On May 26, 2015, the Tax Court issued its opinion in Pacific Management Group v. Commissioner, T.C. Memo. 2015-97, holding that a privilege log provided to the Internal Revenue Service (IRS) was inadequate to sustain claims of privilege. Because the court found the privilege log to be inadequate, the court ordered disclosure of the putatively privileged documents to the IRS. The opinion is a cautionary tale for taxpayers and practitioners, and should serve as a reminder of the importance of preparing an adequate privilege log to protect documents that may contain privileged information.
The IRS has broad authority to request information from taxpayers during an examination or in discovery in a docketed tax case. Oftentimes, such requests may cover documents or information that the taxpayer believes is exempt from disclosure under one or more of the following: (1) the attorney-client privilege; (2) the work product doctrine; and (3) the IRC § 7525 tax practitioner privilege. The taxpayer bears the burden of demonstrating that the asserted privilege applies. Courts have routinely held that a blanket assertion of privilege is not sufficient; rather, the proponent must conclusively prove each element of the asserted privilege. Similarly, Federal Rule of Civil Procedure 26(b)(5) provides that a person withholding subpoenaed information under a claim of privilege must expressly make the claim and “describe the nature of the withheld documents, communications, or tangible things in a manner that, without revealing information itself privileged or protected, will enable the parties to assess the claim.”
The Federal Rules of Evidence apply to Tax Court proceedings, and the Tax Court looks to decisions from the U.S. District Court of the District of Columbia regarding the interpretation of those rules. Although the Tax Court does not have specific rules regarding the requirements for establishing that a privilege applies, its practice has been to require the submission of a privilege log whenever a party asserts the privilege over a large number of documents.
In Pacific Management Group, the Tax Court emphasized the importance of a privilege log—“Without an adequately detailed privilege log, neither a requesting party nor a court can adequately assess whether the privilege has been properly claimed or what the proper scope of the claimed privilege is.” In determining the specific requirements for a privilege log, the Tax Court gave particular weight to Federal Rule of Civil Procedure 26(b)(5) and precedent from the U.S. District Court of the District of Columbia and the Court of Appeals for the D.C. Circuit. Following those authorities, the court indicated that an adequate privilege log must expressly claim the privilege and describe the nature of the withheld documents, communications or tangible things. At a minimum, the author(s) of the document; the recipient(s) of the document; the date(s) that the document was prepared; a brief description of the general subject matter of the withheld document; and the facts establishing each element of the privilege claim must be provided in the privilege log. Indeed, the information provided must be sufficient to enable the party seeking the information to assess the privilege claim. Nevertheless, most courts recognize that there is a tension—balancing the need to adequately show that withheld information is privileged against providing too much information and inadvertently waiving privilege.
The privilege log in Pacific Management Group was ultimately found to be inadequate because it did not describe the general subject of the documents withheld, did not describe the contents, did not describe the purpose for which the document was created, and included no facts indicating that any particular communication was intended to be privileged.
While the facts of Pacific Management Group clearly demonstrate the inadequacy of the taxpayer’s privilege log, other cases are not so clear-cut. For example, in U.S. v. Eaton Corp., 110 AFTR.2d 2012-5766 (D.C. Oh. 2012), the taxpayer claimed that interview notes relating to a functional analysis performed for certain transfer pricing agreements were privileged. The government initiated a summons enforcement action seeking to compel the taxpayer to compel the interview notes, along with various other documents. The taxpayer chose not to provide a document-by-document privilege log relating to the various notes, instead asserting that one was not required because the privileged nature of the document at issue was readily apparent. The district court disagreed, finding that the taxpayer failed to meet its burden of demonstrating that the notes were privileged and, accordingly, required the taxpayer to produce the summonsed documents. Interestingly, the district upheld that taxpayer’s privilege claims for certain other documents where the taxpayer did produce a document-by-document privilege log that contained sufficient information to allow the parties to assess the privilege.
Practice Point: In today’s electronic-information world, privilege logs have become an essential tool to maintaining and protecting against the disclosure of privileged documents. Taxpayers facing requests for documents or information from the IRS need to be aware of the specific requirements necessary to demonstrate that the privilege applies. At a bare minimum, a privilege log must contain the following information: the author(s) of the document; the recipient(s) of the document; the date(s) that the document was prepared; a brief description of the general subject matter of the withheld document; and the facts establishing each element of the privilege claim.