Kearney Partners Fund, LLC v. United States of America
Filing
183
ORDER that Plaintiffs' Partial Objection to Magistrate Judge's Order Denying the Protective Motion to Compel by Plaintiffs is GRANTED IN PART AND DENIED IN PART;) United States of America's Partial Objection to Order Dated February 4, 2013 (D.E. 157) Granting in Part and Denying in Part Plaintiffs' Motion for Clarification and Reconsideration (D.E. 148) is GRANTED IN PART AND DENIED IN PART. Defendant has up to and including May 17, 2013 to produce the following documents: IRS-LS-00155-00158, ADDKEARN-00048, ADDKEARN-00060, ADDKEARN-00122, ADDKEARN-00128, ADDKEARN-00132, ADDKEARN-00135-136, ADDKEARN-00138, ADDKEARN-000256-262, AC00231, AC00248, AC00419, AC00800-801, AC00802-00812, ADDK3-013-015, LDG-0010, LDG-0011, LD-00106-00110, LDG-0013, and 16-8 to 16-9 Signed by Judge Roy B. Dalton, Jr. on 5/10/2013. (VMF)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
FORT MYERS DIVISION
KEARNEY PARTNERS FUND, LLC,
by and through
LINCOLN PARTNERS FUND, LLC,
Tax Matters Partner, et al.,
Plaintiffs,
vs.
Case No. 2:10-cv-153-FtM-SPC
THE UNITED STATES OF AMERICA,
etc.
Defendant.
Order
This cause is before the Court with regard to Plaintiffs’ Partial Objection to
Magistrate Judge’s Order Denying the Protective Motion to Compel by Plaintiffs (Doc.
No. 149), filed on December 27, 2012, Defendant’s Opposition (Doc. No. 152), filed on
January 14, 2013, the United States of America’s Partial Objection to Order Dated
February 4, 2013 (D.E. 157) Granting in Part and Denying in Part Plaintiffs’ Motion for
Clarification and Reconsideration (D.E. 148) (Doc. No. 169), filed on February 21, 2013,
and Plaintiffs’ Opposition (Doc. No. 172 ), filed on March 7, 2013. After a careful review
of the parties’ submissions and the applicable law, the Court grants in part and denies in
part both parties’ partial objections.
BACKGROUND
On September 21, 2013, Plaintiffs filed a Protective Motion to Compel the
Production of Documents on Privilege Logs and Memorandum of Law in Support
(“Plaintiffs’ Motion to Compel”) (Doc. No. 112), which sought the production of sixty1
eight items listed on Defendant’s privilege logs and challenged the United States’
assertion of attorney-client, deliberative process, and work product privileges.
On
November 26, 2012, the Court (Doc. No. 139) required Defendant to produce the
requested documents for an in camera review. On December 13, 2012, Magistrate
Judge Chappell denied Plaintiffs’ Motion to Compel and found that there was no good
cause to support a claim for attorney-client privilege, but upheld the assertion of the
deliberative process privilege. (Doc. No. 147.)
On December 27, 2012, Plaintiffs filed a Motion for Clarification and/or
Reconsideration of the Court’s December 13, 2012 Order (“Motion for Clarification”)
(Doc. No. 148), which declared their intent to challenge the Magistrate’s ruling and
asked the Court to amend its Order to require the United States to produce those
documents for which only the attorney-client and/or attorney work product privileges had
been claimed. On February 4, 2013, the Magistrate issued a new Order (Doc. No. 157)
granting in part and denying in part Plaintiffs’ Motion to Compel and requiring the
production of 15 documents for which Defendant had asserted only the attorney-client
privilege.1 The February 4, 2013 Order has since been stayed pending the resolution of
the parties’ objections. (See Doc. No. 168.) Both parties have filed partial objections to
the Magistrate Judge’s February 4, 2013 Order.
STANDARD OF REVIEW
1
Plaintiffs have since clarified that there are four additional documents that were subject
to only the attorney-client privilege: AC00419, ADDKEARN-000122, ADDKEARN000128, and ADDKEARN-000135-136. Defendant initially asserted the attorney-client
and deliberative process privileges for these four documents but later withdrew the
deliberative process privilege. (See Doc. No. 127, p. 10, n. 4.) Judge Chappell was not
aware of this and did not order production of the four documents. (See Doc. No. 157, p.
5.) Thus, the Court will examine these additional documents when evaluating the
parties’ objections to the attorney-client privilege.
