"RELIANCE" DEFENSE WAIVES WORK PRODUCT & ATTORNEY-CLIENT PRIVILEGE PROTECTION

In litigation, the work-product doctrine and the attorney-client privilege protect materials and communications from discovery by an adversary in litigation. The work-product doctrine excludes from discovery materials prepared in anticipation of litigation because discovery of such materials would hamper the orderly prosecution and defense of legal claims in adversary proceedings.

The attorney-client privilege extends to communication between a taxpayer and a “federally authorized tax practitioner” with respect to tax advice, to the extent the communication would be privileged if it were between a taxpayer and an attorney. 

Many tax penalties will not apply if the taxpayer had reasonable cause for its tax position. At times, reliance on the advice of counsel in adopting a tax position constitutes reasonable cause.

The reliance on counsel defense has saved many a taxpayer from penalties. It is unknown if the taxpayer in this case knew that by using that defense it would be forfeiting the above evidence protections – perhaps the benefits of the defense outweighed the negatives relating to the disclosure of the subject items and thus was intentional.

Just a reminder to litigating taxpayers that a reliance on counsel “reasonable cause” defense may result in a waiver of protections otherwise available under the work-product doctrine and the attorney-client privilege.

(See Rubin's comment regarding SALEM FINANCIAL, INC v. U.S., 109 AFTR 2d 2012-XXXX, (Ct Fed Cl 01/18/2012)).