                          T.C. Memo. 2004-259



                       UNITED STATES TAX COURT



       BARRY E. MOORE AND DEBORAH E. MOORE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11002-03.              Filed November 15, 2004.


     Vivian D. Hoard and Patti M. Richards, for petitioners.

     Michael L. Scheier and Jennifer J. Morales, for affected

     person United Surgical Partners International, Inc.

     Brenda M. Fitzgerald, for respondent.



                          MEMORANDUM OPINION


     HALPERN, Judge:     By notice of deficiency dated April 10,

2003, respondent determined deficiencies in petitioners’ Federal

income taxes for 1999 and 2000 in the amounts of $96,925 and

$78,578, respectively.    Petitioners assign error to respondent’s
                                - 2 -

determinations, and among the issues we must decide is petitioner

Deborah E. Moore’s (Moore’s) membership interest during the years

in issue in the Surgery Center of Georgia, LLC (Surgery Center),

a Georgia limited liability company.      In support of their claim

that, prior to 2000, Moore’s interest in Surgery Center did not

exceed 2 percent, petitioners offer two exhibits (collectively,

the exhibits), marked by the Court as Exhibits 103-P and 104-P,

and the anticipated testimony of attorney James P. Kelly (Kelly),

evidenced by his affidavit (the Kelly affidavit), dated June 14,

2004.   Both the exhibits and the Kelly affidavit have been placed

under seal.   We must resolve a claim of privilege raised by

United Surgical Partners International, Inc., a Delaware

Corporation (International), on behalf of Surgery Center, now a

subsidiary of International’s, with respect to the exhibits and

the anticipated testimony of Kelly.

                             Background

     By order dated May 20, 2004 (the order), we set forth the

procedures for International to follow in raising any claim of

privilege.    Pursuant to the order and Rule 103, Tax Court Rules

of Practice and Procedure, International (an affected person,

within the meaning of the Rule) moves (the motion) that the Court

enter a protective order shielding Surgery Center from intrusion

upon privileged communications between Surgery Center and Kelly,

Surgery Center’s counsel.   Specifically, International asks the
                               - 3 -

Court to prohibit: (1) the admission of the exhibits, which it

claims contain privileged communications between Kelly and

Surgery Center; (2) the anticipated testimony of Kelly (as

evidenced by the Kelly affidavit) regarding privileged

communications between him and Surgery Center, including any

testimony concerning the contents of the exhibits; and (3) all

other testimony or written material containing matters protected

by the attorney-client privilege or work product doctrine.

     In support of the motion, International argues that, as the

parent company of Surgery Center, it is asserting on behalf of

Surgery Center’s present management (New Management) Surgery

Center’s attorney-client privilege, which, with respect to the

information International asks be protected, New Management does

not now waive (nor has it ever waived).   International further

argues that there is no evidence that any predecessor holder of

Surgery Center’s privilege waived that privilege with respect to

such information.   International supports the motion with a

memorandum of law, an affidavit of Jason B. Cagle (the Cagle

affidavit), general counsel for International, and a second

memorandum of law (the reply memorandum), which is in response to

petitioners’ reply to the motion (the reply).

     By the reply, petitioners object to the motion.   Petitioners

identify four issues: (1) whether evidence of ownership interests

in a limited liability company is subject to the attorney-client
                               - 4 -

privilege; (2) whether, as between partners in a joint venture,

the attorney-client privilege attaches to advice to those

partners; (3) whether, prior to the trial of this case, Surgery

Center waived the privilege; and (4) whether Dr. Joffe, at one

time majority owner of Surgery Center and its manager, by his

testimony in this case, impliedly waived the privilege.

      Respondent has taken no position on the claim of privilege

and retains his right to object to the exhibits and any testimony

of Kelly.

     The Court has made an in camera inspection of the exhibits

and Kelly affidavit.

                            Discussion

     To dispose of the motion, we must answer the following

questions:   (1) Would admission of the exhibits and the Kelly

testimony disclose a privileged communication between client and

attorney; (2) assuming it would, who has held, and who now holds,

the privilege; and (3) has the privilege been waived?

Attorney-Client Privilege

     In Bernardo v. Commissioner, 104 T.C. 677, 682 (1995), we

provided the following pertinent summary:

          The attorney-client privilege “applies to
     communications made in confidence by a client to an
     attorney for the purpose of obtaining legal advice, and
     also to confidential communications made by the
     attorney to the client if such communications contain
     legal advice or reveal confidential information on
                               - 5 -

     which the client seeks advice.” Hartz Mountain Indus.
     v. Commissioner, 93 T.C. 521, 525 (1989) (citing Upjohn
     Co. v. United States, 449 U.S. 383, 389 (1981)).

