Today returning guest blogger, Joni Larson, writes about a recent Tax Court case involving a failure to successfully invoke the attorney-client privilege. As with her last post, she takes us into the practical world of transforming information into evidence. Sheis the perfect person to discuss the privilege because she authors the book on evidentiary issues in Tax Court. She teaches at Western Michigan University – Cooley Law School where she is also the Director of the Graduate Tax Program. Keith
One of the most well-known privileges is the attorney-client privilege. Rule 501 of the Federal Rules of Evidence allows common law privileges, such as the attorney-client privilege, to be claimed in the Tax Court (see also IRC section 7453). The privilege protects communications made in confidence by a client to an attorney when the client is seeking legal advice. It also applies to confidential communications made in the opposite direction, from the attorney to the client, if the communications contain legal advice or reveal confidential information on which the client sought advice. The purpose of the privilege is to allow for full and frank communications between attorneys and their clients—the client is able to fully inform the lawyer and the lawyer can be frank and honest with his advice to the client. See Upjohn Co. v. United States, 449 U.S. 383, 389-90 (1981).
The privilege is not an absolute privilege that covers every communication between the attorney and the client. It does not apply to underlying facts, business or other non-legal advice given by the attorney (see Ford v. Commissioner, T.C. Memo. 1991-354), information received from third parties, information given to the attorney that the attorney is expected to disclose to a third party, the identity of a client, or the fact that an individual has become a client.read more...
If a party wants to claim that a communication is covered by the attorney-client privilege, he has the burden of establishing it applies. See Fu Inv. Co. v. Commissioner, 104 T.C. 408, 415 (1995). “Blanket claims of privilege without any allegations that the production of documents requested would reveal, directly or indirectly, confidential communications between the taxpayer and the attorney, or without any allegations that the particular documents were related to the securing of legal advice, are insufficient. . . .”See Bernardo v. Commissioner, 104 T.C. 677, 682 (1995).
The privilege may be waived. If the client voluntarily discloses the information or fails to take precautions to preserve the confidentiality of the privileged material, the privilege is waived. See Moore v. Commissioner, T.C. Memo. 2004-259. While disclosing the actual communication with the attorney will waive the privilege, disclosing only the subject of the communication will not. See WFO Corp. v. Commissioner, T.C. Memo. 2004-186.
This tension between, on the one hand, disclosing enough information to satisfy the burden of proving the privilege applies and, on the other, not disclosing so much information that the privilege is considered waived, provides an interesting challenge for those claiming the privilege. In Pacific Management Group v. Commissioner, T.C. Memo. 2015-97, this tension was the focus of the Tax Court’s decision regarding a motion to compel production of documents.
In 1999 the taxpayers met with an attorney, Mr. Ryder, who pitched to them a program designed to minimize their tax liability; the taxpayers elected to participate. Several years down the road, the Commissioner contended the program lacked economic substance, the taxpayers disagreed, and the parties ended up in Tax Court.
Over the years, Mr. Dunning, an attorney, had provided legal, corporate, and business advice to the taxpayers. Prior to trial, counsel for Commissioner served a Subpoena Duces Tecum on Mr. Dunning. He appeared at trial and produced some of the requested documents but declined to produce all. He claimed the documents he did not produce (mostly emails), were protected by the attorney-client privilege. For the 2,000 or so emails he claimed were privileged, he supplied a privilege log that stated who the email was from, name or email address of to whom it was sent, name or email address of who was copied, and the date and time sent. No other information was provided.
A few days into the trial, the Commissioner filed a Motion to Compel Production of Documents Responsive to a Subpoena Duces Tecum Served on Steven Dunning and the court heard oral arguments on the motion. Judge Lauber indicated he was inclined to grant the motion because the privilege log was inadequate.
To be adequate, a privilege log must set forth each element of the privilege and be sufficient to establish that the confidence was by a client to an attorney for the purpose of obtaining legal advice or by the attorney to the client where the communication contains legal advice or reveals confidential information about the client’s request for advice. Mr. Dunning’s log did not contain any information about the subject of the email, describe the contents of the email, or include facts as to why the communication was intended to be confidential.
Mr. Dunning was in the courtroom on the first day of trial to hear counsel for Commissioner state he was going to challenge the log as insufficient, effectively alerting Mr. Dunning to the fact that he needed to prepare a more detailed log. During the oral arguments, Judge Lauber noted that Mr. Dunning had been put on notice that the Commissioner considered the log inadequate and that Mr. Dunning had been given a second bite at the privilege log apple, but had chosen not to take it.
Because Mr. Dunning was the corporate and general business attorney for the taxpayers and had served as such for a long time, it was possible the email communications contained general business advice or discussed transactional matters. If they did, because they did not contain legal advice, the communications would not be protected. The minimal information supplied in the privilege log made it impossible for the Court to determine what the communications were about. Having failed to meet his burden of proof, Mr. Dunning’s emails were not protected by the attorney-client privilege and the Commissioner’s Motion to Compel was granted.
It could be that Mr. Dunning decided not to provide a more detailed privilege log because, even if he had, the emails would not have been protected. In its opinion, the court noted that the Commissioner also had argued that the taxpayers had waived the privilege, presumably by disclosing the information to a third party. No further information about the suggested waiver was provided.
Noteworthy, the privilege also would have been waived by the taxpayers if they affirmatively placed Mr. Dunning’s advice at issue. The Tax Court uses a three-prong test to determine if the privilege is waived by a taxpayer’s affirmative actions. First, the taxpayer’s assertion of the privilege must have been the result of some affirmative act, such as the taxpayer filing suit in Tax Court. Second, through this affirmative act, the taxpayer put the protected information at issue by making it relevant to the case. Finally, application of the privilege would have denied the Commissioner access to information vital to his defense. See Karme v. Commissioner, 73 T.C. 1163, 1184 (1980), aff’d 673 F.2d 1062 (9th Cir. 1982); Hartz Mountain Industries, Inc. v. Commissioner, 93 T.C. 521, 522–23 (1989).
With few facts about the underlying controversy in Pacific Management disclosed in the opinion, it is not possible to determine if the communications had been disclosed to third parties or if the taxpayers had placed Mr. Dunning’s advice at issue. Perhaps most curious of all is the fact that Mr. Ryder, presumably the same Mr. Ryder who pitched the tax-savings structure, is representing the taxpayers before the Tax Court. It will be interesting to see how his role in the case plays out.