UNITED STATES TAX COURT



3K INVESTMENT PARTNERS, 3K INVESTMENTS LLC, TAX MATTERS PARTNER,
                          Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



    Docket No. 3891-06.                Filed September 3, 2009.



         In this partnership-level proceeding involving a so-
    called Son-of-BOSS transaction, P has moved to compel R to
    produce redacted copies of all tax opinions collected by R
    that have been issued regarding Son-of-BOSS transactions, as
    well as a list of the names and addresses of all law firms
    and accounting firms known to R to have issued tax opinion
    letters regarding Son-of-BOSS transactions.

         Held: Because the materials that P seeks to discover
    are not relevant and do not appear reasonably calculated to
    lead to discovery of admissible evidence, and because the
    materials are nondisclosable “return information” as defined
    under sec. 6103(b)(2), I.R.C., P’s motions to compel
    production will be denied.
                                - 2 -


     Albert L. Grasso and David B. Shiner, for petitioner.

     R. Scott Shieldes, for respondent.



                               OPINION


     THORNTON, Judge:    This case is before us on petitioner’s

motions to compel production of documents pursuant to Rules 72

and 104.1   For the reasons described below, we shall deny

petitioner’s motions.

                             Background

     This partnership-level proceeding involves respondent’s

determination that 3K Investment Partners (the partnership) was

formed and availed of to engage in a so-called Son-of-BOSS

transaction.2   Respondent alleges that James Menighan (Mr.

Menighan) purchased a prepackaged tax shelter from the law firm

Jenkens & Gilchrist, P.C. (Jenkens & Gilchrist), whereby through

his limited liability company 3K Investments, LLC, he acquired

and contributed offsetting digital options on foreign currency to




     1
      Unless otherwise indicated, all Rule references are to Tax
Court Rules of Practice and Procedure, and section references are
to the Internal Revenue Code, as amended.
     2
      BOSS is an acronym for “Bond and Option Sales Strategy”,
which the Commissioner regards as an abusive tax shelter. See
Notice 2000-44, 2000-2 C.B. 255, 256; see also Kligfeld Holdings
v. Commissioner, 

, 194 (2007).
                               - 3 -

the partnership.3   Respondent alleges that the transaction was

designed to inflate artificially Mr. Menighan’s basis in the

partnership.   See Klamath Strategic Inv. Fund v. United States,

(5th Cir. 2009); Cemco Investors, LLC v. United

States, 

(7th Cir. 2008); Stobie Creek Invs., LLC v.

United States, 

(2008); Jade Trading, LLC v.

United States, 

(2007); see also Kligfeld Holdings

v. Commissioner, 

(2007).

     In a notice of final partnership administrative adjustment

with respect to the partnership’s tax year ended December 13,

2000, respondent adjusted the items reported on the partnership’s

return.   Respondent also determined that pursuant to section

6662(a), accuracy-related penalties apply to all underpayments of

tax attributable to adjustments of the partnership items.4


     3
      Seemingly implicit in respondent’s allegation that Mr.
Menighan purchased a prepackaged tax shelter is the assertion
that Jenkens & Gilchrist was the promoter of the shelter, a
question properly at issue in this partnership-level proceeding.
See Tigers Eye Trading, LLC v. Commissioner, T.C. Memo. 2009-121.
In disposing of the motion before us, we need not and do not
address any issue as to whether petitioner would be entitled to
assert reasonable reliance on the Jenkens & Gilchrist opinions as
a defense to the imposition of the penalties.
     4
      Respondent determined that the accuracy-related penalty
should be imposed on these components of underpayments: A 40-
percent penalty on the portion of any underpayment attributable
to any gross valuation misstatement as provided by sec. 6662(a),
(b)(3), (e), and (h); a 20-percent penalty on the portion of any
underpayment attributable to negligence or disregard of rules and
regulations as provided by sec. 6662(a), (b)(1), and (c); a 20-
percent penalty on any underpayment attributable to substantial
                                                   (continued...)
                               - 4 -

