Court Denies Rule 502(d) Order in IRS Administrative Summons Case

In the case of U.S. v. Captive Alternatives, LLC, a decision from August 2023 by United States Magistrate Judge Christopher Tuite, the court addressed Captive’s request for a Rule 502(d) order to protect privileged materials turned over to the IRS, according to an article from ACEDS by Kelly Twigger. Captive, operating a risk management program, faced an administrative summons from the IRS seeking disclosure of various records dating back to January 1, 2011. After the court directed Captive to comply, the parties discussed a Rule 502(d) order, but negotiations failed, leading to Captive’s motion.

Captive sought an order authorizing the production of materials without privilege review, non-waiver of privilege, a restriction on public use by the IRS, and the ability to assert privilege later. However, the court denied the motion for five key reasons.

• First, as the proceeding was summary in nature and not traditional discovery, the court argued that had Captive initially complied with the summons, the issue of a Rule 502(d) order wouldn’t have arisen.
• Second, the court cited guidance from the IRS’s Chief Counsel’s office, which opposed clawback arrangements, stating that they would burden the IRS with identifying potentially responsive documents.
• Third, the court emphasized that IRS agents weren’t trained to evaluate attorney-client privilege, making Captive responsible for designating protected records.
• Fourth, it found Captive’s proposed order restricting public use unacceptable, as it overly broadened the definition of “public use.”
• Finally, the court criticized Captive’s lack of restriction on when it could assert privilege, allowing for delayed assertions.

Captive’s arguments about the volume and cost of document review were rejected, as the court had previously denied similar claims. The court also highlighted that Captive’s strategy to dump documents without prior privilege review contradicted established case law, as Rule 502(d) does not permit such an approach.

According to Twigger, the decision underscores the court’s discretion in issuing Rule 502(d) orders, the importance of complying with administrative summonses, and the limitations on using such orders as cost-shifting tools. It also provides insights into the challenges of responding to government-issued requests and the need for strategic and informed legal arguments in such cases.