Clients’ Identities and the IRS Summons Power

The recent Fifth Circuit case of Taylor Lohmeyer v U.S. explores the limits of the attorney-client privilege in the context of the IRS using its John Doe summons powers seeking the identity of a law firm’s clients the firm represented with respect to offshore transactions. The case provides a useful opportunity to explore the general rule that the attorney client privilege does not extend to client identity and fee arrangements, as well as a limited exception that would allow the privilege to exist when disclosure of the client identity would effectively disclose the nature of the client communication. 

In this post, I will summarize the circuit court opinion, as well as highlight briefs addressing the law firm’s request for a rehearing en banc.


Taylor Lohmeyer involves the IRS’s serving a John Doe summons on the law firm seeking the identity of “John Does”, who were U.S. taxpayers

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.

According to a declaration by an IRS revenue agent, the IRS sought the information because it was familiar with a taxpayer who used the firm’s services in an effort to avoid US income tax:

[The prior IRS] investigation “revealed that Taxpayer-1 hired [the Firm] for tax planning, which [the Firm] accomplished by (1) establishing foreign accounts and entities, and (2) executing subsequent transactions relating to said foreign accounts and entities”. Additionally, “[f]rom 1995 to 2009, Taxpayer-1 engaged [the Firm] to form 8 offshore entities in the Isle of Man and in the British Virgin Islands” and “established at least 5 offshore accounts so [Taxpayer-1] could assign income to them and, thus, avoid U.S. income tax on the earnings”. “In June 2017, [however,] Taxpayer-1 and his wife executed a closing agreement with the IRS in which they admitted that Taxpayer-1 … earned unreported income of over $5 million for the 1996 through 2000 tax years, resulting in an unpaid income tax liability of over $2 [m]illion.”

In seeking to quash the summons, the law firm argued that the identity of its clients was protected by the attorney client privilege because the identifying information itself was tantamount to disclosing confidential client communication.

In finding that the exception did not apply and rejecting the law firm’s petition to quash, the Fifth Circuit relied on general precedent that explored the exception in cases that did not involve the IRS, as well as the few cases exploring the exception in the context of IRS investigations. The Fifth Circuit framed the discussion by noting that the few cases that have allowed shielding clients’ identity do so by not expanding the reach of the attorney-client privilege; the cases emphasize that the exception is a subset of the privilege itself. As such a client’s identity is shielded “only where revelation of such information would disclose other privileged communications such as the confidential motive for retention”. Citing In re Grand Jury Subpoena for Attorney Representing Criminal Defendant Reyes-Requena, 913 F.2d 1118, 1124 (5th Cir. 1990), the opinion emphasized that:

the privilege “protect[s] the client’s identity and fee arrangements in such circumstances not because they might be incriminating but because they are connected inextricably with a privileged communication—the confidential purpose for which [the client] sought legal advice”. Reyes-Requena II, 926 F.2d at 1431 (emphasis added).

The firm argued that the IRS’s request for client identities was “connected inextricably” with the purpose for which its clients sought advice. In rejecting that argument, the opinion explored the Third Circuit case of United States v. Liebman, 742 F.2d 807  (3d Cir. 1984). In Liebman, the Third Circuit sought the identity of a law firm’s clients.  The IRS had issued a John Doe summons to the firm seeking the identity all clients who paid fees over a three-year period in connection with the acquisition of certain tax shelters.

The Third Circuit held that the identity of the clients was protected by the attorney client privilege:

If appellants were required to identify their clients as requested, that identity, when combined with the substance of the communication as to deductibility that is already known, would provide all there is to know about a confidential communication between the taxpayer-client and the attorney. Disclosure of the identity of the client would breach the attorney-client privilege to which that communication is entitled

Liebman and Taylor Lohmeyer are facially similar. One key difference though was that the affidavit of the revenue agent in Liebman tipped the IRS’s hand and revealed that the IRS itself linked the identity of the clients with the specific legal advice that the firm itself gave to the clients:

The affidavit of the IRS agent supporting the request for the summons not only identifies the subject matter of the attorney-client communication, but also describes its substance. That is, the affidavit does more than identify the communications as relating to the deductibility of legal fees paid to Liebman & Flaster in connection with the acquisition of a real estate partnership interest, App. at 116a-121a. It goes on to reveal the content of the communication, namely that “taxpayers … were advised by Liebman & Flaster that the fee was deductible for income tax purposes.” App. at 117a. Thus, this case falls within the situation where “so much of the actual communication had already been established, that to disclose the client’s name would disclose the essence of a confidential communication ….” See United States v. Jeffers, 532 F.2d 1101, 1115 (7th Cir. 1976) (and cases cited therein).

