Sitting in Room 3041 at the Duke University Escuela de la Ley, I am receiving wisdom from Judge Ruwe and STJ Lewis (“His Name Says It All, Spelled Correctly”) Carluzzo on the point of privileged communications.
How appropriate is Judge Lauber’s (not present today, but present in spirit) order in Pacific Management Group, BSC Leasing, Inc., Tax Matters Partner, et al., filed 5/21/15, with forty (count ‘em, forty) docket numbers, so try 21965-13 for a starter.
The facts are simple enough.
“Petitioners include four companies that provide engineering services. In 1999 petitioners’ common shareholders met with Ernest Ryder, an attorney, who described an arrangement designed to minimize their Federal income taxes. Petitioners eventually hired Mr. Ryder to implement this structure. Respondent contends (among other things) that this structure lacked economic substance.” Order, at p. 2.
The CA Franchise Tax Board grabbed Mr. Ryder’s ESI, Ryder claimed some of it was privileged, and these were reviewed by a CA Special Master, and some were privileged and sealed, but some weren’t. And the one that wasn’t is at issue now, because now Ryder’s firm wakes up to the material they didn’t protect.
Meanwhile, IRS was after Ryder, claiming he was promoting tax shelters. So IRS subpoenaed the material CFTB seized from Ryder. Petitioners claim IRS is making an end-run around Tax Court discovery rules, but that doesn’t fly. “Generally, where litigation in this Court has commenced, and the IRS later obtains relevant information by issuing an administrative summons with respect to a different taxpayer or a different tax period, we do not regard the IRS as having obtained that information in defiance of our discovery rules, and we do not exclude it from evidence.” Order, at p. 3, footnote 1.
Some of the unclaimed documents turned up in depositions, and although petitioners’ attorneys made reference to privilege, Judge Lauber finds privilege never got fully asserted. “…neither Mr. Ryder’s attorney, nor petitioners, nor Mr. Ryder have made any effort to ‘claw back’ the allegedly-privileged documents. Neither Mr. Ryder nor petitioners have gone to the District Court …, or to seek, in any forum, return of any materials that the District Court ordered to be turned over to the IRS.” Order, at p. 6.
Of course, petitioners claim good-faith reliance to avoid penalties, and that’s a killer. See my blogpost “Everything Has An End,” 10/10/12.
Read the order, and you’ll have a start on what we are hearing this afternoon. You’ll have missed a good talk, but saved some money.