Opinion
24703-21
05-17-2023
NORTH DONALD LA PROPERTY, LLC NORTH DONALD LA INVESTORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Albert G. Lauber, Judge
This case is calendared for trial at an initial special session of the Court beginning September 9, 2024, and a second special session beginning October 7, 2024, both in New Orleans, Louisiana. The case involves a charitable contribution deduction claimed by North Donald LA Property, LLC (North Donald) for a conservation easement.
On October 11, 2022, petitioner filed a Motion to Compel Production of Documents. In response to petitioner's demands for discovery, respondent has claimed privilege with respect to 147 documents listed on an amended privilege log dated June 1, 2022. Petitioner seeks an order directing respondent to produce in full 27 documents listed on that privilege log, as to which respondent has claimed the attorney-client privilege, the deliberative process privilege, and/or the protections of IRC § 6103. Petitioner also seeks other documents from respondent's administrative file that allegedly relate to respondent's determination of a fraud penalty against North Donald. On January 18, 2023, petitioner filed a First Supplement to its Motion. On April 3, 2023, respondent filed a Response to the Motion in which he maintains that his exclusions from discovery were proper.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code (IRC) in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
A. Claims of Privilege
Proceedings in the Tax Court are conducted in accordance with the Federal Rules of Evidence (FRE). See IRC § 7453; Rule 143. The FRE incorporate the common law rules of privilege, including the attorney-client privilege. See AD Inv. 2000 Fund LLC v. Commissioner, 142 T.C. 248, 254 (2014); Fed.R.Evid. 501, 1101(c). The attorney-client privilege applies to communications made in confidence (1) by a client to an attorney for the purpose of obtaining legal advice and (2) by an attorney to a client, where the communication contains legal advice or reveals confidential information relating to such advice. Upjohn Co. v. United States, 449 U.S. 383, 390 (1981); Bernardo v. Commissioner, 104 T.C. 677, 682 (1995). The attorney-client privilege may be waived. See Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1162 (9th Cir. 1992); Hartz Mountain Industries, Inc. v. Commissioner, 93 T.C. 521, 525 (1989) (citing Upjohn Co., 449 U.S. at 389).
B. Implied Waiver of Privilege
An implied waiver of the attorney-client privilege may occur when a party that has claimed the privilege "raises an issue as to its own knowledge, intent, state of mind, or the reasonableness of its actions," and discovery into attorney-client communications is the only probative evidence of the party's state of mind or knowledge. See Bernardo v. Commissioner, 104 T.C. 677, 690-91 (1995). Under these circumstances, it may be unfair to deny the opposing party access to the only evidence that could effectively disprove the asserting party's claim or defense. See Johnston v. Commissioner, 119 T.C. 27, 36 (2002).
Petitioner contends that respondent implicitly waived the attorney-client privilege over documents in the IRS administrative file when he stated that the entirety of the administrative file supports his allegations of fraud. Petitioner seems to be saying that respondent should have to produce those documents because (according to petitioner) the documents are necessary to its defense against the fraud penalty.
We disagree. Respondent has not implicitly waived privilege over documents in the IRS administrative file because respondent has not "raise[d] an issue as to [his] own knowledge, intent, state of mind, or the reasonableness of [his] actions." Bernardo, 104 T.C. at 690-91. Rather, it is petitioner that presumably will be raising the issue of its state of mind or knowledge in arguing (for example) that it reasonably relied on the advice of its tax advisors. Any documents or witnesses that would tend to support petitioner's position as to its state of mind are presumably already known to petitioner. The success of petitioner's defense to the fraud penalty cannot possibly depend on internal communications that may have occurred among the IRS exam team and attorneys from the Office of Chief Counsel.
C. "Extension of Waiver"
Under FRE 502(a), if privileged documents are disclosed in a Federal proceeding, the waiver is extended to undisclosed documents when (1) the waiver was intentional, (2) the disclosed and undisclosed documents concern the same subject matter, and (3) the two sets of documents "ought in fairness to be considered together."
