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Appraiser Says IRS Summons Improper, Seeks Irrelevant Information

APR. 13, 2020

Claud Clark III v. United States

DATED APR. 13, 2020
DOCUMENT ATTRIBUTES

Claud Clark III v. United States

[Editor's Note:

The exhibits can be viewed in the PDF version of the document.

]

CLAUD CLARK III,
Petitioner,
v.
UNITED STATES OF AMERICA,
Defendant.

IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF ALABAMA
NORTHERN DIVISION

BRIEF TO SHOW CAUSE WHY CLARK'S PETITION TO
QUASH SUMMONS SHOULD NOT BE DENIED

Claud Clark III petitioned to quash the summons issued by the Internal Revenue Service (“IRS”) to the Alabama Real Estate Appraisers Board (the “Alabama REAB”) for records relating to an administrative proceeding involving Mr. Clark in 2019. The government moved for summary denial of Mr. Clark's Petition, and the Court ordered Mr. Clark to show cause why the Petition should not be denied.

The Court should quash the summons because the requested information is entirely irrelevant to the matter for which it has purportedly been sought — the IRS's audit of the 2016 taxable year of an entity that was not involved in any way with the administrative proceeding. The summons at issue thus fails at least two of the four required elements under United States v. Powell, 379 U.S. 48 (1964), relevance and proper purpose. Alternatively, the Court should deny the United States' Motion for Summary Denial and grant a hearing on the merits of the Petition, including an opportunity for Mr. Clark to examine the IRS revenue agents and Department of Justice (“DOJ”) attorney who provided declarations in support of the United States' motion to dismiss the Petition.

ARGUMENT1

Mr. Clark has been an appraiser for nearly 35 years. An Alabama native, he became widely known to the tax world in 2009 following the United States Tax Court's decision in Kiva Dunes Conservation, LLC v. Comm'r, 97 T.C.M. (CCH) 1818 (2009). In Kiva Dunes the Tax Court allowed a $28,656,004 charitable contribution deduction for a conservation easement covering a golf course on the Fort Morgan Peninsula in Baldwin County, Alabama. Mr. Clark completed the appraisal substantiating the deduction claimed on the LLC's return and testified as an expert witness at trial. The Tax Court found Mr. Clark's testimony to be credible and his assumptions to be reasonable and amply supported, and it accepted his valuation with only a modest adjustment.

In the years that followed, increasing numbers of taxpayers became interested in preserving property in a manner that qualified for a charitable contribution deduction; Mr. Clark continued his appraisal practice; and business kept coming in. Naturally this led to more dealings between Mr. Clark and the IRS. Since 2009, more than 200 of Mr. Clark's appraisals have been submitted to the IRS to substantiate charitable contribution deductions, many of which the IRS has audited.2 Only once has the IRS asserted a valuation penalty against Mr. Clark — in 2011 under 26 U.S.C. § 6695A — which it eventually conceded, refunding the amount he paid after he contested it. And no complaint against Mr. Clark has ever been filed with the IRS Office of Professional Responsibility.

In recent years the IRS has dramatically increased its enforcement efforts in the conservation-easement area. In December 2016 it released Notice 2017-10, 2017-4 I.R.B. 544 (2017), which designated certain syndicated conservation easement transactions as “listed transactions” and thereby triggered wide-ranging reporting obligations for persons involved in such transactions. Its first major move after issuing the Notice was initiating a suit in the Northern District of Georgia to enjoin six defendants from engaging in conservation easement transactions, United States v. Zak, Case No. 1:18-cv-05774-AT (N.D. Ga. filed Dec. 18, 2018), which it has since widely publicized in efforts to deter participation in such transactions.

Mr. Clark is a defendant in the Zak case and the only one who is an appraiser. What has ensued is a multi-front attack on Mr. Clark that encompasses dozens of his appraisals and reaches back nearly ten years.3 Taken in context, the issuance of the summons in this case is one of a series of coordinated efforts aimed at overwhelming Mr. Clark and driving him out of the appraisal business by whatever means necessary.

As shown below, the summoned information cannot possibly be relevant to the IRS's stated purpose, i.e., the examination of Rock Spring, LLC (“Rock Spring”). Any other purpose underlying the summons is necessarily improper, and the Court should accordingly quash it.

I. BURDEN OF PROOF

Mr. Clark acknowledges that he bears the burden of proof, because the Court has ordered him to show cause why the Petition should not be dismissed. La Mura v. United States, 765 F.2d 974 (11th Cir. 1985) (placing burden on petitioner upon defendant's prima facie showing). The evidence will show that the IRS has failed to satisfy Powell because the summoned documents are completely irrelevant to the stated purpose, the audit of Rock Spring, and instead are being sought for an improper purpose. United States v. Powell, 379 U.S. 48, 57-58 (1964). In addition, some of the documents are not subject to the summons because they are privileged, confidential under state law, or already in the possession of the IRS. Upjohn Co. v. United States, 449 U.S. 383, 398-99 (1981); Ala. Code §§ 34-27A-12(b), 36-12-40; Powell, 379 U.S. at 58.

