Built on the foundation of the Tax Management Portfolios™, Bloomberg Tax is a comprehensive tax research solution designed by tax practitioners for tax practitioners.
By David I. Kempler, Esq., and Elizabeth Carrott Minnigh, Esq.
Buchanan Ingersoll & Rooney PC, Washington, D.C.
In U.S. v. Richey, No. 09-35462 (9th Cir. 1/21/11), the Ninth Circuit held that the attorney-client privilege did not protect all of the content of an appraisal work file in connection with an appraisal report prepared by a certified appraiser that was filed as an attachment to a federal income tax return, even though the appraiser was retained by a law firm and not by the taxpayer. The Ninth Circuit also held that work-product doctrine did not apply to the appraisal work file because the file was not created in anticipation of litigation. This case brings into question whether retaining an appraiser through a law firm provides any advantage.
Taxpayers owned general and limited partnership interests in a limited partnership which was the 50% owner of certain real property. In January 2002, Taxpayers retained a law firm to provide legal advice to them concerning the granting by limited partnership of a conservation easement on the property. In March 2002, Taxpayers caused the limited partnership to execute a conservation deed for the property in favor of a public charity. In May 2002, the law firm retained a certified appraiser ("Appraiser") to provide valuation services and advice in connection with the conservation easement. Appraiser prepared an appraisal report to be filed with Taxpayers' 2002 federal income tax return, and a work file concerning the value of the easement.
Taxpayers claimed an approximately $200,000 charitable contribution deduction on their 2002 federal income tax return, stemming from their proportionate share of the alleged value of the easement, and attached the appraisal report as required by Regs. §1.170A-13(c)(1). Approximately $1.3 million of the deduction was then carried over on Taxpayers' 2003 and 2004 federal income tax returns. The appraisal report noted: "[T]his report may not include full discussion of the data, reasoning, and analyses that were used in the appraisal process to develop the appraiser's opinion of value. Supporting documentation concerning the data, reasoning, and analyses is retained in the appraiser's file."
In July 2008, the IRS mailed a summons to Appraiser instructing him to appear before an IRS agent, and to provide testimony, documents, books, records and information regarding the appraisal services. Asserting the protections of the attorney-client and work-product privileges, the law firm directed Appraiser not to comply with the summons and Appraiser followed these instructions. In October 2008, the IRS filed a petition to enforce the summons. In December 2008, the IRS issued a Notice of Deficiency to Taxpayers, which disallowed any charitable deduction stemming from the easement for Taxpayers' 2003 and 2004 federal income tax returns. Taxpayers responded to the Notice of Deficiency by paying the claimed assessment, interest and penalties. In February 2009, the district court granted Taxpayers' motion to intervene in the IRS's summons enforcement action against Appraiser. In March 2009, the district court issued a memorandum order quashing the summons. The IRS appealed the decision of the district court.
The attorney-client privilege protects confidential communications between attorneys and clients that are made for the purpose of giving legal advice. The party asserting the attorney-client privilege has the burden of establishing the attorney-client relationship and privileged nature of the communication. The attorney-client privilege exists where: "(1)[ ] legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications 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 adviser, (8) unless the protection be waived."1 If a privileged communication is voluntarily disclosed that disclosure constitutes a waiver of the privilege for all other communications on the same subject. Attorney-client privilege may be extended to communications with third parties who have been engaged to assist an attorney in providing legal advice; however, if the third-party advice sought is not legal advice then the privilege will not be extended.
Appraiser prepared the appraisal report as required by Regs. §1.170A-13(c)(1) for attachment to Taxpayers' 2002 federal income tax returns so that Taxpayers could claim the charitable deduction sought for the value of the Easement. The appraisal report stated that it was in compliance "with the substantiation requirements" under Regs. §1.170A-13(c)(2). Appraiser certified that the appraisal report was based on the objective use of valuation information. As part of the explanation for the methods and specific bases for Appraiser's opinion of value, the appraisal report noted that the work file contained "supporting documentation concerning the data, reasoning, and analyses."
The Ninth Circuit concluded that any communication relating to the preparation and drafting of the appraisal for submission to the IRS was not made for the purpose of providing legal advice, but, rather, for the purpose of determining the value of the Easement. Additionally, the Ninth Circuit noted that to the extent the files contain documents that were not communications, the files would not be protected by the attorney-client privilege. Moreover, the Ninth Circuit noted that Appraiser and Taxpayers did not specifically state what communications, if any, exist in the appraisal work file, that were alleged to be the proper subject of the attorney-client privilege. Therefore, the Ninth Circuit held that it was clear error for the district court to conclude that the entire appraisal work file was protected by the attorney-client privilege.
The work-product doctrine protects documents and the compilation of materials prepared by an attorney or agents of an attorney in preparation for litigation. The protections of the work-product doctrine are waivable. In circumstances where a document was not prepared exclusively for litigation, under the "because of" test the work-product doctrine will apply "in light of the nature of the document and the factual situation in the particular case, the document can be fairly said to have been prepared or obtained because of the prospect of litigation."2 In applying the "because of" test, the Ninth Circuit noted that a court must determine whether the document was prepared because of anticipated litigation, and would not have been prepared in a substantially similar form but for that anticipated litigation.
The Ninth Circuit found that the district court erred by concluding that the entire work file was prepared in anticipation of litigation. The appraisal report was prepared for attachment to Taxpayers' 2002 federal income tax return, as required by Regs. §1.170A-13(c)(1), so that Taxpayers could claim the charitable deduction sought for the value of the Easement. The Ninth Circuit noted that if even the IRS never sought to examine the Taxpayers' 2003 and 2004 federal income tax returns the Taxpayers would still have been required to attach the appraisal to their 2002 federal income tax return and that there was no evidence that Appraiser had prepared the appraisal work file differently in anticipation of prospective litigation. Accordingly, the Ninth Circuit concluded that considering the totality of the circumstances the appraisal work file was not prepared because of the prospect of litigation. Therefore, the Ninth Circuit held that neither Appraiser nor Taxpayers could properly invoke the work-product doctrine in protecting the contents of the appraisal work file.
Based on the foregoing, the Ninth Circuit reversed and remanded the case to the district court for an in camera examination of the materials summoned by the IRS in order to determine which data and materials, if any, are protected from disclosure by the attorney-client privilege. Additionally, the Ninth Circuit ordered Appraiser to appear personally before the IRS to give testimony in accordance with the summons.
In light of this decision, attorneys who directly retain an appraiser should take care to document which communications relate to the preparation and drafting of the appraisal for submission to the IRS and which communications relate to rendering legal advice. Moreover, attorneys should make clear to their client that not all communications between the parties during the process of attaining an appraisal report and contained in the appraisal work file may be protected by attorney-client privilege regardless of how the appraiser is retained.
For more information, in BNA's Tax Management Portfolios, see Kirschten and Freitag, 521 T.M., Charitable Contributions: Income Tax Aspects, Schmehl and Fox, 633 T.M., Compelled Production of Documents and Testimony in Tax Examinations, Hood, 830 T.M., Valuation: General and Real Estate, and in Tax Practice Series, see ¶2395, Contributions of Property.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to email@example.com.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to firstname.lastname@example.org.
Put me on standing order
Notify me when new releases are available (no standing order will be created)