2
The parties filed objections pursuant to Rule 72(a) of the Federal Rules of Civil
Procedure. To prevail, they must show that the conclusions in the Order are clearly
erroneous or contrary to law. See FED. R. CIV. P. 72(a); 28 U.S.C. § 636(b)(1)(A); Nat’l
Ass’n for the Advancement of Colored People, ex rel. Fla. State Conference of
Branches of NAACP v. Fla. Dep’t of Corr., 122 F. Supp. 2d 1335, 1337 (M.D. Fla.
2000).
Findings of fact “are ‘clearly erroneous’ when, although there is evidence to
support [them], the reviewing court on the entire evidence is left with the definite and
firm conviction that a mistake has been committed.” Johnson & Johnson Vision Care,
Inc. v. 1-800 Contacts, Inc., 299 F.3d 1242, 1246 (11th Cir. 2002) (citing Univ. of Ga.
Athletic Ass’n v. Laite, 756 F.2d 1535 (11th Cir. 1985)). Under the clearly erroneous
standard of review, the magistrate’s findings should not be rejected even if a reviewing
court could have decided the issue differently. Anderson v. City of Bessemer City, N.C.,
470 U.S. 564, 574 (1985). “When there are two permissible views of the evidence, the
factfinder’s choice between them cannot be clearly erroneous.”
Elsea, 71 F.3d 837, 843 (11th Cir. 1996).
Caban-Wheeler v.
In contrast, a review of the Magistrate
Judge’s application of the law is de novo, as the “application of an improper legal
standard . . . is never within a court’s discretion.” Johnson & Johnson Vision Care, Inc.,
299 F.3d at 1246. A finding is considered contrary to law if it misapplies the relevant
statutes, case law, or rules of procedure. Tompkins v. R.J. Reynolds Tobacco Co., 92
F. Supp. 2d 70, 74 (N.D.N.Y. 2000).
DISCUSSION
1. Plaintiffs’ Objections to the February 4, 2013 Order
3
Deliberative Process Privilege
a. Were the Documents Privileged
Plaintiffs object to the Magistrate’s finding that the documents at issue were
subject to the deliberative process privilege.
The privilege protects from disclosure
“documents
recommendations,
reflecting
advisory
opinions,
and
deliberations
comprising part of a process by which governmental decisions and policies are
formulated.” Dep’t of Interior v. Klamath Water Users Protective Ass’n, 532 U.S. 1, 8
(2001) (internal quotation marks omitted).
In order for the privilege to apply, a
document must be both “pre-decisional, i.e., ‘prepared in order to assist an agency
decision maker in arriving at his decision,’ . . . [and] deliberative, ‘a direct part of the
deliberative process in that it makes recommendations or expresses opinions on legal
or policy matters.’” Miccosukee Tribe of Indians of Fla. v. United States, 516 F.3d 1235,
1263 (11th Cir. 2008) (quoting Renegotiation Bd. v. Grumman Aircraft Eng’g Corp., 421
U.S. 168, 184 (1975)).
Under the first prong, the Court must identify privileged communications that
precede an agency’s final determination or outcome on a policy or legal matter.2
Miccosukee, 516 F.3d at 1263. However, a document at the time of preparation may
lose privileged status if “adopted, formally, or informally, as the agency position on an
issue or is used by the agency in its dealings with the public.” Coastal States Gas Corp.
v. Dep’t of Energy, 617 F.2d 854, 866 (D.C Cir. 1980); see also N.L.R.B. v. Sears,
Roebuck & Co., 421 U.S. 132, 161 (1975). Moreover, although the Government need
not tether a pre-decisional communication to a specific, discrete, or final decision, id., at
2
Plaintiffs emphasize that they are not asking for documents relating to “policy matters” or opinions
regarding “policy formation,” and thus appear to mistakenly suggest that the deliberative process privilege
only applies to policy determinations. (See Doc. No. 149, p. 17.)
4
151, “an overly lax construction of the term ‘predecisional’ submerges the rule of
disclosure under exemption.” City of Va. Beach v. U.S. Dep’t of Commerce, 995 F.2d
1247, 1254 (4th Cir. 1993).
As for the second prong, “deliberative” documents typically reflect the “give-andtake of the consultative process” that is antecedent to final agency action. Coastal, 617
F.2d at 866. The privilege extends to recommendations, draft documents, proposals,
suggestions, and other subjective documents which reflect the personal opinions of the
writer rather than the policy of the agency. Fla. House of Representatives v. United
States Dep't of Commerce, 961 F.2d 941, 945 (11th Cir.1992).
