132 T.C. No. 17
UNITED STATES TAX COURT
COUNTRYSIDE LIMITED PARTNERSHIP, CLP HOLDINGS, INC., TAX MATTERS PARTNER, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 3162-05, 22023-05, Filed June 8, 2009. 2176-08, 2178-08.
R has moved to compel production of documents. Ps object, claiming that the documents are protected from disclosure by, among other privileges, the so-called federally authorized tax practitioner (FATP) privilege described in sec. 7525(a), I.R.C. We have determined that the FATP privilege applies, subject to R’s right to show the privilege does not apply. To do that, R must show that the requested documents are written communications in connection with the promotion of
1 Cases of the following petitioners are consolidated herewith: Countryside Limited Partnership, CLP Holdings, Inc., Tax Matters Partner, docket No. 22023-05; CLP Promisee L.L.C., WMC Realty Corp., Tax Matters Partner, docket No. 2176-08; Manchester Promisee L.L.C., AMW Realty Corporation, Tax Matters Partner, docket No. 2178-08. - 2 -
corporate tax shelters and, thus, that the exception in sec. 7525(b), I.R.C., to the FATP privilege applies.
1. Held: Ps have the burden of proving the preliminary facts necessary to establish the FATP privilege; R has the burden of proving the preliminary facts necessary to establish the exception.
2. Held, further, the meeting notes in question not communicated to anyone are not a written communication that can satisfy that element of the sec. 7525(b), I.R.C., exception.
3. Held, further, the written minutes in question are not within the sec. 7525(b), I.R.C., exception because R failed to show that the FATP promoted a corporate tax shelter.
Richard A. Levine and Elliot Pisem, for petitioners.
Jill A. Frisch, for respondent.
OPINION
HALPERN, Judge: These consolidated cases are partnership-
level actions based on petitions filed pursuant to section 6226.2
We have issued a report granting participating partner Arthur M.
Winn’s motion for partial summary judgment in docket No. 3162-05,
Countryside Ltd. Pship. v. Commissioner, T.C. Memo. 2008-3.
Respondent has by two similarly styled motions (Nos. 1 and 2, the
motions) moved to compel production of documents in docket No.
3162-05. Petitioners object to the motions, claiming that the
2 All section references are to the Internal Revenue Code of 1986, as amended (the Code). - 3 -
documents are protected from disclosure by either the
attorney-client privilege or the so-called federally authorized
tax practitioner (FATP) privilege described in section 7525(a).
We have resolved by order all issues with respect to the motions
except that, with respect to certain documents described infra,
we have determined that the documents contain privileged
communications, protected from disclosure by the FATP privilege,
but subject to respondent’s right to show that the exception to
the FATP privilege in section 7525(b) applies. Section 7525(b),
as applicable to the privileged documents, provides that the FATP
privilege does not apply to written communications in connection
with promoting corporate participation in a tax shelter. For the
reasons stated infra, we determine that the documents here in
question were not such communications.
Background
The documents responsive to motion No. 1, a series of 16
documents all entitled “Estate Planning Meeting Minutes” (the
minutes), constitute a cumulative chronicle of communications, in
part confidential, from clients, including Countryside Limited
Partnership (the partnership), to their attorneys for legal
advice or to Timothy Egan (Mr. Egan), whom we have found to be an
FATP, for tax advice, or from those individuals back to their
clients. The entries in the minutes begin March 28, 2001, and - 4 -
end February 11, 2003.3 The document responsive to motion No. 2
is two pages of handwritten notes (the notes) made by Lawrence H.
Curtis (Mr. Curtis), a member of the partnership, recording
confidential communications regarding tax advice received during
a meeting with, among others, Mr. Egan.
Discussion
I. Section 7525
Section 7525(a)(1) provides a limited privilege, equivalent
to the attorney-client privilege, to communications regarding tax
advice between a taxpayer and any FATP. Section 7525(b), as
applicable to communications made before October 22, 2004,4
3 The title “Estate Planning Meeting Minutes” is a misnomer, in that, by 2001, the meetings regularly involved a wide range of matters affecting various business entities, including many topics unrelated to estate planning. 4 With respect to communications made after Oct. 21, 2004, sec. 7525(b) provides as follows:
SEC. 7525(b). Section Not To Apply to Communications Regarding Tax Shelters.--The privilege under subsection (a) shall not apply to any written communication which is--
(1) between a federally authorized tax practitioner and--
(A) any person,
(B) any director, officer, employee, agent, or representative of the person, or
(C) any other person holding a capital or profits interest in the person, and (continued...) - 5 -
provides as follows:
SEC. 7525(b). Section Not To Apply to Communications Regarding Corporate Tax Shelters.–-The privilege under subsection (a) shall not apply to any written communication between a federally authorized tax practitioner and a director, shareholder, officer, or employee, agent, or representative of a corporation in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter (as defined in section 6662(d)(2)(C)(iii)).
