Tax Court Holds That IRS Litigation Memos Are Protected Work Product

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

The Tax Court held that the IRS did not have to turn over memos prepared by IRS personnel during the course of litigation because the memos were protected by the work-product privilege and the IRS had not waived the privilege with respect to the documents.


Thomas and Bonnie Ratke (the taxpayers) timely filed their 1993 federal tax return. In 1996, the IRS sent the taxpayers a notice of deficiency for additional taxes and penalties for 1993. On March 29, 1996, the taxpayers filed suit in the Tax Court disputing the entire amount of the deficiency. On the same day, they also sent the IRS an amended return for 1993 that showed an additional deficiency for the year. In May 1996, the IRS made an assessment for the deficiency amount the taxpayers reported on the amended return plus interest.

In March 1997, the taxpayers settled with the IRS, and the Tax Court entered a decision that they owed a small deficiency for 1993 and no penalties. In May 1997, the Service assessed the deficiency agreed to in the settlement. However, it also sent the taxpayers a notice and demand for the amount they had reported as due on their amended return for 1993.

The taxpayers filed a petition in the Tax Court challenging the IRS’s attempts to collect the amount reported as due on the 1993 amended return. The case eventually went to trial and the Tax Court held that the Service could not collect the amount reported as due on the amended return. While preparing for trial, the IRS attorney assigned to the case prepared a memo to the National Office asking for its advice. The memo described the facts in the case and several arguments that the attorney would make in the litigation with the National Office’s approval. A National Office representative sent a reply memo to the attorney that set out the National Office’s opinion on the attorney’s proposed legal arguments.

After the Tax Court issued its decision, the taxpayers moved for an award of costs under Sec. 7430 and later moved for sanctions under Sec. 6673(a)(2). In the course of this further litigation, the IRS provided the taxpayers with a redacted copy of the National Office’s reply memo. The taxpayers later made a discovery request for the trial attorney’s memo and a full copy of the National Office memo. The Service objected to the request on the ground that the opinion information in the memos was protected by the work-product privilege and that the factual information in them was well known to the taxpayers.

The taxpayers argued that although the memos were work product, they were prepared for the “case in chief” and were not privileged for purposes of the “post-decision application for litigation costs and sanctions.”They also argued that they had a substantial need for the information in the memos and they could not obtain the information elsewhere. Finally, the taxpayers argued that the IRS had used the National Office memo as evidence in its defense to the taxpayers’ motions for costs and sanctions and therefore had waived the work-product privilege.

Tax Court’s Analysis

After reviewing the memos in camera, the court found that the memos discussed the intended arguments to be made in the case and that both were prepared in the course of litigation, so they were privileged work product prepared for use in the litigation. The court dismissed the taxpayers’ argument that the memos were not work product for purposes of the taxpayers’ motions for costs and sanctions. The court stated that the taxpayers had failed to point to any precedent for the proposition that the litigation should be separated for work-product purposes into a case in chief and an application for costs and sanctions, as the taxpayers suggested. It noted that the Tax Court and all appeals courts that have addressed the issue had previously held that, to a limited degree, the work-product privilege extends to subsequent litigation.Also, on the basis of its review of the memos, the court found that there was no factual evidence in the memos that would be of use to the taxpayers that they did not already have, so they had no substantial need for the memos that could overcome the work-product privilege.

The court also found that the IRS had not waived the work-product privilege by using the memos’ contents as evidence in the litigation. The court agreed that a use of otherwise privileged documents as evidence in a case (a “testimonial use” of the documents) could be held to be a waiver of privilege in order to prevent a party from unfairly using favorable parts of the documents while not revealing the unfavorable parts. However, the court found that while the IRS had referred to the documents in its response to the taxpayers’ motion for costs, it had not used them as evidence to support its position, so it had not waived the work-product privilege.

Thomas J. Ratke, 129 TC No. 6 (2007)

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