An Idaho couple claimed nearly $1.5 million as a charitable contribution deduction on their federal tax returns relating to the granting of a conservation easement. The IRS summoned the taxpayer’s appraiser to provide evidence related to the easement valuation, including all his work files. Based on advice of the taxpayer’s attorney, the appraiser refused the summons, asserting the attorney-client privilege and work-product protections. The IRS petitioned to enforce the summons and issued a deficiency against the taxpayers, who paid the assessment and then intervened on behalf of the appraiser. According to an IRS internal manual, once a taxpayer agrees to an assessment, the Service “must” close the case, the taxpayers argued, including its investigation of any underlying documents. The federal district court agreed and the IRS appealed to the 9th Circuit, arguing that a good faith summons did not “transmorgrify” into one issued in bad faith simply upon the taxpayer’s consenting to a deficiency.
Although the issue was one of first impression, the 2nd and 7th Circuits have held that the IRS has not acted bad faith by issuing a summons “unless there has been a predicate, final, irrevocable determination of the taxpayer’s liability,” the 9th Circuit court noted. Persuaded by this reasoning, it confirmed the continued enforcement of the IRS summons when the taxpayers’ liability had not been “finally determined” and there was no evidence the IRS acted improperly. In fact, at the time of the IRS petition, the taxpayers’ deadline for appealing the deficiency had not yet expired and they were likely to seek a refund. The court also found the appraiser’s files were not protected by the attorney-client privilege or the work-product doctrine, because they were prepared primarily to comply with IRS regulations concerning charitable deductions and not in advance of litigation. For the complete digest of U.S. v. Richey, 2011 WL 182313 (C.A.9) (Jan. 21, 2011), see the April 2011 Business Valuation Update; the court’s decision will be posted at BVLaw.