See Doe v.
Wachovia Corp., 268 F. Supp. 2d 627 (W.D.N.C. 2003) (suit by
taxpayers for injunctive and declaratory relief to prevent bank from
disclosing identities to IRS in response to administrative summons;
issuance of an administrative summons to a bank “does not appear to
be a ‘tax proceeding’ before the IRS.”)
D. I.R.C. § 7525(b) – Tax Shelter Exception. “The privilege under subsection (a)
shall not apply to any written communication which is—(1) between a
federally authorized tax practitioner and—(A) any person, (B) any director,
officer, employee, agent, or representative of the person, or (C) any other
person holding a capital or profits interest in the person, and (D) in connection
with the promotion of the direct or indirect participation of the person in any
tax shelter (as defined in section 6662(d)(2)(C)(ii)).”
1. I.R.C. § 6662(d)(2)(C)(ii). Tax Shelter. “[T]he term ‘tax shelter’
means—(I) a partnership or other entity, (II) any investment plan or
arrangement, or (III) any other plan or arrangement, if a significant
purpose of such partnership, entity, plan, or arrangement is the
avoidance or evasion of Federal income tax.”
a. BDO Seidman, 492 F.3d at 822-28 (rejecting argument that
exception applies only to corporate income tax shelters).
2. Written Communication. Tax shelter exception requires a written
communication.
a. “Because the [Code § 7525] exception is limited to written
communications, oral communications between a tax
practitioner and the corporate agent remain within the general
rule of privilege.” BDO Seidman, 492 F.3d at 827.
b. Notes from meeting which recorded oral communications with
legal advisor and which were not communicated to anyone do
not constitute a written communication within the tax shelter
exception. Countryside Ltd. P’ship. v. Commissioner, 132 T.C.
347, 351 (2009).
3. Promotion. The tax shelter exception requires the written
communication to be made in connection with the promotion of a tax
shelter.
a. “Tax shelters for which no privilege of confidentiality will
apply include, but are not limited to, those required to be
registered as confidential corporate tax shelter arrangements
under section 6111(d). The Conferees do not understand the
promotion of tax shelters to be part of the routine relationship
between a tax practitioner and a client. Accordingly, the
Conferees do not anticipate that the tax shelter limitation will
adversely affect such routine relationships.” H. Conf. Rept.
105-599, at 1023.
19
b. “[I.R.C. § 7525(b)] was meant to target written promotional
and solicitation materials used by the peddlers of corporate tax
shelters.” Statement of Sen. Mack, 144 Cong. Rec. S7643-02,
S7667 (July 8, 1998).
c. Salem Financial, Inc. v. United States, 102 Fed. Cl. 793, 798
(2012) (corporate tax shelter exception does not extend to
implementation of tax shelter; legal advice from KPMG after
close of STARS transaction regarding proposed changes in law
and the unwinding of the transaction does not trigger
exception.)
d. Countryside, 132 T.C. at 352-55 (examining legislative history
above; distinguishing advice provided pursuant to
longstanding, ongoing, and routine relationship; trusted advisor
vs. promoter; held that longstanding advisor not promoter for
purposes of exception).
e. Valero Energy Corp. v. United States, 569 F.3d 626 (7th Cir.
2009) (focusing on “tax shelter” definition and concluding that
“[n]othing in this definition limits tax shelters to cookie-cutter
products peddled by shady practitioners or distinguishes tax
shelters from individualized tax advice”; finding statute
unambiguous, declined to look to legislative history and, in any
event, refused to give any weight to Senator Mack’s comments;
rejected argument that exception limited to selling or peddling
of prepackaged, tax-shelter products).
E. Waiver. “The privilege created by this provision may be waived in the same
manner as the attorney-client privilege.” H. Conf. Rept. 105-599, 1998-3 C.B.
at 1023; Evergreen Trading, 80 Fed. Cl. at 135 (privilege is “largely
coterminous with the attorney-client privilege”).
1. Privilege waived when tax accrual workpapers provided to
independent auditor. Textron, 507 F. Supp. 2d at 138.
2. Subject matter waiver. Salem Financial, 102 Fed. Cl. at 798-99.
3. Dual-purpose documents. “[A] dual-purpose document—a document
prepared for use in preparing tax returns and for use in litigation—is
not privileged . . . .” United States v. Frederick, 182 F.3d 496, 501
(7th Cir. 1999).
