Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_05-cv-03791/USCOURTS-cand-4_05-cv-03791-3/pdf.json

Parties Involved:
Max D. Gray
Respondent
United States of America
Petitioner

Document Text:

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

UNITED STATES OF AMERICA,

Petitioner, No. C 05-3792 PJH 

v. ORDER REOPENING CASE AND

ENFORCING IRS SUMMONSES; 

REQUIRING STATUS STATEMENT

IN RELATED CASE

 JOHN C. COHAN, aka Christopher Cohan,

Respondent.

___________________________________/

UNITED STATES OF AMERICA, No. C 05-3791 PJH

Petitioner,

v.

MAX D. GRAY,

Respondent.

___________________________________/

The United States’ Motion to Reopen the Case and Enforce IRS Summonses came

on for hearing before this court on May 16, 2007. Respondent John C. Cohan (“Cohan”)

appeared through his counsel, Edward M. Robbins. The United States appeared through

its counsel, W. Carl Hankla. Having read all the papers submitted and carefully considered

the relevant legal authority, the court hereby GRANTS the government’s motion for the

following reasons and for the reasons stated at the hearing.

BACKGROUND

The IRS is conducting an investigation into Cohan’s income tax liability for tax year

1998. The focus of the investigation is on a package of three interrelated tax shelters

Case 4:05-cv-03791-PJH Document 28 Filed 06/27/07 Page 1 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

1 The Gray case was stayed pending Cohan's decision regarding whether to waive

attorney-client privilege. 

2

Cohan purchased for approximately $14 million in an attempt to avoid income tax and

transferee liability on the 1998 sale of his wholly owned cable TV corporation Sonic

Enterprises, Inc.’s (“Sonic”) assets. The government describes these three transactions

as:

(1) a Notice 2000-44 Son of Boss transaction to generate an

artificially high basis for Cohan’s stock in Sonic, which owned

the cable TV assets ( “Foghorn Transaction”);

(2) a Notice 2001-45 basis-shifting transaction to further inflate

Cohan’s basis in Sonic (“Stockton Street Transaction”);

(3) a Notice 2001-16 intermediary transaction to transfer Sonic

stock to a straw person to evade corporate-level tax upon the

sale of Sonic’s cable TV assets, increasing Cohan’s profits in

the sale of his cable TV business (“Midco Transaction”).

The government brought related proceedings in this court pursuant to 28 U.S.C. §§

7402(b) and 7604(a) of the Internal Revenue Code for judicial enforcement of IRS

summonses served on Cohan, and IRS summonses served on Cohan’s then-attorney, Max

D. Gray1

 (“Gray”). The government filed petitions on September 20, 2005, seeking the

documents Cohan refused to produce in response to those summonses. Specifically, the

government sought 93 documents which, although responsive to the summonses, were

withheld by Cohan as subject to attorney-client privilege. The government contended that

Cohan waived the privilege by asserting an advice-of-counsel defense.

At the December 7, 2005 hearing on the government’s petitions, the court ordered

that “upon the assertion of the . . . reliance on advice-of-counsel defense, that Mr. Cohan

simultaneously disclose to the United States the documents that have been withheld on the

privilege log.” At that hearing, Mr. Cohan’s counsel stated that “if Mr. Cohan raises [adviceof-counsel defense],” the government would be entitled to the information and would “get

the documents.” 

Case 4:05-cv-03791-PJH Document 28 Filed 06/27/07 Page 2 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

On December 8, 2005, the court issued a written order finding that Cohan

established a prima facie case of attorney-client privilege and denying the government’s

request for an in camera review of the withheld documents. The court further found that

Cohan had not yet waived the attorney-client privilege by asserting the advice-of-counsel

defense, noting:

Neither party disputes that once the defense is asserted as a basis 

for relief from penalties, the privilege is waived. Accordingly, once the 

IRS has issued the expected notice of deficiency and Cohan files a 

petition with the Tax Court, Cohan shall immediately advise the 

government whether he will assert such defense, and if so, shall

simultaneously produce to the government the 93 withheld documents.

The court also noted that the government could seek to have the case reopened

should Cohan fail to comply with the order. 