The Fifth Circuit in Taylor Lohmeyer highlighted this distinction. Unlike in Liebman, 

the “agent’s declaration did not state the Government knows the substance of the legal advice the Firm provided the Does. …Rather, it outlined evidence providing a “reasonable basis”, as required by 26 U.S.C. §7609(f), “for concluding that the clients of [the Firm] are of interest to the [IRS] because of the [Firm’s] services directed at concealing its clients’ beneficial ownership of offshore assets”. The 2018 declaration also made clear that “the IRS is pursuing an investigation to develop information about other unknown clients of [the Firm] who may have failed to comply with the internal revenue laws by availing themselves of similar services to those that [the Firm] provided to Taxpayer-1”. (Emphasis added.)

Following the adverse circuit court opinion, the Taylor Lohmeyer firm has filed a petition for an en banc rehearing. The American College of Tax Counsel Board of Regents submitted an amicus brief in support of the petition (disclosure: Keith and I are members of the ACTC but did not participate in the amicus filing). 

In submitting its petition, the Taylor Lohmeyer firm emphasized that the panel failed to explore fully circuit precedent, especially United States v. Jones, 517 F.2d 666 (5th Cir. 1975), which it believed supported the privilege applying even in the absence of a declaration that did not definitively tie the request to the firm’s substantive legal advice. The ACTC brief’s main substantive point emphasizes that the summons request should be thought of as covered by the exception flagged in Liebman because the summons is “premised upon the IRS’s purportedly knowing the motive of clients in engaging Taylor Lohmeyer.” (page 11). The ACTC brief states that “[b]ecause the summons at issue requires the Firm to provide documents that connect specific clients with specific advice provided by the Firm, compliance with the summons effectively requires testimony by the Firm regarding that advice.”

In essence both briefs minimize the importance of explicit substantive tax issue that the agent identified in his declaration in support of the summons in Liebman and ask the court to consider the context of the request in Taylor Lohmeyer, which in their view inexorably links the request to the substance of the advice. 

Some Concluding Thoughts

There is more to the briefs, including a detailed discussion of circuit precedent in the petition and the ACTC’s distinguishing of the Seventh Circuit’s United States v. BDO Seidmananother case the Fifth Circuit relied on, and a policy argument alleging that an undisturbed Taylor Lohmeyer opinion will “impose a discernible chill over the attorney-client relationship between taxpayers and tax counsel.” But the key part of the briefs is the point that courts should consider the overall context of the IRS request and not limit the privilege to circumstances when an agent says aloud in a declaration what was driving the request for the client identities.

My colleague Jack Townsend blogged this case when the Fifth Circuit issued its opinion this past spring, and we are discussing it in the next update to the Saltzman and Book treatise (Jack is a contributing author). As he noted in his blog, in Taylor Lohmeyer the IRS request for information “was not connected to ‘identified specific, substantive legal advice the IRS considered improper;’ rather, the request asked for documents of clients for whom the Firm established, maintained, operated or controlled certain foreign accounts, assets or entities, without limitation to any specific advice the Firm rendered, so that it was ‘less than clear . . . as to what motive, or other communication of [legal] advice, can be inferred from that information alone.’

The ACTC suggests that even without the agent’s declaration explicitly referring to the legal advice the law firm purportedly provided the request itself implicates the legal advice in such a way that the identity itself should be protected. This approach, if accepted, would extend the exception in tax cases in a way that other courts have not embraced, at least not in cases that solely focus on the tax consequences of the unknown clients. 