Although he bears the burden, Mr. Clark does not need to go so far as to produce direct evidence showing that the summons was issued for an improper purpose. By its nature, such evidence is not accessible to Mr. Clark, but as the Supreme Court recently said, “circumstantial evidence can suffice to meet that burden; after all, direct evidence of another person's bad faith, at this threshold stage, will rarely if ever be available.” United States v. Clarke, 573 U.S. 248, 253-55 (2014); see also, United States v. Gertner, 65 F.3d 963, 967 (1st Cir. 1995) (“The taxpayer is not at this stage required to disprove the government's profession of good faith.”).

Rather, Mr. Clark can meet the burden that entitles him to a hearing by providing “credible evidence . . . and facts that give rise to a plausible inference of improper motive.” Clarke, 573 U.S. at 253-55. The Court can, and should, facilitate this inquiry: “The court has discretion in deciding whether to order the questioning of IRS agents.” Belcik v. United States, Case No. 2:17-mc-01566-RDP, 2018 WL 4052178 (N.D. Ala. Aug. 24, 2018) (citing Clarke).

II. THE DOCUMENTS SOUGHT LACK RELEVANCE TO THE AUDIT OF ROCK SPRING.

The government claims the documents it has summoned “may throw light upon” its examination of Rock Spring's 2016 return, and it focuses on that low threshold. But the summons power has limits: the government must establish a “realistic expectation” that the summoned documents might contain relevant information. United States v. Harrington, 388 F.2d 520, 523-24 (2d Cir. 1968); La Mura v. United States, 765 F.2d 974, 981-83 (11th Cir. 1985) (quoting Harrington); United States v. Wyatt, 637 F.2d 293, 300-01 (5th Cir. 1981) (binding in the 11th Circuit per Bonner v. City of Prichard, Ala., 661 F.2d 1206 (11th Cir. 1981)); In re Newton, 718 F.2d 1015, 1019-20 (11th Cir. 1983); Jordan v. United States, No. 2:06-MC-3279-MEF, 2006 WL 1418638 (M.D. Ala. May 19, 2006). As there is simply no way that information in the summoned documents can affect any item on Rock Spring's 2016 return, the IRS's claims to the contrary do not withstand scrutiny.

As a preliminary matter, the IRS seeks both public and confidential documents from the Alabama REAB. The public records include the administrative complaint, various procedural orders, and the final order in the matter, all of which the IRS could obtain without a summons.4 The other documents are confidential under Alabama law, see Ala. Code §§ 34-27A-12(b), 36-12-40, and, as discussed below, some of them are also privileged.

Both the public and confidential documents are irrelevant to the audit of Rock Spring. While there is no practical reason to object to the production of public documents (and, in fact, we object to the use of a summons to seek documents that are public records pursuant to Powell), this argument addresses both the public and confidential documents, because the irrelevance of all the documents makes the irrelevance of the confidential documents all the more apparent.

A. The determination of whether Mr. Clark was a “qualified appraiser” when he appraised the Rock Spring property is made as of the date of the appraisal; subsequent events are not relevant to that determination.

Rock Spring was required to obtain a “qualified appraisal” conducted by a “qualified appraiser” in order to substantiate the charitable contribution deduction claimed on its 2016 return. 26 U.S.C. § 170(f)(11)(E). Rock Spring engaged Mr. Clark to prepare an appraisal that it used to fulfill such requirements, which he completed on August 10, 2017.

Internal Revenue Code section 170(f)(11)(E)(ii) and (iii) define a “qualified appraiser” as an individual who:

1. Earned an appraisal designation from a recognized professional appraiser organization OR has otherwise met specified minimum education and experience requirements;

2. Regularly performs appraisals for which the individual receives compensation;

3. Meets such other requirements as may be prescribed by the Secretary in regulations or other guidance;

4. Demonstrates verifiable education and experience in valuing the type of property subject to the appraisal; and

5. Has not been prohibited from practicing before the IRS by the Secretary under 31 U.S.C. § 330(c) at any time during the three-year period ending on the date of the appraisal.

The statute was enacted in August 2006, and a few months later the IRS issued Notice 2006-96, 2006-2 C.B. 902 (2006), which provided guidance on the statutory requirements for being considered a “qualified appraiser,” including specific criteria for meeting the education and experience standards. The Notice remained in effect until January 1, 2019, and it therefore applies in the case of the charitable contribution deduction claimed by Rock Spring. See T.D. 9836, 83 Fed. Reg. 36417-01 (July 30, 2018); Treas. Reg. § 1.170A-17(c).

Section 3.01 of Notice 2006-96 unambiguously states that “[t]he determination of whether an appraiser is qualified . . . must be based on the appraiser's qualifications as of the date the appraisal is made” (emphasis added), and Mr. Clark indisputably met the criteria with respect to the Rock Spring appraisal. He was licensed in Alabama at the time he completed the appraisal, and even if he had not been, he would still have qualified by meeting the education and experience requirements. Notice 2006-96, § 3.03. He regularly performed appraisals for which he received compensation, and had not been prohibited from practicing before the IRS under 31 U.S.C. § 330(c) at any time during the three-year period ending on the date of the appraisal. Neither the state of his Alabama license after that time, nor any other subsequent event, can affect his status as a qualified appraiser for purposes of the Rock Spring appraisal. This is the IRS's own position.

