July 28, 2005
Author: , Jr.
Before we can understand the tax advisor's privilege, we must first understand the attorney-client privilege. 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 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.
The attorney-client privilege protects from disclosure the communications of clients who ask their lawyers for legal advice or provide the facts the lawyer needs to provide legal advice. Each state and the federal courts have their own versions of the rule. For purposes of applying IRC § 7525, it will be the federal version of the privilege which will be important. The conditions to the application of the privilege generally 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).
The privilege belongs to the client and can be asserted or waived by the client notwithstanding the attorney's objection. 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. Companies can be clients, and whoever controls the client controls the privilege. This includes bankruptcy trustees, purchasers of subsidiaries (as to the subsidiary company’s privilege), directors, LLC managers, etc.
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The privilege generally protects communications with any employee where needed to give legal advice, not just communications with the control group of upper management and their key advisors. Upjohn Co. v. U.S., 449 US 383 (1981). The 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.
The privilege under the functional tests of Upjohn may include former employees or independent contractors which are the functional equivalent of employees. Other independent advisors generally are not protected in most courts, for example, accountants, environmental consultants, and investment bankers.
To obtain the privilege, the communication must be with counsel or counsel’s subordinates. In-house counsel is generally protected to the same extent as outside counsel. Some courts grant protection to foreign counsel or persons serving similar functions in foreign countries.
Persons engaged by counsel to help provide legal advice may be protected where if engaged by the client directly, there would be no protection. Thus, communications with an accountant engaged by counsel for purposes of litigation can be privileged at least where the accountant’s presence is necessary or highly useful to the provision of legal advice.
Communication relating to legal advice is the only communication 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. Accounting services are not subject to the privilege even if performed by an attorney.
Client identity is generally not protected. 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. 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).
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 return and for litigation, denied privilege). See also U.S. v. BDO Seidman, 337 F.3d 802 (7th Cir. 2003). Where the third party has a common interest, however, the privilege may apply in limited circumstances. The common interest doctrine is limited to those with an identical legal interest who are in or facing litigation and jointly plan a common litigation strategy.
Sharing information beyond the lawyer-client relationship can cause a waiver of the privilege, including sharing information too broadly within the company. Also, inadvertently allowing otherwise privileged documents to fall into the wrong hands may cause a waiver and loss of the privilege. An implied waiver can exist if, for example, the client claims as a defense reliance on counsel. Waiver generally is forever and for all purposes and covers the entire subject matter. Thus, a client who waives the privilege on one communication could be required to disclose all privileged communications on the same subject matter.
The privilege does not apply to protect communications about future criminal or fraudulent conduct.
From the foregoing, it is clear that the attorney-client privilege is narrowly construed and applied and it can be expected that each concern described above will have an analog with respect to the tax advisor's privilege under IRC § 7525. The tax advisor’s privilege under IRC § 7525 has some additional limitations beyond the limitations of the attorney-client privilege. 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 even where the disclosure occurred in a civil case. Chief Counsel Advice 200008006 (10/19/99, released 2/25/00). The tax advice sought must be within the scope of the practitioner’s authority to practice before the Service. IRC § 7525(a)(3)(B). It does not apply to any written communication in connection with the promotion of a tax shelter. IRC § 7525(b). It does not apply to a case in which the U. S. government is not a party. Doe v. Wachovia Corp., 268 F. Supp. 2d 627 (DCNC 2003). It will not prevent disclosure to any regulatory body other than the Service. Sen. Rept. No. 105-174 (PL 105-206) p. 71. Otherwise, it applies before the Tax Court, before the Service, and in any tax proceeding in federal court by or against the United States. The privilege covers any federally-authorized tax practitioner, which includes attorneys, certified public accountants, enrolled agents, and enrolled actuaries.
The tax advisor's privilege is thus rather narrow and it may be best to try to use the attorney-client privilege where it is available.
Another thing lawyers have going for them in a litigation context is the work product doctrine, but the doctrine can protect the work product of other professionals, as well. Under state rules and the Federal Rule of Civil Procedure 26, this doctrine, akin to a privilege, 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). A primary motivating purpose test is often 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. This doctrine could assist, for example, accountants who help counsel prepare for tax litigation.
The doctrine, however, is not as strong as the attorney-client privilege because it is based on a theory of fairness in the adversarial process rather than on the stronger need for confidentiality between a client and its legal advisors. Thus, 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 a showing of exceptional circumstances or if the reports are pursuant to a court-ordered mental or physical examination.