Clash Between Claim of Attorney Client Privilege and Summons Power

In an unpublished opinion in United States v. Servin (No. 2-16-cv-05615), the Third Circuit upheld the enforcement of a summons against a Pennsylvania attorney. This case does not break new ground but serves as a reminder of the power of the IRS summons and the limitations of the attorney-client privilege. Mr. Servin did receive some relief from the summons so his efforts in contesting it were not entirely without success.


Mr. Servin must owe a decent amount of taxes since his case is in the hands of a revenue officer. Today, taxpayers often must owe in excess of $100,000 to have their case handled by a revenue officer, although that amount can vary based on location and other factors. I have commented before that having a revenue officer assigned to your case is like getting concierge service because you have a knowledgeable individual to work with to resolve the issues rather than having to deal with the Automated Collection Site (ACS); however, my comment was somewhat tongue in cheek because having a revenue officer assigned to your case, particularly if you are not working to resolve the matter, can cause a taxpayer many problems as the knowledgeable revenue officer uses the powerful collection tools at the disposal of the IRS. Here, the taxpayer feels the effect of having his account assigned to a revenue officer rather than to ACS.

This case involves a collection summons which seeks to obtain from him information that would allow the IRS to collect the outstanding liability. Specifically, the revenue officer wants from him information about which clients owe him so that the revenue officer can send a levy to these individuals and businesses in order to collect the outstanding taxes Mr. Servin has not voluntarily paid. The summons requests Mr. Servin’s current client list, including names and addresses of all of the clients and a list of his cases that will be settling or have settled within a specified time period, including names and addresses of the parties to the case (who would also be persons the revenue officer would levy.) Undoubtedly, having levies served on all of your clients and opposing parties would not enhance Mr. Servin’s business. Preventing that from happening would protect his business and professional interest, in addition to client confidentiality which is why we have this summons case on which to report.

Mr. Servin does not contest that the IRS meets the general Powell standards for issuing the summons. The meet the Powell requirements, the government must show that the summons: (1) is issued for a legitimate purpose; (2) seeks information that may be relevant to that purpose; (3) seeks information that is not already within the IRS’s possession; and (4) satisfies all administrative steps required by the Internal Revenue Code. United States v. Powell, 379 U.S. 48, 57-58 (1964). He argues narrowly based upon the defense of attorney-client privilege. Unfortunately for Mr. Servin, the Third Circuit has pre-existing precedent on the issue of using the attorney-client privilege to protect client identities from summons enforcement in the case of United States v. Liebman, 742 F.2d 807 (3d Cir. 1984). The precedent does not favor the outcome he seeks. The Third Circuit precedent is similar to precedent that exists in other circuits.

The general rule does not permit an attorney to protect client names and addresses from summons enforcement based on attorney client privilege. The Third Circuit finds that Mr. Servin fails to identify any circumstances that would cause his case to fall out of the general rule and allow him to shield his client information. The Pennsylvania Rules of Professional Conduct do not prevent this disclosure despite his desire to use those rules and his citation to them.

He does win a partial victory because the court modifies the summons to eliminate the name of individuals that have not yet settled but will settle in the future. This victory reflects the concerns that the IRS limit its intrusion into client information of an attorney. The IRS does not often or lightly summons attorneys for client information. The revenue officer who wants to summons an attorney must persist in order to obtain permission to do so. Summonsing an attorney results in reviews by both Chief Counsel and Tax Division lawyers before the summons is allowed. IRM & 15 discusses some of the special issues related to summonses issued to attorneys. The reason that the IRM requires much higher level of review of summonses issued to attorneys stems from the very matter at issue in this case. The IRS recognizes the sensitivity of client information and does not want to let revenue officers run loose in seeking this information. So, it wants a review before it seeks enforcement. The IRS also does not like to issue summonses that it does not enforce since doing so undermines the authority of its summonses. This causes it to require review of summonses in sensitive areas.

Here, the revenue officer seeks information that the attorney cannot protect. The summons victory may cause Mr. Servin to full pay the liability in order to avoid having levies issued to many of his clients. If so, the summons itself may serve as a very valuable collection tool. If it does not cause Mr. Servin to full pay the liability, his clients and many individuals in his community may be about to learn about their attorney’s tax compliance or tax dispute. It is possible that he could still contest the liability and prove that he does not owe. It’s hard, however, to unring the bell and explain to a host of people that he did not owe when they receive a levy seeking payment of the liability which is why this is a very sensitive matter even if the names are not protected by attorney-client privilege.

