Attorney-Client and Tax Advisors = PrivilegesLangdon Owen
March 27, 2008 — 2,935 views
The attorney-client privilege is naturally of major importance to lawyers, but with the advent of the federal tax practitioner privilege under Internal Revenue Code (IRC) Section 7525, it has also become of major importance to accountants and enrolled agents because the IRC ' 7525 privilege is, to the extent it applies, coextensive with the attorney-client privilege and has the same limitations.
1. The Attorney-Client Privilege. The privilege protects from disclosure the communication of clients asking their lawyers for legal advice or providing the facts the lawyer needs to provide legal advice. Each state and the federal courts have their own versions of the rule. We will mostly focus on the federal rules, but will refer a little to state rules. Since the author is a Utah lawyer, Utah will be used as the primary example of state law rules. Utah=s privilege is at Utah Code Ann. ' 78-24-8, and Utah Rule of Evidence 504. For the source of the federal version of the privilege, see Federal Rules of Evidence 501 (adopts common law privileges, including the attorney-client privilege). For purposes of applying IRC ' 7525, it will be the federal version of the privilege which will be important.
The privilege can be summarized as follows:
(T)he privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client. United States v. United Shoe Machine Corp., 89 F. Supp. 357 (D. Mass 1950).
a. Client=s Privilege. The privilege belongs to the client and can be asserted or waived by the client notwithstanding the attorney=s objection. The attorney may also assert it for the client and so may a guardian, conservator, or personal representative of the client. Ut. Rul. of Evid. 504(c).
Clients include persons who may not have established an attorney-client relationship but who provide confidential information to the attorney in seeking to become a client. See Taylor v. Sheldon, 173 N.E.2d 892 (Ohio 1961); See also State v. Carter, 578 P.2d 1275 (Ut. 1978) (no privilege where not a client).
Clients also include persons who believe they are consulting a lawyer. See Westinghouse Elec. Corp. v. Kerr-McGee Corp., 580 F.2d 1311 (7th Cir. 1978) (disqualification case where trade association members believed association=s counsel represented them in receiving confidential information); Margulies v. Upchurch, 696 P.2d 1195 (Ut. 1985) (disqualification case where limited partners reasonably believed partnership=s counsel represented them where individual interests of partners were directly involved).
b. Communication by Client. The privilege is to encourage disclosure by the client to the attorney. Communications by the attorney to the client even with legal advice, are not automatically privileged in some courts unless they would indirectly reveal the client=s communication to the attorney. U.S. v. (Under Seal), 748 F.2d 871 (4th Cir. 1984); American Std., Inc. v. Pfizer, Inc., 828 F.2d 734 (Fed. Cir. 1987); In re Fischel, 557 F.2d 209 (9th Cir. 1977) (attorney=s summary of transaction by client not privileged where not revealing confidential client communications). Other courts would protect legal advice to a client to encourage two-way communication. In re LTV Secr. Litig., 89 FRD 595 (N.D. Tex. 1981); Sprague v. Thorn Americas, Inc., 129 F.3d 1355 (10th Cir. 1997) (taking broad view of protection); Alexander v. Fed. Bur. Investig., 198 F.R.D. 306 (D.D.C. 2000).
c. Fiduciaries. Confidential communications between counsel and corporate management, trustees, or others acting as fiduciaries are not necessarily absolutely privileged. In some courts the shareholders in a derivative action on behalf of the corporation, or the beneficiaries of a fiduciary, may for good cause obtain the information. Cramer v. Woltinbarger, 430 F.2d 1093 (5th Cir. 1970); Quintel Corp. v. Citibank, N.A., 567 F. Supp. 1357 (S.D.N.Y. 1983) (corporate cases). In re Grand Jury Proceedings, 162 F.3d 554 (9th Cir. 1999) (ERISA pension fund kickbacks), Riggs National Bank v. Zimmer, 355 A.2d 709 (Del. Ch. 1976) (trustee sued by beneficiary).
d. Counsel Protection. The client may not be able to assert the privilege where the otherwise privileged communication is necessary for counsel=s own defense. Communications relevant to an issue of breach of duty by the lawyer to the client or by the client to the lawyer are not privileged. Ut. Rul. Evid. 504(d)(3).
e. Effect of Claiming. If the privilege is asserted, a court may make an adverse presumption. See Shoemaker Est. v. Com=r, 47 T.C.M. 1462 (1984) (in an estate planning matter where privilege upheld, nevertheless Aan unfavorable inference could be drawn from this assertion of the [email protected]). On the other hand, where the burden of proof may otherwise shift to the government and away from the taxpayer in a tax case under IRC ' 7491, asserting the privilege should not be a failure to cooperate, which prevents the shift. see Kohler Est. v. Com=r, 92 TCM 48 (2006)(motion to quash summons, although denied by court, was brought in good faith, documents were subsequently provided by taxpayer, and, consequently, there was no failure to reasonably cooperate).
