Attorney-Client Privilege: The Tax Court Looks at Implied Waiver.

While the attorney-client privilege provides protection for communications between lawyers and clients, that protection can be lost through waiver. The most obvious example is an express waiver, but courts also recognize that a waiver can occur in situation where an individual essentially puts privileged communications in issue by pleading a claim or defense. Last week, the Tax Court looked at implied waiver of privilege in the context of a challenge to penalty determinations. AD Inv. 2000 Fund LLC v Comm’r, 2014 U.S. Tax Ct. LEXIS 13 (Apr. 16, 2014).

AD Investment arose in a consolidated partnership level proceeding involving two LLCs that elected partnership treatment and engaged in a “Son of BOSS” tax shelter. The government sought to compel production of a series of opinion letters that had been rendered in connection with the tax shelter transaction; the motion was premised on the notion that the partnerships had waived the privilege by challenging the substantial understatement penalty with defenses, such as reasonable cause, that turn on their beliefs or state of mind. 2014 U.S. Tax Ct. LEXIS 13, slip op. at *3-*4. In response, the partnerships asserted that they could satisfy their burden on their defenses without relying upon the opinions and, consequently, that no waiver had occurred.

Under the Treasury Regulations, a taxpayer can satisfy its burden of establishing reasonable cause in the context of a substantial understatement penalty two ways:

  • by conducting its own analysis of the facts and relevant authorities and reasonably conclude in good faith that the tax position is more likely than not to be upheld, Treas. Reg. § 1.6662-4(g)(i)(A); or
  • by reasonably relying in good faith upon an opinion from a professional advisor if the opinion rests upon the advisor’s analysis of the relevant facts and authorities and clearly states that it is more likely than not that the tax position will be upheld, Treas. Reg. § 1.6662-4(g)(i)(B).

Since the partnerships could contest the substantial understatement penalty without the benefit of a tax opinion, their argument against implied waiver appeared to be at least plausible. The Tax Court, however, was not persuaded. In the court’s view, even if the partnerships elected to sustain their defense to the penalty on the basis that they had conducted their own tax analysis, the opinions that the partnerships had received were relevant that issue, and since the defense put the partnership’s legal knowledge in issue, fairness dictated that the opinions be provided to the government. 2014 U.S. Tax Ct. LEXIS 13, slip op. at *16-*18.

Jim Malone is a tax lawyer in Philadelphia. © 2014, Malone LLC.

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