The discussion of the relationship between Pennsylvania’s Rules of Professional Conduct serves as an important reminder that those rules too have limits, especially when they run into a valid investigation of an attorney’s conduct. PA Rule of Professional Conduct 1.6 is broader than the attorney client privilege; it provides that “A lawyer shall not reveal information relating to representation of a client unless the client gives informed consent, except for disclosures that are impliedly authorized in order to carry out the representation.”

Servin claimed “in the absence of the client’s informed consent the lawyer must not reveal information relating to the representation – moreover a presumption exists against such disclosure.”

The opinion notes however that the Rules of Professional Conduct are not relevant in the court’s consideration of whether to enforce a summons; rather those rules relate to a state’s possible disciplinary proceedings against a lawyer. Comments to PA Rule 1.6 specifically provide that the scope of the rule is limited by substantive law, and numerous PA cases provide that the Professional Conduct Rules do not govern or affect the application of the attorney-client privilege.



Curtain Finally Comes Down On Schaeffler Privilege Dispute

Readers may recall the dispute involving the IRS and richest man in Germany, Georg Schaeffler. Schaeffler and the IRS disagreed on the the scope of the attorney-client privilege and work product protection after IRS looked into the tax consequences of a restructuring transaction following the 2008 stock market collapse that landed right in the middle of Schaeffler’s bid to buy German company Continetal AG .

The issue of waiver in the context of complex commercial transactions when there are teams of advisors is one that has troubled the courts. To ensure the possible existence of privilege, parties working in tandem need to demonstrate a common legal interest. Guest poster Ben Bolas discussed the Second Circuit Schaeffler opinion that pushed back on some other cases that essentially concluded that the existence of a common commercial interest invalidated a common legal interest.

The Second Circuit Schaeffler opinion did not cover all the documents at issue in the summons; that led to a remand to the district court to determine whether other documents were protected by the attorney client privilege or work product doctrine. Following the remand, IRS withdrew the summons and moved to dismiss the petition to quash the summons due to mootness. (As background, a case becomes moot and a court loses jurisdiction if issues presented are no longer live or the parties lack a legally cognizable interest in the outcome).

Schaeffler opposed the motion to dismiss and sought a judgment quashing the summons. The district court found for the IRS, looking to a long line of cases that held that a withdrawal of a summons moots the case.

Last summer in Update on Schaeffler Privilege and Work Product Dispute I discussed that somewhat odd aspect of the dispute; in my post I leaned on my colleague Jack Townsend (and lead author in the revised criminal section of the IRS Practice & Procedure treatise) who suggested that Schaeffler wanted to get some assurance going forward that the IRS would not be able to access certain documents in a subsequent audit.

Schaeffler appealed the district court holding on mootness. In a summary order  from earlier this week, the Second Circuit affirmed the district court. In so doing, the order discussed the “voluntary cessation of illegal activity” exception to the mootness doctrine. That exception states “[a]s a general rule, ‘voluntary cessation of allegedly illegal conduct does not deprive the tribunal of power to hear and determine the case, i.e., does not make the case moot.’”

In making its case on appeal, Schaeffler did not argue that the summons power in and of itself was illegal; instead it argued that by summonsing certain documents it was not entitled to receive (due to privilege) the exception came into play. The Second Circuit did not agree:

Schaeffler contends that by summonsing some documents that may or may not be subject to the attorney-client or work-product privileges, the summons became “illegal.” We cannot endorse such a tortured under- standing of illegality. If the IRS were to exercise its lawful authority and issue a summons in the future, privilege issues could be litigated then. Doing so here, in the absence of a summons, would result in an impermissible advisory opinion.

The Second Circuit was reluctant to issue a blanket rule that would have expanded the considerable scope of its earlier opinion. While the earlier Second Circuit opinion meant that Schaeffler enjoyed a considerable victory, it was not meant to provide carte blanche protection.  In the future, the courts could entertain specific disputes if they were to arise.

