1. Klomparens & Youmans LLP
INCOME AND OTHER TAXES COMMITTEE TAXATION SECTION OF THE STATE BAR OF CALIFORNIA   2016 ANNUAL INCOME TAX SEMINAR    ATTORNEY/CPA PRIVILEGE ISSUES   June 24, 2016
Irina Rospotnyuk
Wagner Kirkman Blaine
Klomparens & Youmans LLP
Douglas L. Youmans
Christian Speck

2. Overview Types of Privileges/Protections
Attorney-Client Privilege
Attorney-Work Product
Accountant-Client Privilege
Defenses that Avoid Waiver of Privilege
Best Practices for IRS Examinations
Alternative Methods for Document Production

3. ATTORNEY-CLIENT PRIVILEGE

4. Attorney-Client Privilege
What is the attorney-client privilege?
When legal advice is sought from a legal advisor, the communications relating to that advice made in confidence are protected from disclosure unless the privilege is waived.
Purpose:
Intended to facilitate sound and comprehensive legal advice by eliminating the incentive the client would otherwise have to not fully inform his attorney of the facts
See Upjohn Co. v. United States, 449 U.S. 383 (1981)

5. Test for Attorney-Client Privilege
Each prong must be analyzed and satisfied for the privilege to apply:
Communications
Made for the purpose of receiving legal advice
From a legal advisor
Made in confidence
The substance of which has not been disclosed to 3rd parties
AND
Which the client insists on protecting from disclosure
Once the test is satisfied, the privilege applies at all stages of all proceedings, regardless of whether the client is a party to the proceeding

6. Attorney-Client Privilege: Communications
What types of communications can be covered by the privilege?
Written
Consider: electronic communications
Oral
Is there blanket protection for all communications between the attorney and client?
No, generally privilege must be established by the party claiming its protection on a specific, document-by-document (or communication) basis
Privilege log must be kept to identify which documents are privileged and why

7. Attorney-Client Privilege: Made for the Purpose of Receiving Legal Advice
What content is protected?
The privilege protects only communications that are necessary to seek professional legal advice
Examples:
Recommending to the client which CPA to use.
This is likely not protected because this is not legal advice and is merely a recommendation.
Advising the client of the tax consequences of a transaction.
This is likely protected because it involves counseling the client on the law and possible outcomes given the laws in place

8. Attorney-Client Privilege: From a Legal Advisor
The advisor must be acting in his or her “lawyer” capacity
Consider: in-house counsel
Mixed Communications:
Some communications between a client and attorney contain both legal and business advice
Is the communication privileged?
Communications may not be privileged if they contain both legal and business advice

9. Attorney-Client Privilege: Made in Confidence
The client must have an expectation that the communication remain private
Examples:
Attorney is to make a disclosure to the employees on behalf of the company
This is likely not protected because the client, the company, does not intend for this communication to be private.

10. Attorney-Client Privilege: The Substance of Which Has Not Been Disclosed to 3rd Parties
Waiver to one 3rd party is generally deemed a waiver as to all
Examples:
Client cc’s his business partners (not represented by the client’s attorney) on an to the client’s attorney
This is likely not protected because the client has disclosed the substance of the to his business partners
Client cc’s his secretary on an to the client’s attorney because the secretary assists with the client’s filing
Protection debatable, but likely protected. Generally, for a communication to a 3rd party to not constitute a waiver of the privilege, the 3rd party must be indispensable to the communication.
Consider this with the “made in confidence” prong. The client certainly intends for it to be confidential but is he in violation of this prong, thereby waiving privilege?

11. Attorney-Client Privilege: Client Insists on Protecting from Disclosure
The client holds the privilege
An attorney can generally claim the privilege on behalf of the client
If the client wants to disclose something and the attorney does not, the client is generally entitled to disclose unless some other exception applies
Neither the attorney nor the client can be forced to disclose privileged communications
Exception:
There is clear evidence that the client intended to waive the privilege

12. Attorney-Client Privilege: Who is the Client?
A client is a person (or entity) who receives or seeks legal services from an attorney.
Privilege in the Corporate Setting
Entity as the client rather than employees or shareholders
Corporate client cannot immunize every document by sending a copy to its attorney(s)
Consider: Mixed communications
Some courts have required corporations claiming privilege to show that communications to in-house counsel were primarily for the purpose of obtaining legal advice as opposed to ordinary business advice