2. Application to Companies. Companies can be clients, and whoever controls the client controls the privilege. (FTC v. Weintraub, 471 U.S. 343 (1985).) This includes bankruptcy trustees (see, however, Foster v. Hill, 188 F.3d 1259 (10th Cir. 1999) (trustee does not automatically control the privilege with respect to prepetition claims)), purchasers of subsidiaries (as to the subsidiary company=s privilege), directors, LLC managers, etc. See U.S. v. Campbell, 73 F.3d 44 (5th Cir. 1996) (a limited partnership is an artificial person acting only through agents, thus the bankruptcy trustee may control the privilege as with corporations).
a. Employees and Others. The privilege, generally protects communications by counsel with any employee where needed to give legal advice, not just with the control group of upper management and their advisors. Upjohn Co. v. U.S., 449 US 383 (1981). The U. S. Supreme Court held that the privilege applied to communications made by noncontrol group employees of the client to the employer=s attorneys where such communications were made by the employees (1) at the direction of their superiors, (2) in order to secure legal advice for the corporation, (3) about matters within the scope of the employees= corporate duties, and (4) while the employees were aware they were being questioned in order that the corporation could obtain legal advice.
Although Upjohn relates to the federal privilege, that case has been influential in the application of the state privileges as well. Some states, such as Illinois, continue to use the control test, and if sued in those states, a company=s privileged communications can be limited beyond what would otherwise be expected.
b. Former Employees and Employee Equivalents. The privilege under the functional tests of Upjohn can include communications with former employees or independent contractors which are the functional equivalent of employees. Via Com Inc. v. Sumitomo Corp. (In re Copper Market Antitrust Litigation), 200 F.R.D. 213, 220 & n.4 (S.D.N.Y. 2001); In re Allen, 106 F.3d 582 (4th Cir. 1997) (former employees).
c. Independent Advisors to Company. Other independent advisors to a company, or other clients for that matter, generally are not protected in most courts, for example, accountants, environmental consultants, and investment bankers. American Legacy Found. v. Lorillard Tobacco Co., 2004 De. Ch. Lexis 157 (2004) (public relations firm); U.S. v. Stewart, 287 F. Supp. 2d 461 (S.D.N.Y. 2003) (daughter of defendant); U.S. v. Ackert, 169 F.3d 136 (2d Cir. 1999) (tax attorney=s discussion with investment banker recommending tax advantages of investment held not privileged).
a) Internal Investigation. Where employees are interviewed by counsel as part of an internal investigation, but counsel does not represent the employees, if the employee believes the attorney for the company was acting for the employee, the employee may be treated as having an attorney-client relationship with the ability to waive the attorney-client privilege. See Waggoner v. Snow, Becker, Harris & Krause, 991 F.2d 1501 (9th Cir. 1993).
Counsel must make clear that he or she represents only the company, that only the company may waive the privilege, and that the employee should keep the substance of the interview confidential. See also Rules of Professional Conduct 1.13 and 4.3.
d. Inside Counsel. In-house counsel is generally protected to the same extent as outside counsel. Some courts use a presumption of privilege as to the legal department and general counsel, but an opposite presumption as to attorneys working for an operational group, such as a financing arm which can be viewed as the business side of an operation. See Boca Investerings Partnership v. US, 31 F.Supp.2d 9 (D.D.C. 1998). Some courts apply heightened scrutiny to a claim of privilege by in-house counsel due to the general mix of legal and business responsibilities. See Rossi v. BlueCross and BlueShield of Greater New York, 73 N.Y.2d 588 (N.Y. 1989).
e. Subsidiaries. Communications between a corporate parent=s counsel and a subsidiary=s counsel may be privileged. In re Westinghouse Elect. Corp. Uranium Contracts Litig., 76 F.R.D. 47 (W.D. Pa. 1977).
f. Owners. Communications with general partners can be privileged. Abbott v. Equity Group, 1988 WL 86 826 (E.D. La. 1988). But communications with shareholders may destroy the privilege by a finding of waiver. Cf. Garner v. Wolfinbarger, 430 F.2d 1093 (5th Cir. 1970).