While this ends the dispute without the complete victory that Schaeffler sought, the order notes that the IRS had assured the court during oral argument that the case was effectively over and it would not reissue a summons. With the withdrawal came the end of the Schaeffler group’s obligation to turn over documents, and if the IRS keeps to its word the fight over documents pertaining to the restructuring.

Zukerman Case Raises Issues Regarding Crime Fraud Exception to Attorney Client Privilege

We welcome back guest blogger Peter Hardy.  Peter is a partner at Ballard Spahr in Philadelphia and an adjunct professor at Villanova Law School.  Peter, a former Assistant United States Attorney in Philadelphia and a former trial attorney with the Tax Division of the Department of Justice in Washington, D.C., has a practice that focuses on white collar criminal issues and the civil fallout.  Today, he examines the indictment involving a tax fraud case in which the government sought to turn the target’s attorney into a witness and how the government’s actions here should inform your actions in working with clients.  Keith

A recent indictment returned against a high-profile investor for alleged tax fraud has highlighted the potential perils for counsel posed by the crime-fraud exception to the attorney-client privilege and the attorney work product doctrine.  In this case, the crime-fraud exception was invoked successfully by the government to obtain otherwise privileged communications between the defendant and his lawyers during an IRS audit.  This evidence had real-world consequences because the disclosed communications resulted in both additional allegations of criminality and an effort by the government to suggest that counsel might be conflicted out of defending their client during the criminal case filed in the wake of the audit.  This case reminds tax practitioners – and any lawyer representing a client before a government agency – that the real-world protections surrounding legal privilege may be more fragile than anticipated.


The indictment against Morris Zukerman, unsealed on May 23, 2016, charges him with one count of tax evasion (26 U.S.C. § 7201), one count of wire fraud (18 U.S.C. § 1343), and one count of obstructing the IRS (26 U.S.C. § 7212(a)).  The indictment is lengthy and complex and will be summarized here only.  According to the press release issued by the Office of the U.S. Attorney’s Office for the Southern District of New York, Mr. Zukerman is a business person who owns companies involved in energy investments and who engaged in multi-year tax fraud schemes in which he evaded over $45 million in taxes. More specifically, the government has alleged in part that Mr. Zukerman “evaded tens of millions of dollars of corporate income taxes arising out of $130 million sale of an oil company; he prepared personal tax returns for himself and family members that claimed millions of false deductions; [and] he evaded employment taxes based on personal employees[.].  . . . [W]hen the IRS auditors examined his returns, Zukerman allegedly schemed to defraud and obstruct the IRS auditors who were examining his false tax returns.”

For the purposes of this discussion, we will concentrate only on the alleged obstruction of the audit. Again, the government’s press release asserts as follows:

In seeking to obstruct and defraud the IRS during an audit of one of ZUKERMAN’s companies, ZUKERMAN utilized two attorneys from a law firm in Washington, D.C., to convey a false factual narrative to an IRS Appeals officer, who was undertaking a review of ZUKERMAN’s challenge to an adverse determination made by an IRS auditor during the corporate audit.  Pursuant to a “crime-fraud” ruling by the United States District Court for the Southern District of New York, and affirmed by the Second Circuit Court of Appeals, ZUKERMAN’s companies were required to disclose to the grand jury all of the communications between ZUKERMAN and the two attorneys that led to the submission to the IRS of the false factual narrative.


It is somewhat remarkable that the government saw fit to include the last sentence in the press release. The first sentence quoted above would have sufficed to describe the offense alleged in the indictment. For whatever reason, the government also wanted to announce publically the process underlying the grand jury investigation – which was irrelevant to whether or not prior obstruction had occurred during the audit – and make clear that, through successful invocation of the “crime fraud” exception to the attorney-client privilege, the government had obtained records regarding the defendant’s communications with his lawyers. Perhaps this language was intended as a pointed message to defense counsel; perhaps it was intended to set the stage for the government’s effort to raise potential conflict issues involving the defendant’s counsel in the criminal case – who were the same lawyers who had represented him in the audit.

