Supreme Court Dismisses Attorney-Client Privilege Case as Improvidently Granted (1/23/2023)

I recently reported on this blog and my Federal Tax Crimes Blog on the Oral Arguments in In Re Grand Jury (Sup Ct. No. 21-1397), docket entries here.  See On Supreme Court Oral Argument in In Re Grand Jury On Issue of Principal or Significant Purpose for Attorney-Client Privilege (Federal Tax Procedure Blog 1/17/23), here, linking to On Supreme Court Oral Argument in In Re Grand Jury On Issue of Principal or Significant Purpose for Attorney-Client Privilege (Federal Tax Crimes Blog 1/10/23; 1/11/23), here.

Today, the Supreme Court entered the following order “Writ of certiorari DISMISSED as improvidently granted. Opinion per curiam.”  See the docket entried liked above and the opinion here. 

For further discussion, see Supreme Court Dismisses Attorney-Client Privilege Case as Improvidently Granted (1/23/2023), here.

On Supreme Court Oral Argument in In Re Grand Jury On Issue of Principal or Significant Purpose for Attorney-Client Privilege (1/17/23)

Readers of this Federal Tax Procedure Blog may be interested in the following blog entry -  On Supreme Court Oral Argument in In Re Grand Jury On Issue of Principal or Significant Purpose for Attorney-Client Privilege (Federal Tax Crimes Blog 1/10/23; 1/11/23), here.  Rather than cross-posting as I did with the granting of certiorari in the case, I will just link to the Federal Tax Crimes Blog posting.

Supreme Court Grants Cert to Determine Whether Dual-Purpose Communications Involving Legal and Non-Legal Advice (in Tax Return Preparation Setting) is Protected by Attorney-Client Privilege (10/3/22; 10/6/22)

The Supreme Court accepted certiorari in In Re Grand Jury (Sup Ct. No. 21-1397). See docket entries here. The acceptance does not state or refine the issue presented; presumably, the issue presented that the parties will brief is the one in the petition for cert as follows:

            Whether a communication involving both legal and non-legal advice is protected by attorney-client privilege where obtaining or providing legal advice was one of the significant purposes behind the communication.

Added 10/6/22 11:44am:  The foregoing is the question presented that appears on the Supreme Court's docket entries questions presented link, here.

The Solicitor General in its brief in opposition states the issue slightly differently (with some spin) as follows:

             Whether the district court permissibly denied petitioner’s general claim of attorney-client privilege over communications, related to the preparation of a tax return, that did not have obtaining legal advice as their primary purpose, while instructing that all legal advice contained in the communications be redacted.

 The amended opinion below is In re Grand Jury, 23 F.4th 1088 (9th Cir. 2022), CA9 here and GS here. The Ninth Circuit’s Summary (not included in GS opinion) is:

SUMMARY*
* This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader.

Grand Jury Subpoenas

            The panel affirmed the district court’s orders holding appellants, a company and a law firm, in contempt for failure to comply with grand jury subpoenas related to a criminal investigation, in a case in which the district court ruled that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice.

Ninth Circuit Holds that Taxpayer Waived Attorney-Client Privilege and Factual Work Product Protection (8/8/20)

In United States v. Sanmina Corp., ___ F.3d ___ (9^th Cir. 2020), here, the taxpayer’s in-house counsel prepared two memoranda supporting a very large deduction the taxpayer claimed.  The taxpayer provided the memoranda to an outside law firm which prepared a valuation report supporting the claim.  The valuation report referenced the memoranda.  The taxpayer gave the  valuation report to the IRS in support of the claim.  The IRS summonsed the memoranda.  The taxpayer resisted, asserting the attorney-client privilege and work product protection.  The IRS petitioned to enforce the summons.  When the smoke cleared in the opinion, the Court held that the taxpayer’s disclosure to the firm preparing the valuation report waived the attorney-client privilege and was not consistent with work-product protection, so that the factual matter in the memoranda (as opposed to the opinion work product) must be disclosed to the IRS pursuant to the summons.

The holding is important but not that exceptional, so I provide readers here the summary offered by the Court of Appeals (a feature for Ninth Circuit precedential opinions similar to the Tax Court’s summary for T.C. opinions; the Ninth Circuit  summary is not precedential and is prepared by staff for the convenience of readers):

SUMMARY

Tax

The panel affirmed in part and reversed in part the district court’s determination, that taxpayer Sanmina Corporation  had waived attorney-client privilege and workproduct protection for certain memoranda prepared in support of a  worthless stock deduction on Sanmina’s federal tax return, in a petition by the Internal Revenue Service to enforce a summons for those memoranda.

