Opinion
7045-19
02-24-2022
PICAYUNE PEARL AGGREGATES, LLC, PICAYUNE PEARL AGGREGATES INVESTORS, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Courtney D. Jones Judge.
This case concerns the propriety of a charitable contribution of a fee simple interest in property for which Picayune Pearl Aggregates, LLC (Picayune), claimed a $170 million deduction under § 170 for taxable year 2015. On December 22, 2021, respondent filed a motion to compel production of documents (docket entry no. 63) pursuant to Rules 72(b) and 104(b) with respect to several hundred documents withheld from discovery by petitioner Picayune Pearl Aggregates Investors, LLC, (Picayune Investors), the tax matters partner of Picayune, on the basis of the attorney-client privilege, the Federally authorized tax practitioner privilege (FATP privilege), and/or the work product doctrine. On February 1, 2022, Picayune Investors filed a response to respondent's motion to compel production of documents (docket entry no. 68).
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, all regulatory references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times, and all Rule references are to the Tax Court Rules of Practice and Procedure.
For the reasons elaborated upon below, we will hold respondent's motion in abeyance and order Picayune Investors to address the concerns the Court identifies below, in the status report that is currently due on or before April 7, 2022.
Background
At issue are several hundred documents identified in privilege logs prepared by Picayune Investors and transmitted to respondent on March 15, 2021 and April 5, 2021 (March and April privilege logs). Picayune Investors did not identify the specific request(s) the documents listed on the privilege logs were responsive to. However, based off of the descriptions provided therein, respondent believes they implicate the following requests for production:
The privilege logs are included in respondent's motion to compel as exhibits A and B.
No. 13: Provide all tax analyses or tax opinions obtained or relied on by You relating to the transaction.
No. 15.h: Provide any emails, copies of appraisals, and any other Documents reflecting any changes made to any reports and any suggestions made to change the report by anyone involved in the transaction.
No. 76: Please provide all Documents which explain how Baker Donelson has assisted Keyway Management, LLC in the assessment, disclosure, and identification of features of both rewards and risks that may be associated with any Charitable Deduction. Provide all emails, correspondence, presentations, or any other Documents related to the assistance. Provide copies of all contracts or agreements executed in relation to the assistance of Baker Donelson. (internal quotation marks omitted).
The report referenced in request no. 15.h is the Clark Report dated January 26, 2016 and iterations thereof.
Picayune Investors withheld the documents at issue, which the Court agrees appear responsive to the aforementioned requests, by invoking the attorney-client privilege, the FATP privilege described in § 7525(a)(1), and/or the work product doctrine.
Picayune Investors previously resisted respondent's attempts to discover materials responsive to these requests. The Court issued orders dated February 18 and May 3, 2021, which sustained the propriety of these discovery requests by granting respondent's earlier motions to compel dated June 5 and August 10, 2020. These orders also instructed Picayune, to the extent it withheld responsive documents on the basis of any applicable privilege, to prepare detailed privilege logs in accordance with paragraph X of respondent's requests for production of documents dated February 26 and May 8, 2020.
On motion, respondent argues that 1) to the extent the documents are withheld on the basis of the work product doctrine, the privilege cannot apply because none of the documents were prepared in anticipation of litigation, 2) to the extent the documents are withheld on the basis of the attorney-client and FATP privileges, Picayune has impliedly waived them by pleading as an affirmative defense (to penalties) reasonable cause and good faith reliance under § 6664(c)(1), and 3) regardless of whether or not there was implied waiver, Picayune failed to satisfy its burden of establishing all of the elements of a claim to the attorney-client and/or FATP privileges with respect to each document. Respondent requests in the alternative that the Court conduct in camera review of the documents to assess Picayune's privilege claims to the extent we do not order it to produce them.
Analysis
I. The Work Product Doctrine Does Not Apply.
"The work product doctrine protects documents, interviews, statements, memoranda, correspondence, briefs, mental impressions, and tangible things prepared by an attorney in anticipation of litigation or trial." Bernardo v. Commissioner, 104 T.C. 677, 687 (1995) (citing inter alia Hickman v. Taylor, 329 US. 495, 510-11) (1947)). Litigation is often anticipated prior to the formal initiation of legal proceedings. Id. However, in order to establish that a document was prepared in anticipation of litigation, the party invoking the privilege "must demonstrate that the document was created with a specific claim supported by concrete facts which would likely lead to [the] litigation in mind." Id. (quoting Linde Thomson Langworthy Kohn & Van Dyke v. Resolution Trust Corp., 5 F.3d 1508, 1515 (D.C. Cir. 1993)) (internal quotation marks omitted). The party invoking the privilege bears the burden of demonstrating is applicability. See e.g., In re Grand Jury Subpoena Dated July 6, 2005, 510 F.3d 180, 183 (2d Cir. 2007); In re Columbia/HCA Healthcare Corp. Billing Practices Litigation, 293 F.3d 289, 294 (6th Cir. 2002).
In the present case, Picayune asserted privilege over hundreds of documents in part on the basis of the work product doctrine. Picayune did not address respondent's arguments concerning the inapplicability of the work product doctrine to the documents at issue in its response filed on February 1, 2022. Thus, Picayune failed to satisfy its burden of demonstrating, with respect to the relevant documents, that they were prepared with a specific claim supported by concrete facts in mind which would lead to the present litigation. Bernardo, 104 T.C. at 687. Thus, we conclude that the work product doctrine does not apply to any of the documents listed on the March and April privilege logs.