However, factual
findings and conclusions are not protected, unless disclosure of the factual material
would reveal the deliberative process or where the factual material is so inextricably
intertwined with the deliberative material that meaningful segregation is not possible.
Miccosukee Tribe, 516 F.3d at 1263; Pacific Gas & Elec. Co. v. United States, 70 Fed.
Cl. 128, 133 (Fed. Cl. 2006).
When examining the deliberative process privilege, courts are mindful of several
issues: (1) the nature of the decision-making authority vested in the office or person
issuing the disputed document. Taxation with Representation Fund v. Internal Revenue
Service, 646 F.2d 666, 679 (D.C. Cir. 1981); see also Sears, 421 U.S. at 155
(distinguishing between a non-privileged disclosure by the General Counsel with the
authority to reach a final decision on a matter and a lower level official’s decision to file
a complaint which must be approved by superiors and is therefore privileged); (2) the
flow of documents along a decision-making ladder.
For example, “[i]ntra-agency
memoranda from ‘subordinate’ to ‘superior’ on an agency ladder are likely to be more
5
‘deliberative’ in character than documents emanating from superior to subordinate.”
Schlefer v. United States, 702 F.2d 233, 238 (D.C. Cir. 1983); and (3) the character of
the agency documents.
For instance, “deliberative” documents tend to have less
precedential weight than final authoritative statements of agency policies, id. at 241, and
are generally more candid or personal in nature. See United States v. Nixon, 418 U.S.
683, 705 (1974) (“Human experience teaches that those who expect public
dissemination of their remarks may well temper candor with a concern for appearances
and for their own interests to the detriment of the decisionmaking process.”). The party
asserting the privilege bears the burden of justifying its application, and the privilege is
narrowly construed. Pacific Gas & Elec., 70 Fed. Cl. at 133.
With these considerations in mind, the Court has conducted an in camera review
of the documents in question and concludes that with the exception of one particular
Internal Revenue Service (“IRS”) memorandum, they fall under the protection of the
deliberative process privilege. The documents are both pre-decisional and deliberative.
They consist of intra-agency opinions and recommendations of IRS investigators,
examiners, and counsel at the Office of Chief Counsel for the IRS. They reflect the
“give-and-take process” of the IRS’s deliberations that preceded Defendant’s final
determinations on Plaintiffs’ tax obligations concerning the FOCus partnerships. There
are preliminary drafts of internal memoranda discussing Plaintiffs’ tax obligations and
various
e-mails
between
IRS
officials
providing
their
opinions,
views,
and
recommendations regarding the application of accuracy-related penalties and Plaintiffs’
compliance with Announcement 2002-2.
Plaintiffs appear to object that the deliberations between the IRS officials are not
6
at a high enough level for the privilege to apply. (See Doc. No. 149, p. 17 (“Plaintiffs are
not seeking the White House Chief of Staff’s memoranda to the President regarding
policy decisions.
Instead, Plaintiffs are only seeking documents relating to an
examination of their tax returns.”)). That is irrelevant. What matters is that nearly all of
the communications occurred during the Agency’s audit of Plaintiffs’ tax returns, but
prior to a final decision or conclusion appears to have been reached. Moreover, the
documents and communications reveal an impersonal nature and tone evinced by
various edits, comments and notes authored by auditors, counsel, and other IRS
officials. Defendant has a compelling interest in taking part in this consultative intraagency process without the fear that the pre-decisional thoughts, recommendations,
and opinions of its officials will be disclosed. See Moye, O’Brien, O’Rourke, Hogan &
Pickert v. Nat’l R.R. Passenger Corp., 376 F.3d 1270, 1279 (11th Cir. 2004) (concluding
that the deliberative process privilege applies to “the entire body of collaborative work
performed by the auditors . . . ; the staff auditors’ notes and/or memoranda summarizing
site visits, interviews, meetings, and/or telephone conversations . . . ; and suggestions
and critiques from the auditors’ peers and superiors, including recommendations for
further action.”).
However, “[c]haracterizing the documents as ‘predecisional’ simply because they
play into an ongoing audit process would be a serious warping of the meaning of the
word.”
Coastal States, 617 F.2d at 869.
The Court holds that Defendant has
impermissibly asserted the deliberative process privilege with respect to the legal
memorandum that spans Bates Nos. ADDKEARN-00256-00262. The document does
not appear to be either pre-decisional or deliberative. It is a legal opinion by Debra A.
