Tax Court Won’t Bar IRS Contact With Investors in Easement Case

OCONEE LANDING PROPERTY, LLC, OCONEE LANDING INVESTORS, LLC, TAX MATTERS PARTNER,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

United States Tax Court
Washington, DC 20217

ORDER

This is a syndicated conservation easement case. In December 2015 petitioner issued a private placement memorandum and secured investments from 24 individual investors. Shortly thereafter Oconee Landing Property, LLC (Oconee), of which petitioner is the tax matters partner (TMP), donated a conservation easement over newly acquired property and claimed a charitable contribution deduction. The Internal Revenue Service (IRS or respondent) disallowed the deduction and determined penalties. Petitioner timely petitioned this Court for readjustment of the partnership items, and the parties are now engaged in discovery.

As part of informal discovery respondent has contacted some of Oconee's investors to request information related to the syndicated easement transaction. Asserting these information requests are improper, petitioner has moved for a protective order under Rule 103.¹ Petitioner contends that the investors are “constituents” of a represented organization and that respondent is thus prohibited from communicating with them under the ABA Model Rules of Professional Conduct (Model Rules). Finding no merit in this argument, we will deny petitioner's motion.

Background

The following facts are derived from the pleadings, the parties' motion papers, and the exhibits and declarations attached thereto. They are stated solely for purposes of deciding petitioner's motion and not as findings of fact in this case. Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), aff'd, 17 F.3d 965 (7th Cir. 1994).

The real estate at issue is a 355-acre tract of land (Property) located in Greene County, Georgia. The Property was acquired by James Reynolds and Mercer Reynolds in November 2003. In 2014 the Reynoldses caused the Property to be contributed, in exchange for membership interests, to Carey Station, LLC, a newly formed limited liability company (LLC). In May 2015 the Reynoldses signed an engagement letter on behalf of Carey Station to arrange a syndicated conservation easement transaction. They hired Strategic Capital Partners, LLC, to syndicate and promote the transaction. The promoters have recently become the focus of a class action suit. See Hoover v. Strategic Capital Partners, LLC, No. 1:21-cv-1299 (N.D. Ga. filed Mar. 30, 2021).

In November 2015 Oconee was organized as a “manager-managed” LLC. The operating agreement designated petitioner as Oconee's managing member. Petitioner was also organized as a “manager-managed” LLC. Its operating agreement designated Carey Station Manager, LLC, as its managing member. The Reynoldses, through other entities, manage Carey Station Manager.

Strategic Capital Partners solicited investors through a private placement memorandum. It received commitments from 24 individual investors who collectively invested $4,655,000. In exchange for their investments, the investors received membership interests in petitioner.

On December 21, 2015, Carey Station contributed the Property to Oconee in exchange for a 99% membership interest in Oconee. Two days later, petitioner purchased from Carey Station a 97% interest in Oconee for $2,440,000. Eight days later, on December 31, 2015, Oconee granted to the Georgia Alabama Land Trust a conservation easement over the Property. Oconee at that point was owned 97% by petitioner, 2% by Carey Station, and 1% by Carey Station Manager.

Oconee filed Form 1065, U.S. Return of Partnership Income, for its 2015 tax year. On that return it valued the Property (before placement of the easement) at $21,200,000, and it claimed a charitable contribution deduction of $20,670,000 for the donation of the easement. This claimed deduction passed through to Oconee's members and to petitioner's investors as “indirect” partners of the partnership.

The IRS selected Oconee's return for examination. Following examination of that return the IRS issued petitioner, on April 4, 2019, a notice of final partnership administrative adjustment disallowing the charitable contribution deduction in full. The IRS determined a 40% “gross valuation misstatement” penalty under section 6662(h) and (in the alternative) a 20% accuracy-related penalty under other Code provisions. Petitioner, as Oconee's TMP, timely petitioned this Court for readjustment of the partnership items.

The parties are currently engaged in discovery. As part of informal discovery respondent requested from petitioner certain information related to the investors, including “all documents that were provided to potential investors” and “all correspondence” between Oconee and the investors. Petitioner did not provide satisfactory responses to these requests, stating that its counsel “does not and has not represented any of the partners of Oconee Landing Investors, LLC, [or] Carey Station, LLC . . . in connection with this case.”

In an attempt to obtain information that petitioner declined to produce, respondent in January 2021 initiated communications with one or more of the investors. Respondent's counsel initially telephoned the investor and asked to discuss the case informally. If an investor indicated that he or she was represented by an attorney, respondent's counsel ended the call and (in some cases) proceeded to contact the investor's representative.