Petitioners have the burden of proving the preliminary facts
necessary to establish the privilege; respondent has the burden
of proving the preliminary facts necessary to establish the
exception. See United States v. BDO Seidman, L.L.P., 492 F.3d
806, 821 (7th Cir. 2007). Petitioners have met their burden, and
the question before us is whether respondent has met his burden.
II. Arguments of the Parties
Respondent argues that the section 7525(b) exception applies
and that the minutes and notes do not embody privileged
communications because
the series of Countryside transactions that are the subject of this litigation[5] * * * are a “tax shelter”
4 (...continued) (2) in connection with the promotion of the direct or indirect participation of the person in any tax shelter (as defined in section 6662(d)(2)(C)(ii)). 5 In Countryside Ltd. Pship. v. Commissioner, T.C. Memo. 2008-3, under the heading “Facts on Which We Rely”, we described much of the series of transactions that is the subject of this litigation. At the most general level, the series of transactions involves Federal tax questions associated with (continued...) - 6 -
as defined in section 6662(d)(2)(c)(iii) * * * and the documents withheld by Petitioners are in connection with the promotion of the participation of Petitioners’ corporate general partners in the transactions.
Petitioners argue that the section 7525(b) exception does
not apply because respondent has failed to provide evidence of
several elements necessary to that provision’s application: viz,
(1) the promotion of (2) a corporation’s participation in (3) any
tax shelter, and, in the case of the notes, (4) a written
communication. Petitioners argue that respondent’s failure to
provide evidence that all the elements of section 7525(b) have
been satisfied renders the provision inapplicable.
III. Analysis
A. Introduction
We agree with petitioner that, for the FATP privilege not to
apply because of the application of the section 7525(b)
exception, respondent must produce evidence that all the elements
of the exception are satisfied. Cf. United States v. BDO
Seidman, L.L.P., supra at 821 (“[P]roponent of the tax
practitioner privilege must establish each element”.).
The elements of the section 7525(b) exception are not free
of interpretative difficulties. See, e.g., id. at 822-828
(“Scope of the Tax Shelter Exception”); Valero Energy Corp. v.
5 (...continued) distributions by the partnership in redemption of interests of its members. - 7 -
United States, No. 06 C 6730 (N.D. Ill., Aug. 26, 2008)
(corrected memorandum opinion and order) (“‘Promotion’ of tax
shelter”). In no report have we addressed section 7525(b). In
this report, we need go no further than to consider the elements
of “promotion” and “written communication”. We shall start with
the latter. We shall in each case assume that respondent has
shown that the other elements necessary for the application of
the section 7525(b) exception have been satisfied, but we do so
only to isolate the element we are considering.
B. Written Communication
As stated supra, the notes consist of two pages handwritten
by Mr. Curtis recording confidential communications regarding tax
advice received during a meeting with, among others, Mr. Egan.
Respondent’s argument that the notes are a written communication
is succinct: “Written notes of oral communications are ‘written
communications’ under any plausible construction.” Petitioners’
response is also succinct; i.e., the plain meaning of “written
communications” requires some transmission of written material
from one person to another. Petitioners state, and respondent
does not contradict them, that Mr. Curtis did not share his notes
with any other person.
We have examined the notes, and they are just that, notes;
they are neither a verbatim record of an oral communication nor
anything resembling that. They appear to be nothing more than - 8 -
the holographic record of the salient points of a discussion. We
conclude that information was communicated to and perhaps by Mr.
Curtis, but not, in this case, in writing. The Court of Appeals
for the Seventh Circuit said in United States v. BDO Seidman,
L.L.P., supra at 827: “Because the [section 7525(b)] exception
is limited to written communications, oral communications between
a tax practitioner and the corporate agent remain within the
general rule of privilege.” Although the Court of Appeals was
not addressing the question we address here concerning notes of
an oral communication, we think the distinction that court drew
is relevant to the question we face. The notes were not
communicated to anyone. Therefore, they do not constitute a
written communication that can satisfy that element of the
section 7525(b) exception. The FATP privilege accorded to the
notes is not subject to the exception in section 7525(b).
