Tax Law Confidential: Attorney-Client Privilege and the Work Product - PDF document

Tax Law Confidential: Attorney-Client Privilege and the Work Product Doctrine in Tax Practice Adam J. Smith 1 OVERVIEW I. A TTORNEY -C LIENT P RIVILEGE II. T AX P RACTITIONER -C LIENT P RIVILEGE III. WORK PRODUCT DOCTRINE IV. L IMITATIONS ON AND E XCEPTIONS TO P RIVILEGE a. Waiver of attorney- client privilege and the “common interest” exception b. Crime-Fraud Exception c. Return preparation exception d. The Kovel Doctrine V. P ROCEDURE AND B URDENS OF P ROOF VI. R ECENT C ASES AND N OTEWORTHY D EVELOPMENTS a. Schaeffler v. United States, 806 F.3d 34 (2d Cir. 2015). b. United States v. Sanmina Corp. & Subsidiaries, No. 5:15-CV-00092-PSG, 2015 WL 2412322, at *1 (N.D. Cal. May 20, 2015). c. In re Grand Jury Subpoenas Dated Mar. 2, 2015, 628 F. App'x 13, 13 (2d. Cir. 2015) (underlying case is United States v. Zukerman, S1 16 Cr. 194 (AT)). d. The Panama Papers 1 Adam J. Smith is the Visiting Assistant Professor of Tax at the University of Florida Levin College of Law and a Fellow of the Florida Bar Tax Section. Mr. Smith teaches Individual Income Tax, Corporate Tax, and Tax Research. He continues to advise clients and co-counsel attorneys in tax controversy and tax planning matters. Mr. Smith holds a J.D. and an LL.M. in Taxation from the University of Florida, and Bachelor’s and Master’s degrees in accounting from the University of Illinois at Urbana-Champaign. Before joining the UF Law faculty, Mr. Smith worked at the I.R.S. Office of Chief Counsel in Jacksonville, Florida, where he represented the Commissioner in various Tax Court proceedings and advised the I.R.S. on diverse procedural and substantive tax. Mr. Smith is also a C.P.A., with more than four years of public accounting experience in both audit and tax.

OUTLINE I. A TTORNEY -C LIENT P RIVILEGE a. Generally • The attorney-client privilege is a rule of evidence and discovery that protects from discovery and admissibility confidential communications between the client and the attorney. Fed. R. Evid. 501; Fed. R.Civ. P. 26(b)(1). • The attorney – client privilege is the oldest of the privileges for confidential communications known to the common law. Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S. Ct. 677, 682, 66 L. Ed. 2d 584 (1981)(citing 8 J. Wigmore, Evidence § 2290 (McNaughton rev. 1961). b. Distinguished from duty of confidentiality • The attorney-client privilege is sep arate and distinct from an attorney’s ethical duty of confidentiality. The duty of confidentiality is a rule of professional conduct that generally prohibits an attorney from revealing, without the client’s informed consent, information relating to representation of that client . Model Rules of Prof’l Conduct R. 1.6; Fl. St. Bar R. 4-1.6. c. Governing law • For questions of privilege in federal tax cases, federal common law applies. In re Albert Lindley Lee Memorial Hospital, 209 F.2d 122 (2d Cir. 1953), cert. denied, 347 U.S. 960 (1954). • State law applies to questions of privilege in cases involving state tax issues (e.g. state sales and use tax). See, e.g., PacifiCorp v. Dep't of Revenue of State of Mont., 838 P.2d 914, 919 (Mont. 1992). • Though not adopted by Congress, courts recognize “as a source of general guidance regarding federal common law principles” the rule the U.S. Supreme Court promulgated as part of the Proposed Federal Rules of Evidence. In re Grand Jury Investigation, 399 F.3d 527, 532 (2d. Cir. 2005); Fed. R. Evid. 501. 2

• Proposed Rule 503 states: A client has a privilege to refuse to disclose and to prevent any other person from disclosing confidential communications made for the purpose of facilitating the rendition of professional legal services to the client, (1) between himself or his representative and his lawyer or his lawyer’s representative, or (2) between his lawyer and the lawyer’s representative, or (3) by him or his lawyer to a lawyer representing another in a matter of common interest, or (4) between representatives of the client or between the client and a representative of the client, or (5) between lawyers representing the client. Prop. Fed. R. Evid. 503(b). 2 • For the purpose of applying Proposed FRE 503: o (1) A “ client ” is a person, public officer, or corporation, association, or other organization or entity, either public or private, who is rendered professional legal services by a lawyer, or who consults a lawyer with a view to obtaining professional legal services from him. o (2) A “ lawyer ” is a person authorized, or reasonably believed by the client to be authorized, to practice law in any state or nation. 2 Courts have invoked various iterations of the rule. For example, in United Shoe Machine Corp., the court stated : [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). 3

o (3) A “ representative of the lawyer ” is one employed to assist the lawyer in the rendition of professional legal services. o (4) A communication is “ confidential ” if not intended to be disclosed to third persons other than those to whom disclosure is in furtherance of the rendition of professional legal services to the client or those reasonably necessary for the transmission of the communication. Prop. Fed. R. Evid. 503(a). • Summary of the Elements of Attorney Client Privilege o (1) A communication o (2) Made between privileged persons o (3) In confidence o (4) For the purpose of obtaining or providing legal assistance. 8 John H. Wigmore, Evidence in Trials at Common Law § 2290, at 542 (McNaughton rev. ed. 1961). d. Extension of Attorney-Client Privilege to communications with Non-lawyer Professionals (Kovel Doctrine) • The attorney-client privilege extends to communications with non-lawyer professionals who act as agents of the attorney and who facilitate the provision of legal services. U.S. v. Kovel, 296 F.2d 918 (2d Cir.1961). • To enjoy attorney-client privilege, the communication with the non-lawyer agent must (1) be made in confidence and (2) for the purpose of obtaining legal advice from the lawyer. Id. • The privilege does not extend to communications with a nonlawyer who advises or consults with the client on matters beyond the scope of the legal services. The nonlawyer must act as a “ translator or facilitator .” • The privilege that extends to communications with accountants under Kovel is separate and distinct from the Section 7525 Tax Practitioner- Client discussed below. 4

e. Policy • The purpose of the attorney-client privilege is “to encourage full and frank communication between attorneys and their clients and thereby to promote broader public interests in observance of law and administration of justice.” Upjohn Co. v. United States, 449 U.S. 383, 389 (1981). f. Contexts in which attorney client privilege issues arise • In tax practice, attorney-client privilege issues arise throughout the course of representation: o (1) During initial consultation/retention; o (2) In tax planning; o (3) With IRS summonses as part of both civil examinations (i.e. audits) and criminal investigations; and o (4) During litigation with discovery and admissibility of evidence. II. T AX P RACTITIONER -C LIENT P RIVILEGE a. Creation of the Tax Practitioner-Client Privilege • Section 3411 of the IRS Reform Act of 1998 created the tax practitioner- client privilege by adding § 7525 to the Internal Revenue Code of 1986 (“ IRC ”). • Section 7525 provides: With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney. I.R.C. § 7525. • Accordingly, in applying the tax practitioner privilege, we look to the law governing attorney-client privilege. See United States v. BDO Seidman, 337 F.3d 802, 810 (7th Cir. 2003). 5