Petitioner has supplied the Court with one example of these communications, a redacted November 2021 letter from respondent's counsel to the representative of one investor. This letter began as follows:

You stated that you represent [redacted], who was an investor in the transaction. As a partner or member of the LLC, we believe that he may have documents or information relevant to the litigation. Moreover, as a party to the litigation pursuant to Tax Court Rule 247(a), he may also be a potential witness who may be called to testify at trial.

We are writing to request certain information and documents . . . We would also appreciate the opportunity to speak with you and [redacted] informally. Your cooperation would be greatly appreciated in this matter, which would avoid more formal measures to obtain the information, e.g. deposition proceedings or serving a subpoena compelling the production of documents and his appearance and testimony at trial.

When petitioner learned about these information requests, its counsel demanded that they be “withdrawn immediately.” Petitioner's counsel stated that she “represents the partnership” and that the Model Rules “prohibit contacts with represented parties and constituents of such represented parties.” Respondent declined to withdraw the information requests, explaining that his communications did not violate the Model Rules because petitioner's counsel does not represent any of the individual investors. Petitioner then moved for a protective order under Rule 103.

Discussion

“The purpose of discovery in the Tax Court is to ascertain facts which have a direct bearing on the issues before the Court.” Ash v. Commissioner, 96 T.C. 459, 463 (1991). But discovery is not limitless. Rule 103 protects parties from “[u]nnecessarily broad discovery.” Ibid. Under Rule 103(a) the Court may, “for good cause shown,” issue an order “to protect a party or other person from annoyance, embarrassment, oppression, or undue burden or expense.” “The party seeking the protective order must establish good cause.” Estate of Yaeger v. Commissioner, 92 T.C. 180, 189 (1989) (stating that “conclusory or unsupported statements” are not sufficient to establish good cause).

Generally speaking, informal requests for information or interviews “are not subject to restriction under Rule 103” because they “do not fall within our discovery procedures.” Fu Inv. Co. v. Commissioner, 104 T.C. 408, 410 (1995). Respondent has made informal requests for information to certain individuals who invested in the transaction. These individuals are not represented by petitioner's counsel, and respondent's counsel has advised the investors that their cooperation is voluntary.

Under these circumstances, it is hard to see how respondent's requests could be “subject to restriction under Rule 103.” Ibid. Because his requests have been directed to the investors rather than petitioner, the requests would not impose on petitioner any “annoyance, embarrassment, oppression, or undue burden.” See Rule 103(a). And because the investors are free (directly or through their attorney if represented) to decline respondent's overture, we do not see how respondent's request could be thought to impose oppression, undue burden, or undue expense on them.²

Petitioner nevertheless seeks to justify a protective order on the theory that respondent's informal requests breach certain ethical obligations. See Fu Inv. Co., 104 T.C. at 410-11 (noting that we have “inherent powers” to “control the conduct of attorneys” and “prevent injustice”). Rule 201(a) requires practitioners to “carry on their practice in accordance with the letter and spirit of the Model Rules.” Petitioner contends that respondent's counsel has violated Model Rule 4.2.

Model Rule 4.2 is captioned, “Communication with Person Represented by Counsel.” It provides: “In representing a client, a lawyer shall not communicate about the subject of the representation with a person the lawyer knows to be represented by another lawyer in the matter, unless the lawyer has the consent of the other lawyer. . . .” Model Rules of Pro. Conduct R. 4.2 (Am. Bar Ass'n 1983). This rule is designed to protect the attorney-client relationship and prevent improper ex parte communications. See Hill v. St. Louis Univ., 123 F.3d 1114, 1121 (8th Cir. 1997); Graham v. United States, 96 F.3d 446, 449 (9th Cir. 1996).

At first blush, Model Rule 4.2 would seem to have no application here. As petitioner's counsel has repeatedly asserted, none of the individual investors is “represented by [petitioner's counsel] in th[is] matter.” Some of these investors may be represented by their own counsel. But petitioner does not challenge respondent's representation that, as soon as he learns that an investor is “represented by another lawyer in the matter,” ibid., he will immediately cease communication with that person and direct any future communication to that person's lawyer.

That being so, petitioner directs its argument to Comment 7, which provides that “constituents” of a represented entity may fall within the scope of the represented-party rule. See Model Rules of Pro. Conduct R. 4.2, cmt. 7 (Am. Bar Ass'n 2002). The Comment defines a “constituent” as a person “who supervises, directs or regularly consults with the organization's lawyer concerning the matter or has authority to obligate the organization with respect to the matter or whose act or omission in connection with the matter may be imputed to the organization for purposes of civil or criminal liability.” Ibid. Petitioner contends that the investors are “constituents” of Oconee and thus covered by Model Rule 4.2. As the party seeking the protective order, petitioner bears the burden on this point. See Fu Inv. Co., 104 T.C. at 413-16 (concluding that Model Rule 4.2 did not prohibit the IRS from interviewing former employees of the taxpayer).

