United States v. Richey

Alan and Wendy Pesky donated a conservation easement to the Nature Conservancy and claimed a charitable contribution deduction, based on a 29% reduction in the value of the property. The Internal Revenue Service reviewed the deduction and issued a notice of deficiency. The taxpayers paid the assessment, along with penalties, in full. But in October 2008, prior to this payment, the Service issued a summons to the taxpayer's appraiser, seeking his entire workfile, on top of the final appraisal report that was already in the Service's possession. The appraiser turned over his control of the workfile to the taxpayers' attorney, and did not respond to the summons. The taxpayers intervened in the summons action and claimed attorney-client and work-product privileges with respect to the workfile. The lower Court held that the appraiser's workfile was indeed subject to the attorney-client and work-product privileges.

The 9th Circuit reversed concluding that the work-product doctrine didn't protect the appraisal work file because the work file could not be fairly said to have been prepared or obtained because of the prospect of litigation. Richey was hired to provide valuation services, and he prepared the appraisal report that the Peskys attached to their return, as required by law. Had no appraisal report been attached to the Peskys' return, they would not have been eligible for any charitable deduction on the contribution of the easement. Had IRS never sought to examine the taxpayers' returns, they would still have been required to attach the appraisal to their return. There was no evidence in the record that Richey would have prepared the appraisal workfile differently in the absence of prospective litigation. The Ninth Circuit found that the district court wrongly concluded that the entire workfile was prepared in anticipation of litigation.

Holding: The Ninth Circuit reversed on the privilege claims. It found that attorney-client privilege did not apply to the entire workfile because it was prepared primarily for easement valuation purposes, not to provide legal advice. On remand the District Court was ordered to conduct an in camera (behind closed doors) review of each document in the work file to determine which may be protected communications that are in the nature of legal advice as opposed to valuation information. Meanwhile, the work-product privilege was held not to apply because the work file was prepared primarily so that the taxpayers could claim an income tax deduction, and not primarily in anticipation of litigation.

Analysis and Notes: One unusual aspect of this case is that the appraisal specifically directs one to the work file for supporting information. Even so, the IRS likely will interpret its rights broadly, and thus landowners, appraisers and attorneys should consider all of the appraiser's documents discoverable by the IRS.