Opinion
20894-19 6791-20 10830-20 17749-21 17771-21
10-04-2023
NOEL M. PARDUCCI & KENNETH L. PARDUCCI, ET AL., Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
ORDER
Ronald L. Buch Judge
Pending before the Court are two motions. The first is the Commissioner's Motion in Limine to Admit Testimony by David Lennon, filed August 30, 2023, in which he asks the Court to conclude that: (1) the Hoyals and Crater Lake Trust waived attorney-client privilege with respect to certain communications with Mr. Lennon; or (2) in the alternative, the crime-fraud exception applies to certain communications with Mr. Lennon. The second motion is the Commissioner's Motion for Leave to Conduct Discovery Under Rule 70(a)(2) - To Propound Request for Production of Documents Out of Time to Petitioners in Hoyal and Crater Lake Trust, filed August 31, 2023. In this Motion, the Commissioner asks that we reopen discovery so that he can request records related to communications with Mr. Lennon. The Commissioner's Motion for Leave was filed in connection with his Motion in Limine.
Attorney-client privilege protects confidential communications between attorneys and clients that are made for the purpose of giving legal advice. However, the privilege is not absolute and may be waived voluntarily or by implication. Furthermore, attorney-client privilege does not extend to communications made to further ongoing or future criminal or fraudulent acts.
We will deny the Commissioner's Motion in Limine. The Hoyals and Crater Lake Trust have not asserted the attorney-client privilege with respect to communications requested by the Commissioner, and the Commissioner has not established that the crime-fraud exception applies. Because the Commissioner's Motion for Leave to Conduct Discovery hinges on his Motion in Limine, we will also deny the Commissioner's Motion for Leave.
BACKGROUND
Five cases related to a subscription mail business have been consolidated for trial. The petitioners in two of these cases are Jeffrey and Lori Hoyal, at Docket No. 6791-20, and Crater Lake Trust, at Docket No. 10830-20.
In 2014, the Commissioner initiated income tax examinations of the Hoyals and Crater Lake Trust for 2012. The examinations focused on the earnings from the subscription mail business.
The Commissioner interviewed Mr. Hoyal during the examinations. One of the topics discussed during the interview was the earnings from the subscription mail business. Mr. Hoyal also provided the Commissioner with documents during the examinations. The documents included two consulting agreements and a Unit Purchase Agreement.
On March 20, 2020, the Commissioner issued Notices of Deficiency to the Hoyals and to Crater Lake Trust for 2012 and 2013. The Commissioner determined deficiencies and penalties related to the subscription mail business. In July 2020, the Hoyals and Crater Lake Trust filed petitions with the Court challenging the Commissioner's determinations.
Pre-trial discovery commenced in 2022. During discovery, the Hoyals and Crater Lake Trust responded to the Commissioner's Request for Production of Documents. In their responses, they provided the Commissioner with a Unit Purchase Agreement that differed from the Unit Purchase Agreement that was provided during the examinations. On June 15, 2023, the Commissioner deposed Mr. Hoyal. During the deposition, Mr. Hoyal was asked about the different Unit Purchase Agreements as well as the other documents provided to the Commissioner during discovery.
On August 30, 2023, the Commissioner filed a Motion in Limine to Admit Testimony by David Lennon. The Motion asks the Court to conclude that attorney-client privilege does not apply to testimony or documents related to the Hoyals' and Crater Lake Trust's communications with Mr. Lennon regarding the collection and presentation of documents during their income tax examinations. Additionally, on August 31, 2023, the Commissioner filed a Motion for Leave to Conduct Discovery Under Rule 70(a)(2) - To Propound Request for Production of Documents Out of Time to Petitioners in Hoyal and Crater Lake Trust. With this Motion, the Commissioner seeks to request "all records of communications and documents created, edited, prepared, or transmitted incident to those communications between the Hoyals, Crater Lake Trust, and Mr. Lennon for purposes of responding to IRS requests for information during the income tax audits of the Hoyals and Crater Lake Trust." This Motion was filed to correspond with the Commissioner's Motion in Limine. The Hoyals and Crater Lake Trust object to these Motions.
DISCUSSION
We are tasked with deciding two issues. First, we must determine whether the Hoyals and Crater Lake Trust waived attorney-client privilege with respect to communications with Mr. Lennon related to responding to the Commissioner's information requests during their income tax examinations. Then, we must determine whether discovery should be reopened to allow the Commissioner to request from the Hoyals and Crater Lake Trust all records related to those communications with Mr. Lennon. We will address each issue in turn.
I. Attorney-client Privilege
Attorney-client privilege is perhaps "the most sacred of all legally recognized privileges, and its preservation is essential to the just and orderly operation of our legal system." U.S. v. Baur, 132 F.3d 504, 510 (9th Cir. 1997). The privilege protects confidential communications between attorneys and clients that are made for the purpose of giving legal advice. U.S. v. Sanmina Corp., 968 F.3d 1107, 1116 (9th Cir. 2020). The burden is on the party asserting the privilege to establish that it applies. U.S. v. Martin, 278 F.3d 988, 999-00 (9th Cir. 2002). But that party cannot make a blanket assertion; rather, the party "must identify specific communications and the grounds supporting the privilege as to each piece of evidence over which privilege is asserted." Id. at 1000.