4. Fed. R. Evid. 502 and its limitations on waiver resulting from an
inadvertent disclosure are not applicable to the Code § 7525 privilege.
20
F. Burden of Proof. Taxpayers have the burden of proving the preliminary facts
necessary to establish the privilege. The government has the burden of
proving the preliminary facts necessary to establish the exception.
Countryside, 132 T.C. at 349.
1. The Commissioner must produce evidence that all the elements of the
corporate tax shelter exception are satisfied. Countryside, 132 T.C. at
350.
2. BDO Seidman, 492 F.3d at 821-822 (holding that corporate tax shelter
exception is a “true exception” and not an element of the privilege).
V. Governmental, Executive, or Deliberative Process Privilege
A. In General.
1. Housekeeping Statute, 1 Stat. 68 (1789); 1958 amendment; Kaiser
Aluminum & Chemical Corp. v. United States, 157 F. Supp. 939 (Ct.
Cl. 1958); United States v. Nixon, 418 U.S. 683 (1974).
2. The terms “deliberative process privilege,” “governmental privilege,”
and “executive privilege” are interchangeable.
B. Requirements: “Predecisional” and “Deliberative”.
1. Predecisional Document. A predecisional document is one prepared in
order to assist an agency decision maker in arriving at his decision, and
may include recommendations, draft documents, proposals,
suggestions, and other subjective documents which reflect the personal
opinions of the writer rather than the policy of the agency. As opposed
to postdecisional communications which implement an established
policy of an agency, or explain actions that an agency has already
taken.
a. A predecisional document is a part of the deliberative process,
if the disclosure of materials would expose an agency’s
decision making process in such a way as to undermine the
agency’s ability to performs its functions. Carter v. United
States Dep’t. of Commerce, 307 F.3d 1084, 1089 (9th Cir.
2002) (quoting Assembly of California v. United States Dep’t of
Commerce, 968 F.2d 916, 920 (9th Cir. 1992) (quotation marks
omitted)).
b. Predecisional communications are those prepared antecedent to
the agency’s final decision or the adoption of agency policy.
c. Must be an agency decision or policy to which the
communication contributed. If the deliberative process does
not ripen into a final agency decision or policy, the government
must show that it nonetheless generated the communication in
anticipation of a decision. See NLRB v. Sears, Roebuck & Co.,
21
421 U.S. 132 (1975); Senate of Puerto Rico v. United States,
823 F.2d 574, 585 (D.C. Cir. 1987).
d. “Thus, the privilege protects documents reflecting advisory
opinions, recommendations, and deliberations comprising part
of a process by which governmental decisions and policies are
formulated, as well as other subjective documents that reflect
the personal opinions of the writer prior to the agency’s
adoption of a policy.” Taxation With Representation Fund v.
Internal Revenue Service, 646 F.2d 666 (D.C. Cir. 1981).
e. Amazon.com, Inc. & Subs. v. Commissioner, Tax Court Docket
No. 31197-12, Order Dated Aug. 22, 2014 (treating
determinations of deficiencies as the “decision” and date of the
decision as the date of the notice of deficiency).
f. Should be construed narrowly. EPA v. Mink, 410 U.S. 73, 87
(1973).
2. Deliberative Process. Documents are deliberative when they show the
“give-and-take of the consultative process” of the governmental
agency. Coastal States Gas Corp. v. Dept. of Energy, 617 F.2d 854,
866 (D.C. Cir. 1980) (emphasis added).
a. “[C]onfidential intra-agency advisory opinions . . . disclosure
of which would be injurious to the consultative functions of
government.” NLRB, 421 U.S. at 149 (internal citations and
quotation marks omitted).
b. Idea of secret, “working law” of the agency. Retained, referred
to, and used as precedent or guidelines. Taxation With
Representation, 646 F.2d at 678-79.
c. Purposes of the privilege include “protect[ion] against
premature disclosure of proposed policies” and “protect[ion]
against confusing the issues and misleading the public by
dissemination of documents suggesting reasons for the
agency’s action.” Coastal States, 617 F.2d at 866.
d. “The statements covered by this privilege are statements of
advice, deliberation, and recommendation. The privilege is
based on the public policy of encouraging wise and efficient
government by fostering an environment wherein officials may
comment on issues of governmental policy and decision-
making in a candid manner, without fear that their comments
will be subjected to scrutiny by the public at large.” P.T. & L.
