Appeal from the United States District Court for the District of Idaho Edward J. Lodge, District Judge, Presiding D.C. No. 1:08-cv-00452-EJL
The opinion of the court was delivered by: M. Smith, Circuit Judge:
Argued and Submitted October 8, 2010-Seattle, Washington
Before: Sidney R. Thomas and Milan D. Smith, Jr., Circuit Judges, and Raner C. Collins, District Judge.*fn1
Opinion by Judge Milan D. Smith, Jr.
The Internal Revenue Service (IRS or Government) challenges the district court's ruling denying its motion to enforce a summons against Defendant-Appellant, Mark Richey, seeking production of an appraisal work file. The IRS contends that the district court erred when it found that the summons was not issued in good faith, and that the appraisal work file was protected by the attorney-client privilege and work-product doctrine.
We hold that the IRS summons was issued in good faith, and that the district court erred in finding that Richey's entire appraisal work file was protected by both the attorney-client privilege and the work-product doctrine. We therefore reverse and remand to the district court.
FACTUAL AND PROCEDURAL BACKGROUND
Intervenors-Appellees Alan and Wendy Pesky (the Peskys or Taxpayers) owned general and limited partnership interests in FAWPEAS, an Idaho limited partnership. FAWPEAS, in turn, was the 50% owner of certain real property located in Ketchum, Idaho (the Property). In January 2002, the Peskys retained the law firm of Thornton Byron LLP (Thornton) to provide legal advice to them concerning the granting by FAWPEAS of a conservation easement on the Property (the Easement). On March 7, 2002, the Peskys caused FAWPEAS to execute a conservation deed for the Property in favor of the Nature Conservancy. On May 7, 2002, Thornton retained Mark Richey, an MAI-certified appraiser, to provide "valuation services and advice with respect to the conservation easement." In response, Richey prepared an appraisal report to be filed with the Taxpayers' 2002 federal income tax return, and a work file concerning the value of the Easement.
Given their partnership interest in FAWPEAS, the Peskys claimed an approximately $200,000 charitable contribution deduction on their 2002 federal income tax return, stemming from their proportionate share of the alleged value of the Easement. The approximately $1.3 million bulk of the deduction was carried over on the Peskys' 2003 and 2004 federal income tax returns. Richey's appraisal report was attached to the Peskys' 2002 federal income tax return, as required by Treasury Regulation section 1.170A-13(c)(1). The appraisal report noted: "[T]his report may not include full discussion of the data, reasoning, and analyses that were used in the appraisal process to develop the appraiser's opinion of value. Supporting documentation concerning the data, reasoning, and analyses is retained in the appraiser's file."
On July 28, 2008, the IRS mailed a summons to Richey instructing him to appear before IRS Agent Shane Cole, and to provide testimony, documents, books, records, and information related to the services Richey provided to the Peskys. Asserting the protections of the attorney-client and work-product privileges, Thornton directed Richey not to comply with the summons and Richey followed Thornton's instructions. In October 2008, the Government filed a petition to enforce the summons. Agent Cole attached a declaration to the petition, stating that he was conducting an investigation of the Peskys' 2003 and 2004 federal income tax returns, had summoned Richey to inquire about the valuation of the Ease- ment, and did not have the documents needed to determine the Peskys' correct tax liability.
In December 2008, the IRS issued a Notice of Deficiency to the Peskys, which disallowed any charitable deduction stemming from the Easement for the 2003 and 2004 federal income tax returns. The Peskys responded to the Notice of Deficiency by paying the assessment, interest, and penalties claimed by the IRS. On February 11, 2009, the district court granted the Peskys' motion to intervene in the Government's summons enforcement action against Richey. The district court also ordered Richey to show cause why he should not be compelled to comply with the summons. At the show cause hearing, the district court ordered the parties to provide supplemental briefing addressing whether the IRS investigation had closed as the result of the Peskys' agreement to pay the assessment, interest, ...