The memoranda in question (Attorney Memos) were authored by Sanmina’s in-house counsel and referenced in a valuation report prepared by DLA Piper (DLA Piper Report) in support of the worthless stock deduction. The district court initially denied enforcement of the summons. This court remanded for in camera review of the Attorney Memos. On remand, the district court determined that the Attorney Memos were covered by both attorney-client privilege and work-product protection, but that those privileges had been waived. On appeal, the parties did not dispute that the Attorney Memos were privileged.

The panel first held that Sanmina expressly waived the attorney-client privilege when it disclosed the Attorney Memos  to DLA Piper. The panel next held that Sanmina did not expressly waive work-product immunity merely by providing the  Attorney Memos to DLA Piper, but it impliedly waived the privilege when it subsequently used the DLA Piper Report to support its tax deduction in an IRS audit, because such use was inconsistent with the maintenance of secrecy against its adversary. The panel ordered disclosure of only the factual content of the Attorney Memos on which the DLA Piper Report relies, and remanded for the district court to determine the specific portions of the Attorney Memos that  should be disclosed to the IRS.

JAT Comments:

Fifth Circuit Rejects Attorney-Client Identity Privilege for Law Firm Documents (4/26/20)

In Taylor Lohmeyer Law Firm P.L.L.C. v. United States, ___ F.3d ___ (5th Cir. 4/24/20), here, the Court of Appeals affirmed the district court’s enforcement of a John Doe Summons (JDS) to a law firm to obtain documents, and thus identities, of the Firm’s clients who “at any time during the years ended December 31, 1995[,] through December 31, 2017, used the services of [the Firm] . . . to acquire, establish, maintain, operate, or control (1) any foreign financial account or other asset; (2) any foreign corporation, company, trust, foundation or other legal entity; or (3) any foreign or domestic financial account or other asset in the name of such foreign entity.”  The Court affirmed the district court's enforcement of the summons, rejecting the firm's argument that the client's identities were confidential client communications.

I have revised the relevant portion of the working draft of my Federal Tax Procedure Book (for publication in August 2020) and offer below a cut and paste of the revised portion (footnotes omitted).  I also point readers to a good law review article on the general subject:  Richard Lavoie, Making a List and Checking it Twice: Must Tax Attorneys Divulge Who's Naughty and Nice, 38 U.C. Davis L. Rev. 141 (2004), here.  The following discussion from my Federal Tax Procedure Book is under the attorney-client privilege discussion.

    (4) Client Identity Privilege.

 Is the identity of the client privileged under the attorney-client privilege?   A frequent context in which this question is presented is the reporting requirements for cash payments via the Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business.  (Recall that the Form 8300 is a double agency form–for the IRS and for FinCEN.)  This reporting requirement applies to cash received by attorneys.  Often clients engaged in criminal activity pay their attorneys in cash.  Can the attorney receiving cash omit the client’s name from the report?  The mere receipt of the cash might disclose, at least implicitly, something confidential that is important to the purposes behind the attorney-client privilege; thus a requirement that the attorney disclose the receipt of the cash from the identified client might be inconsistent with the attorney-client privilege.  Another context in which the issue comes up is when the IRS issues a John Doe Summons (“JDS”) to a law firm related to abusive tax shelter transactions to discover the names of clients engaging the firm with respect to the shelter. That those clients engaged the firm with respect to the shelter does imply something about the clients’ communications with the firm, at a minimum the clients’ desire and tax need for some form of tax mitigation.  The conventional holding in this context is that the identity of the client and fee arrangements are not attorney-client communications invoking the the attorney-client confidential communications privilege.

 Some courts of appeals recognize that there may be a “narrow exception * * * when revealing the identity of the client and fee arrangements would itself reveal a confidential communication.” For purposes of convenience I refer to this narrow exception as the “identity privilege” which is a common term for it, but you should remember that it is not a separate privilege but rather a particular subset of one or more other privileges or policies that might be involved (here the attorney-client privilege).  The district court in Gertner relied upon the identity privilege but the Court of Appeals did not address the issue because it denied enforcement of the summons in any event because the Government had not used the proper John Doe summons procedure.

 I attempt here just a summary of the law in the area in tax cases:

Microsoft Summons Enforcement on Transfer Pricing "Planning" - Mixed on Privilege Claims (1/22/20)

After publishing this blog entry, a new article was published about Microsoft's transfer pricing planning and the audit.  I discuss that article in my comments below (Comment #4.)