          Disclosure of a privileged communication may
    result in a waiver of the attorney-client privilege.
    Id. The party asserting the attorney-client privilege
    must prove that it has not waived the privilege. Id.
    * * *

Would admission of the exhibits and the Kelly testimony disclose
a privileged communication between client and attorney?

     We have examined the exhibits and have no doubt that they

disclose communications to an attorney (Kelly) for the purpose of

obtaining legal advice.   That is apparent from the face of the

exhibits (each of which is a letter from Kelly) and is not

seriously challenged by petitioners.    While nothing in the Cagle

affidavit declares that those communications were made in

confidence, Exhibit 103-P carries the legend: “Confidential[,]

Attorney-Client Communication”; and Exhibit 104-P carries the

legend: “Confidential[,] Attorney/Client Privilege”.    We think it

a fair inference, and we find, that the communications underlying

each letter, and the letters themselves, were intended to be in

confidence.

     Nevertheless, petitioners claim that the exhibits contain

references to Kelly’s understanding, as of the dates of the

exhibits, of the various ownership interests (percentages) in

Surgery Center.   Petitioners argue:   “The [attorney-client]

privilege simply does not apply to routine business transactions

disclosed to outsiders or business records necessary for the
                               - 6 -

preparation of the tax return.”   It is true that communications

to an attorney not both in confidence and for the purpose of

obtaining legal advice are not protected by the attorney-client

privilege.   See, e.g., In re Grand Jury Investigation, 842 F.2d

1223, 1224 (11th Cir. 1987) (“Courts generally have held that the

preparation of tax returns does not constitute legal advice

within the scope of that privilege.”).   Nevertheless, if a client

expects that his communication to an attorney for the purpose of

obtaining legal advice will remain confidential, the privilege

not to have that communication disclosed applies notwithstanding

that the communication contains nonconfidential information.

Professor Paul R. Rice, in his treatise, Attorney-Client

Privilege in the United States, describes the general rule as

follows:

     The communication from the client to the attorney may
     contain nonconfidential information such as business
     information, public or technical information, or pre-
     existing documents that were not created for the
     purpose of communicating with the attorney. This is
     not relevant to the point of whether confidentiality
     can reasonably be expected in the communications that
     contain the information.

Rice, Attorney-Client Privilege in the United States, sec. 6:2,

at 9-11 (2d ed. 1999).   See, e.g., Natta v. Zletz, 418 F.2d 633,

637 (7th Cir. 1969) (“It is also immaterial that some of them

[letters] refer to technical or public information.”); Cuno, Inc.

v. Pall Corp., 121 F.R.D. 198, 202 (E.D.N.Y. 1988) (“The fact

that the submissions exclusively contain technical data is not
                                 - 7 -

controlling.”); Byrnes v. IDS Realty Trust, 85 F.R.D. 679, 683

(S.D.N.Y. 1980) (“[T]hat the [technical] information in these

documents was not necessarily confidential [,] ‘that is, known

only to the client’[,] does not defeat the privilege as long as

the communication is made in confidence.”).

     Admission of the exhibits and of any testimony of Kelly

regarding the contents of the exhibits would disclose a

privileged communication between client and attorney.

Given the existence of privileged communications, who has held,
and who now holds, the privilege?

     From the Kelly affidavit, we conclude that, with respect to

the legal advice contained in the exhibits, Kelly believed his

client to be Surgery Center, and only Surgery Center, and we find

that his client was Surgery Center.      As stated, Surgery Center is

a Georgia limited liability company, and a member of a Georgia

limited liability company is considered a person separate from

the company.    Yukon Partners, Inc. v. Lodge Keeper Group, Inc.,

572 S.E.2d 647, 651 (Ga. Ct. App. 2002).

     International admits that Georgia courts have not addressed

whether an attorney who represents a limited liability company

also represents the individual members of the company.

