"Tax Shelter" Exception To The Tax Practitioner- Client Privilege Is Broad Enough To Encompass Any Plan Who Significant Purpose Is To Avoid Taxes
VALERO ENERGY CORPORATION v. UNITED STATES OF AMERICA (June 17, 2009)
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Valero Energy Corp., a large U.S. refiner, acquired Ultramar Diamond Shamrock Corporation ("UDS”) in 2001. Prior to the transaction, Valero received relevant tax advice from Arthur Andersen. With Arthur Andersen's help, Valero initiated a complex set of transactions that resulted in tax deductible losses in excess of $100 million. The size of the deduction caught the eye of the IRS, which issued a summons to Arthur Andersen seeking documents relating to its tax analysis for Valero or UDS. Valero moved to quash the summons, in part based on the tax practitioner-client privilege. The government argued that the tax practitioner-client privilege did not apply because of the statutory exception for documents made in connection with the promotion of a tax shelter. The district court originally upheld Valero’s claim of privilege, concluding that the government failed to meet its burden. On a second round of document production, however, the government again challenged the privilege and supported its challenge with a detailed affidavit. This time the district court concluded the government met its burden with respect to some documents and ordered them produced. Valero appeals.
In their opinion, Judges Rovner, Evans and Tinder affirmed. The Court noted that Congress created the tax practitioner-client privilege in 1998 as a limited shield of confidentiality. It is no broader than the attorney-client privilege and does not protect general accounting advice, even if provided by an attorney. The Court first rejected Valero’s arguments that the bulk of the documents were even covered by the privilege. Although some of the documents contained legal analysis, the Court concluded they were not privileged because they contained the type of information generally collected in the process of preparing a return. With respect to the small group of documents that the district court found were protected, the Court agreed with the government that they fell within the exception for communications in connection with the promotion of a tax shelter. Under the statute, a "tax shelter" includes any plan or arrangement a "significant purpose" of which is the avoidance of income tax. Because the privilege is an exception to the broad summons power of the IRS, the Court declined to broaden the privilege through a narrow interpretation of the exception. Given that the Valero documents addressed the structure of the transactions that resulted in a large tax deduction, the Court concluded that they fit within the exception and were not covered by the privilege.