     Petitioner timely petitioned the Tax Court.    Pursuant to

Rule 72, petitioner served on respondent a request (the first

request) to produce redacted copies of all tax opinions collected

by respondent that have been issued regarding Son-of-BOSS

transactions (the opinion letters).    In response to the first

request, respondent produced no documents but noted that he

previously had provided petitioner copies of two opinion letters

that Jenkens & Gilchrist had issued to Mr. Menighan.    Respondent

objected to providing any further response on the grounds that

the request was irrelevant, not likely to lead to the discovery

of admissible evidence, and unduly burdensome and impermissibly

sought confidential third-party return information.

     Petitioner served on respondent a request (the second

request) to produce a list of the names and addresses of all law

firms and accounting firms known to respondent to have issued tax

opinion letters regarding Son-of-BOSS transactions (the firm

list).   In response, respondent identified Jenkens & Gilchrist as

the law firm that issued the two opinion letters to Mr. Menighan

but objected to providing any further response on the grounds

that the request was irrelevant and not likely to lead to the




     4
     (...continued)
understatement of income tax as provided by sec. 6662(a), (b)(2),
and (d); or a 20-percent penalty on the portion of any
underpayment attributable to any substantial valuation
misstatement as provided by sec. 6662(a), (b)(3), and (e).
                              - 5 -

discovery of admissible evidence and impermissibly sought

confidential return information of third-party taxpayers.

     Petitioner filed a motion (the first motion) to compel

production of the documents requested in the first request.

After the Court held a hearing on the first motion, petitioner

filed a motion (the second motion) to compel production of the

documents requested in the second request.

                           Discussion

     Respondent objects to petitioner’s motions to compel

production of the opinion letters and the firm list primarily on

the ground of relevance and on the ground that they impermissibly

seek confidential return information of third-party taxpayers.5

Respondent, as the party objecting to discovery, has the burden

of establishing that his objections to the requests for

production should be sustained.   Branerton Corp. v. Commissioner,

, 193 (1975).

1.   Relevance

     Rule 70(b)(1), regarding the scope of discovery, provides in

part:




        5
      At the hearing, although not in his written notice of
objection, respondent briefly raised an argument that the opinion
letters and the methods employed by the Government in collecting
the opinion letters constitute nondiscoverable work product.
Because we sustain respondent’s objections to petitioner’s
discovery requests on other grounds, we need not and do not
address this argument.
                              - 6 -

     The information or response sought through discovery
     may concern any matter not privileged and which is
     relevant to the subject matter involved in the pending
     case. It is not ground for objection that the
     information or response sought will be inadmissible at
     the trial, if that information or response appears
     reasonably calculated to lead to discovery of
     admissible evidence, regardless of the burden of proof
     involved. * * *

Although the standard of relevancy in a discovery action is

generally liberal, the Court is especially careful to require a

showing of relevancy where, as in this case, the discovery seeks

confidential information relating to third parties.     Avedisian v.

Commissioner, T.C. Memo. 1987-176 (citing United States v.

Harrington, 

(2d Cir. 1968)).

     Petitioner contends that the opinion letters and the firm

list are relevant to its defense against respondent’s

determination of penalties under section 6662.   No penalty shall

be imposed under section 6662(a) with respect to any portion of

an underpayment if it is shown that there was reasonable cause

and that the taxpayer acted in good faith.   See sec. 6664(c).

Whether a taxpayer acted with good faith depends upon the facts

and circumstances of each case.   See sec. 1.6664-4(b)(1), Income

Tax Regs.

     In this partnership-level proceeding, the applicability of

any penalty that relates to an adjustment to a partnership item

is determined at the partnership level.   See sec. 6221.   When

considering the determination of penalties at the partnership
                                - 7 -

level, the Court may consider defenses of the partnership,

including a reasonable cause defense presented on behalf of the

partnership.    See Klamath Strategic Inv. Fund v. United States,

supra at 547-548; New Millennium Trading, L.L.C. v. Commissioner,

131 T.C. ___,       (2008) (slip op. at 9) ; Whitehouse Hotel Ltd.

Pship. v. Commissioner, 131 T.C. ___,       (2008) (slip op. at

90).    Respondent does not dispute that petitioner’s requested

discovery pertains to defenses of the partnership that are

properly before the Court.