International argues, however, that Georgia law largely is in

accord with Federal law on the question of who holds, and hence

has the power to assert or waive, a corporation’s attorney-client

privilege.     Compare Zielinski v. Clorox Co., 504 S.E.2d 683, 685
                               - 8 -

(Ga. 1998) (“the corporate attorney-client privilege belongs to

the corporation, not to an officer or employee of the

corporation”) with Commodity Futures Trading Commn. v. Weintraub,

471 U.S. 343, 348-349 (1985) (“for solvent corporations, the

power to waive the corporate attorney-client privilege rests with

the corporation's management”).   By analogy to a corporation,

International argues that, when a limited liability company makes

a confidential communication to an attorney for the purpose of

obtaining legal advice, the privilege to prohibit disclosure of

that communication belongs to the company and not to its members.

By further analogy to the corporate situation, International

argues that only management has the authority to assert that

privilege.   See Commodity Futures Trading Commn. v. Weintraub,

supra (management’s power to waive solvent corporation’s

attorney-client privilege is normally exercised by its officers

and directors).

     The Georgia Limited Liability Company Act allows management

of the business and affairs of a limited liability company to be

vested in one or more managers, to the exclusion of the members.

See Ga. Code Ann. sec. 14-11-304 (2003).   We have in evidence the

operating agreement of Surgery Center (the operating agreement).

The operating agreement vests management of the company in a

single manager [Manager], who, to the exclusion of the members,

is given the power and authority on behalf of the company “to do
                                - 9 -

and perform all acts as may be necessary or appropriate to the

conduct of the Company’s business as permitted [by law].”

Specifically, the Manager “shall have exclusive, full and

complete authority, power and discretion to manage and control

the business, affairs and Properties of the Company, to make all

decisions regarding those matters and to perform any and all acts

or activities customary or incident to the management of the

Company’s business.”   Accordingly, we believe that the Manager

has exclusive authority to assert, or waive, the attorney-client

privilege on behalf of Surgery Center.     International argues

that, as evidenced by Waiver of Notice and Right to Purchase,

attached to Exhibit 65-J, Assignment and Assumption Agreement,

and a document styled “Resignation”, dated July 28, 2000, and

attached as Exhibit C to the reply memorandum, Dr. Joffe was

Manager of Surgery Center in 1997, when Kelly authored the

exhibits, and continuing through July 28, 2000 (the date of his

resignation as manager).    Petitioners make no argument to the

contrary, and we so find.

     International argues that, at present, on account of the

passage of control of Surgery Center to International, the

authority to assert or waive Surgery Center’s attorney-client

privilege rests with New Management, the Manager of Surgery

Center installed by International.      See Ramada Franchise Sys.,

Inc. v. Hotel of Gainesville Associates, 988 F. Supp. 1460, 1463
                              - 10 -

(N.D. Ga. 1997) (stating: “The authority to assert and waive the

corporation's attorney-client privilege follows the passage of

control of the corporation.” (citing Commodity Futures Trading

Commn. v. Weintraub, supra at 349)).   As we understand

petitioners’ response to that argument, it is that the cited

caselaw does not apply because the “client” communicating with

the attorney here was not Surgery Center but was, collectively,

its members (i.e., its “partners”, including Moore).   We have

already found that Kelly’s client was Surgery Center and

concluded that, in Georgia, a member of a limited liability

company is considered a person separate from the company.   We

have also found that management of the company was out of the

hands of the members.   As a member of Surgery Center, in light of

the facts before us, Moore enjoys no privilege (nor may she waive

any privilege) with respect to privileged communications between

Surgery Center and Kelly, its attorney.   We conclude that, at the

present time, the authority to assert or waive Surgery Center’s

attorney-client privilege rests with New Management.

Has the privilege been waived?

     Petitioners argue that any privilege Surgery Center may have

enjoyed with respect to the exhibits has been waived by Surgery

Center’s own actions.   Among those actions, petitioners list

Moore’s receipt of the exhibits, the communication of the “gist”

of the exhibits to Surgery Center’s accountants (and from them to
                                - 11 -

respondent’s agents during an examination of Surgery Center’s tax

returns for 1999 and 2000), and the “dissemination” of the

exhibits to respondent.    International responds:

          “Even if true, not one of these alleged
     disclosures operates as a waiver of the attorney-client
     privilege attaching to Mr. Kelly’s letters. The reason
     is simple: the privilege belonged at all times to SCG
     [Surgery Center]. Consequently, only the entity
     (through the Manager) has the power to effect a waiver.
     The actions of SCG’s tax matters partner and
     accountants could not waive SCG’s privilege.