7
Butler, the Associate Chief Counsel (Procedure & Administration) in the Office of Chief
Counsel, Internal Revenue Service to the Associate Area Counsel in the Large & MidSize Business division. The memorandum is in response to a request for assistance
regarding whether accuracy-related penalties may be imposed on taxpayers
notwithstanding their disclosure of their participation in the FOCus partnership.
It
appears to be the type of legal document “relied upon by recipients as statements of law
and public policy that have not been found to be ‘pre-decisional.’” Jones v. Murphy, 256
F.R.D. 510, 517 (D. Md. 2008).
For example, in Tax Analysts v. Internal Revenue Service, 117 F.3d 607 (D.C.
Cir. 1997), the D.C. Circuit dealt with similar legal memoranda that were the subject of
the deliberative process privilege. The documents were labeled “Field Service Advice
Memoranda (“FSAs”), and were issued by the Office of Chief Counsel for the IRS to
field personnel. Id. at 608. Although the memoranda were not binding upon the field
personnel, the FSAs were routinely used and relied on by field personnel as statements
of law.
Id. at 617.
As the court reasoned, the documents were “produced in the
process of formulating policy,” and were “themselves statements of an agency’s legal
position, and as such, cannot be viewed as predecisional.” Id. Because the FSAs
represented “the considered view of the Chief Counsel’s national office on significant
legal issues, FSAs d[id] not reflect the ‘give and take’ that characterizes deliberative
materials.” Id.
Similarly, the memorandum here reflects the Office of the Chief Counsel’s
statements of law and assessments of Plaintiffs’ tax obligations. The opinion appears to
be in its final form, with no visible marks or edits.
8
The tone of the document is
impersonal with distinct conclusion, facts, and law and analysis sections. Although the
memorandum indicates that it may not be used or cited as precedent, the document is a
representation of the IRS’s legal position in this case.3
And even if the document
precedes the IRS’s final decisions in Plaintiffs’ case, there is no indication that it
precedes the Agency’s final legal position.4
See Tax Analysts, 117 F.3d at 617
(“Although FSAs may precede the field office’s decision in a particular taxpayer’s case,
they do not precede the decision regarding the agency’s legal position.”); see also
Coastal States, 617 F.2d at 868 (denying the deliberative process privilege where
“[t]here is nothing subjective or personal about the memoranda; they are simply
straightforward explanations of agency regulations in specific factual situations.”).
For these reasons, the Court concludes that the deliberative process privilege
does not apply to the following document: ADDKEARN-00256-00262. Therefore, the
Court grants in part and denies in part Plaintiffs’ objections on this issue.
b. Were the Proper Procedures Followed When Invoking the Deliberative
Process Privilege
Plaintiffs argue that Defendant failed to satisfy the procedural requirements for
invoking the deliberative process privilege. Courts “carefully scrutinize[ ] the manner of
assertion of the [deliberative process] privilege” and require that “the party resisting
discovery must meet several procedural requirements.” Pacific Gas & Elec., 70 Fed. Cl.
at 134 (internal quotation marks omitted). First, the head of the agency that has control
3
Defendant’s Litigation Guideline Memorandum for asserting the deliberative process privilege
acknowledges that “a communication issued by the Chief Counsel is much more likely to be a statement
of policy or a final decision than if it is issued by a docket attorney.” (See Doc. No. 127-15, p. 6.)
4
There is no explicit evidence that the memorandum was formally adopted as or incorporated by
reference into the IRS’s final position on Plaintiffs’ tax obligations, including the application of accuracyrelated penalties. However, the positions espoused in the memorandum are nearly identical to the IRS’s
ultimate determination in this case. See Coastal States, 617 F.2d at 866 (noting that “a document at the
time of preparation may lose privileged status if “adopted, formally, or informally, as the agency position
on an issue or used by the agency in its dealings with the public.”).
9
over the requested document must assert the privilege after personal consideration. Id.
Alternatively, “the head of an Agency can, when carefully undertaken, delegate authority
to invoke the deliberative process privilege on the Agency’s behalf.” Marriott Intern.
Resorts, L.P. v. United States, 437 F.3d 1302, 1308 (Fed. Cir. 2006). Second, the party
seeking protection “must state with particularity what information is subject to the
privilege.” Walsky Const. Co. v. United States, 20 Cl. Ct. 317, 320 (1990). Third, “the
agency must supply the court with precise and certain reasons for maintaining the
confidentiality of the requested document.”