In United States v. Microsoft, 2020 U.S. Dist. LEXIS 8781 (W.D. Wash. 1/17/20), here, the district court resolved a contentious summons enforcement proceeding started in December 2014.  (See the CourtListener docket entries, here.)  Summons enforcement proceedings are supposed to be “summary in nature.”  United States v. Clarke, 573 U.S. 248, 254 (2014) (citing United States v. Stuart, 489 U.S. 353, 369 (1989)).

So, why was this summons enforcement proceeding not so summary, taking just over 5 years to resolve?  A hint at the answer is the amount of the tax savings involved (perhaps $5 billion over 10 years, achieved at a cost of $10 million (I don't think that planning included tax professional fees)), the promoter tax shelter context (involving one of the prominent bullshit promoter tax shelter players, KPMG, in the early 2000s), and the sheer number of attorneys appearing in the case (many of whom are amici).  (For the attorneys, see the CourtListener list which may be reviewed by clicking on the “Parties and Attorneys on the CourtListener docket list above; the Government lists 4 attorneys, Microsoft lists 14 (included terminated attorneys), and the amici attorneys are more than I want to count; the relative imbalance between the attorneys for Government and attorneys for the parties opposing the Government reminds me of the old saying about Texas rangers–one mob, one Ranger; in this case one mob, 4 Government attorneys.)

Well, there is not much in the case.  It is, after all, a summons enforcement proceeding where, once the minimal Powell standards are met, the summons is enforced.  United States v. Powell, 379 U.S. 48 (1964).  The Court thus early on ordered the summons enforced.  United States v. Microsoft Corp., 154 F. Supp. 3d 1134 (2015).  But that left the privilege assertions to be thrashed over, hence the delay.

So, what’s the context for this battle?  Not surprisingly, high-dollar transfer pricing cost sharing arrangements that has drawn similar high dollar litigation with loads of attorneys.  E.g., Altera Corp. v. Commissioner, 926 F.3d 1061 17143 (9th Cir. 2019), reh. en banc den. 941 F.3d 1200 (9th Cir. 2019) (with an analogous melange of attorneys, including amici).  As the Microsoft Court said in the most recent opinion (the one linked in the opening paragraph):

Ultimately Microsoft did enter into cost sharing arrangements through technology licensing agreements. Because those cost sharing arrangements were required by law to be arm's length transactions, the design and implementation details are a central focus of the government's examination. The government expresses skepticism that a third party would be likely to enter into the agreements, thereby satisfying the arm's length standard, because the agreements contained several unique provisions. Dkt. #146 at ¶¶ 18-20. While many of the terms changed before and afterward the agreements were to have been formed, they remained favorable for Microsoft's income tax liability. Id. at ¶¶ 9-11. The government believes that the transactions were "designed and implemented for the purpose of avoiding tax." Id. at ¶ 20. n1
   n1 The government expresses further skepticism on the basis that the agreements effectively netted the Puerto Rican entity $30 billion for the "routine" reproduction of CDs containing software and did not otherwise have a significant impact on Microsoft's operations. Dkt. #146 at ¶¶ 15-20. 

Microsoft maintains that nothing was abnormal about its actions. [*7]  Microsoft argues that transfer pricing disputes with the government were prevalent and, "[r]ecognizing the inevitability of an [Internal Revenue Service ("IRS")] challenge, Microsoft was determined to be adequately prepared to defend these cost sharing arrangements." Dkt. #140 at 6; see also Dkt. #143 at ¶ 23. To this end, and because of the complexity of facts relevant to corporate international tax, Microsoft employed KPMG "to help the lawyers provide legal advice" and to give its own tax advice. Dkt. #140 at 1; Dkt. #143 at ¶¶ 7, 10. Mr. Boyle, then Microsoft's Corporate Vice President and Tax Counsel, maintains that the materials at issue were prepared for his use and that they were "prepared in anticipation of an administrative dispute or litigation with the IRS over the Puerto Rican cost sharing arrangement, the pricing of the software sales to Microsoft, and other issues expected to be in dispute relating to those transactions." Dkt. #143 at ¶ 23.

Significant 2d Circuit Opinion on Lack of Waiver of Attorney-Client and Work Product Privileges in Common Interest Situation (11/14/16)

Note, this presentation was substantially revised on 11/15/16.

