a. The attorney-client privilege protects only communications made in the course of seeking legal advice from a professional legal adviser in his or her capacity as such.
b. Because the attorney-client privilege has the effect of withholding relevant information from the fact-finder, it is applied only when necessary to achieve its limited purpose of encouraging full and frank disclosure by the client to his or her attorney. A client is entitled to hire a lawyer, and have his secrets kept, for legal advice regarding the client's business affairs.
c. A particular transaction would receive protection where the general purpose concerns legal rights and obligations even though typically it would be considered commercial in nature.
d. Legal advice is not involved when the facts show that the lawyer is employed without reference to his knowledge and discretion in law. The attorney-client privilege still applies, however, where business advice is incorporated into legal advice.
e. Blanket assertions of the attorney-client privilege are extremely disfavored.
f. An attorney must raise attorney-client privilege as to each record sought and each question asked. Further, a district court may conduct an in camera inspection of alleged confidential communications to determine whether the attorney-client privilege applies. The privilege extends to cover both the substance of the client's confidential communications and the attorney's advice in response thereto. All other communications from the attorney to the client are protected if the attorney's communications would reveal confidential client communication
g. Furthermore, confidential communications passing through persons acting as the attorney or client's agent are also covered by the privilege. The privilege also covers papers prepared by the attorney or by a third party at the attorney's request for the purpose of advising the client, insofar as the papers are based on and would tend to reveal the client's confidential communications.
II. 26 U.S.C. § 7525
a. Extends the attorney-client privilege to a federally authorized tax practitioner, that is, a nonlawyer who is nevertheless authorized to practice before the Internal Revenue Service.
b. Nonlawyers (including tax preparers, many of them accountants) have long been allowed to practice before the IRS. 5 U.S.C. § 500(c). The new statute protects communications between a taxpayer and a federally authorized tax practitioner "to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney." § 7525(a)(1). (It does not protect work product.)
c. Nothing in the new statute suggests that these nonlawyer practitioners are entitled to privilege when they are doing other than lawyers' work. It is applicable only to communications made on or after July 22, 1998 , the date the statute was enacted.
d. Section 7525(b) provides that the privilege does not apply to criminal tax matters before the IRS or in federal court.
e. Section 7525(b) provides that the privilege does not apply to written communications between a tax practitioner and a corporation in connection with the promotion of the corporation’s participation in any tax shelter, as defined in Section 6662(d)(2)(C)(iii).
III. ATTORNEY-CLIENT PRIVILEGE IN TAX MATTERS
United States v. Frederick ,
182 F.3d 496 (7 th Cir. 1999)
a. The most recent authoritative case on the application of the attorney-client privilege to tax matters, Frederick , makes clear that the privilege does not apply to communications made to and work papers prepared by a practitioner for the purpose of preparing a tax return.
b. Facts: In Frederick , an attorney who was also an accountant provided both legal representation and tax return preparation for a corporation and its two individual owners. Plaintiff, the Internal Revenue Service, was investigating defendant-intervenors.
In the course of the investigation, plaintiff issued summonses to defendant, directing him to hand over hundreds of documents. The taxpayers were being investigated by the IRS, which issued a summons under Section 7602 to Frederick directing him to turn over to the IRS hundreds of documents. Most of the documents at issue were created in connection with preparation of tax returns, including drafts of returns (including schedules), worksheets containing the financial data and computations required to fill in the returns, and correspondence relating to the returns. Defendant refused to disclose all of them, claiming some were protected by either the attorney-client privilege or the work-product privilege (or both).
Plaintiff then brought an enforcement action. The district court examined the documents in camera, and ruled that some were privileged but others were not. The court characterized them as “the kinds of documents that accountants and other preparers generate as an incident to preparing their clients’ returns, or that the taxpayers themselves generate if they prepare their own returns, though in the latter case there is unlikely to be correspondence.
i. The information that a person furnishes the preparer of his tax return is furnished for the purpose of enabling the preparation of the return, not the preparation of a brief or an opinion letter, and therefore is not privileged.
i. The Court in Frederick held that worksheets prepared by defendant and that which reflected his own thinking were not protected by the attorney-client privilege. The U.S. Supreme Court has held that an accountant’s worksheets are not privileged and a lawyer’s privilege is no greater when he is doing accountant’s work. United States v. Arthur Young & Co., 465 U.S. at 817-19 (1984).
i. Work done for a client’s tax audit may not be privileged. The alarming fact about this aspect of Frederick is that the taxpayers were under investigation by the IRS for prior years and Frederick was representing the taxpayers in that investigation. The court said that by “using Frederick as their tax preparer, the [taxpayers] ran the risk that his legal cogitations born out of his legal representation of them would creep into his worksheets and so become discoverable by the government.”
ii. The court also said that “a dual-purpose document—a document prepared for use in preparing tax returns and for use in litigation—is not privileged…”
i. The Court in Frederick said if the taxpayer is accompanied to the audit by a lawyer who is there to deal with issues of statutory interpretation or case law that the revenue agent may have raised in connection with his examination of the taxpayer’s return, the lawyer is doing lawyer’s work and the attorney-client privilege may attach
United States v. KPMG, LLP
316 F. Supp 2d. 30 (D.C., 2004)
a. The recent case of KPMG narrows the tax practitioner privilege even further by denying protection to opinion letters written by KPMG to their clients regarding the tax consequences of a transaction.
b. Facts: The government claimed that the firm falsely asserted that it has never developed, sold, or promoted a tax shelter. The court initially held that the identity of individuals who were clients of the firm and who had participated in potentially abusive tax shelters were required to be disclosed to the IRS pursuant to I.R.C. § 6112, and that the statutory period for the assessment of additional taxes against any participants in the tax shelters whose identities had previously been withheld was tolled pursuant to 26 U.S.C.S. § 6503(a)(1).