We further note that the documents at issue were prepared well before the Internal Revenue Service (IRS) even issued a Notice of Beginning of Administrative Proceedings (NBAP) on May 24, 2018. Consequently, it is difficult to conceive of a factual predicate that would have made it reasonable for Picayune Investors to anticipate litigation concerning the section 170 deduction at issue when these documents were created in 2015 and 2016. But see Bernardo, 104 T.C. at 688 (IRS notification to taxpayers that its Art Advisory Panel disagreed with their valuation of a charitable contribution for which they claimed a deduction constituted a sufficient fact for taxpayers to reasonably anticipate litigation for purposes of invoking the work product doctrine).
II. Judgment Withheld as to Whether Picayune Impliedly Waived the Attorney-Client and FATP Privileges.
"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 information on which the client seeks advice." Bernardo, 104 T.C. at 682 (internal quotations and citations omitted). The FATP privilege described in § 7525(a)(1) provides a limited privilege equivalent to the attorney-client privilege with respect to communications regarding tax advice between a taxpayer and any federally authorized tax practitioner.
The attorney-client privilege and the FATP privilege may be impliedly waived under certain conditions. Respondent argues that under this Court's precedent in Johnston v. Commissioner, 119 T.C. 27 (2002), Picayune Investors impliedly waived the attorney-client and FATP privilege by pleading as an affirmative defense (to penalties) reasonable cause and good faith reliance under § 6664(c)(1).
In Johnston, this Court endorsed the three-pronged test for implied waiver of Hearn v. Rhay, 68 F.R.D. 574, 581 (E.D. Wash. 1975) in a case concerning an evidentiary dispute. See Johnston, 119 T.C. at 32-35. Under this test, a finding of implied waiver requires that:
(1) assertion of the privilege was a result of some affirmative act, such as filing suit, by the asserting party; (2) through this affirmative act, the asserting party put the protected information at issue by making it relevant to the case; and (3) application of the privilege would have denied the opposing party access to information vital to his defense.Id. at 36 (citing Hearn, 68 F.R.D. at 581). The Court noted that the Hearn test was endorsed by the U.S. District Court for the District of Columbia whose rules of evidence were then applicable to trials conducted by this Court under section 7453 and by the U.S. Court of Appeals for the Ninth Circuit, which was the presumptive venue of an appeal in that case.
Section 7453 was amended in 2015 such that this Court was no longer required to conduct proceedings in accordance with "the rules of evidence applicable in trials without a jury in the United States District Court of the District of Columbia". See Protecting Americans from Tax Hikes Act of 2015, Pub. L. No. 114-113, §425(a), 129 Stat. 3040, 3125.
Notwithstanding our decision in Johnston, we note that the presumptive venue of appeal in this case is the U.S. Court of Appeals for the Fifth Circuit, which does not endorse the Hearn test and articulates an alternative standard. Though the Fifth Circuit's jurisprudence is not necessarily binding upon this Court, see Lardas v. Commissioner, 99 T.C. 490 (1992); Robinson v. Commissioner, 119 T.C. 44, 51-52, n. 8, we carefully consider it.
According to the Fifth Circuit's decision in In re Itron, Inc., 883 F.3d 553, 558 (2018), a client waives the attorney-client privilege when he affirmatively relies on communications with an attorney to support an element of a legal claim or defense, thus placing them at issue. In that case, the court found no waiver of the privilege by the plaintiff because the complaint did not plead reliance on any legal advice or communication with an attorney. In re Itron, Inc., 883 F.3d at 560.
In In re Schlumberger Technology Corp., 818 Fed.Appx. 304, 307 (5th Cir. 2020), the court applied its precedent in Itron and again found no waiver of the privilege where a defendant raised as an affirmative defense good faith reliance "on applicable law, administrative regulations, orders, interpretations and/or administrative practice or policy enforcement." In so concluding, the court noted that the defendant had tailored its pleading so as not to rely on privileged communications. In re Schlumberger Technology Corp., 818 Fed.Appx. at 307.
Having recognized the Fifith Circuit's jurisprudence, we decline at this juncture to render judgment as to whether Picayune Investors impliedly waived the attorney-client and FATP privileges because, as discussed below, petitioner has not met its burden of proving the applicability of such privileges.
III. Picayune Did Not Meet its Burden of Proving the Applicability of the Attorney-Client Privilege and the FATP Privilege.
The burden of proving the applicability of the attorney-client or FTAP privilege rests with the party asserting the privilege. See Fu Investment Co., Ltd. v. Commissioner, 104 T.C. 408, 415 (1995); United States v. BDO Seidman, LLP, 492 F.3d 806, 821 (7th Cir., 2007). In neither the March and April privilege logs nor its response to the motion to compel did Picayune Investors establish the basis for the privileges invoked with respect to each document.
While a column of the privilege logs were devoted to "subject matter and grounds for privilege," the details provided therein were vague and the analysis conclusory. In providing such scant detail and analysis, Picayune Investors has deprived the Court of any ability to assess its claims to the attorney-client and FATP privileges. Perhaps recognizing its failure, petitioner asks the Court to order the parties to provide an update as to the ongoing privilege dispute in their joint status report, currently due on or before April 7, 2022.
IV. Conclusion
The work-product doctrine does not apply to the documents at issue. We withhold judgment on whether petitioner impliedly waived the attorney-client and the FATP privileges, and will give petitioner an opportunity to establish the basis for the privileges invoked with respect to each document.
To reflect the foregoing, it is
ORDERED that respondent's motion to compel, filed December 22, 2021 (docket entry no. 63), is held in abeyance. It is further
ORDERED that, in conjunction with the joint status report, currently due on or before April 7, 2022, Picayune Investors shall establish the basis for the privileges invoked with respect to each document identified in exhibits A and B of respondent's motion to compel production of documents (docket entry no. 63). In the alternative, if the parties resolve the ongoing privilege dispute, they may jointly report such resolution.