     As Professor Rice expresses the general rule:

          Waiver of the attorney-client privilege can be
     either express or implied. Express waivers are less
     common. More often than not, waivers must be found by
     implication from client conduct that is inconsistent
     with any reasonable claim of confidentiality and that
     would make maintenance of the privilege unfair. * * *

Rice, Attorney-Client Privilege in the United States, sec. 9:22,

at 56-57 (2d ed. 1999) (footnotes omitted); see, e.g., Hanson v.

AID, 372 F.3d 286, 293-294 (4th Cir. 2004) (“A client can waive

an attorney-client privilege expressly or through his own

conduct.   Implied waiver occurs when a party claiming the

privilege has voluntarily disclosed confidential information on a

given subject matter to a party not covered by the privilege.”

(Citation omitted.)).     Moreover:

          Regardless of whether the client intended to waive
     the attorney-client privilege protection by his
     conduct, the client’s failure to take reasonable
     precautions to preserve the confidentiality of
     attorney-client communications can result in the
     destruction of their privileged protection. * * *
                               - 12 -

Rice, Attorney-Client Privilege in the United States, sec. 9:23,

at 58-59; see, e.g., Gomez v. Vernon, 255 F.3d 1118, 1131-1132

(9th Cir. 2001) (“[W]hen there has been an involuntary

disclosure, the privilege will be ‘preserved if the privilege

holder has made efforts “reasonably designed” to protect the

privilege.   * * *   Conversely * * * the privilege [will be

deemed] to be waived if the privilege holder fails to

pursue all reasonable means of preserving the confidentiality of

the privileged matter.’”).

     Although we have found that the exhibits were confidential

communications, the confidentiality of the exhibits has been

breached.    Respondent attached copies of the exhibits to his

motion to compel production of documents, reciting that, among

other documents, the exhibits were provided to respondent by

Moore (apparently during the discovery phase of this case).

Although petitioners have failed in their promise made at trial

to produce affidavits from Surgery Center’s accountants that they

(the accountants) had received copies of the exhibits from

Surgery Center for tax return preparation purposes, petitioners

have attached to the reply copies of Internal Revenue Forms 5701

and 886-A, both dated November 11, 2002.    Those forms discuss

proposed adjustments with respect to Surgery Center’s Federal

income tax returns for 1999 and 2000.    They state that the

“taxpayer’s representative” has stated that certain contemplated
                                - 13 -

transfers of stock were not completed because of the advice of

attorneys that the contemplated transfers violated “the Stark

laws relating to physicians and the amount of interest they may

own in a hospital.”    Although that is not an accurate description

of the exhibits, we think it a fair inference that the attorney

advice being referred to is that contained in the exhibits.

International had the opportunity to challenge that inference in

its reply memorandum, but failed to do so, which we think

equivalent to an admission that that inference is fair.

     “[A]t the point where attorney-client communications are no

longer confidential, i.e., where there has been a disclosure of a

privileged communication, there is no justification for retaining

the privilege.”     United States v. Suarez, 820 F.2d 1158, 1160

(11th Cir. 1987).     As Professor Rice generalizes the rule:   “The

voluntary disclosure of privileged communications to third

parties (who are not agents of either the attorney or the client)

by the client or the client’s authorized agent destroys both the

communications’ confidentiality and the privilege that is

premised upon it.”     Rice, Attorney-Client Privilege in the United

States, sec. 9:27, at 70-71 (2d ed. 1999) (footnotes omitted).

Indeed: “[D]isclosure of any significant portion of a

confidential communication waives the privilege as to the whole.”

United States v. Davis, 636 F.2d 1028, 1044 (5th Cir. 1981).       An

attorney or other agent of the client may possess the implied
                               - 14 -

authority to waive the attorney-client privilege on behalf of his

client.   See, e.g., In re Von Bulow, 828 F.2d 94, 101 (2d Cir.

1987).    We believe that, during the course of the Internal

Revenue Service’s (IRS’s) examination of Surgery Center’s income

tax returns for 1999 and 2000, Surgery Center’s representative

disclosed some or all of the contents of the exhibits to the IRS.

Although we have virtually no information concerning the scope of

that representative’s authority to represent Surgery Center, we

have no reason to believe that he (or she) exceeded the scope of

that authority.    We, thus, conclude that he had the authority,

explicit or implicit, to disclose to the IRS the contents of the

exhibits.    Since the IRS is a third party (that is neither an

agent or attorney of Surgery Center’s), such disclosure destroyed

the confidentiality of the exhibits and ended the privilege

premised on such confidentiality.