On December 30, 2005, the IRS issued a statutory notice of deficiency to Cohan,

which included penalties. He and his wife then filed a petition and an amended Tax Court

petition (on May 1, 2006) to contest the tax deficiency and penalties. Cohan conceded that

two transactions – the “Foghorn Transaction” and the “Stockton Street Transaction” were

invalid for tax purposes, and he asserted an advice-of-counsel defense with regards to

those transactions. In his amended petition, Cohan does not mention the Midco

Transaction. Cohan claims that the 93 privileged documents relate to the “asset sale” of

the actual cable TV business deal rather than the Stockton Street and Foghorn

Transactions. Because he is only asserting the advice-of-counsel defense with regards to

the latter transactions, he claims he should not have to produce the documents. 

The government claims that all of these transactions were designed to avoid tax at

the corporate level on capital gain from the asset sale, to avoid ordinary income and/or

capital gains at the individual level triggered by distribution of sale proceeds to Cohan, and

to avoid transferee liability at the individual level. The government contends that the 93

documents on the privilege log are related to the tax shelter transactions, including the

Midco Transaction. The government requests these documents, as well as additional

Case 4:05-cv-03791-PJH Document 28 Filed 06/27/07 Page 3 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

“Binder 116" documents, identified by the IRS after the court entered its last order, and now

seeks to reopen the case and obtain an order enforcing the IRS summonses at issue.

DISCUSSION

A. Legal Standard

The IRS may issue a summons only for the purposes set out in 26 U.S.C. § 7602(a). 

Crystal v. United States, 172 F.3d 1141, 1143 (9th Cir. 1999). Those purposes include

“ascertaining the correctness of any return, making a return where none has been made,

determining the liability of any person for any internal revenue tax . . . or collecting any such

liability.” 26 U.S.C. §7602(a). To enforce an IRS summons, the government must

establish that: (1) the investigation will be conducted for a legitimate purpose; (2) the

material being sought is relevant to that purpose; (3) the information sought is not already

in the IRS’s possession; and (4) the IRS complied with all the administrative steps required

by the Internal Revenue Code. Crystal, 172 F.3d at 1143-44 (citing United States v.

Powell, 379 U.S. 48, 57-58 (1964)). “The government’s burden is a slight one, and may be

satisfied by a declaration from the investigating agent that the Powell requirements have

been met.” Id. 

Because the court has already found this burden has been met, the burden then

shifts to Cohan to show why the summonses should not be enforced. See Liberty Fin., 778

F.2d at 1392. The party asserting the attorney-client privilege has the burden of proving

that the privilege applies to a given set of documents or communications. See In re Grand

Jury Investigation, 974 F.2d 1068, 1070-71 (9th Cir. 1992). To meet this burden, a party

asserting the privilege must make a prima facie showing that the privilege protects the

information the party intends to withhold. Id. On December 8, 2005, this court found that

Cohan’s privilege log, “which shall be supplemented within one week by a declaration to be

prepared by Cohan’s counsel in accordance with the court’s instructions at the hearing,” is

sufficient to establish a prima facie case of attorney-client privilege. However, the court

found that privilege would be waived if Cohan asserted a reliance on advice-of-counsel

defense.

Case 4:05-cv-03791-PJH Document 28 Filed 06/27/07 Page 4 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

2 Cohan also argues that the government has not followed disclosure

requirements of Federal Rule of Civil Procedure 26 pertaining to experts. Rule

26(a)(1)(E)(v), however, exempts actions to enforce administrative summonses

from the initial disclosure requirements. 

5

B. The Government’s Motion

1. The Motion is Timely

Cohan first argues that the government waited too long to seek to reopen the case. 

The government’s motion is timely. The government moves to reopen the case pursuant to

the court’s December 8, 2005 Order, which stated that the government could seek to

reopen the case should Cohan fail to produce the 93 withheld documents when he

asserted the advice-of-counsel defense in Tax Court. On May 1, 2006, Cohan asserted

that defense. The government filed the instant motion on February 20, 2007. No deadline

was set for filing the motion in the court’s order, and the government has not waived any of

its arguments. This is especially true here, where Cohan’s refusal to produce the privileged

documents was in violation of the plain language of the court’s December 8, 2005 Order. 

