Third-Party Tax Opinion Letters Held by IRS Are Not Discoverable

By James Beavers, J.D., LL.M., CPA

The Tax Court denied a taxpayer’s motion to compel the IRS to produce redacted copies of all third-party tax opinions regarding son-of-boss transactions it had collected, as well as a list of the names and addresses of all law firms and accounting firms known to the IRS to have issued tax opinion letters regarding son-of-boss transactions because the opinion letters and the firm list were not relevant, the request did not appear reasonably calculated to lead to discovery of admissible evidence, and the materials were nondisclosable “return information” per Sec. 6103(b)(2).


James Menighan, through a limited liability company he owned, acquired and contributed offsetting digital options on foreign currency to the 3K Investment Partners partnership (the partnership). On examination, the IRS determined that Menighan formed and used the partnership to engage in a so-called son-of-boss transaction that was designed to artificially inflate Menighan’s basis in the partnership. The IRS alleged that the transaction was a prepackaged tax shelter that Menighan purchased from the law firm Jenkens & Gilchrist, P.C. (Jenkens & Gilchrist). As a result of this determination, the IRS issued a final partnership administrative adjustment that made changes to the items reported on the partnership’s tax return for the 2000 tax year.

The partnership challenged the IRS’s determination in Tax Court. During the proceedings, the partnership requested that the IRS provide it with redacted copies of all third-party tax opinions collected by the IRS regarding son-of-boss transactions (the opinion letters) and a list of the names and addresses of all law firms and accounting firms known to the IRS to have issued son-of-boss transaction tax opinion letters. The IRS objected to the request on the grounds that the opinions and the list were irrelevant and that the request was not likely to lead to the discovery of admissible evidence, was unduly burdensome, and impermissibly sought confidential third-party return information. The partnership filed a motion with the Tax Court to compel the IRS to produce the opinion letters and the list.

The Tax Court’s Decision

The Tax Court held that the opinion letters and the firm list were not relevant to the subject matter of the case and the discovery request was not reasonably calculated to lead to the consequent discovery of admissible evidence in the case. Therefore, it denied the partnership’s motion to compel the IRS to produce the letters and the list.

The partnership argued that the opinion letters and the firm list were relevant to its reasonable cause and good-faith defense (under Sec. 6664(c)) against the IRS’s determination of penalties under Sec. 6662. Whether a taxpayer had reasonable cause and acted with good faith depends upon the facts and circumstances of each case. The partnership first contended that the opinion letters would bolster its reasonable cause and goodfaith defense because they would show that national law firms across the country had endorsed the same position the partnership took with respect to son-of-boss transactions. According to the Tax Court, this argument failed because a taxpayer must establish the reasonableness of its position on the basis of the facts and merits of its own case. Therefore, the advice that tax advisers may have given to other taxpayers based on their facts and circumstances were irrelevant to the reasonableness of the position that the partnership took.

The partnership also argued that the opinion letters and the firm list were relevant to its contention that it had reasonably relied on the advice of its tax advisers. The Tax Court flatly rejected the idea that the information had any bearing on whether it was reasonable that the partnership relied on the advice of Jenkens & Gilchrist, stating that if the partnership did not have access to this information before it filed its returns, the court did not see how the information could possibly establish that the partnership’s reliance was reasonable. The Tax Court found that even if the opinion letters tended to show that Jenkens & Gilchrist was competent to provide the advice, the relevance of this evidence was too remote to justify discovery of the opinion letters and the firm list, considering that the information related to confidential thirdparty information, its production would be burdensome for the IRS, and evidence of Jenkens & Gilchrist’s competence could be more easily obtained from other sources.

Finally, the partnership contended that the opinion letters were not returns or return information that could not be disclosed under Sec. 6103(a). The Tax Court found that the opinion letters fell under the expansive definition of return information found in Sec. 6103(b)(2)(A) and that the Supreme Court had held that redacting taxpayer identifying information from return information did not change its character (see Church of Scientology of Cal., 484 U.S. 9 (1987)). In addition, the Tax Court found that because the opinion letters were not prepared by the IRS and contained specific taxpayer information that was protected by Sec. 6103, they were not written determinations of the IRS that are required to be made public under Sec. 6110.


This case highlights a key point of a reasonable cause and good-faith defense: The taxpayer must establish the defense directly, not by analogy. The Tax Court characterized the partnership’s argument as “everyone’s doing it,” but the fact that other taxpayers are doing the same thing should not have a bearing on whether it is reasonable in a specific taxpayer’s case.

As the Tax Court noted, any advice provided in the undisclosed opinion letters was not provided to the partnership or for its benefit—and could not have been relied on by the partnership, since it did not know the contents of the undisclosed opinion letters. The fact that other tax advisers may have been giving similar advice to other taxpayers about transactions that were in some way similar to the transactions the partnership was engaged in was too tenuous to establish reasonable cause or good faith.

3K Investment Partners, 133 T.C. No. 6 (2009)

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