United States: Tax Court Rejects Claim Of Attorney-Client Privilege And Orders Release Of Opinion Letters

On April 16, 2014, the Tax Court issued an opinion holding that two partnerships, AD Investment 2000 Fund LLC and AD Global 2000 Fund LLC, were required to release attorney opinion letters addressing "Son-of-BOSS" tax shelter transactions.¹

The IRS had asserted section 6662 accuracy-related penalties against the partnerships with respect to any underpayment of tax as a result of the tax shelter transactions. The partnerships argued that the section 6662 penalties did not apply because they had a reasonable belief that their tax treatment of the transactions was more likely than not the proper tax treatment. The IRS responded by moving to compel the production of six opinion letters provided to the partnerships by the law firm Brown & Wood LLP. The partnerships claimed that the opinion letters, which addressed whether it was more likely than not that the anticipated tax benefits from the transactions would be upheld for US federal income tax purposes, were protected by attorney-client privilege.

Under Treas. Reg. § 1.6662-4(g)(4), the reasonable belief defense to penalties can be satisfied by either: (i) the taxpayer analyzing the facts and authorities and concluding in good faith there is a greater than 50-percent likelihood that the tax treatment of the item will be upheld, or (ii) the taxpayer reasonably relying in good faith on the opinion of a professional tax advisor that analyzes the facts and authorities and concludes there is a greater than 50-percent likelihood that the tax treatment of the item will be upheld. The partnerships claimed that, because they were relying on their own tax analysis, rather than the analysis of a professional tax advisor, the partnerships did not waive attorney-client privilege with respect to the advice in the opinion letters when they asserted their reasonable belief and good faith as a defense to the penalties.

The Tax Court found that the partnerships' legal knowledge, understanding and beliefs were placed into contention as a result of the partnerships' use of the reasonable belief and good faith defense, and the court determined that the opinion letters may address such knowledge, understanding and beliefs. The court noted that each partnership received the opinions well before the filing of their 2000 tax returns, and the partnerships did not claim that the opinions were ignored.

Because the opinion letters were relevant to the partnerships' reasonable beliefs and good faith, the court held that the partnerships forfeited the attorney-client privilege with respect to the opinion letters. The court concluded that if the partnerships continued to assert their reasonable belief and good faith as a defense against the section 6662 penalties, "it would be unfair to deprive the [IRS] of knowledge of the contents of the opinions and the opportunity to put those opinions into evidence."²

Footnotes

1 Ad Investment 2000 Fund LLC et al. v. Commissioner, 142 T.C. No. 13. A "Son-of-BOSS" transaction is a variant of the Bond and Options Sale Strategy (BOSS) tax shelter, and the purpose of such transaction is to create artificial tax losses to offset income from other transactions.

2 Id.

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