Opinion
6819-20
09-23-2024
OTAY PROJECT LP, ORIOLE MANAGEMENT LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Christian N. Weiler, Judge.
A trial of this case is set to commence in Washington, D.C., on October 15, 2024. On June 21, 2024, respondent filed a Motion to Compel Production of Documents. In his Motion, respondent asks this Court to order that petitioner produce all privileged communications, including internal communications, which concern the same subject matter as two copies of an internal memorandum (one in draft format and one in final format) from Mr. Mark S. Rhyme (Rhyme Memos) and which were made during the period ending when Otay Project LP (OPLP) filed its 2012 Forms 1065, U.S. Return of Partnership Income.
On July 23, 2024, petitioner filed its Response to Motion to Compel Production of Documents which also included a Declaration of George M. Gerachis in Support of Response to Motion to Compel Production of Documents. In its Response, petitioner states any privilege waiver in this case was based on the disclosure of documents on which OPLP actually relied in reporting the section 743(b) adjustment on its Forms 1065 for its tax periods ending March 2, 2007, and April 20, 2007. Petitioner states it has already produced these documents.
Unless otherwise indicated, all statutory references are to the Internal Revenue Code, Title 26 U.S.C., in effect at all relevant times, and all regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all relevant times.
Having considered the parties' arguments in full, the Court is now prepared to rule on respondent's Motion to Compel.
Background
Petitioner argues that any unproduced documents fall into two categories: (1) documents by and/or among petitioner's external advisors which were not communicated to petitioner or its employees (Uncommunicated Documents); and (2) documents created after the time period from 2004 to 2009 (Post-2009 Documents).
Respondent does not appear to dispute these two categories of documents made by petitioner.
Petitioner contends that these documents do not fall under the scope of any privilege waiver because they do not concern the same subject matter as the Rhyme Memos. Petitioner argues that the Uncommunicated Documents should not be discoverable because OPLP did not rely on such documents in reporting the section 743(b) adjustments on its Forms 1065. Petitioner further argues that the Post-2009 Documents should not be discoverable because the transactions at issue in this case occurred during the 2004 to 2009 tax years. Petitioner asserts that it has already produced all the documents that OPLP relied on in reporting the section 743(b) adjustments on its Forms 1065 for its tax periods ending March 2, 2007, and April 20, 2007.
In an Order served on September 3, 2024, we initially indicated this Court was inclined to permit discovery of the Uncommunicated Documents and that we were not inclined to allow discovery of the Post-2009 Documents. In our September 3, 2024, Order, we also requested that respondent file a Reply to petitioner's Response to Motion to Compel Production of Documents. Respondent filed his Reply on September 20, 2024 along with a Declaration of Arvind Sabu, counsel for respondent.
On September 13, 2024, and prior to receipt of the Reply, the Court and counsel held a pretrial conference which included a brief discussion of the Court's September 3, 2024, Order. During the conference respondent indicated the parties had reached a tentative agreement on the production of the Uncommunicated Documents and withdrawal of the Motion to Compel based on the Court's September 3, 2024, Order.
On September 14, 2024, respondent filed a Motion to Enforce Agreement seeking to enforce the parties' agreement and to have this Court order petitioner to produce the Uncommunicated Documents. The Court is not ruling on this motion at this time.
Analysis
Under Federal Rule of Evidence 502(a) the scope of a privilege waiver "extends to an undisclosed communication or information . . . only if: (1) the waiver is intentional; (2) the disclosed and undisclosed communications or information concern the same subject matter; and (3) they ought in fairness to be considered together." The waiver, however, extends "only as to communications about the matter actually disclosed." See Chevron v. Pennzoil, 974 F.2d 1156, 1162 (9th Cir. 1992) (citing Weil v. Inv./Indicators, Rsch. & Mgmt., 647 F.2d 18, 25 (9th Cir. 1981)).
In our prior order served on January 3, 2024, we stated:
On November 20, 2020, petitioner submitted the affidavit of Mark S. Rhyme. Mr. Rhyme is an officer for petitioner and also a licensed CPA. In his affidavit, Mr. Rhyme recites the background of facts surrounding the development of Otay Ranch by Al Baldwin and Jim Baldwin, including the construction performance obligations held by the Partnership. The Rhyme Memos were furnished during the IRS examination of the Partnership, and again in response to discovery requests in this case. Considering the foregoing, we find that petitioner's waiver was intentional.
Next, we find that the disclosed Rhyme Memos, also include undisclosed communications concerning the same subject matter; namely the business purpose surrounding the estate planning by Al and Jim Baldwin and their spouses. Which included the formation of new partnerships, and transfers (or donation) of interests in several upper-tier partnerships (some 34 LLCs) to newly formed family partnerships which were indirectly owned by the children and grandchildren of Al and Jim Baldwin. Finally, petitioner is using (and has used) the Rhyme Memos and Rhyme Affidavit in this litigation which weighs in favor of respondent as to fairness for the production. Accordingly, we find the three elements of Federal Rule of Evidence 502(a) have been met here.
