LLCs waived attorney-client privilege for opinion letters.

• Position: Limited liability companies

The Tax Court held that in a son-of-boss tax shelter case, two LLCs waived attorney-client privilege for opinion letters from their attorneys by asserting defenses that turned on the LLCs' beliefs or state of mind.

Background

The IRS adjusted the partnership items of and assessed accuracy-related penalties against AD Investment 2000 Fund LLC and AD Global 2000 Fund LLC. The IRS claimed that the two LLCs, which were taxed as partnerships, were son-of-boss tax shelters. The LLCs challenged the IRS's determinations in Tax Court.

In the proceedings, the IRS sought to compel the LLCs to produce six opinion letters from a law firm. The letters expressed the law firm's opinion as to whether, on the basis of representations made to the law firm by the LLCs, it was more likely than not that the anticipated tax benefits from the transactions in question would be upheld for federal income tax purposes. The LLCs argued that attorney-client privilege protected all the opinion letters and, therefore, the LLCs did not have to disclose them. The IRS contended that, while attorney-client privilege applied to the opinion letters, under the common law doctrine of implied waiver, the LLCs had waived attorney-client privilege for the letters. According to the IRS, the LLCs had placed the opinion letters into controversy by relying on affirmative defenses to the penalties that turned on the LLCs' beliefs or state of mind.

Sec. 6662 Belief Requirement

Under Sec. 6662(b)(2), the accuracy-related penalty will not apply to an underpayment if there is or was substantial authority for the tax treatment of any items resulting in an underpayment of tax, and the taxpayers (in this case the LLC and its members) reasonably believed that their tax treatment of such items was more likely than not the proper tax treatment. Regs. Sec. 1.6662-4(g)(1)(i)(B) provides that the belief requirement is satisfied if "[t]he taxpayer reasonably believed at the time the return was filed that the tax treatment of that item was more likely than not the proper treatment."This requirement is satisfied if:

(A) The taxpayer analyzes the pertinent facts and authorities ... , and in reliance upon that analysis, reasonably concludes in good faith that there is a greater than 50-percent likelihood that the tax treatment of the item will be upheld if challenged by the Internal Revenue Service; or

(B) The taxpayer reasonably relies in good faith on the opinion of a professional tax advisor, if the...