After the return of the indictment, the government filed a letter with the district court, requesting a hearing on whether or not the defendant’s counsel could remain in the case. To be clear, there has been no suggestion that counsel engaged in misconduct. Rather, the government stated that there was a potential conflict created by the Mr. Zukerman proceeding to trial with his defense counsel, who “are potential witnesses as a result of the defendant’s use of those attorneys to convey false information to the Internal Revenue Service during a civil audit – offense conduct that is . . . described at length in the Superseding Indictment[.]” Although the government indicated that it thought that potential conflicts could be waived by the defendant, a hearing was necessary to establish knowing and intelligent waiver by the defendant of those potential conflicts. Ultimately, the district court determined that defense counsel could remain in the case because Mr. Zukerman provided the required waiver and because it is anticipated that Mr. Zukerman will not go to trial, but rather may resolve the case through a guilty plea.

Scenarios like the above case highlight the fact that lawyers who represent clients in tax audits – or in any sort of administrative investigation or inquiry – can become potential witnesses if the government later decides that misrepresentations occurred during the audit or inquiry.  Further, the same lawyer can be perceived as a helpful witness by either the client or the government: as a witness in support of a reliance on counsel defense, or as a witness for the government to undermine such a defense or even provide affirmative evidence of criminal intent, if, for example, counsel received less than full and accurate information from the client when providing the advice at issue, or if the client received advice and then acted to the contrary.

Thus, the prosecutorial interest in the potential opportunities afforded by the crime-fraud exception – both tactical and evidentiary – is not surprising. However, there is also a real risk that the crime-fraud exception can be abused, intentionally or otherwise, as we will now discuss.

To invoke successfully the crime-fraud exception to obtain otherwise privileged attorney-client communications, the government must make a prima facie showing that (a) the client was committing or intending to commit a crime; and (b) the attorney-client communications were in furtherance of the alleged ongoing crime.  The government’s prima facie burden is relatively light, and it does not require the government to prove that a crime in fact occurred, or that the intended crime was accomplished.  Rather, courts generally hold that the standard is merely one of “reasonable cause”; that is, the government only has to make a showing of reasonable cause to believe that the attorney’s services were misused in furtherance of an ongoing criminal scheme.  The exception can apply even if the attorney is innocent and entirely unaware that the client is engaged in or planning a crime.  As a matter of process, the district court reviewing the government’s application – which will be filed under seal – may make its decision in camera, based upon information supplied ex parte by the government.  The court does not have to base its decision on evidence independent of the communications between the attorney and the client.

This evidentiary threshold is low.  Further, the usual procedure attendant to decisions regarding the crime-fraud exception, which almost always occur during grand jury investigations, virtually ensures that the details and merits underlying most decisions – sometimes based on ex parte government submissions – will never see the light of day.  Moreover, district courts overseeing grand jury investigations are, generally speaking, extremely reluctant to potentially interfere with the evidence gathering function of the grand jury, which historically has received very wide berth.  Of course, the course of almost every grand jury investigation is a function of the choices and subjective beliefs of the particular federal prosecutor directing the investigation, rather than the grand jurors themselves.  This confluence of factors means that, as a practical matter, it will be a very rare case indeed – perhaps no case – in which a district court or a magistrate court concludes on the basis of a limited and non-public hearing that it will put some brakes the grand jury’s fact-finding function because the government has failed to show (sometimes through an ex parte submission) that, after accepting its view of the case, there is at the very least “reasonable cause” to believe or suspect that legal advice was misused in the furtherance of some alleged ongoing offense, and that the most prudent course is to order otherwise privilege communications to be divulged.  In part, the reasoning for allowing privilege to be pierced may go:  if criminal charges are actually ever filed, it ultimately will be up to the jury to sort out whether or not an actual crime was committed.  Such reasoning may be explicit, or it may be an unconscious consideration rooted in the very human proclivity to perform an act when ultimate responsibility can be attributed to others.