According to respondent, in the Rhyme Memo, Mr. Rhyme opines on the federal income tax consequences on the transactions giving rise to the section 743(b) adjustment at issue herein. His opinions include that the transactions at issue had sufficient business and/or estate planning purposes such that they should be respected under Treasury Regulation § 1.701-2 and the economic substance doctrine.
In our January 3, 2024, Order we found a waiver of privileges has occurred; however, we left it to the parties "to resolve the scope of waiver based on our guidance herein."
For a discussion on the applicable "privileges" in this case and whether a waiver of privileges by petitioner has occurred see this Court's Order served on January 3, 2024.
In opposition to respondent's Motion to Compel petitioner contends "[w]hen a privilege waiver is based on the disclosure of documents related to a client's reliance on advisors, documents not communicated to the client do not concern the same subject matter as the documents disclosed and are therefore outside the scope of waiver." Petitioner cites us to this Court's Order in Tribune Media Company v. Commissioner, Docket No. 20940-16 (issued July 12, 2019) (Tribune Order) in support of its conclusion that the scope of waiver does not include the Uncommunicated Documents. In our Tribune Order, we denied the Commissioner's Motion to Compel in part and stated "communications internal to Tribune's advisors but unknown to Tribune would not shed light on Tribune's knowledge at the time of filing its return." We continue to agree with this reasoning and conclude that the waiver of the attorney-client privilege by petitioner relating to a reasonable cause and good faith defense does not extend to internal, undisclosed communications since those documents remain privileged under the work product doctrine, including communications between EY and McKee and Nelson LLP. However, and as explained below, work product doctrine does not extend to internal, undisclosed documents containing contemporaneous discussions of prior communications between counsel and the taxpayer. See In re Martin Marietta Corp. v. Pollard, 856 F.2d 619, 625 (4th Cir. 1988) (discussing the scope of waiver of the attorney-client and work product privileges).
Petitioner also cites us to an opinion and order rendered in Allison v. Dolich, 2017 WL 2901930 at *2 (D.OR. July 7, 2017).
Section 7525 extends the attorney-client privilege "with respect to tax advice" to any "communication between a taxpayer and any federally authorized tax practitioner." For purposes of this Order we will treat the tax practitioner privilege as synonymous to the attorney-client privilege.
To bring a resolution to this matter, we recognize at least three general categories of work product that are potentially relevant here. They include: (1) documents that embody communications between counsel and the client concerning the subject matter of the case such as a traditional opinion letter; (2) documents analyzing the law, facts, trial strategy, and so forth that reflect counsel's mental impressions but were not given to the client; and (3) documents that discuss a communication between counsel and client concerning the subject matter of the case but are not themselves communications to or from the client. See In re EchoStar Commc'ns Corp., 448 F.3d 1294, 1302 (Fed. Cir. 2006).
In sum, the legal opinions or mental impressions that were never communicated to the petitioner provide little, if any, probative value in determining the merits of a reasonable cause defense as to penalties; and any probative value is outweighed by the protections afforded under the attorney-client and work product privileges. We will therefore deny respondent's Motion to Compel relating to those Uncommunicated Documents which fall within category (2), because they contain analysis of the law, facts, or trial strategy, and which otherwise set forth the tax advisor's mental impressions but were not furnished to petitioner. We further conclude that through the disclosure of the Rhyme Memos waiver of the attorney-client and/or work-product privileges have been made over categories (1) and (3) and we will compel the production of the Uncommunicated Documents falling into this third category.
It is our understanding that production has already been made with respect to any document falling into category 1.
In his Reply, respondent contends (for the first time) that since the Uncommunicated Documents were available to the true author of the Rhyme Memos-namely Thomas Lawson-petitioner's waiver includes these Uncommunicated Documents. This may very well be true; and the Court assumes that all communication between Mr. Rhyme, and by extension, Mr. Lawson (if he was a co-author to the Rhyme Memos) and external advisors has been (or will be) produced to respondent. This issue of Mr. Lawson drafting the Rhyme Memos remains unresolved and was only raised in respondent's Reply notwithstanding a prior deposition of Mr. Rhyme. We conclude that trial in October of this year remains the most appropriate forum to understand the authorship of the Rhyme Memos.
On the basis of our prior discussions and respondent's Reply we conclude respondent no longer seeks to compel the production of Post-2009 Documents. To the extent respondent does seek to compel the production of these documents the relief sought will be denied since we find the waiver of the attorney-client and/or work product privileges does not extend to these documents.
Considering the foregoing, it is
ORDERED that respondent's Motion to Compel Production of Documents filed on June 21, 2024, is granted in part, in that any document currently withheld based on privilege and which discusses communication between external advisors and petitioner concerning the subject matters found in the Rhyme Memo, but are not themselves communications to or from said advisor and petitioner, shall be produced on or before September 30, 2024. It is further
ORDERED that respondent's Motion to Compel Production of Documents filed on June 21, 2024, is otherwise denied.