Moreover, the IRS has repeatedly recognized Mr. Clark as a qualified real property appraiser. In Kiva Dunes the IRS conceded in its post-trial brief that Kiva Dunes was entitled to a charitable contribution deduction under 26 U.S.C. § 170(a)(1), which necessarily constitutes a concession that Mr. Clark and his appraisal met the applicable standards.5 97 T.C.M. (CCH) 1818 (2009). And in Pine Mountain Preserve, LLLP v. Comm'r, 116 T.C.M. (CCH) 597 (2018), the IRS stipulated that Mr. Clark was a qualified appraiser and that he prepared a qualified appraisal. The IRS conceded the same points in its post-trial answering brief in Glade Creek Partners v. Comm'r, No. 022272-17 (T.C. filed Dec. 18, 2019), Ex. 3.

The United States admitted in its Answer that even a prohibition on practicing before the IRS, its most significant possible sanction against a practitioner under 31 U.S.C. § 330(c), would not affect the validity of an appraisal submitted to the IRS before the discipline was imposed. Answer, ECF No. 7 ¶ 11; 26 U.S.C. § 170(f)(11)(E)(iii)(II). Yet in its brief, the United States contends that “the summoned documents are relevant to whether Clark is a qualified appraiser and whether Rock Spring obtained a qualified appraisal to substantiate its . . . deduction” and that “[i]f Clark is not a 'qualified appraiser' . . . then Rock Spring improperly claimed the tax deduction.” U.S. Brief, ECF No. 9 at 10 (emphases on the present tense added). This argument conflates what happened in 2017 (the Rock Spring appraisal) with what happened in 2019 (the Alabama REAB proceeding). The statutory requirements of a qualified appraiser are not indefinitely forward-looking, for that would contradict the clear rule of Notice 2006-96 and 26 U.S.C. 170(f)(11)(E)(iii), as well as plain common sense.

In short, there is no possibility that the 2019 administrative proceeding, or the subsequent voluntary surrender by Mr. Clark of his Alabama license, could have any bearing on whether Mr. Clark was a qualified appraiser with respect to the Rock Spring appraisal two years earlier. It follows that it can have no bearing on the validity of the deduction at issue in the audit of Rock Spring's 2016 return and that no documents related to it are relevant to the audit.

B. None of the documents sought bear on the value of the Rock Spring charitable contribution.

In addition to its incorrect legal argument, discussed above, the United States wrongly claims that the summoned documents “might shed light on the appropriateness of Clark's methodology and valuation” of the Rock Spring property. U.S. Brief, ECF No. 9 at 11. Real property is unique,6 and the IRS has not even suggested how the Alabama REAB's materials regarding an appraisal Mr. Clark completed years earlier on a vastly different property in the opposite corner of the state might shed light on the valuation of Rock Spring's contribution. Perhaps for the IRS agents located in Atlanta and the DOJ attorney located in Washington, D.C., it suffices that the properties are both simply in Alabama, but it would be unreasonable for the IRS to compare these appraisals and draw arbitrary and faulty conclusions from that comparison.

Furthermore, no sound inferences could be drawn from the Alabama REAB materials because its inquiry came to no conclusions — it was resolved by Mr. Clark's voluntary surrender of his license. There was no hearing, the administrative judge made no determinations, and the Alabama REAB acknowledges that “There have been no admission of facts or guilty plea to the administrative charges lodged against Mr. Clark in the case.” Ex. 2. While the Board commenced an inquiry to ascertain whether there were flaws in Mr. Clark's appraisal, the allegations in the complaint were neither substantiated nor challenged because the matter was settled. “[S]tatements made in furtherance of settlement are never relevant” as they “may be motivated by a desire for peace rather than from any concession of weakness of position.” Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 983 (6th Cir. 2003) (emphasis in original).

Nevertheless, the United States contends in its brief that such documents “may shed light on whether Clark made the same or similar errors” and “[w]hether these defects exist in the Rock Spring appraisal.” U.S. Brief, ECF No. 9 at 11. But the government has not explained how someone could extrapolate meaningful information from comparing the unchallenged allegations in the Alabama REAB matter to an appraisal of a vastly different property years later.

III. THE DOCUMENTS WERE SOUGHT FOR AN IMPROPER PURPOSE, NOT FOR THE AUDIT OF ROCK SPRING.

Based on the foregoing, it is clear that the Alabama REAB documents are not legally or factually relevant to the audit of Rock Spring. In a vacuum, it might be reasonable to assume the summons was simply the action of an over-eager revenue agent who took his background research a step too far in an otherwise legitimate examination. But this case does not exist in a vacuum, and there is ample evidence suggesting that the summons was issued to further improper ulterior motives, and not for the audit of Rock Spring.

