Posted by: Taxlitigator | May 18, 2015


In Eaton Corp. v. Comm’r, No. 5576-12, the Tax Court recently granted the government’s Motion to Compel Production of Documents where the taxpayer asserted a reasonable cause/good faith defense, finding that the taxpayer waived the privilege to protect the documents from disclosure.

In Eaton, the taxpayer opposed the government’s Motion to Compel Production of Documents, arguing that the documents were protected from discovery by the attorney-client privilege, the federal tax practitioner privilege under Code section 7275, and/or the work product doctrine. The documents consisted of the taxpayer’s internal emails, memos, and data compilations prior to entering into an advance pricing agreement with the IRS.  The taxpayer stated that the documents “generally were prepared by its internal and external tax advisors or counsel in the course of adversarial administrative proceedings with the IRS, and reflect confidential communications made by [the taxpayer] for the purpose of obtaining tax or legal advice.” The government argued that the documents were not protected from discovery and even if they were, the taxpayer waived any privilege or protection by asserting that it had reasonable cause for and acted in good faith in reporting its tax liability.

The Court noted that documents that are protected from disclosure by a privilege are beyond the scope of discovery pursuant to Tax Court Rule 70(b) and that in resolving privilege disputes, the Tax Court applies relevant holdings of the Court of Appeals for the DC Circuit. The party asserting privilege bears the burden of establishing that the privilege applies, and once the privilege is established, the party asserting an exception to the privilege bears the burden of showing the exception should apply.

The Court analyzed the documents and concluded that although the documents were protected under the work product doctrine and the attorney-client and tax practitioner privileges, the taxpayer waived work product doctrine and the attorney-client and tax practitioner privilege protections. The Court noted that taxpayers can, in some circumstances, involuntarily forfeit privileges for matters that are pertinent to factual claims made by taxpayers. Courts decide on a case-by-case basis whether fairness requires disclosure of otherwise privileged communications.

The Tax Court relied on its own recent decisions, which adopted the approach of determining whether an implied waiver of privilege occurred.  In a recent decision, the Tax Court found that taxpayers can waive privilege when they put into to issue their subjective intent, good faith, and state of mind in complying with the law and that the Section 6664 reasonable cause defense puts such issues into contention.  The Tax Court also noted that several courts have held that the privilege is waived where a party claims that it acted on a good faith belief that its conduct was reasonable and legal.

The Tax Court analogized the facts in Eaton, where the taxpayer alleged that it was not liable for accuracy related penalties because it had reasonable cause and acted in good faith in reporting its tax obligations, to the facts in the Tax Court’s recent decision in AD Inv. 2000 Fund LLC v. Comm’r, 142 T.C. 248 (2014), in which the Tax Court held that the taxpayer waived privilege by raising the Code section 6664 reasonable cause defense. The Court concluded that its analysis in AD Inv. 2000 Fund v. Comm’r was controlling in Eaton. The Court reasoned:

“Recognizing that a reasonable cause/good faith defense under section 6664(c) is dependent upon a review of all the pertinent facts and circumstances, petitioner’s reliance on the reasonable cause/good faith defense in this case, and the averments in the petition related thereto, call into question a number of factual issues including (but not limited to) petitioner’s knowledge and understanding of the pertinent legal authorities governing APAs and the application of those legal authorities to the relevant facts, whether petitioner provided its attorneys and tax practitioners with accurate information and all of the facts material to its APA request and the negotiations related thereto, and whether petitioner abided by the advice that it received from its attorneys and tax practitioners. Petitioner’s communications with its attorneys and tax practitioners may be the only probative evidence of the state of mind or knowledge of the persons who acted on its behalf and those communications may tend to show, among other material facts, whether those persons in fact considered the APAs to be binding and valid…”

The Court held that the taxpayer waived the privilege to withhold the documents under the Court’s review, noting that the taxpayer’s reasonable cause/good faith defense put into contention the subjective intent and state of mind of those who acted for the taxpayer and the taxpayer’s good faith efforts to comply with the tax law.  The Court also reasoned that it would be unfair to deprive the government of knowledge of the legal and tax advice the taxpayer received. The Court granted the government’s Motion to Compel Production of Documents.

As an obstacle to the investigation of the truth, privileges are often strictly confined within the narrowest possible limits consistent with the logic of its principle. To become privileged, a communication must be made in confidence. To remain privileged, the communication must remain confidential. A disclosure of confidential communications to third parties, including government agencies (i.e., tax returns), constitutes a waiver both as to the disclosed communication and as to other communications relating to the same subject or transaction (“opening the door”).

If otherwise privileged communications are utilized in a manner inconsistent with maintaining their confidentiality, the privilege may be deemed to have been waived. As a general rule, disclosure of privileged communications to a person outside the attorney-client relationship manifests indifference to confidentiality and waives the protection of the privilege. The primary determination is whether there has been an objective attempt to safeguard the confidential nature of the communications.

Taxpayers and practitioners must carefully protect all potentially available privileges from both direct and inadvertent waivers. Eaton held that assertions of reasonable cause for and acting in good faith in reporting a tax liability as a penalty defense served to open up what might otherwise be deemed privileged communications that occurred between the taxpayer and its lawyer/tax practitioner advisors.

KRISTA HARTWELL – For more information please contact Krista Hartwell at or 310.281.3200. Ms. Hartwell is a tax lawyer at Hochman, Salkin, Rettig, Toscher & Perez, P.C. and represents clients throughout the United States and elsewhere involving federal and state, civil and criminal tax controversies and tax litigation. Additional information is available at

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