13. Attorney-Client Privilege: Dual Purpose Correspondence
Taxpayers have been denied privilege claims when documents were prepared by both accountants and attorneys, or someone who serves both roles
Non-privileged use of dual-purpose documents can waive privileged use
Documents prepared for audits to substantiate positions taken on tax returns are not privileged because the preparation of tax returns and substantiating those returns is not considered to be the practice of law
Caveats:
Analysis of law is legal work even if done for an audit
Information can become so intertwined with legal advice that it becomes privileged

14. Waiver of Attorney-Client Privilege
The attorney-client privilege can be waived when there is disclosure to a 3rd party, which may be deliberate or inadvertent.
Consider: “Advice of Counsel” Defense
The attorney-client privilege is waived when the client places an otherwise privileged tax opinion in controversy by asserting a reasonable cause defense to accuracy-related penalties.
See Ad Investments 2000 Fund LLC v. Commissioner (142 T.C. 248 [April 16, 2014]) (granting IRS’ motion to compel production of opinion letters issued by attorneys for the taxpayer where the taxpayer raised a reasonable cause defense to accuracy related penalties imposed on a Son-of-Boss transaction).

15. Exceptions to the Attorney-Client Privilege
Crime/Fraud
Communication is not privileged if a client seeks advice from an attorney to assist with the furtherance of a crime or fraud or the post-commission concealment of the crime or fraud
Query: How might this apply in the (medical) marijuana context? Is the communication privileged?
“The lawyer should warn the client that, if the client becomes involved in civil or criminal litigation, there is a risk that the communications between them will not be held to be privileged and thus be subject to disclosure in testimony.”
San Francisco Bar Association Ethics Opinions, Opinion (June 2015)
Common Interest
Example: Joint Defense Agreements
Breach of Duty
Example: Malpractice

16. Exceptions to the Attorney-Client Privilege (cont.)
Fiduciary Duty
Exception for when the corporation's shareholders wish to pierce the corporation's attorney-client privilege
Deceased Client
Privilege may be waived upon death of a testator-client if litigation ensues between decedent's heirs or other parties claiming under deceased client
Tax Return Preparation
Tax return preparation services rendered by an attorney are not protected by the attorney-client privilege

17. Privilege vs. Duty of Confidentiality
Places ethical restrictions on a lawyer’s disclosure of information relating to the representation of the client
Attorney-Client Privilege:
An evidentiary principle; if the privilege applies to a communication, disclosure of that communication cannot be compelled
Comparison:
A lawyer may have a duty of confidentiality with regard to information about his or her representation of a client, but because the information is not a part of a confidential communication, it does not benefit from the protection of the privilege. A court could compel the client or the lawyer to disclose that information
Example: Nondisclosure/confidentiality agreements

18. ATTORNEY-WORK PRODUCT DOCTRINE

19. Attorney-Work Product Doctrine
Federal Rules of Evidence (“FRE”), Rule 502(g)(1)
The protection that applicable law provides for tangible material (or its intangible equivalent) prepared in anticipation of litigation or for trial
(i.e. document-based protection)
Federal Rules of Civil Procedure (“FRCP”) Rule 26(b)(3):
“[A] party may obtain discovery of documents and tangible things otherwise discoverable under subdivision (b)(1) … and prepared in anticipation of litigation or for trial by or for another party … only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party’s case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means. In ordering discovery of such materials the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.”

20. Attorney-Work Product: Purpose
To encourage lawyers to prepare thoroughly for litigation without fear of being forced to aid an adversary at the expense of the client
Compare to Attorney-Client Privilege:
The purpose is not to protect attorney-client communications
Protection can be pierced through no fault of the lawyer or the client because of the “in preparation of litigation” prong

21. Attorney-Work Product: Test under FRCP 26(b)(3)
All 3 prongs must be satisfied for the privilege to apply:
Documents and tangible things
Prepared in anticipation of litigation or for trial
AND
By or for a party (or by or for the party’s representative)