3. Counsel. To obtain the privilege, the communication must be with counsel or counsel=s subordinates.
a. Foreign Counsel. Some courts grant protection to foreign counsel or persons serving similar functions in foreign countries.
b. Counsel=s Assistants. Persons and advisors engaged by counsel to help provide legal advice may be protected where if engaged by the client directly, there would be no protection. See Ut. Dept. of Transp. v. Rayco Corp., 599 P.2d 481, 491-92 (Ut. 1979) (not protecting appraiser=s report). Thus, communications with an accountant engaged by counsel for purposes of litigation can be privileged. See U.S. v. Kovel, 296 F.2d 918 (2d Cir. 1961); but see Cavallaro v. U.S., 284 F.3d 236 (1st Cir. 2002) (accountant=s presence must be necessary or highly useful to the provision of legal advice); Himmelfarb v. U.S., 175 F.2d 924 (9th Cir. 1949) (not privileged where accountant=s presence convenient but not indispensable).
It is important that the accountant (or other advisor) act under the direction of counsel subject to the confidentiality of communications made, and that their services substantially aid in rendering legal advice. See U.S. v. Adlman, 68 F.3d 1495 (2d Cir. 1995) (corporate client not the lawyer engaged the accountant for tax advice so communication between the lawyer and accountant was not privileged). In some courts direct payment by counsel is not necessary. See Advisory Committee Note to Ut. Rul. of Evid. 504.
4. Legal Advice Covered. Only communications relating to legal advice are covered. Disclosure of underlying facts is not protected. See Upjohn case cited above (at 2a), which cites to Philadelphia v. Westinghouse Elect. Corp., 205 F. Supp. 830 (E.D. Pa. 1962).
a. Generally Not Covered. The privilege does not cover such things as a general description of the lawyer=s services, the circumstances of the communication, historical facts, information learned from third persons relayed to the client, or the lawyer=s communication as a business advisor or personal friend. The underlying facts described in a communication are not necessarily protected, because the privilege is for the communication itself, not the facts. Rhone-Poulenc Rorer, Inc. v. Hone Indemn. Co., 32 F.3d 851 (3d Cir. 1994).
b. Predominant Character. Some courts require that a communication be primarily or predominantly of a legal character. Spectrum System Int=l Corp. v. Chemical Bank, 575 N.Y.S. 2d 809 (N.Y. 1991); Neuder v. Battele Pac. N.W. Nat=l Lab., 194 F.R.D. 289 (D.D.C. 2000). This would also apply to in-house counsel where legal and business advice may be given. Allendale Nat. Insur. Co. v. Ball Data Sys., Inc., 152 F.R.D. 132 (N.D. Ill. 1993). Concerning the predominant character of a communication, see In re Grand Jury Subpoena Duces Tecum Dated September 15, 1983, 731 F.2d 1032 (2d Cir. 1984) (legal, not business, advice required); see also Olender v. US, 201 F.2d 795 (9th Cir. 1954); Pippenger v. Gruppe, 883 F. Supp. 1201 (S.D. Ind. 1994).
Some courts have raised doubts about the availability of the privilege where a lawyer acts solely as a negotiator for a transaction, believing a privilege here would give attorneys an unfair advantage over lay negotiators. See Georgia Pacific Corp v. GAF Roofing Mfg. Corp., No. 93 Civ. 5125, 1996 U.S. Dist. LEXIS 671 (S.D. N.Y. Jan. 25, 1996) (negotiation and making business judgments); MSF Holdings, Ltd. v. Fiduciary Trust Co., Int=l, No. 03 Civ. 1818, 2005 U.S. Dist. LEXIS 34171 (S.D. N.Y. Dec. 7, 2005) (contrasting commercial knowledge against legal expertise); Note Funding Corp. v. Babian Investment Co., No. 93 Civ. 7424, 1995 U.S. Dist. LEXIS 16605 (S.D. N.Y. Nov. 9, 1995) (dual purpose communication in transaction where predominant purpose protected some documents, but not others).
