And Privilege is not Unlimited

 Everything has an end, but a sausage, said my old friend Paul V. Olsson, quoting his Swedish grandmother, has two. Proving him (and his grandmother) right is Carpenter Family Investments II LLC, David James, LLC, Tax Matters Partner, Docket No. 30834-08, filed 10/10/12.

You’ll recall that Judge Wherry gave IRS the right-about-face in 43 pages in 136 T. C. 17, filed 4/25/11, as set forth in my blogpost “Carpenter, Colony, Chevron and Mayo”, 4/26/11. But I finished my blogpost with my usual prescient comment: “And you may be sure there will be an appeal.”

Well, there was. But IRS moved to dismiss its appeal in the outwash from Home Concrete & Supply v. United States, 132 S. Ct. 1836 (2012), and Ninth Circuit, nowise loath to clear its docket, dismissed.  See my blogpost “Colony Lives”, 4/26/12, one year to the day after Carpenter.

So the Clan Carpenter moves for summary judgment dismissing everything as barred by the 3SOL, and Judge Wherry, although not quite so obliging as his colleague Judge Gustafson, grants Carpenter’s motion.

You can see there was nothing interesting by way of opinions out of Tax Court today, but the orders had something interesting.

We lawyers write tax opinions for clients. At rare intervals, they take our advice; sometimes we even get paid. The protection of client-attorney privilege attends such opinions. Only the client can give up the privilege, although it can be lost through careless disclosure, and there’s bushelbaskets of caselaw on that point.

And there’s been recent discussion of the privilege as pertains to accountants on the LinkedIn Technical Tax Issues Board, which I co-manage with a certain highly-regarded Director at a major accounting firm. See 26USC§7525(a)(1), which puts “any federally authorized tax practitioner” in the position of an attorney. How about Registered Tax Return Preparers?

But Tax Court answers one question today: if taxpayer wants to use reasonable cause (Section 6664(c)), and an expert rendered advice that would be privileged, even if the taxpayer doesn’t want to use that advice on the trial, the taxpayer has to give up the privilege and hand over the opinion.

The Order is Humboldt Shelby Holding Corporation and Subsidiaries, Docket No. 25936-07, Judge Goeke. It’s an economic substance case. IRS moves to compel production of the tax opinions which taxpayer got from well-regarded New York City attorneys. “The law firm of Pryor, Cashman, Sherman, and Flynn LLP rendered two legal opinions (Cashman opinions) to petitioner regarding the federal income tax consequences of the aforementioned transactions. Petitioner refuses to produce the Cashman opinions on the basis that they are protected by the attorney-client privilege and work-product doctrine. On September 14, 2012, respondent filed a Motion to Compel Production of Documents with regards to the Cashman opinions.” Order, p. 1.

Taxpayer claims Section 6664(c) reasonable cause umbrella to ward off penalties, but wants to withhold the opinions. Apparently taxpayer has other grounds for showing reasonable cause, and claims they didn’t rely on the opinions. Haven’t we all heard that old song before? I hope Cashman & Co got paid.

No, says Judge Goeke: “In determining whether petitioner is entitled to the reasonable cause exception of section 6664, we must also decide whether petitioner acted in good faith. A good faith determination requires that we consider all information available to petitioner. Accordingly…we believe the Cashman opinions are relevant to such defense whether relied upon by petitioner or not. Therefore, we agree with respondent (IRS) that the claim of privilege regarding the Cashman opinions has been waived.” Order, p. 1 (Citations and footnote omitted).

“Gude faith, ye maunna’ fa’ that”, as Scotland’s greatest remarked. But hand everything over.