Id. at 320 (internal quotation marks
omitted). Finally, the agency must establish that certain information is privileged at the
time the privilege is asserted. Pacific Gas & Elec., 70 Fed. Cl. at 135.
Defendant submitted an affidavit from Richard G. Goldman which declared his
authority to invoke the deliberative process privilege on behalf of the IRS and provided
the reasons for the Agency’s privilege claims. (See Doc. No 127-13). Plaintiffs object
that the Goldman Affidavit is defective because it was not executed contemporaneously
with Defendant’s privilege log. They maintain that Defendant’s trial counsel initially and
impermissibly asserted the privilege.
However, courts have rarely rejected the Government’s deliberative process
privilege claims because of a single procedural deficiency. Dairyland Power Co-op. v.
United States, 77 Fed. Cl. 330, 340 (Fed. Cl. 2007). Plaintiffs rely on three unavailing
cases to support their argument. In Pacific Gas & Electric Co., 71 Fed. Cl. at 208-10,
the court held that formal assertions of the deliberative process privilege, including
supporting affidavits from government officials with the authority to assert the privilege,
should be executed at the time the privilege is asserted, not in response to a motion to
10
compel. Nevertheless, the court permitted defendant to rely on its untimely affidavit. Id.
at 10 (“However, after reviewing a number of the ex parte affidavits and documents . . .,
the court exercises its discretion . . . to afford defendant the opportunity to assert the
deliberative process privilege . . . .”). In Mobil Oil Corp. v. Dep’t of Energy, 102 F.R.D. 1
(N.D.N.Y. 1983) and Alpha I, L.P. ex rel. Sands v. United States, 83 Fed. Cl. 279 (Fed.
Cl. 2008), the courts found the Government’s privilege claim defective due to the failure
to submit an affidavit, not the timing of the submission.5 In fact, several courts have
held that an affidavit in support of the deliberative process privilege may be produced in
response to a motion to compel. See Huntleigh USA Corp. v. United States, 71 Fed. Cl.
726, 727 (Fed. Cl. 2006). Accord In re Sealed Case, 121 F.3d 729, 741 (D.C. Cir.
1997); Solis v. New China Buffet #8, Inc., No. 5:10-CV-78 (CAR), 2011 WL 2610296, at
*2 (M.D. Ga. July 1, 2011); Abramson v. United States, 39 Fed. Cl. 290, 294, n. 3
(1997).
Accordingly, the Court will not deny Defendant’s deliberative process privilege
claims on this lone procedural deficiency. Plaintiffs’ objection on this issue is denied.
c. Need for Disclosure v. Need for Confidentiality
Plaintiffs maintain that even if the deliberative process privilege applies, their
substantial interests in disclosure warrant the production of the documents.
The
deliberative process privilege is a qualified privilege and may be overcome where there
is a sufficient showing of a strong need that outweighs the reasons for non-disclosure.
In re Sealed Case, 121 F.3d at 737. This needs determination is to be made on a caseby-case basis using a fresh balancing of competing interests, taking into account factors
5
In Alpha, the court acknowledged Defendant’s obligation to submit an affidavit from an agency official at
the time privilege is first asserted, but did not rely on this particular deficiency to deny the privilege claim.
83 Fed. Cl. at 290.
11
such as “the relevance of the evidence,” “the availability of other evidence,” “the
seriousness of the litigation,” “the role of the government,” and the “possibility of future
timidity by government employees.” Id. at 737-38. Plaintiffs have not established a
substantial need that overcomes the privilege.
The crux of Plaintiffs’ objection is that the requested evidence is critical to: (1) its
Motion to Dismiss, which relates to whether Sarma lawfully “opted out” of these
partnership proceedings; and (2) their Summary Judgment Motion, which argues that
the IRS failed to follow its own procedures for determining Plaintiffs’ tax obligation,
namely whether Plaintiffs properly disclosed their involvement in FOCus in accordance
with Announcement 2002-2.
The Court has already denied Plaintiffs’ Motion to Dismiss and the privileged
documents will not impact that determination.6 As for the Summary Judgment Motion,
Plaintiffs argue that the documents at issue relate to their tax obligations in this case,
their burden of proving that the Final Partnership Administrative Adjustments (“FPAA”)
issued are erroneous, unfair, and arbitrary, and their theory that the IRS has failed to
follow its internal procedures requiring the Director of Field Operations to make a final
determination of whether accuracy-related penalties should be imposed. However, as
the Court’s contemporaneous Order addressing the parties’ cross-motions for summary
judgment explains, the IRS’s internal policies for approving penalties are non-binding
6
The Motion to Dismiss concerned the IRS’s obligation to provide a timely Notice of Beginning of
Administrative Proceeding (“NBAP”) for the partnership examination that precipitated this case. (Doc. No.