22. Attorney-Work Product: Opinion & Factual Work Product
Work product that pertains to discoverable documents and tangible things
Factual work-product may be discoverable in certain circumstances
Opinion Work Product:
“[T]he mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation”
Enjoys almost absolute immunity from discovery and can only be discoverable in rare and extraordinary circumstances

23. Attorney-Work Product: Anticipation of Litigation
Circuit Court Split:
Majority: A document is privileged if it was prepared “because of potential or anticipated litigation” (United States v. Adlman 134 F.3d 1194 (2d Cir. 1998)
Minority: A document is privileged if the primary motivating purpose for preparing the document is preparation for litigation (U.S. v. El Paso Co., 682 F.2d 530 (5th Cir. 1982)
Not necessary that litigation have already been filed or be certain
That the work product relates to a proposed transaction is just one factor that suggests it was not prepared in anticipation of litigation and is not, in and of itself, dispositive

24. Attorney-Work Product: Waiver
Test: Was the document disclosed to an adversary or conduit to an adversary?
If yes, there is a waiver of the work-product privilege.
Disclosure to a third party which is not inconsistent with maintaining secrecy against opponents is not a waiver
Consider: Disclosure to a financial auditor
See U.S. v. Textron, Inc. 577 F.3d 21 (1st Cir. 2009) (holding that there was no waiver where the auditor was actively engaged in evaluating the tax issues for the company with the lawyers and the auditor was not an adversary in this situation).

25. ACCOUNTANT-CLIENT PRIVILEGE

26. Accountant-Client Privilege
A statutory privilege enacted by Congress in 1997
IRC § 7525(a)(1):
“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.”
"Federally authorized tax practitioner" = any individual who is authorized under Federal law to practice before the Internal Revenue Service (“IRS”)
Examples: Lawyers, CPAs, and enrolled agents

27. Accountant-Client Privilege: Limitations
A very weak privilege compared to the attorney-client privilege
There can be a waiver of the privilege
No work-product protection
IRC § 7525 Privilege does not apply to:
Criminal proceedings
IRC § 7525 applies to any noncriminal tax matter before the IRS and noncriminal tax proceeding in Federal court brought by or against the United States.
Civil Litigation
State tax matters
Consider consequences of FTB initiating audit and sharing information with IRS
See California Revenue and Taxation Code section (a)(1), extending attorney-client type privilege to communications between federally authorized tax practitioners and clients.
Non-tax regulatory investigations
Written communications in connection with the promotion of an IRC § 6662 “tax shelter”

28. Accountant-Client Privilege: Case Examples
Any information included in documents involved in preparation of a tax return or involved in verification of a tax return during audit loses both the attorney-client privilege and the IRC § 7525 privilege
United States v. Frederick, 182 F.3d 496 (7th Cir.1999)
Burden is on the IRS to establish that the tax shelter exception applies
United States v. BDO Seidman LLP, 492 F.3d 806 (2007)
See Countryside Limited Partnership v. CIR, 132 T.C. 347 (2009) (IRS could not demonstrate that handwritten notes were “written communications,” or that written minutes were in connection with the promotion of a tax shelter)
See Valero Energy Corp. v. United States, 569 F. 3d 626 (7th Cir. 2009) (Tax shelter exception applied to portion of documents sought in summons)

29. Defenses that Avoid Waiver

30. Defenses that Avoid Waiver: “Selective Waiver”
“Selective waiver” theory: The concept that the voluntary disclosure of otherwise privileged material to government agencies does not constitute a waiver for all purposes to all other third parties (See Diversified Industries v. Meredith, 572 F.2d 596 (8th Cir en banc))
Few federal appellate courts have upheld the theory of selective waiver
Exception:
A voluntary disclosure could be protected as a selective waiver if the disclosing party and the government enter into an explicit confidentiality agreement. In re Steinhardt Partners, L.P., 9 F.3d 230 (1993); but see United States v. Massachusetts Institute of Technology, 129 F.3d 681 (1st Cir. 1997).