c. Accounting; Tax Returns. Accounting services are not subject to the privilege even if performed by an attorney. U.S. v. Arthur Young & Co. 465 U.S. 805 (1984) (broad authority for Service to seek tax accrual work papers by summons); Couch v. U.S., 409 US 322 (1973); see also U.S. v. BDO Seidman, 2004 WL 1470034, 94 AFTR 2d 2004-5066 (N.D. Ill.) (law firm=s memos to accounting firm subject to privilege despite claim of tax shelter preclusion because the law firm was doing lawyer=s work). Tax return preparation has been treated primarily as an accounting service and not privileged. U.S. v. Lawless, 709 F.2d 485 (7th Cir. 1983); In re Schroeder, 842 F.2d 1223 (11th Cir. 1987); US v. Davis, 636 F.2d 1028 (5th Cir. 1981); U.S. v. Gurtner, 474 F.2d 297 (9th Cir. 1973); Caraday v. US 354 F. 2d 849 (8th Cir. 1966). See, however, Colton v. U.S., 306 F.2d 633 (2d Cir. 1962) (tax advice and returns within professional competence of an attorney and prima facie subject to privilege); U.S. v. Abrahams, 905 F.2d, 1276 (9th Cir. 1990) (return material may also be for legal advice); U.S. v. Bornstein, 977 F.2d 112 (4th Cir. 1992). However, an attorney may be asked to prepare tax returns because of legal problems, and in such case would be acting as an attorney, but the tax return preparation itself is not subject to any presumption as to attorney-client privilege. U.S. v. Willis, 565 F. Supp. 1186, 1189-94 (S.D. Iowa 1983). The analysis of a tax return and providing judgment on the outcome of litigation about it is legal advice. U.S. v. Rockwell Int=l, 897 F.2d 1255 (3d Cir. 1990). See also, the intent to reveal cases at e. below relating to tax returns.
Concerning application of the privilege for tax advice and tax opinions generally, see U.S. v. Tel. & Data Sys. Inc., 2002-2 USTC & 50,569 (D.Wis. 2002); Wojdak v. First W. Gov=t Sec., Civ. Action No. 83-1076, 1991 U.S. Dist. LEXIS 11482, 4-5(E.D. Pa. 8/15/91) (draft tax opinions privileged).
A new variation on tax and accounting matters has arisen under the Financial Accounting Standards Board ([email protected]) interpretation of generally-accepted accounting principles ([email protected]), FIN 48 (effective for fiscal years after December 15, 2005), pursuant to which companies must evaluate whether their tax positions satisfy a two-part recognition threshold. Tax accrual work papers may need to be provided to the outside auditors to establish compliance with GAAP. A U. S. District Court ruled the work papers prepared by tax attorneys and CPAs were subject to the attorney-client privilege, the tax advisors= privilege, and the attorney work product doctrine, but the attorney-client and tax advisors= privileges were waived on turning over the papers to the auditors, but the attorney work product doctrine was sufficient to protect them from a summons from the Service, absent a showing of substantial need. U.S. v. Textron and Subsidiaries (No. 06-198), FTC 2d/FIN & T-1330, USTR & 76, 024.07 (D.C.R.I. 2007). Further developments are likely in this area. See also U.S. v. Roxworthy, 457 F.3d 590 (6th Cir. 2006) (also discussed in connection with work product doctrine at 8a below: IRS Summons for two tax opinions quashed where one purpose of the opinions was in anticipation of litigation).
d. Client Identity. Client identity is generally not protected. In re Shargel, 742 F.2d 61, 62-64 (2d Cir. 1984). However, there may be a privilege where the name of the client is material for purposes of showing an acknowledgment of guilt to the very offense on account of which the attorney was employed. Baird v. Koerner, 279 F.2d 623 (9th Cir. 1960); Liebman, 742 F.2d 807 (3d Cir. 1984); Vigelli v. DEA, 992 F.2d 449 (2d Cir. 1993). See also In re Grand Jury Proceedings, 680 F.2d 1026 (5th Cir. 1982) (applying a last link test where Adisclosure of the client=s identity his attorney would . . . supply the last link in an existing chain of incriminating evidence likely to lead to the client=s [email protected]) and In re Grand Jury Proceedings, 641 F.2d 199, 204 (5th Cir. 1981) (applying a mostly-discarded legal advice test).
If disclosing a client=s identity would disclose the client=s motive for seeking legal advice, that identity may be privileged. Tillotson v. Boughuer, 350 F.2d 663 (7th Cir. 1965). But see U.S. V. BDO Seidman, 337 F.3d 802 (7th Cir. 2003) (identities of participants in potentially abusive tax shelters subject to list keeping and disclosure under IRC '' 6111 and 6112 must be disclosed, despite claim of privilege); see also U.S. v. Arthur Anderson LLP, 92 AFTR 2d 2003-5800 (N.D. Ill.) (follows BDO Seidman case in holding that IRC '' 6111 and 6112 supercede the privilege); Doe v. Wachovia Corp., 268 F. Supp. 2d 627 (W.D.N.C. 2003) (identities of shelter participants disclosable where found not to be clients of tax advisors).