We find that petitioner has not discharged its burden. Petitioner has failed to establish — indeed, it has not attempted to show — that the individual investors “supervise, direct, or regularly consult with” petitioner's counsel regarding this case. Petitioner has not alleged, for example, that any of the investors regularly reviews draft stipulations, motions, or Court orders, or that they discuss or influence litigation strategies. There is no indication that they have the authority to fire petitioner's lawyers and hire new ones. Those powers, along with the power to hire expert witnesses and negotiate settlement agreements, appear to lie with petitioner's managing member, Carey Station Manager, which is in turn managed by the Reynoldses. Other than Mercer Reynolds, who allegedly communicates with petitioner's counsel once or twice a month, petitioner has not identified a single investor as falling within the term “constituent” as defined in Comment 7.³

Nor has petitioner established that the individual investors have “authority to obligate [Oconee]” with respect to this litigation. Model Rules of Pro. Conduct R. 4.2 cmt. 7. The investors are non-managing members of petitioner; as such, they have no authority to bind Oconee. See Ga. Code Ann. § 14-11-301(b)(1) (providing that a non-managing member of a manager-managed LLC is not an “agent” of the LLC). As the relevant operating agreements make clear, only Carey Station Manager (through petitioner) has the power to direct Oconee's affairs. Petitioner does not dispute this fact, conceding that “the individual partners cannot 'bind' the entity under agency principles.”⁴

In short, petitioner has not shown that the investors with whom respondent wishes to speak fall within the scope of Comment 7. They are not “constituents” of Oconee within the contemplation of Model Rule 4.2. If these investors believe that informal communication with respondent will best serve their own interests, then they should be free to speak.

We likewise reject the notion that respondent's informal requests display an “improper attempt to circumvent this Court's limitations on discovery.” Respondent began contacting individual investors only after his efforts to obtain the information from petitioner proved unsuccessful. Petitioner is now seeking to prevent respondent from securing that same information through other informal means. A protective order under Rule 103 is not an appropriate means to that end.

Petitioner next contends that respondent's informal requests “call for privileged information” and “invade the partnership's privilege.” We rejected a substantially similar argument in Fu Investment Co., 104 T.C. at 415-16. Here, as there, petitioner has raised only “general assertions that the . . . [investors] were privy to privileged communications.” Id. at 415. As we explained in that case, bare assertions of privilege are not sufficient to warrant a protective order. Id. at 416. In any event, respondent has an obligation to “refrain from eliciting or inducing statements . . . that involve privileged communications.” Ibid. (citing Model Rules of Pro. Conduct R. 4.4). If the investors divulge privileged information during informal interviews, respondent has represented that he will “treat any disclosure . . . as an inadvertent disclosure” under the Federal Rules of Evidence and “immediately notify petitioner.” See Fed. R. Evid. 502(b) (listing circumstances where disclosure does not waive privilege).⁵

During a conference call to discuss the motion, we invited petitioner to submit declarations from investors (or similar evidence) demonstrating that they are “constituents” of Oconee within the meaning of Model Rule 4.2 and Comment 7. Petitioner submitted no such declarations. Instead it submitted an unsworn declaration from an ethics professor. He offers a legal opinion on the ultimate issue before the Court, on the basis of “factual assumptions” supplied to him by petitioner's counsel.

Respondent has moved to strike this declaration for noncompliance with Rule 143(g), which requires (among other things) that expert witness testimony take the form of a report, exchanged in advance with the opposing party, and that the expert be available for cross-examination. We need not decide that question because we agree with respondent that the declaration should be disregarded as impermissible advocacy in contravention of Federal Rule of Evidence 702. The declaration offers no help to the Court in understanding any evidence, grasping the inner workings of any industry, or determining any fact in issue. It simply expresses the declarant's personal opinion — aligning precisely with petitioner's argument — about how the legal question currently before the Court should be decided. That is the province of the Court, not of an expert. See, e.g., Hosp. Corp. of Am. v. Commissioner, 109 T.C. 21, 59 (1997) (“Testimony that expresses a legal conclusion and does not assist the trier of fact is not admissible.”); Alumax, Inc. v. Commissioner, 109 T.C. 133, 171 (1997) (“We shall disregard any opinion of an expert that constitutes nothing more than that expert's legal opinion or conclusion about a particular matter.”), aff'd, 165 F.3d 822 (11th Cir. 1999).

For these reasons, it is

ORDERED that petitioner's Motion for Protective Order Pursuant to Rule 103, filed January 6, 2022, is denied. It is further

ORDERED that respondent's Motion to Strike, filed March 15, 2022, is denied as moot.

Albert G. Lauber
Judge