C. Promotion
Respondent argues: “The * * * facts show that Mr. Egan was
promoting the Countryside transactions.” In support of that
claim, respondent alleges, among other things, that Mr. Egan
played a “substantial role in structuring Countryside and similar
transactions” and “was involved in organizing, structuring and
assisting with respect to tax shelter transactions known as basis - 9 -
swaps for Winn-controlled partnerships and corporations.”6
Petitioners respond: “Mr. Egan, a longstanding tax advisor to
Petitioners and to other members of the Winn Organization,
performed precisely the kind of one-on-one tax advice and
counseling that is the antithesis of a ‘promotional’
relationship.”
Petitioners support their claim with respect to Mr. Egan’s
relationship to what we shall call “the Winn organization” with
excerpts from his deposition taken by respondent in these cases.
In those excerpts, Mr. Egan testifies to the following. He began
his relationship with the Winn organization in 1982, when he was
a second-year staff accountant at an accounting firm asked to
review a tax return. He is now a tax partner at
PricewaterhouseCoopers (PWC) servicing the Winn organization
account. He prepares tax returns for the Winn organization
entities, the Winn family trusts, Mr. Winn himself, his family
members, and corporate general partners (generally S
corporations). Presently, 70 percent of his work for the Winn
organization involves tax compliance (i.e., return preparation),
with the balance encompassing tax planning, answering questions,
and responding to notices and inquiries from Federal and State
6 By the term “Winn-controlled partnerships and corporations”, respondent refers to various entities (including the partnership) in which Arthur Winn and his associates held an interest. - 10 -
tax officials. The Winn organization is billed pursuant to
engagement letters at a fixed fee for tax compliance work; for
all other work, the organization is billed by the hour (hours
expended times a rate, pursuant to a schedule provided to the
organization). Winn organization personnel consult him with
respect to the tax implications of the organization’s real estate
transactions. He provides tax advice with respect to both
contemplated and completed transactions. He has telephone
conversations with Winn organization personnel once or twice
weekly and meets with them once or twice monthly. He provided
tax advice on various alternatives that Winn organization
personnel considered in connection with the partnership
redemptions and associated transactions that are under review in
these consolidated cases. He had previously made similar
recommendations to the Winn organization in connection with
similar transactions. Advising clients with respect to the tax
aspects of partnership redemptions is a regular part of his
practice, and he has been providing advice to clients (including
the Winn organization) on that subject for his entire career. In
formulating the advice here under examination, he applied
knowledge as to the tax consequences of partnership redemptions
that he believes are well known among partnership tax
professionals. In formulating that advice, he did not rely on
any generic prototypes, descriptive materials, or files - 11 -
maintained by PWC. He had recourse to tax specialists in the PWC
national office in Washington, D.C., who help him understand
complex provisions of the Internal Revenue Code and associated
regulations, but he received from them no descriptive materials
regarding the tax structure in issue here.
In pertinent part, section 7525(b) provides that there is no
FATP privilege with respect to any “written communication * * *
in connection with the promotion of * * * [corporate
participation] in any tax shelter”. (Emphasis added.) The term
“promotion” is not defined in section 7525(b). A commonly used
dictionary contains alternative meanings, including
“Encouragement of the progress, growth, or acceptance of
something; furtherance” and “Advertising; publicity”. The
American Heritage Dictionary of the English Language 1403 (4th
ed. 2000). The verb “promote” is alternatively defined to mean
“To urge the adoption of” and “To attempt to sell or popularize
by advertising or publicity”. Id. Other courts considering the
meaning of the term “promotion” in section 7525(b) have reached
different answers. Compare United States v. Textron Inc., 507 F.
Supp. 2d 138, 148 (D.R.I. 2007) (the term applies to the peddling
of prepackaged tax shelters) with Valero Energy Corp. v. United
States, No. 06 C 6730 (N.D. Ill., Aug. 26, 2008) (corrected
memorandum opinion and order) (the term applies “to a person who
organizes or assists in organizing a tax shelter”). There - 12 -
appears to be sufficient ambiguity in the meaning of the term
that we are justified in looking to legislative history.7
Section 7525 was added to the Code by the Internal Revenue
Service Restructuring and Reform Act of 1998, Pub. L. 105-206,
sec. 3411(a), 112 Stat. 750. Section 7525(b), as enacted in
1998, was added in conference between the House of
Representatives and the Senate on the Senate’s amendment to H.R.