As noted previously, Mr. Clark is a defendant in United States v. Zak, the main event in the IRS's enforcement campaign against conservation easement deductions. A day after filing the lawsuit the DOJ and IRS touted it in a press release, DOJ Press Release 18-1672 (Dec. 19, 2018), and since then the IRS has referenced the case in a multitude of communications seeking to deter participation in conservation easement transactions. See e.g., IRS News Release IR-2019-47 (Mar. 19, 2019); IRS News Release IR-2019-182 (Nov. 12, 2019). Recently, in a report to the court in the Zak case requesting massive expansions of discovery, DOJ attorneys reaffirmed their belief that “the outcome of this case will have significant public impact.” Joint Proposed Amended Scheduling Order at 2, United States v. Zak, Case No. 1:18-cv-05774-AT (N.D. Ga. filed Dec. 18, 2018), ECF No. 128.

In the Zak case the government is seeking to permanently enjoin Mr. Clark from making appraisals, and is asking for disgorgement of the gross fees Mr. Clark has earned over nearly ten years (an amount that far exceeds his net worth), notwithstanding that the IRS has never sustained an appraiser penalty against him or referred him for discipline and that no court has ever found one of his appraisals to contain a gross valuation overstatement. (Recognizing this inconsistency, the IRS has only now undertaken a new 26 U.S.C. § 6695A examination of Mr. Clark.) Meanwhile, the government has put ninety-six conservation easement transactions at issue spanning from 2009 to 2016, about seventy of which involve Mr. Clark. Although many of the conservation easements have been or are being audited by the IRS, the government's attorneys have made clear their intention to conduct a de novo evaluation of each transaction. Joint Preliminary Report and Discovery Plan at 7, 21, 23, United States v. Zak, Case No. 1:18-cv-05774-AT (N.D. Ga. filed Dec. 18, 2018), ECF No. 56; Transcript of Telephone Conference Proceedings (Jan. 10, 2020) at 34, United States v. Zak, Case No. 1:18-cv-05774-AT (N.D. Ga. filed Dec. 18, 2018), Ex. 4.

So far the government has produced little information regarding IRS examinations of the conservation easements at issue in the Zak case, but what has been provided shows that the same people at the IRS are involved in many of the examinations. For example, IRS appraiser Gary McGurrin was assigned to twenty-one of thirty-three examinations identified by the government as involving Mr. Clark's appraisals. Revenue Agent Benjamin M. Brantley, who is working on the Rock Spring audit and signed a declaration in this matter (ECF No. 9-2), has worked on at least a handful of other audits involving Mr. Clark, including several with Mr. McGurrin, as examining agent, managing revenue agent, or acting team manager.

One examination involving both Mr. Brantley (as managing revenue agent) and Mr. McGurrin is of particular note. It is the earliest examination of a Clark appraisal for which the government has produced records, and those records reflect a familiarity with and bias toward Mr. Clark. The first entry in Mr. McGurrin's activity records is dated April 26, 2013, and it states “[The examining agent] forwarded a referral . . . which was assigned to me and Rick . . . . I skimmed the appraisal and advised [the examining agent] that it was prepared by the same appraiser who had prevailed in Kiva Dunes.” The file also includes a print-out of Mr. Clark's website, which prominently features a picture of him, with “Your hero! Of Kiva Dunes :-)” handwritten in sharpie. Ex. 5. It appears Mr. McGurrin printed this page on January 10, 2014, the same day his activity records indicate that he began to outline his review of Mr. Clark's appraisal, and that he handwrote the note and gave it to Rick Nixon, the other IRS appraiser on the matter. Again, Mr. McGurrin has been involved in at least twenty subsequent examinations involving Mr. Clark's appraisals, including several with Mr. Brantley.

It is with this context that the IRS summons to the Alabama REAB must be evaluated. Doing so, at a minimum, suggests that the true purpose of the summons is to further the IRS's ultimate goal of putting Mr. Clark out of business by bolstering the government's case in United States v. Zak.

A. The true purpose of the summons is to further the United States' efforts in the Zak case.

As described above, the voluntary surrender of Mr. Clark's Alabama license in 2019 can have no effect on the substantiation or value of a contribution of unrelated property that he appraised in 2017. An IRS agent with Mr. Brantley's experience should be well aware of that, and it casts grave doubt on his declaration that “[i]t is necessary to examine [the summoned Alabama REAB documents] in order to properly examine the correctness of Rock Spring's tax return for the tax year ending December 31, 2016.” ECF No. 9-2 ¶ 14. Because there is no legitimate purpose and the only purpose is improper, including to benefit unrelated litigation or harass the taxpayer, the court is obliged to quash the summons. Bicoastal Holding Co. & Subsidiaries v. United States, No. 8:96-cv-01479-EAJ, 1997 WL 369398 (M.D. Fla. March 25, 1997) (although in that case post-hearing discovery was denied because the taxpayer had not met his burden).

Though the Alabama REAB materials are useless in the Rock Spring audit, a few allegations in the Zak complaint demonstrate why the government might find them useful in that case.