Cohan’s attorney represented to the court that he would “cough those [93 privileged]

documents right up” should Cohan rely on the advice-of-counsel defense. Cohan never

indicated that he would produce a narrower subset of documents if he relied on that

defense for certain limited transactions. Yet, despite the fact the court ordered him to

produce all 93 documents when he asserted the advice-of-counsel defense, Cohan never

sought modification of the court’s order when he decided not to comply with it. 

2. Admissibility of McKenna Declaration

The government submits two declarations from IRS Agent Bernard McKenna

(“McKenna”) in support of its motion. 

Cohan argues that McKenna’s declaration is not proper expert testimony, noting that

the government has not attempted to qualify McKenna as an expert.2

 IRS agents,

however, may give expert opinions. See United States v. Tarwater, 308 F.3d 494, 513 (6th

Cir. 2002); see also United States v. Wade, 203 Fed. Appx. 920, 930 (10th Cir. 2006)

(“properly qualified IRS agent may analyze a transaction and give expert testimony about

Case 4:05-cv-03791-PJH Document 28 Filed 06/27/07 Page 5 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

its tax consequences”). McKenna has a B.S. degree in accounting, a M.S. degree in

taxation, and experience as a Revenue Agent for over 26 years, including experience in a

tax-shelter examination group and experience as an instructor. He has spent over 1000

hours investigating the Cohan case and looking at the various documents. Cohan has not

made any specific objections to McKenna’s qualifications. The court finds that McKenna is

qualified to give expert opinion. 

At the hearing, Cohan requested the opportunity to hire an additional expert to rebut

McKenna’s opinions. The court allowed Cohan to submit an expert declaration, and he did

so on June 5, 2007. The court has considered that declaration, as well as McKenna’s

declaration, in analyzing whether Cohan has waived the attorney-client privilege, as

discussed below.

3. Waiver of Privilege

The Ninth Circuit employs a three-pronged test in determining whether the attorneyclient privilege has been waived. See United States v. Amlani, 169 F.3d 1189, 1995 (9th

Cir. 1995). A waiver is effected where (1) a party raises an affirmative defense, (2) that

puts in issue communications otherwise privileged, and (3) upholding the privilege would

deny the opposing party access to vital facts. Id. (upholding finding that appellant waived

his attorney-client privilege by asserting a counsel disparagement claim).

Here, as Cohan has conceded, he raised the advice-of-counsel defense and waived

attorney-client privilege with respect to the Stockton Street and Foghorn transactions. By

including all of the 93 withheld documents on his privilege log, Cohan has already

conceded that all of these documents are relevant to the IRS’s investigation. Clearly, the

two transactions for which Cohan asserted his advice-of-counsel defense are part of the

IRS’s investigation. Neither Cohan nor his expert refute this assertion by Agent McKenna. 

While Cohan asks this court to determine the merits of how exactly the tax shelters being

investigated are related to one another, the issue is whether Cohan’s waiver of privilege is

broad enough to encompass all aspects of this particular IRS investigation. Moreover,

Case 4:05-cv-03791-PJH Document 28 Filed 06/27/07 Page 6 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

 Gray’s IRS interview transcript also provides support for a conclusion that the

transactions are related. Gray refers to all of the various transactions in the 1997-1998 time

period as “the transaction”. See Gray Tr. at 8-9. He notes that various companies developed

parallel proposals for the transactions in 1997, noting that one such proposal was “all inclusive”

and for “the whole transaction, from beginning to end.” Id. at 28, 85, 87-88, 150. He also

notes that the different transactions were difficult to distinguish. Id. at 133:17-20. 

7

Cohan’s decision-making process regarding which tax-shelters to choose and how to

structure the various transactions is relevant to his advice-of-counsel defense.

Furthermore, apart from the fact that all of the transactions at issue are part of the

IRS investigation involved here, the facts indicate that the transactions although separate,

have some relationship to one another. McKenna opines that Cohan bought a package of

three interrelated tax shelters. All three tax shelters (Midco, Stockton Street, and Foghorn)

were promoted, funded, and closed as a package deal to provide Cohan shelter at both the

corporate and individual level. This package was referred to by his attorney as a “turn-key

deal.” The Stockton Street and Foghorn transactions served to avoid recognition of

deferred intercompany gain and asset sale capital gains on the corporate returns and

inflate Cohan’s stock basis, avoiding recognition of gains resulting from the reported Midco

transaction on his individual return. McKenna Decl. ¶ 10.3

 Avram Salkin’s declaration,

submitted by Cohan, does not refute the fact that the transactions were related in some

way. He merely concludes that the transactions are differentiated from one another, but he

acknowledges they all concern the sale of Sonic. Salkin Decl. ¶¶ 3-5.

