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).