       Petitioner alleges and respondent does not dispute that in

connection with many Son-of-BOSS transactions, one or more law

firms or accounting firms wrote opinion letters to the investors

supporting the claimed tax treatment.    Petitioner alleges, and

respondent does not dispute, that respondent has a large number

of these tax opinion letters.    Petitioner contends:   “The

availability of a large number of law firms and accounting firms

issuing tax opinion letters determining that so-called ‘Son of

Boss’ transactions * * * would produce the tax results as

reported by Petitioner on its subject tax return would bolster

Petitioner’s position that it had reasonable cause and that

Petitioner acted in good faith.”    Similarly, at the hearing

petitioner’s counsel argued that “based upon the general

consensus of national law firms across the country that were

issuing tax opinion letters that were taking the same position as
                                - 8 -

the Petitioner in my case was taking, I wanted to show that

reasonable cause does exist to take the position that we took on

the tax return.”

       Petitioner’s argument appears to be a variant of the

refrain, familiar to parents of teenagers, that “Everyone’s doing

it.”    For the same reason that this does not constitute

reasonable cause for teenagers, it would not constitute

reasonable cause for petitioner.    Petitioner must establish the

reasonableness of its position on the basis of the facts and

merits of its own case.6   See Avedisian v. 

(“each individual must rest on the validity of his own position

under the applicable taxing provisions, independently of

others”).    The legal analysis, conclusions, and recommendations

that some tax advisers may have given other taxpayers are

irrelevant to the reasonableness of the positions the partnership

took on its return.    See P.T. & L. Constr. Co. v. Commissioner,

, 414 (1974).

       Petitioner suggests that the requested information is

relevant to the partnership’s defense that it reasonably relied

upon the advice of tax advisers.   Reliance on the advice of a

professional tax adviser may demonstrate reasonable cause and



       6
      We also reject any suggestion that the requested
information, which appears to involve only a small subset of tax
advisers, shows any “general consensus” of tax advisers regarding
Son-of-BOSS transactions.
                                 - 9 -

good faith if, taking into account all the facts and

circumstances, the reliance was reasonable and the taxpayer acted

in good faith.     Sec. 1.6664-4(b)(1), (c)(1), Income Tax Regs.   A

defense of reasonable reliance on the advice of a professional

tax adviser requires the advice to be “provided to (or for the

benefit of) the taxpayer and on which the taxpayer relies,

directly or indirectly, with respect to the imposition of the

section 6662 accuracy-related penalty.”    Sec. 1.6664-4(c)(2),

Income Tax Regs.    Reliance on a tax adviser may be reasonable and

in good faith if the taxpayer establishes:    (1) The adviser was a

competent professional with sufficient expertise to justify

reliance; (2) the taxpayer provided necessary and accurate

information; and (3) the taxpayer actually relied in good faith

on the adviser’s judgment.    See Neonatology Associates, P.A. v.

Commissioner, 

, 99 (2000), affd. 

(3d Cir.

2002).

     Petitioner does not contend that the advice in the

undisclosed opinion letters was provided directly to the

partnership or for its benefit.    Indeed, petitioner’s motions to

compel production are predicated on an alleged lack of access to

these opinion letters and to the identities of their authors.

Petitioner seems to suggest, however, that information in the

opinion letters and the firm list might lead to the discovery of

admissible evidence as to the reasonableness of the partnership’s
                               - 10 -

reliance upon the tax advice contained in opinion letters that

Jenkens & Gilchrist provided to Mr. Menighan with respect to the

transaction at issue.   For the reasons described below, we

disagree.