     Alternatively, if the confidentiality of the exhibits had

not been destroyed previously, Moore’s disclosure of the exhibits

to respondent during the discovery phase of this case caused such

destruction and ended the privilege.    It may be that the

disclosure was not voluntarily made by Surgery Center, if Moore

had no authority to make that disclosure.    Nevertheless, Moore’s

ready access to the exhibits (Dr. Joffe described her position as

“equivalent of the president or chief operating officer of the

facility [Surgery Center] in terms of the day to day running”)
                              - 15 -

raises the question of whether Surgery Center took reasonable

precautions to preserve their confidentiality.     The failure to

take precautions to preserve the confidentiality of privileged

material can result in the destruction of the material’s

privilege protection.   Rice, Attorney-Client Privilege in the

United States, sec. 9:23, at 58-59 (2d ed. 1999); see, e.g., In

re Horowitz, 482 F.2d 72, 82 (2d Cir. 1973) (“It is not asking

too much to insist that if a client wishes to preserve the

privilege * * *, he must take some affirmative action to preserve

confidentiality.”).   “When employees leave the client’s

employment, the client must take reasonable steps to ensure that

they do not retain the confidential communications to which they

were given access while employed.”     Rice, Attorney-Client

Privilege in the United States, sec. 9:23, at 61 (2d ed. 1999);

see, e.g., Bowles v. Natl. Association of Home Builders, 2004

U.S. Dist. LEXIS 19622, *32-*36, 2004 WL 2203831, *10-*11 (D.D.C.

2004) (holding that defendant-corporation had waived any

attorney-client privilege to documents retained by plaintiff, a

former executive of a subsidiary, because, among other things,

defendant had failed to take reasonable measures to preserve

confidentiality even before plaintiff left subsidiary’s employ

with documents); IMC Chems. v. Niro, Inc., 2000 WL 1466495, *27

(D. Kan. 2000) (declining to uphold attorney-client privilege

given “limited, if any, precautions taken by plaintiff to assure
                              - 16 -

the confidentiality of the documents kept by [a former consultant

to the plaintiff]”); Apex Mun. Fund v. N-Group Sec., 841 F. Supp.

1423, 1433 (S.D. Tex. 1993) (refusing to recognize attorney-

client privilege over documents that the party asserting the

privilege had effectively abandoned to a former employee).

International has made no showing of any precautions taken to

maintain the confidentiality of the exhibits, either generally or

with respect to departing employees, such as Moore.   Indeed, Dr.

Joffe was Manager of Surgery Center in 1997, when Kelly authored

the exhibits, and continuing through July 28, 2000.   He was

available to testify or provide an affidavit as to precautions

taken to insure the confidentiality of the exhibits, but he did

not do so.   We think that a fair inference to be drawn from

International’s failure to call Dr. Joffe or provide his

affidavit is that his testimony or declaration would have been

negative to International.   See Wichita Terminal Elevator Co. v.

Commissioner, 6 T.C. 1158, 1165 (1946) (“the failure of a party

to introduce evidence within his possession and which, if true,

would be favorable to him, gives rise to the presumption that if

produced it would be unfavorable”), affd. 162 F.2d 513 (10th Cir.

1947); see also United States v. Tory, 52 F.3d 207, 211 (9th Cir.

1995) (similar).   We therefore find that Surgery Center failed to

preserve the confidentiality of the exhibits, with the result

that Moore’s disclosure of the exhibits destroyed the
                                - 17 -

confidentiality of the exhibits and ended the privilege premised

on such confidentiality.

Conclusion

     Relying on its claim of attorney-client privilege,

International has asked the Court to prohibit: (1) the admission

of the exhibits; (2) the anticipated testimony of Kelly regarding

privileged communications between him and Surgery Center; and (3)

“all other testimony or written material containing matters

protected by the attorney-client privilege or work product

doctrine.”

     Since disclosure of the exhibits destroyed the

confidentiality of the exhibits and ended the privilege premised

on such confidentiality, we shall deny the motion with respect to

admission of the exhibits.    We shall likewise deny the motion

with respect to any testimony of Kelly concerning communications

made to him by Surgery Center and in response to which he

authored the exhibits.     In all other respects, we shall deny the

motion since there has been no showing that petitioners wish to

introduce any communications protected by the attorney-client

privilege or work product doctrine.

                                      An appropriate order

                                 will be issued.