Construction, 63 T.C. at 409.
e. Bernardo, 104 T.C. at 693-94 (Art Advisory Panel’s notes held
not covered by deliberative process privilege; Panel’s meetings
closed to the public in order to protect the confidentiality of the
22
information provided to the Panel by taxpayers and not to
insure the candor of intragovernmental communications).
C. Factual Material Not Protected. Purely factual or objective material is not
covered by the privilege.
1. “Factual portions of documents covered by the deliberative process
privilege must be segregated and disclosed unless they are ‘so
interwoven with the deliberative material that [they are] not
segregable.’” Pacific Fisheries, Inc. v. United States, 539 F.3d 1143,
1148 (9th Cir. 2008) (citing United States v. Fernandez, 231 F.3d
1240, 1247 (9th Cir. 2000)).
2. “The burden is on the agency to establish that all reasonably
segregable portions of a document have been segregated and
disclosed.” Id.; see also Mink, 410 U.S. at 87.
3. Barger v. Commissioner, 65 T.C. 925, (1976) (special agent’s report
severable between facts, narrative summary, and recommendations);
Brown v. Commissioner, T.C. Memo 1994-282 (similar).
D. Qualified Privilege. The deliberative process privilege is a qualified privilege,
not an absolute privilege.
1. “[E]xecutive privilege, unlike the work product doctrine, does not
protect all opinions, conclusions, mental impressions, and thought
processes of governmental officials.” P.T. & L. Construction, 63 T.C.
at 409-10.
a. Deliberative process privilege is not coextensive in its coverage
with the work product doctrine. Id. at 410. There is a
distinction between the deliberative process privilege and work
product doctrine with respect to, for example, statements
consisting of factual inferences by special agent in report. Id.
2. Taxpayer’s needs may outweigh governmental interests in abuse of
discretion cases and cases involved a heightened burden of proof.
3. Privilege is qualified and may be overcome upon a sufficient showing
of need by the taxpayer. P.T. & L. Construction., 63 T.C. at 409. The
privilege “is qualified in that it recognizes there are instances in which
justice will require disclosure of such material. A balancing of
interests is required: the gravity of the individual’s need for disclosure
must be weighed against the harm that disclosure may do to
intragovernmental candor.”
a. P.T. & L. Construction, 63 T.C. at 411-12 (recommendation
and deliberation portions of special agent’s report and appellate
conferee’s report subject to privilege).
b. Rutter v. Commissioner, 81 T.C. 937, 949 (1983) (memoranda
to file written by revenue agent subject to privilege).
23
c. The Branerton Corp. v. Commissioner, 64 T.C. 191 (1975)
(“Although respondent makes a persuasive argument for
protecting the requested documents, we see the uniquely heavy
burden of proof petitioner bears on the bad debt reserve issue as
striking a balance in favor of limited discovery in the instant
case.”) (T-letter and accompanying workpapers subject to
discovery; district conferee, memoranda of conference, and
appellate conferee reports subject to privilege).
d. Hospital Corp. of America v. Commissioner, T.C. Memo 1994-
100 (Appeals Office settlement statements subject to discovery
and not privileged because they were aimed at determining
whether the Commissioner consented to a change to the
taxpayers’ hybrid method of accounting for purposes of IRC §
446(e); taxpayers bear “a heavy burden in attempting to prove
an abuse of discretion under section 446. Petitioners must
show that respondent has acted arbitrarily in order to prevail
under section 446.”)
e. Estate of Benham v. Commissioner, T.C. Memo 1981-426
(recommendation and deliberation portions of estate tax agent’s
report and full Appellate Conferee report found privileged;
taxpayer’s need not shown; balancing of taxpayer’s needs
described as exceptional).
f. Amazon.com, Tax Court Docket No. 31197-12, Order Dated
Aug. 22, 2014 (I.R.C. § 482 adjustments; documents subject to
privilege).
g. Manquen v. Commissioner, Tax Court Docket No. 26666-12,
Order Dated Aug. 5, 2014 (Appeals case memorandum subject
to privilege).
h. Eaton Corp. & Subs. v. Commissioner, Tax Court Docket No.