The court then held that the firm's claims of privilege under 26 U.S.C.S. § 7525 were unsupportable for all the requested documents, except for certain alleged opinion letters, because the special master accurately found that the firm was misrepresenting its unprivileged tax shelter marketing activities as privileged communications, and the firm's privilege log was inaccurate, incomplete, and even misleading regarding those documents. The court further held that the firm had an option to submit a more individualized and detailed privilege log which showed why its alleged opinion letters were privileged, or to produce them immediately.
i. The court in KPMG held that a “confidential opinion concerning tax advice” issued to a KPMG client was not privileged. In its analysis of this item, denominated as Document 22 on the detailed privilege log that KPMG was required to submit to the court, the court noted that its first line provided that “[Y]ou have requested our opinion regarding the U.S. federal income tax consequences of certain investment portfolio transactions that have been concluded by you….” Apparently, the opinion was written for tax preparation purposes. Thus, such opinion was not privileged.
United States v. BDO Seidman
337 F.3d 802 (7th Cir. 2003).
a. The IRS investigated BDO Seidman, LLP, for promoting potentially abusive tax shelters, as part of its efforts to shut down tax shelters it considers as abusive. Consequently, the government asserts BDO failed to disclose tax shelters properly in accordance with Sections 6111 and 6112, among other provisions. As part of its investigation, the IRS summoned the identities of BDO’s clients who had participated in certain transactions. Some of BDO’s clients objected and asserted that their identities were privileged under Section 7525.
b. Congress has determined that tax shelters are subject to special scrutiny, and anyone who organizes or sells an interest in tax shelters is required, pursuant to I.R.C. § 6112, to maintain a list identifying each person to whom such an interest was sold. This list-keeping provision precludes the “Does” from establishing an expectation of confidentiality in their communications with BDO, an essential element of the attorney-client privilege and, by extension, the § 7525 privilege. At the time that the “Does” communicated their interest in participating in tax shelters that BDO organized or sold, the “Does” should have known that BDO was obligated to disclose the identity of clients engaging in such financial transactions. Because the “Does” cannot credibly argue that they expected that their participation in such transactions would not be disclosed, they cannot now establish that the documents responsive to the summonses, which do not contain any tax advice, reveal a confidential communication. 337 F.3d 802, 812 (7 th Cir. 1999).
i. The court noted that many of these documents labeled “Confidentiality Agreement” stated that BDO was going to provide confidential information for the purpose of providing taxpayers the required information to prepare income tax returns. Those confidentiality agreements were not privileged.
a. Held that investor lists held by a bank regarding taxpayers it had assisted with potentially abusive tax shelters were not privileged communications. Clients of a bank used the bank to facilitate and implement tax advice concerning investment strategies. Legal advice on tax matters was provided by a law firm and accounting advice was received from the accounting firm of KPMG, LLP.
b. The court found that no attorney-client relationship existed between the law firm and the clients of the bank who used the bank to implement tax advice concerning investment strategies. The rationale behind the court's decision was that the law firm, to which the bank directed clients, merely sold a package to investors which contained a description of a transaction and a memorandum as to potential tax consequences stemming from the transaction. The court also held that if a legal opinion which might have been privileged when given to the client is then circulated to third parties, including investors, it loses its privileged status. Id. at 633.
IV. THE ACT OF PRODUCTION DOCTRINE
Fisher v. United States
425 U.S. 391 (1976)
a. This doctrine was first recognized by the Supreme Court in Fisher v. United States, which noted the "act of producing evidence" may have communicative aspects that can violate the Fifth Amendment. 425 U.S. 391, 410-13 (1976).
b. The Court maintained that, even when the contents of documents or records are unprotected by the Fifth Amendment, the Fifth Amendment's protections may nevertheless be implicated by the very act of producing the documents or records.
c. The Court reasoned that the act of complying with the government's request may have testimonial aspects and an incriminating effect.
d. The Court explained, "compliance with the subpoena tacitly concedes the existence of the papers demanded and their possession or control by the taxpayer. It also would indicate the taxpayer's belief that the papers are those described in the subpoena." Fisher, 425 U.S. at 410.
e. However, not every act that communicates statements of fact rises to the level of a protected communication under the Fifth Amendment. For example, if the existence, possession, and authenticity of the documents are a "foregone conclusion" and the taxpayer "adds little or nothing to the sum total of the Government's information" by his act of producing the documents, the taxpayer's Fifth Amendment privilege is not violated "because nothing he has said or done is deemed to be sufficiently testimonial for purposes of the privilege." Fisher, 425 U.S. at 411. T
e. Where the government already possesses the knowledge that would otherwise be communicated, "the question is not of testimony but of surrender." Id.
i. In Braswell v. United States, 487 U.S. 99 (1988), the question was whether the custodian of corporate records may resist a subpoena for such records on the ground that the act of production would incriminate him in violation of the Fifth Amendment.
ii. Federal grand jury issued a subpoena to “Randy Braswell, President Worldwide Machinery Sales, Inc….” requiring petitioner to produce the books and records of the two corporations. Petitioner moved to quash the subpoena arguing that the act of producing the records would incriminate him in violation of his Fifth Amendment privilege against self-incrimination.
iii. The District Court denied the motion to quash, ruling that the “collective entity doctrine” prevented petitioner from asserting that his act of producing the corporations’ records was protected by the Fifth Amendment.
iv. Bellis v. United States, 417 U.S. 85 (1974): Proposition that a corporation’s records custodian may not claim a Fifth Amendment privilege no matter how small the corporation may be.