      The opinion letters and the firm list have no bearing on

any issue as to whether Jenkens & Gilchrist was provided

necessary and accurate information.     Nor do we believe that the

opinion letters and the firm list have any bearing on any issue

as to whether the partnership actually relied in good faith on

the advice of Jenkens & Gilchrist.      If, as petitioner’s discovery

motions suggest, the partnership, before it filed its return, did

not have access to the names of any firms (other than Jenkens &

Gilchrist) that issued opinion letters or to the opinion letters

which it now seeks, we do not see how the identity of such firms

and the contents of their opinion letters could tend to establish

that the partnership acted in good faith when it filed its

return.

     Finally, petitioner’s requested discovery of the opinion

letters and the firm list does not appear reasonably calculated

to lead to the discovery of admissible evidence with respect to

any issue as to whether Mr. Menighan’s tax advisers at Jenkens &

Gilchrist were competent professionals with sufficient expertise

to justify reliance.    At best, petitioner’s discovery requests

might be calculated to lead to discovery of evidence that the
                              - 11 -

advice that Jenkens & Gilchrist provided Mr. Menighan was in some

degree similar to advice that other tax advisers had provided

other taxpayers with respect to transactions that were in some

degree similar.   But any relevance of such evidence would be too

remote, we believe, to justify discovery of the requested

materials, especially considering that they relate directly to

confidential information of third parties.7   For similar reasons,

we believe the requested discovery would be unduly burdensome on

respondent, taking into account the needs of the case.8   See Rule

70(b)(2).   Moreover, we believe that discovery of evidence of the

professional competence of Mr. Menighan’s tax advisers at Jenkens

& Gilchrist is obtainable from other sources that are more

convenient and less burdensome.   See 

shall

sustain respondent’s relevance objections to petitioner’s motions

to compel production of documents.

     Although these are sufficient grounds to deny petitioner’s

discovery motions, for the sake of completeness and because the

parties have argued the issue at length, we shall also briefly



     7
      Respondent argues persuasively that simply removing the
names of taxpayers and other identifying information would not
suffice to remove the confidential nature of the opinion letters.
     8
      Respondent’s counsel presented to the Court, as a
representative example, one of the Jenkens & Gilchrist opinion
letters to Mr. Menighan that respondent had previously provided
petitioner. The opinion letter is nearly 150 pages. Respondent
contends, and we agree, especially in the light of the remote
relevance of these materials, that it would be unduly burdensome
for respondent to review possibly hundreds of such opinion
letters page by page to make redactions.
                             - 12 -

address respondent’s contentions that under section 6103 the

opinion letters and the firm list constitute confidential return

information which may not be disclosed.

2.   Confidential Return Information Under Section 6103

     Section 6103(a) provides that “Returns and return

information shall be confidential” and shall not be disclosed

“except as authorized by this title”.     See Church of Scientology

of Cal. v. IRS, 

, 11-12 (1987).    Section 6103(b)(2)(A)

defines “return information” expansively to include, among other

things:

     a taxpayer’s identity, the nature, source, or amount of his
     income, payments, receipts, deductions, exemptions, credits,
     assets, liabilities, net worth, tax liability, tax withheld,
     deficiencies, over assessments, or tax payments, whether the
     taxpayer’s return was, is being, or will be examined or
     subject to other investigation or processing, or any other
     data, received by, recorded by, prepared by, furnished to,
     or collected by the Secretary with respect to a return or
     with respect to the determination of the existence, or
     possible existence, of liability (or the amount thereof) of
     any person under this title for any tax, penalty, interest,
     fine, forfeiture, or other imposition, or offense * * *

The flush language of section 6103(b)(2) provides that return

information “does not include data in a form which cannot be

associated with, or otherwise identify, directly or indirectly, a

particular taxpayer.”