Upholding the privilege here would deny the government access to vital facts. As

the Amlani court noted, "where a party raises a claim which in fairness requires disclosure

of the protected communication, the [attorney-client] privilege may be implicitly waived." Id.

(citing Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1162 (9th Cir. 1992). To refute

Cohan’s contention that he relied on his counsel’s advice with regards to transactions

designed to avoid recognition of gains from the sale of Sonic, the government must have

access to communications that describe counsel’s advice with regards to all of the

underlying transactions the IRS is examining in this particular investigation. See id. 

(“Amlani cannot assert that certain factors caused him to discharge his attorney and then

Case 4:05-cv-03791-PJH Document 28 Filed 06/27/07 Page 7 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

invoke the attorney-client privilege to prevent the government from examining the situation

further. We have made it clear that ‘the privilege which protects attorney-client

communications may not be used both as a sword and a shield.’”) (citations omitted). In

addition, there are really no alternative sources of evidence to evaluate Cohan’s advice-ofcounsel defense. See id.

Cohan relies on Bittaker v. Woodford, 331 F.3d 715 (9th Cir. 2003) to argue that

even if the three transactions are interrelated, waiver of the privilege on two of the

transactions does not amount to a waiver of the privilege on the remaining transaction,

because such waiver is to be narrowly construed. In Bittaker, an inmate was convicted of

multiple murders and was sentenced to death. He filed a federal habeas petition raising a

variety of ineffective assistance of counsel claims. The district court entered a protective

order precluding the use of attorney-client privileged materials for any other purpose than

litigating the habeas corpus petition. The Ninth Circuit affirmed, adopting a narrow waiver

rule, holding that the scope of the inmate's waiver extended only to the federal habeas

petition, and that the privilege was not waived for all time and all purposes. Id. at 722. This

case does not support Cohan: the issue in Bittaker was whether waiver was effective

beyond the instant proceeding. In accordance with Bittaker, Cohan’s privilege is not

waived for subsequent or different IRS investigations or prosecutions. It is, however,

waived for the IRS proceeding in which he has asserted the advice-of-counsel defense.

4. Binder 116 Documents

The government also requests documents from Binder 116, which came into

Cohan’s possession after the original summonses were served. To the extent that Cohan

withholds these documents on the basis of privilege, these documents must be produced

for the reasons described above. Cohan also claims that certain documents in the binder

relate to Fortrend International (“Fortrend”) and are not responsive to the government’s

subpoenas.

The subpoenas, however, expressly request documents from Gray’s files. The

documents are bates-stamped “MG”, indicating that they were in Gray’s files, and are

Case 4:05-cv-03791-PJH Document 28 Filed 06/27/07 Page 8 of 9
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

9

therefore responsive to the subpoena. The subpoenas also request documents showing

communications exchanged after January 1, 1997 between certain persons (including Gray

and Cohan) concerning the sale of Sonic stock, engagement of Presidio Advisory LLC, etc. 

See id. at 3. It also requested documents concerning Cohan’s tax strategy. Fortrend and

Presidio submitted competing proposals to Cohan regarding the Midco transaction being

investigated by the IRS. See Gray Tr. at 10, 28. These documents, therefore, are

responsive to the government’s subpoena, and Cohan shall produce them.

CONCLUSION

Case No. 05-3792

In accordance with the foregoing, the government’s motion is GRANTED. Cohan

shall produce the 93 documents identified in the privilege log, as well as the documents in

Binder 116 within 10 days of this order. The court file shall be closed. 

Case No. 05-3791

It is further ordered that the parties in related case number 05-3791 PJH shall

submit a further joint status statement within 10 days of this order.

IT IS SO ORDERED.

Dated: June 26, 2007

____________________________

PHYLLIS J. HAMILTON

United States District Judge

Case 4:05-cv-03791-PJH Document 28 Filed 06/27/07 Page 9 of 9