5576-12, Order Dated Oct. 31, 2013 (advance pricing
agreement memoranda subject to privilege).
i. Balancing test may be limited by the axiom that Tax Court
generally will not look behind notice of deficiency.
Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324
(1974).
E. IRS Self-Imposed Requirement.
1. Because the Internal Revenue Service favors disclosure, a third
requirement has been self-imposed: the information must also
significantly impede or nullify IRS action in carrying out a
responsibility or function if released, or would constitute an
unwarranted invasion of personal privacy. Delegation Order No. 220
(Rev. 2), 56 Fed. Reg. 60,149 (Nov. 27, 1991).
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2. In determining whether disclosure will significantly impede or nullify
agency action, one must show a specific harm to an issue in, or aspect
of, an agency program or initiative. See LGM TL-98, 1992 WL
1355874, Guidelines and Procedures for Asserting the Deliberative
Process Privilege in Federal Civil Tax Litigation (Oct. 7, 1992).
3. LGM TL-98. IRS Guideposts:
a. Determine whether the communication is a final decision. If it
is, then the privilege does not apply.
b. Examine the nature of the decision making authority of the
office or person issuing the communication. If the person who
issues the document has the authority to speak finally and
officially for the agency, the communication is likely to fall
outside the privilege. However, if the author lacks legal
decision authority, the communication is more likely to fall
within the privilege. Chief Counsel vs. docket attorney.
c. Examine the direction in which the communication flowed
along the decision making chain. If a memorandum goes up
the review chain from low level officials to high level
managers, it is much more likely to be predecisional and
deliberative than if the opposite were so. Final decisions
typically flow from superiors with policymaking authority to
subordinates who carry out the policy.
d. Determine whether any communication that is apparently
predecisional and deliberative was expressly or implicitly
adopted or incorporated by reference in a final agency decision.
If so, the communication loses its predecisional status and falls
outside the privilege.
e. Determine whether the privilege for an otherwise predecisional
and deliberative communication was waived.
F. Delegation Issues. The courts are split on who may raise the deliberative
process privilege.
1. United States v. Reynolds, 345 U.S. 1 (1953). Formal claim from head
of the department or agency, actual personal consideration by that
officer, specific designation of documents, and specific reasons for the
need to preserve their confidentiality.
2. I.R.M. § 1.2.49.3, Delegation Order 11-2 (Rev. 1) (formerly DO-11-2)
(04-22-2014). Relates to the authority to permit disclosure of tax
information and to permit testimony or the production of documents.
3. I.R.M. § 1.2.49-2, Delegation Order 11-2 (Rev. 2), Table 8, Privileges.
Trial attorney may assert government privileges, including the
deliberative process privilege. Trial attorney may waive privilege,
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after appropriate coordinate with the Commissioner. “See Delegation
Order 30-4 . . . for certain courts in which the claim of the deliberative
process privilege requires assertion of the privilege by the Deputy
Associate Chief Counsel (Procedure and Administration).”
4. Chief Counsel Notice, CC-2005-005 (Apr. 8, 2005) (discretionary
disclosure policy; discovery and FOIA requests).
5. I.R.M. 1.2.53.5, Delegation Order 30-4 (formerly DO-220, Rev. 3)
(10-01-2009). Deputy Associate Chief Counsel (Procedure &
Administration). Formerly Assistant Chief Counsel (Disclosure
Litigation) under DO-220.
6. Amazon.com, Tax Court Docket No. 31197-12, Order Dated Aug. 22,
2014, (recognizing positions taken by other courts, but stating that “we
concern ourselves only with the procedures applicable to respondent in
matters before this Court, and, in the absence of any showing of abuse,
defer to respondent’s delegation of authority on the point”; permitting
privilege to be raised by trial attorney).
7. LGM TL-98. Provides a quick annotated guide to range of decisions
in the federal circuits.
G. Burden of Proof. The agency bears the burden of demonstrating that a
document is predecisional and deliberative. Schlefer v. United States, 702
F.2d 233, 237 (D.C. Cir. 1983).