e. Intent to Reveal. Nor does the privilege cover information the client intends to reveal outside the attorney-client relationship. For example, tax return information is intended to be disclosed to the Internal Revenue Service, so communications leading to the filing of the return fall outside the privilege. See U.S. v. Frederick, 182 F.3d 496 (7th Cir. 1999) (dual purpose document, for tax return and for litigation, denied privilege). See also U.S. v. BDO Seidman, 337 F.3d 802 (7th Cir. 2003); U.S. v. Lawless, 709 F.2d 485 (7th Cir. 1983); Dorokee Co. v. U.S., 697 F.2d 277 (10th Cir. 1983); U.S. v. Cote, 456 F.2d 142 (8th Cir. 1972); U.S. v. El Paso Co., 682 F.2d 530 (5th Cir. 1982). See also discussion at 4c above and 8a below.
f. Common Interest. Where the third party involved in the communication has a common interest, however, the privilege may apply in limited circumstances. The common interest exception is limited to those with an identical legal interest who are in or facing litigation and who jointly plan a common litigation strategy. Stenovich v. Wachtell, Lipton, Rose & Katz, 756 NYS 2d 367 (NY App. Div. 2003). See also U.S. v. Lopez, 777 F.2d 543 (10th Cir. 1985) (no privilege where there were potentially adverse interests and did not show purpose of meeting was to plan common defense). Communications between the clients is not privileged outside a conference involving legal services.
g. Billing Matters. Billing and fee matters are not privileged. U.S. v. Leventhal, 961 F.2d 936 (11th Cir. 1992) and U.S. v. Blackman, 72 F.3d 1418 (9th Cir. 1995) (payment of $10,000 cash to law firm and client identity not privileged against IRS summons); Clarke v. American Commerce Nat=l Bank, 974 F.2d 127 (9th Cir. 1992) (billing statements with general nature of services performed not privileged); see also U.S. v. Ellis, 90 F.3d 447 (11th Cir. 1996); Chaudhry v. Gallerizzo, 174 F.3d 394 (4th Cir. 1999).
h. Law-related Services. A lawyer will be subject to the Rules of Professional Conduct in providing services which might reasonably be performed in conjunction with, and in substance are related to, legal services, either where the circumstances are not distinct from the lawyer=s provision of legal services or in other circumstances, if the lawyer fails to take reasonable measures to assure that the client knows the other services are not legal services and the protections of the client-lawyer relationship (such as, but not limited to, the attorney-client privilege) do not apply. Ut. Rul. Prof. Cond. 5.7. The commentary to the rule describes some such other services as possibly including financial planning, accounting, tax preparation, economic analysis, and other sorts of consulting or counseling.
5. Waiver. Waiver can be by the client or by the attorney as the agent of the client. Counsel cannot properly waive the privilege without the client=s consent, but third persons can enforce a waiver by counsel with apparent authority. See Hartz Mountain Indus. v. Com=r, 93 T.C. 521 (1989). Sharing information beyond the lawyer-client relationship can cause a waiver of the privilege (see Ut. Rul. of Evid. 507(a)), including sharing information too broadly within the company. Verschoth v. Time Warner, Inc., 2001 U.S. Dist. Lexis 3174 (SDNY 2001). Disclosures to shareholders may be a waiver of the privilege. Garner v. Wolfinberger, 430 F.2d 1093 (5th Cir. 1970). Showing documents to a witness to refresh recollection, or to an expert even if not used in the report, is a waiver since the other side is entitled to examine it. Fed. Rul. Evid. 612; Fed. R. Civ. Proc. 26; In re Pioneer Hi Bred Int=l, Inc., 238 F.3d 1370 (Fed. Cir. 2001) (expert). Care must be exercised concerning who attends meetings with counsel. See Hofmann v. Conder, 712 P.2d 216 (Ut. 1985) (third person=s presence needs to be reasonably necessary). Also, information disclosed in a governmental audit waives the privilege. See U.S. v. Mass. Inst. of Tech., 129 F.3d 681 (1st Cir. 1997) (in an investigation into tax exempt status, the IRS was entitled to summons unredacted documents given to Dept. of Defense in a contract audit).
a. Scope of Waiver. Waiver generally is forever and for all purposes and covers the entire subject matter. Bernardo v. Com=r, 104 T.C. 677 (1995). Thus, a client who waives the privilege on one communication could be required to disclose all privileged communications on the same subject matter. In re National Marietta Corp., 852 F. 2d 6119 (4th Cir. 1988); Doe v. Marat, 984 P.2d 980 (Ut. 1999). See VLT, Inc. v. Lucent Techs. Inc., 54 Fed. R. Serv. 3d 1319 (D. Mass. 2003) (applying the subject matter rule to a mistaken waiver). See In re Pioneer Hi-Bred Int=l Inc., 238 F.3d 1370 (Fed Cir. 2001) (a tax opinion on a merger printed in a proxy solicitation waived privilege as to the tax advice, but not other issues). See however, Long-Term Capital Holdings v. U.S., 2003-1 USTC & 50,304 (D. Conn. 2003) (disclosing gist of a more-likely-than-not tax opinion did not waive privilege as to entire opinion).