107.) The Court held that even if Defendant possessed enough information to notify Sarma, it was under
no obligation to do so because of Plaintiffs’ failure to provide the names, addresses, and profit interests of
partnerships and indirect partners to the IRS in one of two forms prescribed by the IRS Code. (Doc. No.
178, pp. 12-13.) The documents at issue do not indicate that Plaintiffs provided this information. Indeed,
Plaintiffs do not even dispute Defendant’s assertion that the information was not provided in one of the
two required manners. (See Doc. No. 128.) Accordingly, the requested documents are not relevant to
and will not alter the Court’s denial of the Motion to Dismiss.
12
and immune from judicial review. Moreover, Plaintiffs have misconstrued their burden
in this case. The Court must conduct a de novo review of the FPAAs issued by the IRS.
As Sealy Power, Ltd. v. Comm’r., 46 F.3d 382, 385–86 (5th Cir.1995) explains:
an FPAA is the functional equivalent of a notice of deficiency . . . . A
determination of deficiency issued by the Commissioner is generally given
a presumption of correctness, which operates to place on the taxpayer the
burden of producing evidence showing that the Commissioner’s
determination is incorrect. Several courts have recognized, however, that
they need not give effect to the presumption of correctness and may
instead shift the burden from the taxpayer to the Commissioner when the
notice of deficiency is determined to be arbitrary or excessive. In these
cases, the notice of deficiency involved a determination of unreported
income . . . . [However], [e]ven while carving out this exception to the
general rule of presuming the determination correct, courts have
reaffirmed their reluctance to look behind the notice of deficiency to
determine whether the Commissioner’s determination is arbitrary.
Because Plaintiffs’ case involves allegedly improper tax deductions, not unreported
income, the Court will not look behind the FPAA to examine the IRS’s factual and legal
basis of making tax adjustments. Id.
Plaintiffs respond that the Court has already determined the relevance of the
requested documents in its prior Order granting in part Plaintiffs’ initial Motion to Compel
and concluding that the documents due are “directly related to Plaintiffs’ case and
therefore relevant.” (Doc. No. 91, pp. 5-6.) However, that determination was made in
the context of evaluating the relevance of a general discovery request, a burden far less
onerous than establishing a compelling need for the evidence that overcomes the
deliberative process privilege. Compare Fed. R. Civ. P. 26(b) (“Relevant information
need not be admissible at the trial if the discovery appears reasonably calculated to
lead to the discovery of admissible evidence”), and e.g. Pacific Gas & Electric Co., 71
Fed. Cl. at 211 (holding that plaintiff has to make a showing of substantial need in order
13
to succeed in compelling production of documents as to which the government invoked
the deliberative process privilege); Moreland Props, LLC v. City of Thornton, No. 07-cv00716-EWN-MEH, 2007 WL 2523385, at *3 (D. Colo. Aug. 31, 2007) (declaring that the
deliberative process privilege should be overridden only with a “strong showing by the
party seeking to overcome the privilege that the requested information is very important
to the proper resolution of its case.”)
In light of Plaintiffs’ failure to demonstrate the necessary relevance of the
documents at issue and Defendant’s compelling interest in maintain the confidentiality
of its deliberations, the Court denies Plaintiffs’ objection on this issue. In sum, the Court
finds that the deliberative process privilege applies to all documents for which the
privilege was asserted except for ADDKEARN-00256-00262.
Work Product Privilege
Plaintiffs’ final objection is that Defendant did not specifically address their
assertion that the work-product privilege was waived.
In their Motion to Compel,
Plaintiffs argued that the IRS waived the attorney-client and work product protection
under the sword-shield doctrine when Defendant withheld privileged documents while
also relying on them to defend against Plaintiffs’ claims. See, e.g., Allstate Ins. Co. v.
Levesque, 263 F.R.D. 663, 667 (M.D. Fla. 2010) (“Under the sword and shield doctrine,
a party who raises a claim that will necessarily require proof by way of a privileged
communication cannot insist that the communication is not privileged.”).
In their
Opposition, Defendant responded inter alia that it has not waived the attorney-client
privilege because it has not proffered and will not proffer the documents to support any
of its claims or defenses. Defendant’s arguments apply with equal force to the work
14
product privilege even if Defendant did not specifically say so.