H. Waiver.
1. Documents that are covered by the deliberative process privilege
generally remain privileged even after the decision to which they relate
is reached. Federal Open Market Committee v. Merrill, 443 U.S. 340,
360 (1979). However, the documents may lose their privileged status
if they are later adopted by the agency as a decision or statement of
policy, or if they are later incorporated by reference in a final agency
decision or policy statement. Taxation With Representation, 646 F.2d
at 678.
2. If a document was released pursuant to a prior FOIA request, it cannot
be brought back within the privilege. North Dakota v. Andrus, 581
F.2d 177 (8th Cir. 1978).
3. Even if the release of information is unauthorized, if the information
has been disseminated widely to the public or within the agency, the
privilege may be waived. See United States v. Zolin, 809 F.2d 1411,
1415 (9th Cir. 1987); In re Sealed Case, 676 F.2d 793, 818 (D.C. Cir.
1982).
4. An oral release of otherwise privileged governmental information may
be sufficient to waive the privilege with respect to that information but
not the underlying document itself. Shell Oil Co. v. Internal Revenue
Service, 772 F. Supp. 202 (D. Del. 1991).
26
5. Fed. R. Evid. 502 and its limitations on waiver resulting from an
inadvertent disclosure are not applicable to the deliberative process
privilege.
I. Related Authorities and Issues.
1. FOIA. Freedom of Information Act (“FOIA”), 5 U.S.C. § 552(b)(5):
“inter-agency or intra-agency memorandums or letters which would
not be available by law to a party other than an agency in litigation
with the agency.”
a. Tax Analysts cases.
i. Tax Analysts v. Internal Revenue Service, 294 F.3d 71
(D.C. Cir. 2002) (IRS Legal Memoranda and Office of
Chief Counsel intradivisional Technical Assistance
memoranda).
ii. Tax Analysts v. Internal Revenue Service, 117 F.3d 607
(D.C. Cir. 1997) (field service advice memoranda).
iii. Taxation With Representation, 646 F.2d at 666 (General
Counsel Memoranda, Technical Memoranda, and
Actions on Decisions).
2. Touhy Regulations. Treas. Regs. §§ 301.9000-1 to -6.
a. Touhy v. Regan, 340 U.S. 462 (1951) (subordinate official of
Department of Justice refusal to comply with subpoena duces
tecum is valid).
b. IRS Chief Counsel Notice, CC-2013-001 (Oct. 11, 2012).
Procedures for the preparation and review of the
Commissioner’s responses to requests and demands for
testimony and production of internal revenue records or
information.
c. Treas. Reg. § 301.9000-3(a), testimony authorization required.
“[W]hen a request or demand for IRS records or information is
made, no IRS officer, employee or contractor shall testify or
disclose IRS records or information to any court, administrative
agency or other authority, or to the Congress, or to a committee
or subcommittee of the Congress without a testimony
authorization.”
d. Treas. Reg. § 301.9000-1(i), testimony authorization. “A
testimony authorization is a written instruction or oral
instruction memorialized in writing within a reasonable period
by an authorizing official that sets forth the scope of and
limitations on proposed testimony and/or disclosure of IRS
records or information issued in response to a request or
demand for IRS records or information. A testimony
27
authorization may grant or deny authorization to testify or
disclose IRS records or information and may make an
authorization effective only upon the occurrence of a precedent
condition, such as the receipt of a consent complying with the
provisions of section 6103(c) of the Code. To authorize
testimony means to issue the instruction described in this
paragraph (i).”
e. Isley v. Commissioner, Tax Court Docket No. 5616-11L, Order
Dated Feb. 24, 2012 (failure to satisfy Touhy regulations with
respect to AUSA witness by not specifying subject matter of
testimony.
3. Morgan rule. Generally, there is no right to depose high-ranking
government officials about the mental process of their decision-making
where the officer’s duties take on a judicial quality, other than in
extraordinary circumstances. United States v. Morgan, 313 U.S. 409
(1941); see Black & Decker Corp. v. United States, 340 F. Supp. 2d
621 (D. Md. 2004) (two high-level IRS officials not covered by
Morgan rule because (i) they were not at level of cabinet secretaries or
agency heads, and (ii) proposed deposition sought information
regarding the quasi-legislative aspects of the officials’ roles in the
agency, not quasi-judicial).