Continually and repeatedly, Defendant Clark relied upon inappropriate assumptions, utilized inappropriate methodology and used various techniques to improperly inflate the value of the conservation easements. This inflated value results in Defendant's customers claiming inflated and improper deductions from their participation in the conservation easement syndication scheme. (Complaint at ¶ 150, United States v. Zak, Case No. 1:18-cv-05774-AT (N.D. Ga. filed Dec. 18, 2018), ECF No. 1.)

And further:

Continually and repeatedly, Clark overstated the fair market value of the conservation easements . . . . Clark claims that his appraisals follow the Uniform Standards of Professional Appraisal Practice (“USPAP”), but because of his flawed methodology, inappropriate data and [un]supportable assumptions . . . Clark's appraisals do not comply with USPAP. Clark's appraisals are therefore unreliable . . . . (Complaint at ¶¶ 152, 153, United States v. Zak, Case No. 1:18-cv-05774-AT (N.D. Ga. filed Dec. 18, 2018), ECF No. 1.)

Surely the government would like to review any potential evidence that tarnishes Mr. Clark's reputation as an appraiser or casts doubt on his adherence to USPAP. But right now it cannot issue any third-party subpoenas in the Zak case. Minute Sheet for Proceedings Held in Chambers (Jan. 10, 2020), United States v. Zak, Case No. 1:18-cv-05774-AT (N.D. Ga. filed Dec. 18, 2018), ECF No. 135; cf. Sugarloaf Funding, LLC v. U.S. Dep't of the Treasury, 584 F.3d 340, 348 (1st Cir. 2009) (By contrast, “[w]here the summons is issued before the commencement of judicial proceedings, that summons is generally not found to undermine the discovery process.” (quoting another source)).

Of course issuing the summons on a pretext would take coordination between the IRS and DOJ, but that does not have to be imagined here. Both agencies have publicly announced they are coordinating with respect to the Zak case specifically and enforcement against conservation easement transactions in general. DOJ Press Release 18-1672 (Dec. 19, 2018); IRS Press Release, IR-2019-182 (Nov. 12, 2019). Moreover, the revenue agent who issued the summons has a significant history with the transactions at issue in the Zak case, and the government's lead attorney in that case is the same attorney who appeared for the United States to contest Mr. Clark's Petition to quash.

The institutional posture of the IRS and the motives of the agents involved are important considerations in evaluating the propriety of the summons. See United States v. LaSalle Nat. Bank, 437 U.S. 298, 316 (1978); United States v. Millman, 822 F.2d 305 (2d Cir. 1987). Mr. Clark is a defendant in the government's flagship enforcement case against conservation easement tax deductions, a key component of which is taking down the “hero” appraiser who “prevailed” in Kiva Dunes. And he has long been familiar to the agents and attorneys involved with the summons. Considering all the circumstances, including the new 26 U.S.C. § 6695A examination, it seems evident that the true purpose of the summons was to acquire the Alabama REAB materials for the DOJ and perhaps other IRS agents, and not for purposes of the Rock Spring audit.

If the Court does not immediately quash the summons, then Mr. Clark respectfully asks that he be permitted to examine the IRS revenue agents and DOJ attorney regarding the summons and related matters before a final determination is made. United States v. Clarke, 573 U.S. 248 (2014). The IRS cannot be allowed to hide evidence of improper activity behind its presumed authority to issue summonses.

B. Many of the summoned documents were inadvertently produced in the Zak case, and the pursuit of additional documents underscores the government's improper purpose.

We would like to respectfully correct the Petition regarding our misstatement in paragraph 24. Mr. Clark inadvertently produced 68 pages related to the Alabama REAB inquiry in a production with hundreds of thousands of pages to the DOJ in the Zak case, and he has asked for them back.7 Included in the materials that Mr. Clark inadvertently produced was the review appraisal commissioned by the Alabama REAB which served as the basis for many of the allegations in the administrative complaint. The fact that the government already possesses the review appraisal and insists on pushing forward for yet further information, regarding a state administrative proceeding involving an appraisal of property that is completely unrelated and vastly dissimilar to Rock Spring, is further evidence of its improper purposes.

IV. THE ALABAMA REAB FILES CONTAIN PRIVILEGED AND CONFIDENTIAL DOCUMENTS.

The IRS's overreach is further illustrated by its request for documents that are privileged and confidential. It is well-established that “the obligation imposed by a tax summons remains 'subject to the traditional privileges and limitations.'” Upjohn Co. v. United States, 449 U.S. 383, 398 (1981).8 Accordingly, all documents that were part of settlement negotiations between the Alabama REAB and Mr. Clark are privileged and protected from the summons. McKeen v. U-Haul International, Inc., Civil Action No. 3:11-cv-00980-MHT, 2013 WL 11323899 (M.D. Ala. Mar. 20, 2013) (denying production of documents related to settlement negotiations as privileged); Ex parte Water Works and Sewer Bd. of City of Birmingham, 723 So.2d 41 (Ala. 1998) (applying federal jurisprudence to the state rule and denying production of documents relating to settlement negotiations).