Semantics aside, Plaintiffs have asserted a nearly identical argument in their
Motion for Summary Judgment. The Court independently rejects the argument for the
reasons described in the Order addressing the parties’ cross-motions for summary
judgment.
2. Defendant’s Objections to the February 4, 2013 Order
Defendant objects to the Magistrate’s holding that the attorney-client privilege
does not apply to the requested documents. The Court reviews Defendant’s objection
with respect to the following 20 documents: IRS-LS-00155-00158, ADDKEARN-00048,
ADDKEARN-00060,
ADDKEARN-00122,
ADDKEARN-00135-136,
ADDKEARN-00128,
ADDKEARN-00138,
ADDKEARN-00132,
ADDKEARN-000256-262,
AC00231,
AC00248, AC00419, AC00800-801, AC00802-00812, ADDK3-013-015, LDG-0010,
LDG-0011, LD-00106-00110, and LDG-0013, 16-8 to 16-9.7
Attorney-Client Privilege
The party asserting the attorney-client privilege has the burden of proving the
following elements: (1) legal advice of any kind is sought; (2) from a professional legal
advisor in his capacity as such; (3) the communication relating to that purpose; (4)
made in confidence; (5) by the client; (6) are at his instance permanently protected; (7)
from disclosure by himself or by the legal advisor; (8) except the protection may be
7
Plaintiffs’ Motion to Compel concerned 68 documents that Defendant had withheld due to either one or
both of the attorney client and deliberative process privileges. Magistrate Chappell upheld the
deliberative process privilege, not the attorney-client privilege and ordered Defendant to produce 15
documents that the United States had erroneously withheld only under the attorney-client privilege. (See
Doc. No. 157, p. 5.) As mentioned earlier (supra, n. 1), Defendant asserted both the attorney-client and
deliberative process privileges for four additional documents: AC00419, ADDKEARN-000122,
ADDKEARN-000128, and ADDKEARN-000135-136. Later, the Defendant withdrew the deliberative
process privilege with respect to these four additional documents. Therefore, this Court will evaluate
Defendant’s objections with respect to 19 documents, plus Bates No. ADDKEARN-000256-000262, which
as the Court noted above is not subject to the deliberative process privilege.
15
waived. Provenzano v. Singletary, 3 F. Supp. 2d 1353, 1366 (M.D. Fla. 1997), aff’d,
148 F.3d 1327 (11th Cir. 1998). “The key question in determining the existence of a
privileged communication is ‘whether the client reasonably understood the conference
to be confidential.’” United States v. Schaltenbrand, 930 F.2d 1554, 1562 (11th Cir.
1991) (quoting MCCORMICK ON EVIDENCE, § 91 at 189 (1972)).
As both parties acknowledge, most of the communications involve Leslie Spiegel,
a Senior Counsel with the Office of Chief Counsel, Large Business & International
Division of the IRS. After an in camera review, Magistrate Judge Chappell held that the
attorney client privilege did not apply because the communications were either
addressing factual issues concerning Sarma’s compliance with the IRS and
Announcement 2002-2 or because they were “not specified confidential legal advice
that would fall under the attorney-client privilege.” With the exception of Bates No.
ADDKEARN-00256, this Court agrees.
The attorney-client privilege applies only to communications made in confidence
between a client and an attorney for the purposes of securing legal advice. Pentz v.
United States, 2:09-cv-687-FTM-29, 2011 WL 3269460, at *6 (M.D. Fla. July 29, 2011).
Here, Ms. Spiegel appears to have had dual legal and non-legal responsibilities with
respect to Plaintiffs’ case. On the one hand, she was counsel to the revenue agents
who were responsible for examining the tax returns of FOCus and the partnerships
involved. (Doc. No. 127, p. 14.) On the other hand, Plaintiffs allege and Defendant
does not dispute that Ms. Spiegel was substantially involved in reviewing Plaintiffs’ tax
returns and assessing their tax obligations. She purportedly interviewed witnesses,
prepared audit information and document requests, assisted in the preparation of the
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FPAAs, and was involved in negating the penalty relief that was supposed to apply
under Announcement 2002-2. (See Doc. No. 172, p. 9 (citing Doc. No. 112-3); Doc. No.
103, p. 9.) This was done even though Defendant declares that “[t]he examination
teams were responsible for reviewing the substance of the [tax shelter] disclosures and
determining if penalties should be waived.” (Doc. No. 131, p. 10.)