31. Defenses that Avoid Waiver: Kovel Agreements
Named after the case United States v. Kovel, 296 F.2d 918 (2d Cir. 1961)
Kovel recognizes that the inclusion of a third party in attorney-client communications does not destroy the privilege if the purpose of the third party’s participation is to improve the understanding of the communication between the attorney and client.
Thus, experts engaged by an attorney to assist in rendering tax advice and representation to a taxpayer fall under the attorney-client privilege

32. Defenses that Avoid Waiver: Kovel Agreement Factors
Factors for Kovel protection:
Written engagement letter in place between the expert and the attorney setting forth the terms of this engagement
Expert works under the attorney’s direction and control
Work papers and documents are the attorney’s property
Attorney pays the expert’s bill
The work must be for the purpose of rendering legal advice, not simply for the preparation of tax returns

33. Defenses that Avoid Waiver: What Experts Get Kovel Protection?
Generally, any experts who act as the attorney’s agent retained for the purpose of the purpose of improving the understanding of the communication between the attorney and client, including:
CPA’s
Public relations firms
Appraisers
But see United States v. Ackert, 169 F.3d 136 (2d Cir. 1999). Circuit Court held that conversations between an investment banker and an in-house attorney were not privileged. Court would not extend Kovel because, rather than translating or interpreting communication between the attorney and the client, the banker was simply providing factual information about a transaction to the attorney

34. Defenses that Avoid Waiver: Joint Defense Doctrine
Preserves the attorney-client privilege, despite disclosure of the privileged information to third parties, when a client shares privileged communication among parties with common interests pursuant to a joint defense agreement.
Aka “common interest doctrine” or “common interest privilege”
The Doctrine does not apply when parties share only a common business or commercial interest.

35. Defenses that Avoid Waiver: Joint Defense Doctrine Factors
Requirements for Joint Defense Doctrine application:
Underlying communication is privileged
Communication disclosed in course of joint defense effort
Parties share a common legal interest
Parties have not waived the underlying privilege

36. Defenses that Avoid Waiver: “Common Interest” Under the Joint Defense Doctrine
No uniform definition of “common interest”
Some courts require “identical” legal interest
Other courts do not require a complete unity of interests among the participants.
Court split with regard to whether the common interest doctrine can apply absent anticipated or pending litigation
See United States v. BDO Seidman LLP, 492 F.3d 806 (7th Cir. 2007) (holding communication did not need to be made in anticipation of litigation

37. Defenses that Avoid Waiver: Non-Disclosure/Confidentiality Agreements with the IRS
A potential scenario is when the taxpayer and the IRS enter into a settlement agreement which limits disclosure by the taxpayer and the IRS of the settlement terms.
Can these settlement terms later be used against the taxpayer under the guise of waiver in other proceedings?

38. Best Practices for IRS Examinations

39. Pre-Examination Preserving the privilege in the corporate setting
Avoid actions inconsistent with the confidential nature of the communication
Preserving the privilege in the corporate setting
Keep distribution of confidential materials to designated group within the corporation (“need to know” standard)

40. Pre-Examination (cont.)
Establishing Work Product
Key element: creation in anticipation of litigation
Memorialize litigation-oriented aspects of document
Counsel involvement/oversight in creation of document
Duty to Preserve
Duty to preserve arises when litigation is reasonably anticipated
Special considerations in tax cases:
Burden of proof always on taxpayer
IRS can ask for finding that missing documents are adverse to taxpayer
Intentional destruction of documents outside normal record retention policy brings about issues of fraud, concealment, and obstruction of justice.

41. During Examination
Rigorous document review and scrutiny to avoid accidental waiver
Evaluate grounds for good faith argument for privilege
Involvement of counsel does not guarantee privilege
Maintain adequate privilege log
Documents created during audit to assist in defense of audit can be work product/privileged

42. Alternative Methods for Document Production
Goal in examination:
Preserve privilege and protections while at the same time satisfying the IRS with its request for information
If privileged documents are implicated by an IDR, assert all privileges and protections and prepare a privilege log
IRS input: at audit stage, revenue agents with no legal training do not request a privilege log but it may be insisted upon by IRS counsel if they assisting in audit
Consider: IRS counsel involvement in audits arising out of Panama Papers fiasco

43. Alternative Methods for Document Production (cont.)
Alternatives to Producing Documents
Persuade IRS that it is not necessary for them to evaluate the issue
Provide fresh analysis
Provide redacted documents