Petitioner contends that respondent waived privilege over all documents that relate to respondent's allegations of fraud by disclosing certain attorney-client communications for the purpose of establishing timely supervisory approval of the fraud penalty. See IRC § 6751(b)(1). The documents that respondent disclosed consist of communications involving Chief Counsel attorney Anita Gill and her immediate supervisor, Mark Miller. These communications establish that Ms. Gill made the initial determination that a fraud penalty should be asserted in this case and that Mr. Miller approved her recommendation. Petitioner contends that the intentional disclosure of these communications causes waiver of the attorney-client privilege to extend to all documents relating to respondent's allegation of fraud.
On April 18, 2023, the Court issued an opinion (T.C. Memo. 2023-50) holding that the IRS met the requirements of section 6751(b)(1) in this case.
Again we disagree. Granted that respondent's limited waiver was intentional, and assuming arguendo that the disclosed and undisclosed documents concern the same subject matter, petitioner has not convinced us that the two sets of documents "ought in fairness to be considered together." Fed.R.Evid. 502(a). Respondent disclosed three communications involving Ms. Gill and her supervisor for the limited purpose of establishing the identity of the IRS officers who made and approved the "initial determination of [the penalty] assessment." IRC § 6751(b)(1). Disclosure of this information was necessitated by section 6751(b)(1), which requires the IRS to show that the assertion of the penalty (here, the fraud penalty) was approved by "the immediate supervisor of the individual making such determination." By effecting the minimum disclosures required to show compliance with the statute's procedural requirements, respondent was not waiving privilege over substantive communications between the exam team and IRS Chief Counsel attorneys. Petitioner has supplied no logical reason to believe that the two sets of documents "ought in fairness to be considered together."
Petitioner errs in urging an analogy with Oconee Landing Property, LLC v. Commissioner, T.C. Docket No. 11814-19 (Order dated Nov. 17, 2022). In that case, an individual who had disclosed a large volume of privileged documents attempted to reassert privilege over a subset of those documents. We ruled that privilege had been irrevocably waived over the subset of documents because the initial waiver had been intentional, the subset concerned the same subject matter as the broader set of documents, and because the subset "ought in fairness to be considered together" with the entire set. In that scenario, the taxpayer sought to cherry-pick particular documents over which privilege would be reasserted following a waiver of the privilege. That is not the situation here.
D. Other Arguments
We reject petitioner's assertion that respondent's privilege logs are inadequate. We find that they "set forth facts that establish, as to each document, each element of the claimed privilege," and include "the identification of the authors, dates of preparation, and subject matter of the documents. Pac. Mgmt. Grp. v. Commissioner, T.C. Memo. 2015-97. We likewise reject petitioner's contention that respondent improperly asserted the deliberative process privilege. We find that each document over which respondent asserted this privilege contains pre-decisional internal deliberations, i.e., deliberations among IRS officials prior to the issuance of the FPAA. See P.T. & L. Constr. Co. v. Commissioner, 63 T.C. 404, 409-410 (1974); Estate of Benham v. Commissioner, T.C. Memo. 1981-426. Respondent has supplied an adequate explanation for each assertion of the privilege. And petitioner has not identified any authority to support its contention that the Commissioner must personally assert the deliberative process privilege. Cf. Marriott Int'l Resorts, L.P. v. United States, 437 F.3d 1302, 1307-08 (Fed. Cir. 2006) (recognizing Commissioner's ability to delegate authority to assert deliberative process privilege).
Finally, petitioner urges that respondent has invoked section 6103(a) inappropriately. This provision bars IRS officers and employees from disclosing confidential taxpayer return information unless an exception applies. Respondent has redacted portions of documents containing confidential information about other taxpayers. Petitioner has not shown that any statutory exceptions apply in a way that would render respondent's redactions unjustified.
In consideration of the foregoing, it is
ORDERED that petitioner's Motion to Compel Production of Documents as Supplemented is denied.