Defendant argues that “Ms. Spiegel did what lawyer should do,” by ascertaining
facts related to the tax shelters and by applying those facts to the law in order to enable
the IRS to determine Plaintiffs’ tax obligations.
However, the revenue agents had
similar responsibilities. The Court is unable to glean whether Ms. Spiegel conducted
factual and legal analysis as counsel to the revenue agents or as one of the revenue
agents.8 As the proponent of the privilege, Defendant bears the burden of but has failed
to identify “the underlying facts demonstrating the existence of the privilege.” F.T.C. v.
Shaffner, 626 F.2d 32, 37 (7th Cir. 1980).
Accordingly, the Court holds that the
attorney-client privilege does not apply to IRS-LS-00155-00158, ADDKEARN-00048,
ADDKEARN-00060,
ADDKEARN-00122,
ADDKEARN-00135-136,
ADDKEARN-00128,
ADDKEARN-00138,
AC00231,
ADDKEARN-00132,
AC00248,
AC00419,
AC00800-801, AC00802-00812, ADDK3-013-015, LDG-0010, LDG-0011, LD-0010600110, LDG-0013, and 16-8 to 16-9.
With respect to Bates No. ADDKEARN-000256-262, the Court concludes that the
document is subject to the attorney client privilege, but should be produced because it
8
As Plaintiffs note, courts have frequently held that a taxpayer should not be able to invoke the attorneyclient privilege simply because he hires an attorney to prepare his tax returns. See In re Grand Jury
Investigation, 842 F.2d 1223, 1224-25 (11th Cir. 1987). This is so even though “a lawyer who prepares a
tax return can provide legal advice on tax matters unrelated to the preparation of that return. Such advice
falls within the scope of the attorney-client privilege.” Id. at 1225. Similarly here, the IRS may not invoke
the attorney-client privilege simply because an attorney was involved in evaluating Plaintiffs’ tax returns
and assessing their tax obligations.
17
reflects the IRS’s final legal position concerning Plaintiffs’ tax obligations. As mentioned
above, the document is a legal opinion from the Office of Chief Counsel to the Associate
Area Counsel in the Large & Mid-Size Business division.
The memorandum is in
response to a request for assistance regarding whether accuracy-related penalties may
be imposed on plaintiffs due to their purported failure to comply with Announcement
2002-2. Ms. Spiegel did not appear to be involved in drafting the document. And there
is no indication that the Office of Chief Counsel was responsible for anything but
rendering legal advice in its capacity as a legal advisor to the IRS. However, for the
reasons explained above, the Court holds that the memorandum’s legal conclusions
reflect the IRS’s final position on Plaintiffs’ tax obligations and compliance with
Announcement 2002-2.
Like the deliberative process privilege, the attorney-client
privilege may not be invoked to shield a document adopted as, or incorporated by
reference into, an agency’s policy. Nat’l Council of La Raza v. Dep’t of Justice, 411
F.3d 350, 360-61 (2d Cir. 2005). In such circumstances, the chief rationale behind the
attorney-client privilege “to promote open communication between attorneys and their
clients so that fully informed legal advice may be given,” disappears. Id. at 360.
For these reasons, the Court grants in part and denies in part Defendant’s partial
objections to the February 4, 2013 Order.
CONCLUSION
It is hereby ORDERED AND ADJUDGED that:
(1) Plaintiffs’ Partial Objection to Magistrate Judge’s Order Denying the
Protective Motion to Compel by Plaintiffs is GRANTED IN PART AND
DENIED IN PART.
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(2) United States of America’s Partial Objection to Order Dated February 4, 2013
(D.E. 157) Granting in Part and Denying in Part Plaintiffs’ Motion for
Clarification and Reconsideration (D.E. 148) is GRANTED IN PART AND
DENIED IN PART.
(3) Defendant has up to and including May 17, 2013 to produce the following
documents: IRS-LS-00155-00158, ADDKEARN-00048, ADDKEARN-00060,
ADDKEARN-00122, ADDKEARN-00128, ADDKEARN-00132, ADDKEARN00135-136,
ADDKEARN-00138,
ADDKEARN-000256-262,
AC00231,
AC00248, AC00419, AC00800-801, AC00802-00812, ADDK3-013-015, LDG0010, LDG-0011, LD-00106-00110, LDG-0013, and 16-8 to 16-9.
DONE AND ORDERED in Chambers in Fort Myers, Florida, on May 10, 2013.
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