In Schaeffler v. United States, ___ F.3d ___, 2015 U.S. App. LEXIS 19617 (2d Cir. 2015), here, the Second Circuit rendered a major decision on the issue of waiver of the attorney client privilege, through § 7525, here, in a common legal interest context.  The Court's opening paragraph is:

Georg F.W. Schaeffler ("Mr. Schaeffler" or "Schaeffler") and associated entities ("Schaeffler Group") (collectively "appellants") appeal from Magistrate Judge Gorenstein's order denying a petition to quash an IRS summons. n1 We conclude that: (i) the attorney-client privilege was not waived by appellants' provision of documents to a consortium of banks ("Consortium") sharing a common legal interest in the tax treatment of a refinancing and corporate restructuring resulting from an ill-fated acquisition originally financed by the Consortium; and (ii) the work-product doctrine protects documents analyzing the tax treatment of the refinancing and restructuring prepared in anticipation of litigation with the IRS. We therefore vacate and remand.

So, how did the 2d Circuit justify that holding?  The opinion is relatively short, so that is the best source for its reasoning.  At the risk of oversimplification, I offer my short analysis of the points I think appropriate.

Schaeffler, a U.S. resident (perhaps not citizen), was 80% owner of a German corporation which attempted to acquire a minority interest in another German corporation by a tender offer.  German law requires such tender offers to at least offer to acquire all shares.  The offer, unfortunately, was made just before the 2008 financial crisis, hence "far more shareholders than expected or desired accepted [4]  the offer, leaving the Schaeffler Group the owner of nearly 89.9% of outstanding Continental AG shares."  The net result was that the Schaeffler Group had to re-group, so to speak, or refinance with its committed lenders.  That created a potential bust in the financing as a result of the decline in the market and German law.  That required coordination among all parties, including Schaeffler and the coordination in order to respond to the crisis.

From that re-grouping and refinancing and sharing among the parties of information, documents and legal analysis, this dispute arose.  Did that sharing among parties with a common legal interest waive the privileges -- attorney-client and work product?

The issue presented a subtlety in the application of the attorney-client privilege in a common-interest situation.  What exactly does it mean that sharing of otherwise attorney-client or work product privileged information among persons with a common interest preserves the privileges from waiver?  The opinion does not provide any black letter law on that issue, but does address the issue in the specific context before it.

The Second Circuit described the common interest rule as follows (omitting all citations and most quotation marks for easier readability):

While the privilege is generally waived by voluntary disclosure of the communication to another party, the privilege is not waived by disclosure of communications to a party that is engaged in a “common legal enterprise” with the holder of the privilege. Such disclosures remain privileged where a joint defense effort or strategy has been decided upon and undertaken by the parties and their respective counsel in the course of an ongoing common enterprise and multiple clients share a common interest about a legal matter. The need to protect the free flow of information from client to attorney logically exists whenever multiple clients share a common interest about a legal matter. 

Parties may share a “common legal interest” even if they are not parties in ongoing litigation. The common-interest-rule serves to protect the confidentiality of communications passing from one party to the attorney for another party where a  joint defense effort or strategy has been decided upon and undertaken by the parties and their respective counsel. It is therefore unnecessary that there be actual litigation in progress for the common interest rule of the attorney-client privilege to apply. However, only those communications made in the course of an ongoing common enterprise and intended to further the enterprise are protected. The dispositive issue is, therefore, whether the Consortium's common interest with appellants was of a sufficient legal character to prevent a waiver by the sharing of those communications.

The Saltzman Tax Procedure treatise, here, has a good discussion of the common interest rule.  Saltzman and Book, Tax Practice and Procedure, ¶ 13.04[3][a][viii][A] Express waiver [of the attorney-client privilege].

Deja Vu All Over Again (1/24/13)

The U.K. Supreme Court held that "Advice by accountants cannot be kept secret in the same way that legal counsel is confidential."  See Estelle Shirbon, Tax advice not secret like legal counsel, UK court rules (Reuters 11/23/13), here.

I use the famous Yogi Berra quote (Wikipedia entry here) as the title of this article, but the U.S. has been through this fight before and reached the same result.

I offer the following on the U.S. rule from the most recent draft of my Federal Tax Procedure book (footnotes omitted):

The Courts have resisted expanding the common-law privileges that are available even when strong policy arguments are made that privileges should be available.  Courts thus routinely reject the existence of an accountant/client privilege even though one may exist under state law.  Couch v. United States, 409 U.S. 322 (1973).  In United States v. Arthur Young & Co., 465 U.S. 805 (1984), the IRS issued a summons to the taxpayer's independent certified public accountants to obtain the information and documents behind the tax reserve reported on the taxpayer's certified financial statements.