Anecdotally, it appears to this writer that, over the years, federal prosecutors have become increasingly willing to pursue otherwise privileged evidence from counsel through the aggressive invocation of the crime-fraud exception.  Several years ago, the perils inherent in this possible trend were noted by the district judge who acquitted Lauren Stevens, a former in-house counsel charged with obstruction of justice during an investigation by the Food and Drug Administration, after finding that the government’s evidence during her trial was insufficient as a matter of law to prove criminal intent.  When explaining the granting of the defendant’s motion for judgment of acquittal, the district court observed that much of the evidence upon which the government relied had been obtained through the crime-fraud exception, and then noted:

There are, of course, profound implications for the free flow of communications between a lawyer and a client when the privilege is abrogated, as it was in this case.

. . . .

With the 20/20 vision of hindsight, and that’s always the place to be in terms of wisdom, the [order requiring the production of legal documents under the crime-fraud exception] was an unfortunate one, because I now have benefitted from a trial in which these documents that were ordered produced were paraded in front of me, and the prosecutors were permitted to forage through confidential files to support an argument for criminality of the conduct of the defendant.

What those records demonstrate to the Court is, first of all, that access should not have been granted to them in the first place. . . .

. . . .

[A] lawyer should never fear prosecution because of advice that he or she has given to a client who consults him or her, and a client should never fear that its confidences will be divulged unless its purpose in consulting the lawyer was for the purpose of committing a crime or a fraud.

United States v. Stevens, No. RWT 10cr0694 (D. Md. May 10, 2011).  These concerns regarding the potential for abuse in the use of the crime-fraud exception, although eloquent, do not appear to have been embraced often in practice since the issuance of the acquittal in the Stevens case.

The decision in the Zukerman case regarding the crime-fraud exception may have been entirely appropriate; this discussion does not purport to address that question on the merits.  Regardless of whether it was right or wrong, however, the case represents yet another cautionary tale about how the attorney-client privilege and work-product doctrine do not always provide the long-lasting protections that one might hope they provide, particularly if your client stumbles later into the cross-hairs of a creative and aggressive prosecutor. Even if counsel is not personally the subject or target of a criminal investigation, receiving a subpoena for records or to testify against one’s client is obviously a situation to be avoided.  Certainly, this cautionary tale applies to lawyers representing clients during tax audits.  However, it also applies more globally to any lawyer – whether acting as outside counsel or in-house counsel – handing an administrative inquiry by the government, including the Securities and Exchange Commission, the Food and Drug Administration, and many other agencies.  Although courts describe the reasonable cause standard as reasonably demanding, the practical realities suggest that whether or not the crime-fraud exception will overcome otherwise privileged communications turns not on a court’s application of the legal standard to the facts, but rather on the discretion and mindset of the particular government attorney and whether or not he or she sees fit to pursue the exception.

Schaeffler v. United States: Second Circuit Rejects District Court’s Limitations on Attorney-Client Privilege and Work Product Doctrine in the Context of Tax Advice

Today we welcome first time guest blogger Ben Bolas.  Ben provided significant assistance to me in researching blog posts during the early days of the blog while he was still a student at Villanova.  In 2014 he was the tax clinic student of the year.  He is now an associate at Dilworth Paxson LLP in Philadelphia where he focuses on tax issues.  He writes today on an important issue regarding attorney-client privilege and work product in a high dollar tax case with significant pre-litigation tax planning.  Keith 

On November 10, 2015, the Second Circuit issued a decision in Schaeffler v US that expanded the boundaries of attorney-client privilege and work product doctrine in the context of tax advice, which was rendered in connection with a complex debt restructuring transaction.  Schaeffler reminds us of the importance of maintaining proper procedures and documentation to safeguard attorney-client privilege and work product. The Second Circuit rejected the district court’s holding, severely limiting the application of attorney-client privilege and work product doctrine, and rewarded the taxpayer for careful planning.

In addition to providing guidance regarding attorney-client privilege and work product doctrine, Schaeffler is also noteworthy because it involved a marquee matchup between a high-profile taxpayer, Georg F.W. Schaeffler (“Mr. Schaeffler”), and the IRS.  As the opinion described him, Mr. Schaeffler was a resident of Texas and the majority owner of Schaeffler Group, a German automotive and industrial part supplier.  However, Mr. Schaeffler also happens to be the richest man in Germany.  He is currently the 21st richest billionaire in the world, with a net worth of $26.7 billion, according to Forbes.  To put Mr. Schaeffler’s wealth into perspective, Mr. Schaeffler’s net worth is more than double the IRS’s annual operating budget in recent years.

