In Estate of Marion Levine et al. v. Commissioner, Docket No. 13370-13 (Oct. 26, 2017), the Tax Court granted an estate’s motion for a protective order and limited the Internal Revenue Service’s subpoena duces tecum served on the estate’s attorney and his law firm. The Tax Court ruled that the scope of the subpoena was too broad and the work product privilege protected many of the documents requested.
Notice of Deficiency
Attorney Shane M. Swanson and his law firm, Stinson Leonard Street, created Marion Levine’s estate plan and prepared her estate tax return, which was filed in April 2010. Shane represented Marion’s estate during an audit that led to a notice of deficiency in April 2013. The IRS served a subpoena for documents through the middle of 2017. In 2013, the estate hired Stinson Leonard in anticipation of litigation with the IRS regarding the notice of deficiency.
The estate served Shane and Stinson Leonard with a subpoena as well, requesting documents relating to Marion Levine and her estate from Jan. 1, 2007 to April 22, 2010 (the date Shane filed Marion’s estate tax return). The estate requested the documents to help it with its reasonable cause defense to the penalties the IRS had levied. The IRS argued that by raising a reasonable cause defense of relying on a professional advisor, the estate waived the work product privilege and the documents were discoverable.
Work Product Privilege
The Tax Court noted that the work product privilege exists to allow attorneys a degree of privacy regarding files and their mental impressions. Documents prepared “in anticipation of litigation” are also protected by this doctrine. Documents prepared during an audit, before the IRS issues a notice of deficiency, fall into the category of being prepared “in anticipation of litigation.” Thus, “any documents that Swanson and his firm produced after petitioners retained them specifically for this litigation likely fit within the definition of work product,” stated the Tax Court.
The IRS claimed that the estate waived the work product privilege when it proffered its reasonable reliance defense. To support its argument, the IRS cited Ad Inv. 2000 Fund LLC v. Comm’r, 142 T.C. 248 (2014), a case that held that a good faith defense could waive the attorney-client privilege. However, the Tax Court in the instant case distinguished Ad Inv. in that the IRS was seeking documents that were most likely opinion letters related to a time period prior to the taxpayer filing its return. In this case, the IRS was seeking documents produced after litigation began; thus, the work product doctrine wasn’t waived.
Substantial Need
There’s an exception to the work product doctrine found in Fed. R. Civ. P. 26(b)(3)(A)(ii) and in case law: A party can obtain work product documents if the party shows a “substantial need” for them. In this case, the IRS stated that it had a “genuine need to review Mr. Swanson's files and communications” to rebut the estate’s reasonable cause defense. Under Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002), to support a reasonable cause defense, the estate must show it gave a competent professional all pertinent facts and relied in good faith on his advice when taking the disputed return position. The IRS, however, never explained why anything produced after it mailed the notice of deficiency or after the estate took their return position could possibly lead to evidence that was relevant and admissible to this defense.
Thus, the Tax Court granted the estate’s motion for a protective order and limited the time frame in the subpoena from Jan. 1, 2007 to April 19, 2013. The Tax Court concluded:
The cliché is that subpoenas aren’t for fishing expeditions, see Wis. Psychiatric Servs., Ltd. v. Commissioner, 76 T.C. 839, 846 (1981); see also Rule 70(b) (discovery limited to items “relevant to the subject matter involved in the pending case”), but that’s not quite true. A well-placed baited hook or cast net may well be okay; this kind of large-scale drift-netting is not.