The reason statements related to settlement negotiations are privileged is that they are inherently unreliable. After discussing the foundation of the settlement negotiations privilege in federal common law, the Sixth Circuit held: “The public policy favoring secret negotiations, combined with the inherent questionability of the truthfulness of any statements made therein, leads us to conclude that a settlement privilege should exist. . . .” Goodyear Tire & Rubber Co. v. Chiles Power Supply, Inc., 332 F.3d 976, 981 (6th Cir. 2003), cited by the Eleventh Circuit in Baker v. Sec'y, U.S. Dep't of Transp., 452 Fed. Appx. 934 (11th Cir. 2012) (holding “the settlement negotiations privilege does not apply to exchanges in the employment context [where among other things] no formal complaint had been filed. . . .”) (emphasis added);9 cf. Doe No. 1 v. United States, 749 F.3d 999 (11th Cir. 2014) (holding that victims of Jeffrey Epstein had a right to criminal plea deal negotiations).

The Northern District of Alabama has adopted the reasoning in Goodyear: “the Sixth Circuit has wisely observed that 'parties may assume disputed facts to be true for the unique purpose of settlement negotiations [and] these sort of 'facts' would be highly misleading if allowed to be used for purposes other than settlement.'” Bobo v. Agco Corp., No. 5:12-cv-01930-CLS, 2013 WL 12419635 (N.D. Ala. Jun. 7, 2013); see also Kaplan v. Lappin, No. 9:10-cv-80227-KAM, 2011 WL 13225294, at *2 (S.D. Fla. Feb. 23, 2011) (citing Goodyear in holding that revealing details of settlement “would violate the general privilege that cloaks settlement communications from discovery”).

The IRS seeks “[a]ll communications between [the Alabama REAB] and Mr. Clark or his representatives,” which would necessarily include protected communications regarding settling the proceeding. U.S. Brief, ECF No. 9 at 4. Mr. Clark ultimately surrendered his license voluntarily on the basis of correspondence with the Board. The Voluntary Revocation Consent Order recites the terms of this settlement, including that “any remaining complaints are extinguished by this surrender.” Ex. 6 (dated May 16, 2019, signed by Mr. Clark, Maxwell Pulliam, and Lisa Brooks for the Alabama REAB). The settlement of the Alabama REAB proceeding without any findings of fact underscores the lack of relevance of such internal documents to the IRS's tax administration, reinforcing the conclusion that they are instead sought for an improper purpose.

In addition to being privileged, the Alabama REAB file in its entirety is protected by Alabama public records law. Where disclosure would be “detrimental to the best interests of the public,” records are confidential. Ala. Code § 36-12-40. The chapter of the Alabama Administrative Code that regulates the Alabama REAB specifically provides that confidential records “include, but are not limited to, those received by a public officer in confidence, sensitive personnel records, [and] complaints against registrants. . . .” ALA. ADMIN. CODE r. 780-X-1-.14 (2019) (emphasis added); see also, ALA. ADMIN. CODE r. 780-X-App. A (2019) (“[I]t is unethical for a member of a duly authorized professional peer review committee to disclose confidential information or factual data presented to the committee.”). The protection extends to documents whether received, created, or provided by the Alabama REAB, in part to maintain appraiser-client confidentiality as required by Alabama law. Ala. Code § 34-27A-12(b).

The Court of Civil Appeals of Alabama has protected the records of a professional board where an applicant for an architecture license sought disclosure of past licensing examinations. Munger v. State Bd. for Registration of Architects, 607 So.2d 280, 284 (Ala. 1992). The Court applied a balancing test weighing the interest of the record-seeker against “the interest of the general public in having the business of government carried on efficiently and without undue interference.” Id. (quoting Stone v. Consolidated Publ'g Co., 404 So.2d 678 (Ala. 1981)).

While federal purposes sometimes preempt state rights, state law operates unless there is a finding that it in fact obstructs a federal purpose which outweighs it.10 The instant case implicates the right of Alabama to protect documents that it has deemed confidential, the right of the Alabama REAB to exercise its authority without interference, and the right of Mr. Clark as a registrant. Those rights outweigh the IRS's purported need for the documents, which are comprised of unproven allegations and privileged settlement negotiations that concern the valuation of an unrelated property, and which cannot affect Mr. Clark's status as a qualified appraiser of the Rock Spring property. The purpose of 26 U.S.C. § 7609 is to allow the IRS to investigate the accuracy of a taxpayer's liability; the Alabama public records law does not frustrate this purpose in the least, because the confidential documents sought do not bear on Rock Spring's liability.

The IRS issued this summons in the audit of Rock Spring because the property at issue is in Alabama, but that is a pretext and a federal attempt to misuse Alabama's state resources. Based on its response to the Senate Finance Committee, the Alabama REAB also believes these records deserve protection. Ex. 2. In fact, the rights of all Alabama appraisers as well as their Alabama clients are implicated in this, because their confidential information is protected by Alabama statute. Ala. Code § 34-27A-12(b) (providing that appraiser-client confidentiality is protected even when records are provided to the Alabama REAB). While Mr. Clark acknowledges that he does not have standing to speak for all of them, he merely asks that the totality of these interests be weighed against the interests of the IRS in obtaining documents that do not meet even the meager standard for relevance set by Powell.

