Two (count ’em, two) years ago I asked whether pleading reliance on Section 6662(e)(3)(B)(i) objectivity was a good tactic. “Whether this is a good tactic remains to be seen,” I wrote in my blogpost “A Note of Sympathy,” 11/14/24. It did work for Amgen back then, according to Judge (then STJ) Jeffrey S. (“High-Rise”) Fried, and it works now for Eaton Corporation & Subsidiaries, Docket No. 2607-23, filed 9/22/26, a special day hereabouts.
Judge Albert G. (“Scholar Al”) Lauber recalls Judge High-Rise Fried’s analysis, and goes along with it, though of course not citing it as precedent, which it can’t be. But note well, practitioner: you can use the reasoning in an order as persuasive and mention the order.
IRS wants privilege waiver on all Eaton’s attorneys and CPAs, as Eaton asserts Section 6662(e)(3)(B)(i) as basis for their good-faith reliance argument to avoid net Section 482 adjustment chops. Eaton specifically does not mention experts, saying they relied on an objective test. IRS agrees, and Judge Scholar Al says it’s “100%” objective, but it still shows state of mind, and that brings in everything.
Judge Scholar Al doesn’t agree that asserting good faith reliance means all privileges are waived.
“We addressed a similar question in a discovery Order issued in Amgen, Inc. v. Commissioner, No. 15631-22. The IRS argued that the taxpayer, by advancing defenses to penalties, had implicitly waived privilege over various documents. We noted that an implied waiver of privilege may occur where the party claiming the privilege raises an issue as to its own knowledge, intent, or state of mind. T.C. No. 15631-22 (Order served Nov. 11 [sic], 2024, at 7). But the taxpayer there, in asserting penalty defenses, ‘ha[d] not pleaded any specific allegations relating to its own knowledge, intent, state of mind, or the reasonableness of its actions.’ And the taxpayer did not ‘rely on privilege[d] communications’ as a basis for its penalty defenses. Ibid. We accordingly ruled that no waiver of privilege had occurred.” Order, at p. 2.
Judge, the issue date of Judge Fried’s order was 11/14/24; 11/11/24 was Veterans’ Day, a public holiday in the District of Columbia. I trust Tax Court was closed, appropriately.
“Reduced to its essentials, respondent’s argument seems to be that a taxpayer is precluded from raising a defense to a transfer-pricing adjustment unless it waives privilege over all communications relating to that issue, even though the taxpayer does not intend to rely on those communications as a basis for its defense. The taxpayer would thus face a dilemma: it would have to waive privilege as a condition of exercising its right to assert a penalty defense, regardless of the nature of the defense it seeks to assert. In practical effect, this would impose a huge burden on taxpayers’ ability to secure privileged advice from their lawyers and tax advisors. This does not strike us as an appealing argument. It is especially unappealing on the facts of this case, where the penalty defense Eaton seeks to raise is 100% objective and in no way implicates its state of mind.” Order, at pp. 2-3. (Footnote omitted, but it says the order I blogged back on 4/6/15 raised a general good faith reliance defense, not the Section 6662(e)(3)(B)(i) defense, so doesn’t apply. See my blogpost “Never Call Retreat,” 4/6/15.)
Chaps, read my blog. I cover all this good stuff.