Attorney-client privilege is not absolute and can be waived. The privilege may be waived voluntarily "when a party discloses privileged information to a third party who is not bound by the privilege, or otherwise shows disregard for the privilege by making the information public." Sanmina Corp., 968 F.3d at 1116-17. A voluntary waiver of privilege also waives the privilege to all other communications on the same subject. Id. at 1117. Privilege may also be waived by implication, which is based on the rule that a party waives attorney-client privilege "by putting the lawyer's performance at issue during the course of litigation." Id. Furthermore, attorney-client privilege does not apply to communications that are sought in furtherance of a crime. Under the crime-fraud exception, attorney-client communications are exempt from attorney-client privilege, when "that client was engaged in or planning a criminal or fraudulent scheme when it sought the advice of counsel to further the scheme" and the communications sought are "sufficiently related to and were made in furtherance of" the scheme. In re Grand Jury Investigation, 810 F.3d 1110, 1113 (9th Cir. 2016). The burden is on the party not asserting the privilege to prove that the crime-fraud exception applies. See U.S. v. Chen, 99 F.3d 1495, 1503 (9th Cir. 1988).
A. Parties' Arguments
The Commissioner argues that the Hoyals and Crater Lake Trust waived their attorney-client privilege for all communications with Mr. Lennon made in connection with the collection and preparation of documents for their income tax examinations. He asserts that Mr. Hoyal waived these privileges voluntarily when he testified in his deposition about Mr. Lennon's handling of the income tax audits, and by implication by putting Mr. Lennon's conduct at issue during the deposition. He also argues that the crime-fraud exception applies because Mr. Lennon, with the full knowledge of Mr. Hoyal, assisted in the creation, execution, and presentation of backdated and altered documents.
The Hoyals and Crater Lake Trust disagree. They argue that the Motion should be denied because: (1) the privilege issue is not ripe; (2) the attorney-client privilege was not waived in Mr. Hoyal's deposition; and (3) the Commissioner has not shown that the crime-fraud exception applies. We agree with the Hoyals and Crater Lake Trust.
B. Analysis
We are asked to determine that Mr. Hoyal waived attorney-client privilege, or alternatively if the crime-fraud exception applies to the privilege. The issue of whether attorney-client privilege applies to bar testimony or the admissibility of documents related to the Hoyals' and Crater Lake Trust's communications with Mr. Lennon in the context of collecting and presenting documents to the Commissioner during the income tax examinations is premature. Therefore, we must deny the Commissioner's Motion in Limine.
First, the Commissioner argues that Mr. Hoyal voluntarily or implicitly waived attorney-client privilege when he discussed Mr. Lennon's handling of the examinations with the Commissioner during his June 15, 2023 deposition. And he cites specific portions of the deposition transcript to support his conclusion. However, the Commissioner's argument that privilege was waived is not ripe. The Hoyals and Crater Lake Trust have not claimed attorney-client privilege to communications related to Mr. Lennon's responses to the Commissioner during the income tax examinations. Furthermore, the Commissioner failed to identify specific communications that he requested and were denied because of attorney-client privilege.
Next, the Commissioner argues that the crime-fraud exception to attorney-client privilege applies because Mr. Lennon assisted in the creation, execution, and presentation of backdated and altered documents, with the full knowledge of Mr. Hoyal, to intentionally mislead the Commissioner during the income tax examinations. He cites to some of Mr. Hoyal's responses in the June 15, 2023, deposition, the different Unit Purchase Agreements, and email correspondence between Mr. Lennon and Joseph Petrucelli to support his argument. "To invoke the crime-fraud exception successfully, the government has the burden of making a prima facie showing that the communications were in furtherance of an intended or present illegality and that there is one relationship between the communications and the illegality." Chen, 99 F.3d at 1503. To satisfy this burden, the government must show that "there is reasonable cause to believe that the attorney's service were utilized in furtherance of the ongoing unlawful scheme." Baur, 132 F.3d at 509. The Commissioner failed to meet his burden to show that the crime-fraud exception applies. One of the main requirements of the exception is that the party asserting attorney-client privilege must be engaging in, or plans to engage in, illegal conduct. The sources cited to by the Commissioner do not establish that Mr. Hoyal was engaged in or planning to engage in illegal conduct. Therefore, the crime-fraud exception does not apply.
II. Motion for Leave to Conduct Discovery
The Commissioner's Motion for Leave to Conduct Discovery Under Rule 70(a) (2) essentially asks that we reopen discovery to allow the Commissioner to request from the Hoyals and Crater Lake Trust all records related to their communications with Mr. Lennon for the purpose of responding to the Commissioner's information requests during their income tax examinations. This Motion was filed to correspond with the Commissioner's Motion in Limine. Because these Motions are connected, and we are denying the Commissioner's Motion in Limine, we will also deny the Motion for Leave.
We also note that the discovery being sought is ancillary to the issues in this case. The primary issues are the parties' liabilities for the years in issue. A related issue is the potential liability for fraud penalties. An issue often considered when determining whether a fraud penalty applies is the parties conduct during an examination. See Clark v. Commissioner, T.C. Memo. 2021-114 at *37 ("[M]isleading statements during an audit, even from an unsophisticated taxpayer, may indicate fraudulent intent.") If the Commissioner has evidence of misleading statements or documents being provided during audit, he can present that evidence at trial. At this late stage of these proceedings, any incremental benefit of being able to show additional inconsistent statements is of limited value when weighed against the likely need to delay the trial of these cases that would be caused by reopening discovery. Accordingly, it is
ORDERED that the Commissioner's Motion in Limine to Admit Testimony by David Lennon filed August 30, 2023, is denied without prejudice. It is further
ORDERED that the Commissioner's Motion for Leave to Conduct Discovery Under Rule 70(a)(2) - To Propound Request for Production of Documents Out of Time to Petitioners in Hoyal and Crater Lake Trust, filed August 31, 2023, is denied.