V. THE IRS ALREADY POSSESSES OR HAS ACCESS TO SOME OF THE SUMMONED DOCUMENTS.

The IRS may not use this summons to obtain documents it already possesses or that are publicly available. United States v. Powell, 379 U.S. 48, 57-58 (1964). To clarify the rights of the IRS to summon the various documents it seeks, the following addresses each category of documents sought and notes the grounds upon which Mr. Clark objects, in addition to his foregoing objections that all of the summoned documents are irrelevant and sought for an improper purpose.

a. “The full complaint against Mr. Clark filed by the complainant.” This is public record; also the IRS possesses it through its counsel at the DOJ.

b. “All information submitted with the complaint to support the allegations.” This request is unclear, as the Alabama REAB initiated the complaint. Nothing was “submitted with the complaint” to the Alabama REAB by a person who was not a member of the Alabama REAB, so there are no documents that fall into this category. In the alternative, for the sake of argument and stating Mr. Clark's objections, this category could be interpreted to include the appraisal of the reviewer that the Alabama REAB engaged to critique Mr. Clark's appraisal. The IRS already possesses this appraisal as well, through its counsel at the DOJ. Furthermore, it is irrelevant to the Rock Spring audit: it is not an appraisal of the property contributed by Rock Spring, and it is not even an appraisal by Mr. Clark.

c. “A copy of all appraisals which are the subject of any complaint.” This is a request for the appraisal that the Alabama REAB reviewed. First, the IRS already possesses the appraisal of this property, which was submitted with a tax return. Second, Mr. Clark provided the appraisal to the IRS in 2017. Third, the IRS possesses it through its counsel at the DOJ.

d. “All notes, minutes, transcripts, and other records of hearings held by the Board on the matter regarding Mr. Clark.” No hearing was held, as is documented in the final order, which is public, so there are no documents that fall into this category. Ex. 6.

e. “All documents, communications, notes, workpapers, and determination memoranda relating to the investigation of Mr. Clark by the Board pursuant to the complaint.” The resolution is public record. Any other documents that fall into this category are likely protected by the settlement negotiation privilege, and/or also protected by state law. Ala. Code §§ 34-27A-12(b) (appraiser-client confidentiality), 36-12-40 (public records and exceptions); ALA. ADMIN. CODE r. 780-X-1-.14 (2019) (confidential records of the Alabama REAB).

f. “All communications between your office and Mr. Clark or his representatives. This would include notes, letters, memoranda, or emails, whether formal or informal.” This request would include the notices and resolution, which are public record, and any other documents that fall into this category again would likely be protected by the settlement negotiation privilege and/or by state law. Ala. Code §§ 34-27A-12(b) (appraiser-client confidentiality), 36-12-40 (public records and exceptions); ALA. ADMIN. CODE r. 780-X-1-.14 (2019) (confidential records of the Alabama REAB).

g. “Any final determination pursuant to the investigation of Mr. Clark by the Board.” The resolution is public record; also, the IRS already possesses it through its counsel at the DOJ.

CONCLUSION

The IRS is abusing its summons power, but judicial protection “against the sweeping or irrelevant order” limits the IRS's power in this case. United States v. Harrington, 388 F.2d 520, 523 (2d Cir. 1968). The irrelevance of the summoned documents to the audit of Rock Spring alone is grounds to quash the summons. Moreover, Mr. Clark has provided specific and sufficient credible circumstantial evidence to give rise to a plausible inference of improper purpose, which at least warrants a hearing on the merits of the Petition including an opportunity to examine the IRS revenue agents and DOJ attorney. In combination these grounds grow in strength, as the irrelevance of the requested materials exposes the improper purpose behind the summons.

For the foregoing reasons, the Petition to quash should be granted, and the United States' motion should be denied.

Respectfully submitted this 13th day of April, 2020.

Niles A. Elber, Esq.
DC Bar No. 488099
NC Bar No. 26679
Attorney for Petitioner
CAPLIN & DRYSDALE, CHTD.
One Thomas Circle, N.W., Suite 1100
Washington D.C. 20005
Tel: (202) 862-7827
Fax: (202) 429-3301
Email: nelber@capdale.com

Admitted Pro Hac Vice

FOOTNOTES

1The United States' Brief in Support of its Motion for Summary Denial (“U.S. Brief,” ECF No. 9) repeatedly accuses Mr. Clark of making assertions in the Petition without briefing the argument. That is the nature of a petition. The U.S. Brief is the first filing that contains any legal argument. And correspondingly this brief is the first opportunity for Mr. Clark to present the arguments in support of his Petition.

2Recently, the DOJ estimated that IRS employees spent 6,563 hours on “just 10” now-complete examinations involving Mr. Clark's appraisals. Exhibit (“Ex.”) 1, Excerpt from U.S. Responses to Mr. Clark's Interrogatories.