2676, 105th Cong., 2d Sess. (1998), which was enacted as Pub. L.
105-206. The conferees defined a tax shelter as “any
partnership, entity, plan, or arrangement a significant purpose
of which is the avoidance or evasion of income tax.” H. Conf.
Rept. 105-599, at 269 (1998), 1998-3 C.B. 747, 1023. They added:
“The Conferees do not understand the promotion of tax shelters to
be part of the routine relationship between a tax practitioner
and a client. Accordingly, the Conferees do not anticipate that
the tax shelter limitation will adversely affect such routine
relationships.” Id.
We are satisfied, in view of excerpts from respondent’s
deposition of Mr. Egan, the truth of which respondent does not
7 “This Court’s function in the interpretation of the Code is to construe the statutory language so as to give effect to the intent of Congress.” Merkel v. Commissioner, 109 T.C. 463, 468 (1997), affd. 192 F.3d 844 (9th Cir. 1999); see United States v. Am. Trucking Associations, 310 U.S. 534, 542 (1940). “Where the statute is ambiguous, it is well established that we may look to its legislative history and to the reason for its enactment.” Merkel v. Commissioner, supra at 468-469; see United States v. Am. Trucking Associations, supra at 543-544. - 13 -
question, that Mr. Egan has had a long, close relationship with
the Winn organization, preparing returns, assisting with tax
planning when asked, answering questions when asked, and
responding to notices and inquiries from Federal and State tax
officials. His advice with respect to the partnership
redemptions and associated transactions under review in these
cases was furnished (as was similar advice with respect to
similar transactions) as part of a long-standing, ongoing, and,
hence, routine relationship with the Winn organization. Mr. Egan
provided tax advice to the Winn organization when requested to do
so, and his advice here followed the same regular course of
procedure as did his other tax advice, including tax advice
related to partnership redemptions. His employer, PWC, had no
stake in the outcome of the transactions under review in this
case other than in the continued retention of the Winn
organization as a client. It did not receive a fixed fee or a
fee based on a percentage of some claimed tax saving. It was
paid by the hour pursuant to a rate schedule for Mr. Egan’s time
in rendering his advice, just as it was for the other services
outside of return preparation that he rendered to the Winn
organization.
Respondent has focused on Mr. Egan as “promoting the
Countryside transactions.” We read the conferees’ statements
quoted above as distinguishing tax advice given in the course of - 14 -
a relationship such as that between Mr. Egan and the Winn
organization from the “promotion” of a client’s participation in
a tax shelter. There may be a point at which an FATP’s actions
cross the line, and will no longer be encompassed within the
routine relationship between an FATP and his client and will
amount to tax shelter promotion. Respondent has, however, failed
to show us that Mr. Egan’s communications with the Winn
organization with respect to the partnership redemptions and
associated transactions before us crossed that line. He rendered
advice when asked for it; he counseled within his field of
expertise; his tenure as an adviser to the Winn organization was
long; and he retained no stake in his advice beyond his
employer’s right to bill hourly for his time. Respondent has
failed to show us that he crossed the line from trusted adviser
to promoter.8
8 Sec. 6111(d) provides that confidential corporate tax shelters are subject to the tax shelter registration rules of sec. 6111. A confidential corporate tax shelter is a transaction for which, among other things, the tax shelter promoters may receive fees in excess of $100,000. Sec. 6111(d)(1)(C). For purposes of sec. 6111(d), the term “promoter” is defined as a person “who participates in the organization, management, or sale of the tax shelter.” Sec. 6111(d)(2). While in 1998, in sec. 7525(b), Congress cross-referenced sec. 6662(d)(2)(C)(iii), now (ii), for the definition of the term “tax shelter” applicable to sec. 7525(b), neither in sec. 7525(b) nor in the conference committee report did Congress cross-reference sec. 6111(d)(2) with respect to the meaning of the term “promotion” in sec. 7525(b). We draw no inference as to the meaning of the term “promotion” in sec. 7525(b) from the particularized meaning of the term “promoter” in sec. 6111(d)(2). For the same reason, we (continued...) - 15 -
Because Mr. Egan was not a promoter with respect to the
Countryside transactions, communications between Mr. Egan and the
Winn organization, including the minutes at issue in motion No.
2, remain privileged.
IV. Conclusion
On the premises stated, we will deny the motions.
An appropriate order will be
issued in docket No. 3162-05.
8 (...continued) draw no inference as to the meaning of that term from the description in sec. 6700(a) of persons promoting abusive tax shelters.