b. Inadvertent Disclosure. Inadvertently allowing otherwise privileged documents to fall into the wrong hands may cause a waiver and loss of the privilege. See In re Sealed Case, 877 F.2d 976 (D.C. Cir. 1989) (applying a Astrict [email protected] approach, the court denied the privilege as to the documents and the entire subject matter, as well); compare to Already v. City of Granada, 988 F.2d 1425 (5th Cir. 1993) (applying a more lenient [email protected] approach and listing factors as to precautions taken, etc.). Ut. Rul. of Evid. 507(a) (waiver occurs where holder fails to take reasonable precautions against inadvertent disclosure; note that a prior disclosure is not required, but failure to take precautions may alone be sufficient for waiver). See also Doe v. Maret, 984 P.2d 980 (Ut. 1999) (concept of inadvertence does not apply to deposition).
Further, as an ethical matter, a lawyer who knows or should know he or she has received an inadvertent disclosure, is required to promptly notify the sender. Ut. Rul. Prof. Conduct 4.4(b). See also Fed. R. Civ. Proc. 26(b)(5)(B) (adopted 12/1/06) (on giving notice of inadvertent disclosure to recipient and the recipient=s duty in dealing with such material) and 26(f)(4) (also adopted 12/1/06) (on counsel meeting and conferring about how to deal with privileged material after inadvertent disclosure, such as quick peek and claw-back agreements or orders); and, given the problem that claw-back agreements or orders don=t affect third parties and may not be recognized by other jurisdictions, further see currently-proposed (Advisory Committee action 4/13/07) Fed. Rul. Evid. 502 (no subject matter waiver for inadvertent disclosures, case-by-case review of reasonable steps to prevent and rectify inadvertent disclosure, court claw-back orders, or other similar orders affect third parties in federal or state matters, and the rule binds state courts affected as well), which rule must be adopted by Congress to affect the states (28 USC 2074(b)).
c. Sword and Shield. An implied waiver can exist if, for example, the client claims as a defense reliance on counsel or (in some circumstances) a belief that the person had not violated the law. Chevron Corp. v. Pennzoil Co., 974 F.2d 1156, 1162-63 (9th Cir. 1992); U.S. v. Bernard, 877 F.2d 1463, 1465 (10th Cir. 1989); U.S. v. Bilzerian, 926 F.2d 1285 (2d Cir. 1991); Columbia Pictures Television, Inc. v. Krypton Broadcasting of Birmingham, Inc., 259 F.3d 1186 (9th Cir. 2001). Using the defense of reliance on tax counsel may waive the privilege in its entirety. In re G-I Holdings, Inc., 218 F.R.D. 428 (D. N.J. 2003).
d. Other Persons. A waiver in one matter or as to one person may be a waiver as to other persons in other matters as well. A selective waiver to the government has only been allowed by a few courts. Diversified Indust., Inc. v. Meredith, 572 F.2d 596 (8th Cir. 1978). Other courts have rejected selective waivers. In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F.3d 289 (6th Cir. 2002); Westinghouse Elect. Corp. v. Repub. of the Phillip., 951 F.2d 1414 (3rd Cir. 1991). Some courts have allowed selective waivers where the government agreed to confidentiality, but only as to the work product doctrine (discussed at 8 below), not the privilege itself. In re Steinhardt Partners, L.P., 9 F.3d 230 (2d Cir. 1993); Permian Corp. v. U.S., 665 F.2d 1214 (D.C. Cir. 1981).
e. Unringing the Bell. Some jurisdictions may in some circumstances refuse to allow evidence of privileged matters where disclosed under erroneous compulsion or without an opportunity to claim the privilege. Ut. Rul. of Evid. 507(b).
f. Burden. In the U.S. Tax Court, the party asserting the privilege has the burden to show that the privilege has not been waived. Hartz Mountain Indus. v. Com=r, 93 T.C. 521 (1989).