3As part of this attack, within the last three months, the IRS opened a new 26 U.S.C. § 6695A examination of Mr. Clark involving 12 appraisals not at issue in the Zak case.

4The professionals at the Alabama REAB evaluated a request from the Senate Finance Committee for documents related to the administrative proceeding involving Mr. Clark and provided these documents in recognition of their public nature. Ex. 2 (Letter from Ms. Lisa Brooks to Senators Charles E. Grassley and Ron Wyden dated August 14, 2019).

5In its Answer, ECF No. 7, the United States erroneously denied that Mr. Clark was recognized as a qualified appraiser in Kiva Dunes.

6See e.g., Bender v. Comm'r, 35 T.C.M. (CCH) 718 (1976) (“Every piece of land is unique; and, in determining its fair market value, an examination must be made of the surrounding area and its usefulness, the topography, accessibility, the size and shape of the parcel in relation to its highest and best use, the development possibilities in the area, comparable sales of land in the immediate vicinity, the zoning requirements and all other relevant factors.”); The Appraisal Foundation, Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice (2016) 18-19, Standards Rule 1-2(e) (identifying myriad characteristics to consider in valuing each property).

7Mr. Clark's response to discovery requests 60 and 61 related to a 2016 inquiry from a Georgia administrative body. Mr. Clark has objected to production of post-complaint documents in the Zak case, and he intended that the Alabama REAB documents would be withheld subject to that objection. He was not aware of the inadvertent production until the government filed its Answer in this case.

8The Alabama REAB may also wish to protect its file by asserting the deliberative process privilege, which protects the internal processes of government agencies that are part of the executive branch. Nadler v. U.S. Dep't of Justice, 955 F.2d 1479, 1490-91 (11th Cir.1992) (holding it “protects the internal decisionmaking processes of the executive branch in order to safeguard the quality of agency decisions”), overruled on other grounds by U.S. Dep't of Justice v. Landano, 508 U.S. 165 (1993). The Alabama REAB members are appointed by the Governor of Alabama, making the REAB part of the executive branch. Ala. Code § 34-27A-4. Also, the Alabama REAB may protect its work-product as privileged. Fed. R. Civ. P. 26(b)(3); Hope for Families & Comm. Serv., Inc. v. Warren, No. 3:06-cv-01113-WKW, 2009 WL 1066525 (M.D. Ala. Apr. 21, 2009) (denying production of certain documents subject to the work-product privilege); Regions Fin. Corp. v. United States, No. 2:06-cv-00895-RDP, 2008 WL 2139008 (N.D. Ala. May 8, 2008).

9Prior to Baker, districts courts were looking to the Eleventh Circuit for confirmation of this privilege and confusion lingers. E.g., Amerisure Ins. Co. v. Auchter Co., 673 F.3d 1294 (11th Cir. 2012); United States for use and benefit of Cleveland Construction, Inc. v. Stellar Group, Inc., No. 4:16-cv-179-CDL, 2017 WL 11460973 (M.D. Ga. Oct. 23, 2017); Graves v. United States, No. 13-cv-22501-KMM, 2014 WL 11899874 (S.D. Fla. Oct. 30, 2014); Travelers Casualty and Surety Company of America v. Winmark Homes, Inc., No. 1:09-cv-3582-SCJ, 2012 WL 12895640, at *3 (N.D. Ga. Dec. 5, 2012); Sacred Heart Health System, Inc. v. Humana Military Healthcare Service, Inc., No. 3:07-cv-00062-MCR-EMT, 2012 WL 12960898 (N.D. Fla. Jan. 31, 2012); AGSouth Genetics, LLC v. Georgia Farm Services, LLC, No. 1:09-cv-00186-WLS, 2011 WL 13187172 (M.D. Ga. Feb. 11, 2011); Barber v. Fireman's Fund Ins. Co., Case No. 4:05-cv-374-RH-WCS, 2005 WL 8164868 (N.D. Fla. Dec. 19, 2005); see also In re MSTG, Inc., 675 F.3d 1337 (Fed. Cir. 2012) (denying writ of mandamus).

10There is no authority that the Alabama open records law has been preempted by the IRS summons authority. When the Supreme Court of Alabama has addressed the issue of preemption with respect to the open records law, it found preemption where the federal statute provided more privacy protection, not less, than the state's. Kendrick v. Advertiser Co., 213 So.3d 573 (Ala. 2016); Ex parte Alabama Dep't of Transp., 757 So.2d 371 (Ala. 1999) (similar). If the federal purpose does not require abrogation of the state law, then it cannot preempt it. Michigan Canners and Freezers Ass'n, Inc. v. Agric. Bd., 467 U.S. 461 (1984); Florida Lime & Avocado Growers, Inc. v. Paul, 373 U.S. 132 (1963); Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947) (holding that there is a presumption against preemption); Hines v. Davidowitz, 312 U.S. 52, 67 (1941).

END FOOTNOTES

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