     The purpose and effect of these provisions is to “protect

taxpayers’ private financial information contained within the

files of the Internal Revenue Service * * * and therefore to

encourage the taxpayers’ free and open disclosure to the
                              - 13 -

Service.”   Estate of Yaeger v. Commissioner, 

, 184

(1989).   Return information may not be revealed to a third party

except as specifically authorized under section 6103.       

with respondent that the opinion letters and the

data requested in the firm list constitute return information

within the meaning of section 6103(b)(2)(A) because they are

“data, received by, * * * or collected by the Secretary with

respect to a return or with respect to the determination of the

existence, or possible existence, of liability (or the amount

thereof) of any person under this title”.    Petitioner’s

contention that the opinion letters are not protected from

disclosure under section 6103(a) because they are not tax returns

or attachments thereto ignores the plain terms of the statute,

which makes confidential not only “returns” but also “return

information” as defined expansively in section 6103(b)(2).

     Petitioner suggests that if respondent were to redact

taxpayer-specific information from the opinion letters, as

petitioner has requested, they would no longer be protected

“return information”.   We disagree.    In Church of Scientology of

Cal. v. 

, the Supreme Court held that correspondence

and memoranda, among other materials, contained within

investigative files of the Internal Revenue Service (IRS) were

nondisclosable return information, even if redacted of

identifying data.   The Court stated:   “Congress did not intend
                               - 14 -

the statute to allow the disclosure of otherwise confidential

return information merely by the redaction of identifying

details.”   

     Petitioner’s reliance on Tax Analysts v. IRS, 

(D.C. Cir. 1997), is misplaced.    In Tax Analysts, the Court of

Appeals held that legal analyses contained in field service

advice memoranda (FSAs) prepared by attorneys in IRS’s National

Office of the Office of Chief Counsel are not “return

information” under section 6103.    The Court of Appeals reasoned

that legal analyses contained in FSAs are not “data” within the

meaning of section 6103(b) because such “non-taxpayer-specific

information” would have “nothing to do with § 6103’s core purpose

of protecting taxpayer privacy.”    

  In addition, the

Court of Appeals reasoned that section 6103 should be construed

in conjunction with section 6110, which requires that written

determinations of the Secretary be made public.     

section 6110 has no applicability to the

opinion letters or the firm list.    The opinion letters were

written by private law firms or accounting firms rather than the

Commissioner’s Office of Chief Counsel.    The opinion letters were

collected from investigated taxpayers or parties potentially

subject to penalties.    Moreover, as previously discussed, both

the opinion letters (even if based upon assumed sets of facts as

petitioner suggests) and the data requested in the firm list
                               - 15 -

constitute information specific to other taxpayers that falls

within the core purpose of section 6103 of protecting taxpayer

privacy.

     With little elaboration, petitioner contends that even if

the opinion letters are nondisclosable return information under

section 6103, we should nevertheless determine that the firm list

does not constitute return information.   It is not apparent to us

that the firm list presently even exists.   It is clear, however,

that the information which petitioner seeks to have respondent

provide in the firm list constitutes “data * * * collected by the

Secretary” in determining other taxpayers’ tax liabilities and is

therefore “return information” under section 6103(b)(2).   Cf.

Landmark Legal Found. v. IRS, 

(D.C. Cir. 2001)

(identities of tax-exempt organizations, identities of third

parties requesting investigations of tax exempt organizations,

and materials included in the third-party requests were

nondisclosable return information); Solargistic Corp. v. United

States, 

(7th Cir. 1991) (the fact of an IRS audit of

a taxpayer was return information).

     Petitioner has identified no statutory exception that would

permit disclosure of the return information which it seeks to

discover.9   We conclude and hold that the opinion letters that


     9
      At the hearing the Court gave the parties the opportunity
to brief whether sec. 6103(h)(4), which provides certain
exceptions to nondisclosure in the case of judicial and
                                                   (continued...)
                             - 16 -

respondent has not already provided and the firm list are

confidential return information under section 6103(a) which

respondent may not disclose to petitioner.

     In the light of the foregoing,


                                           An order will be issued

                                      denying petitioner’s motions

                                      to compel production of

                                      documents.




     9
     (...continued)
administrative proceedings, has any applicability. Respondent
contends it does not. Petitioner filed a legal memorandum but
did not address this issue. We deem petitioner to have waived or
conceded any argument as to the applicability of sec. 6103(h)(4).