At this point, I should explain generally the jargon that helps explain the law and IRS policy and practice in this area.  Publicly held companies prepare and file public financial statements that report the financial results of their operations for a period.  The financial statements include a profit and loss statement for a period (a year period for the major filings), as well as an ending balance sheet, and extensive notes to assist in making the statements comprehensible.  In reporting a result for the period, a company must accrue liabilities that arose during the period and, on the ending balance sheet, must show any accrued but unpaid liabilities.  Under financial accounting standards, reserves for federal income tax liabilities must be accrued and reserved in certain cases.  Specifically, with respect to tax planning that might otherwise be reflected as a benefit on the financial statements, reserves must be accrued to reflect the probability that the benefits may not be ultimately sustained.  In making a decision whether and how much to reserve for such unpaid potential liabilities, a company internally will prepare workpapers that back up its decisions.  Similarly, when the independent auditor then attests the financial statements, the auditor prepares audit workpapers that back up the attestation.  The company’s and the auditor’s workpapers underlying that type of liability or reserve are called “tax accrual workpapers” or some variation of that term.  The tax accrual workpapers should be distinguished from the “tax reconciliation workpapers” which reconcile the financial reporting to the tax return.  The tax reconciliation workpapers are not audit workpapers, because they are not prepared by the company in making the financial statements or by the independent accountants in attesting them.

IRS Won Some / Lost Some on Privilege Assertions in Summons Enforcement (8/20/12)

In United States v. Eaton, 2012 U.S. Dist. LEXIS 115003 (ND OH 2012), here, the IRS was not pleased with the taxpayer's assertion of privilege in a contentious audit.  In an earlier blog today on the sister blog site, Federal Tax Crimes blog, in discussing the John Doe Summons, I discussed the administrative summons and the minimal showing the IRS must make to obtain a court enforcement order.  See The IRS Administrative Summons as Pretext to Avoid the Need for a John Doe Summons (8/20/12), here.  I won't repeat that discussion here, for it overlaps with what I do discuss.

I should just stick to the opinion, but I do link to an earlier article that suggests that the ongoing to and fro between Eaton and the IRS has been quite adversarial (adversarial on steroids).  See Patrick Temple-West, Eaton, IRS tangle over cross-border pricing pacts (Reuters 6/17/12), here.  The IRS had, for the first time in four years, canceled APAs, Advanced Pricing Agreements between the IRS and the taxpayer as to transfer pricing mothologies, and then, after extensive investigation, issued a notice of deficiency.  The article discusses the filing of a Tax Court petition in response to the notice of deficiency.  But, apparently toward the end of the audit rancor, the IRS issued those summonses which it sought to enforce.  Hence the case I discuss in this blog.

In the summons dispute, the Court's statement of the Background for the case consists almost entirely of Eaton's complaints, in effect, that the the IRS had abused its information gathering tools in a vendetta against Eaton:

The examination of Eaton's 2005 and 2006 tax returns has lasted more than four years, and Eaton asserts that the examination has been extensive in scope. In particular, Eaton asserts that its employees and outside advisors have spent more than 30,000 hours addressing various information requests issued  to Eaton by the IRS in connection with the examination. Eaton asserts that it has responded to more than 240 Information Document Requests (the IRS's standard means of communicating written requests for information) by providing written, narrative answers to the IRS's information document requests and producing more than 10,000 pages of documents and "massive amounts of electronic information." In addition, in connection with its investigation, the IRS has conducted a total of 12 site visits to Eaton facilities in the United States, Puerto Rico, and the Dominican Republic, two full days of transcribed interviews each with Eaton's Senior Vice President-Taxes and its Vice President-Federal Tax Strategy, interviews of "multiple third parties engaged in business with Eaton's relevant operations, and eight days of transcribed interviews with a former employee of Eaton's Tax Department, John Semanchik (and in addition is currently seeking an unspecified number of additional interview days with Mr. Semanchik in a separate enforcement proceeding recently filed in the Western District of Pennsylvania). n1
   n1 Eaton also asserts that, "in practical terms," the 2005 and 2006 examination ended on December 19, 2011 (just four business days after the summons response date in Case Nos. 24, 26, and 27), when the IRS issued Eaton a Notice of Deficiency asserting tax deficiencies related to Eaton's 2005 and 2006 tax years. Eaton contends the IRS was aware when it served its summonses that Eaton intended to challenge in court any adjustments made by the IRS to its transfer pricing. In fact, on February 29, 2012, Eaton filed a petition with the United States Tax Court challenging the IRS's Notice of Deficiency, Eaton Corp.  v. Commissioner, Case No. 5576-12 (T.C. filed February 29, 2012).