6. Crime-Fraud Exception. The privilege does not apply to protect communications about future criminal or fraudulent conduct. See State v. Carter, 578 P.2d 1275 (Ut. 1978); Master Funding v. Telebank, 206 F.R.D. 298 (D. Ut. 2002); In re Grand Jury Subpoena, 233 F.3d 213 (3d Cir. 2000). The crime-fraud exception may apply where the lawyer was not aware of the crime or fraud. In re Grand Jury Proceedings, 604 F.2d 798 (3d Cir. 1979).
Other future torts may destroy the privilege as well. See Coleman v. Amer. Broadcasting Co., 106 FRD 201 (D.D.C. 1985), and compare to Motley v. Marathon Oil Co., 71 F.3cd 1547 (10th Cir. 1995) (refusing to extend the exception to privilege). Utah has rejected a general tort exception to privilege. See Advisory Committee Note to Ut. Rul. of Evid. 504.
7. The Tax Advisor=s Privilege. The tax advisor=s privilege under IRC ' 7525 has some additional limitations beyond the limitations of the attorney-client privilege. It applies to communications made after July 22, 1998. The tax advisor=s privilege is rather narrow and it may be best to try to use the attorney-client privilege where it is available.
a. Criminal Exception. It does not apply to any criminal matter. IRC ' 7525 (a)(2). The Service takes the (probably correct) view that it does not apply in criminal cases where the disclosure occurred in a civil case. Chief Counsel Advice 200008006 (10/19/99, released 2/25/00).
b. Scope of Authority. The tax advice sought must be within the scope of the practitioner=s authority to practice before the Service. IRC ' 7525(a)(3)(B). The privilege covers any federally-authorized tax practitioner, which includes attorneys, certified public accountants, enrolled agents, and enrolled actuaries.
c. Tax Shelter. It does not apply to any written communication in connection with the promotion of a tax shelter. IRC ' 7525(b). ATax [email protected] is broadly defined in IRC ' 662(d)(2)(C)(ii) (which means any partnership, entity, plan, or arrangement if a significant purpose is the avoidance or evasion of federal income tax; does this effectively eliminate the privilege for a great deal of tax planning?). See the U.S. v. Textron case cited above at 4c (although a listed transaction was involved, the accountants were not peddlers of tax shelters, and the work papers reflected opinions on foreseeable tax consequences of transactions which had already occurred; however, the privilege was waived on turning over work papers to auditors).
d. Tax Proceedings. Otherwise, it applies before the Tax Court (cases pursuant to IRC ' 7453 and Tax Court Rules 704 and 143(a)), before the Service (including summons; see Arthur Young & Co., 465 US 805 (1984)), and any tax proceeding in federal court by or against the United States. It does not apply to a case in which the United States is not a party. Doe v. Wachovia Corp., 268 F. Supp. 2d 627 (DCNC 2003).
e. Other Regulatory Bodies. It will not prevent disclosure to any regulatory body other than the Service. Sen. Rept. No. 105-174 (PL 105-206) p. 71.
8. Attorney Work Product Doctrine. Under Utah Rule of Civil Procedure 26(b)(3) and the Federal Rule of Civil Procedure 26, there is a doctrine, akin to a privilege, which may be asserted both by the client and by the attorney to prevent discovery of materials prepared in anticipation of litigation or for trial by or for the client or by or for the client=s representative (including the client=s attorney, consultant, surety, indemnitor, insurer, or agent). See Hickman v. Taylor, 329 U.S. 495 (1947). The doctrine can apply to protect, for example, attorney notes, which might not be covered by the attorney-client privilege. See Upjohn v. U.S., 449 U.S. 383, 399-400 (1981). This doctrine could assist, for example, accountants who help counsel prepare for tax litigation. See U.S. v. Kovel, 296 F.2d 918 (2d Cir. 1961) (attorney should hire the CPA). Accountants= work papers are covered, if at all, only through the attorney. U.S. v. Arthur Young & Co., 465 U.S. 805 (1984). The doctrine extends to work by the client and its agents at the direction of the lawyer. In re Perrigo Co., 128 F.3d 430 (6th Cir. 1997).
a. Motive. The level of certainty required by the anticipation of litigation standard is not clear and varies from court to court, but the actual filing of litigation is not needed. See, e.g., Energy Capital Corp. v. U.S., 45 Fed. Cl. 481 (Fed. Cl. 2000); A. Michaels Piano, Inc. v. Fed. Trade Comm=n, 18 F.3d 138 (2d Cir. 1994); Schiller v. N.L.R.B., 964 F.2d 1205 (D.C. Cir. 1992); U.S. v. Rockwell Int=l, 897 F.2d 1255 (3d Cir. 1990); Binks Mfg. Co. v. Nat=l Presto Indus. Inc., 790 F.2d 1009 (7th Cir. 1983). In Utah, a primary motivating purpose test is used in applying the anticipation of litigation standard; the mere possibility that litigation may ensue or the mere fact that litigation does ensue is not enough. Gold Standard v. Barrick Resources Corp., 805 P.2d 164, 169-70 (Ut. 1990).
Other courts have allowed dual use documents to be protected by the doctrine. See U.S. v. Roxworthy, 457 F.3d 590 (6th Cir. 2006) (quashed summons of two tax opinions where there was subjective anticipation of litigation (in contrast to ordinary business purpose), which was reasonable, even though the opinions could also have been created in the ordinary course of business, including for financial audit). See also AOD 2007-004 (Service will not follow Roxworthy and will aggressively enforce summons and challenge claims of work product or other privilege, even in cases appealable to the Sixth Circuit; it found no objective evidence of anticipation of litigation in Roxworthy and is taking a tough stance).
In the U.S. v. Textron case cited above at 4c, the tax accrual work papers were protected because the attorneys prepared the work papers with a view to future litigation; the District Court found no need for the work papers in order to establish an adequate reserve but for the prospect of a challenge to the tax position by the Service likely to result in litigation or adversarial proceedings of some sort. On the other hand, see U.S. v. KPMG, 237 F.Supp. 35 (DDC 2002) (tax opinion letters to clients of EPAs related to tax returns and not covered by privilege) and see also U.S. v. KPMG 2003-2 USTC & 50, 691 (D.D.C. 2003) (but some other items are covered by IRC ' 7525 privilege); see also Black & Decker Corp. v. U.S., 219 F.R.D. 87 (D. Md. 2003) (CPA advice not privileged).
That a matter involves a proposed transaction is one factor only as to whether the standard is met, it is not determinative. U.S. v. Adlman, 68 F.3d 1495 (2d Cir. 1995) (officer obtained tax memo from accountant-lawyer at CPA firm regarding a reorganization).
A nonlegal predominant purpose to a communication can remove work product protection. See Watts Indust., Inc. v. Superior Ct., 171 Cal. Rptr. 503 (Cal. App. 1981) (attorney Amerely as business [email protected]).
b. Exceptions. The doctrine has a number of exceptions, including (i) a showing of substantial need and inability without undue hardship to obtain the substantial equivalent of the materials by other means; (ii) a person=s own statement, (iii) identity of experts expected to testify and the substance of the testimony, and (iv) reports of experts not expected to testify upon showing of exceptional circumstances or if the reports are pursuant to a court-ordered mental or physical examination.
c. Confidentiality Agreement. A confidentiality agreement may protect work product material from disclosure to others where the attorney-client privilege would not be allowed to be selectively waived. (See 5d above.)
d. Opinion or Fact. Some courts give more protection to attorney opinion than to factual information. See State v. McNearney, 110 P.3d 183 (Ut. App. 2005) (identity of defense witnesses not subject to work product doctrine); In re Allen, 106 F.3d 582 (4th Cir. 1997) (factual product discoverable on a special showing of need); compare to Cox v. Adm=r US Steel & Carnegie, 17 F.3d 1386 (11th Cir. 1994) mod. on rehearing by 30 F.3d 1347 (11th Cir. 1994) (nearly absolute immunity for opinion except in very rare and extraordinary circumstances). See also the U.S. v. Textron case cited above (at 4c), which found a heightened burden for substantial need where opinion work product was involved.
e. Waiver. The doctrine can be waived in ways similar to the ways that the attorney-client privilege can be waived, and, although the policies behind the privilege and the doctrine are not identical, similar defenses to a claim of waiver can be raised. See Merrill Lynch & Co., Inc. v. Alleghany Energy, Inc., 229 F.R.D. 441 (S.D.N.Y. 2004) (disclosure to outside auditors of internal investigation of an internal theft did not waive the doctrine because it was to a party sharing a common interest). Selective waivers have been allowed as to the work product doctrine which would not be allowed for the attorney-client privilege. See cases cited at 5d. above.
If you have any questions in reference to the materials discussed above, please contact:
Langdon T. Owen
P- (801) 363-4300
F- (801) 363-4378
Langdon T. Owen, Jr. is a member of the law firm of Parsons Kinghorn Harris, p.c. in Salt Lake City, Utah. Mr. Owen is a transactional lawyer who practices in the areas of estate and tax planning, business and commercial transactions involving both corporate and partnership taxed enterprises (including tax, employment, and benefit issues relating to such transactions), loans and creditors' workouts, pension and profit sharing plans, health care law, probate, and real estate.