While the issues in Schaeffler began when Mr. Schaeffler and the Schaeffler Group (referred to collectively as “Schaeffler”) attempted to buy a minority interest in a German company, it is worth noting that Schaeffler and the IRS maintain a long-standing and ongoing acquaintance via IRS audit of several of Schaeffler’s prior year tax returns.  In light of this history, and considering the magnitude of Schaeffler’s transactions in this case, Schaeffler had good reason to expect additional IRS scrutiny in the form of IRS audit and litigation.  In fact, as the Second Circuit determined, Schaeffler was planning on it.




In 2008, due to the nature and timing of a tender offer to buy a minority interest in a German company named Continental AG, Schaeffler purchased many more shares of Continental AG stock than planned.  German law prohibited tender offers seeking less than all of a company’s shares, and so Schaeffler needed to set an offering price that would yield the desired number of shares.  German law also prohibited withdrawing a tender offer once made.  Unfortunately for Schaeffler, the tender offer expired on September 16, 2008, two days after Lehman Brothers collapsed and amidst the height of stock market panic associated with the 2008 economic collapse.  Schaeffler quickly became the not-so-proud owner of roughly 90% of Continental AG stock at a cost of €11 billion.  Threatened by insolvency stemming from Continental AG stock acquisition-related indebtedness, Schaeffler needed to refinance and restructure debt with several banks that helped finance the tender offer (the “Consortium”).

From the earliest stages of planning, Schaeffler expected IRS audit and litigation in connection with at least some of the refinancing and restructuring, given the magnitude and complexity of the envisioned transactions.  Anticipation of IRS scrutiny was further bolstered by the fact that in 2007-2008 the IRS audited Mr. Schaeffler’s amended 2001 and 2004 returns, and in 2009 the IRS audited his 2006, 2007 and 2008 tax returns.  In contemplation of refinancing and restructuring €11 billion, Schaeffler described IRS scrutiny as “inevitable.”

In response to ongoing and additional anticipated IRS scrutiny, Schaeffler hired Ernst & Young, and global law firm, Dentons, to advise him on the federal tax implications of the proposed debt refinancing and restructuring transaction with the Consortium.  Schaeffler requested and obtained a private letter ruling from the IRS approving the core tax treatment of proposed transactions, and Ernst & Young prepared a 321-page memorandum (“EY Tax Memo”) to analyze and support the refinancing and restructuring plan.  The EY Tax Memo and hundreds of other related documents explained in intricate detail the federal tax issues implicated by each step in the proposed transaction, while also setting forth legal strategies and appraisals of the likelihood of success of such strategies in a case or controversy with the IRS.

Schaeffler, Ernst & Young and Dentons worked closely with the Consortium to accomplish the refinancing and restructuring.  The Consortium was also concerned about the tax implications of Schaeffler’s refinancing because the tax consequences to Schaeffler would directly impact the assets available for repayment to the Consortium.  Schaeffler and the Consortium even conditioned some of the terms of refinancing upon Mr. Schaeffler’s duty to notify the Consortium of IRS audit, and to allow the Consortium to advise Schaeffler on proposed action and response to a tax case or controversy with the IRS.  Schaeffler and the Consortium executed an agreement, wherein the parties expressed their desire to “share privileged, protected, and confidential documents and their analyses without waiving those privileges, protections, or the confidentiality of the information.”  Thereafter, Schaeffler shared tax advice it received from Ernst & Young and Dentons with the Consortium, including the EY Tax Memo.  On July 26, 2012, Schaeffler received notice of IRS audit of Mr. Schaeffler’s personal tax returns and the Schaeffler Group’s tax returns relating to tax years 2009 and 2010.

In response to the IRS’s Information Document Request (“IDR”) in September 2012 requesting documents prepared by Ernst & Young, Schaeffler invoked attorney-client privilege and work product doctrine.  Thereafter the IRS issued 86 IDRs and an administrative summons to Ernst & Young to provide all documents created by Ernst & Young, including but not limited to legal opinions, analysis and appraisals, that were provided to parties outside the Schaeffler Group relating to the debt refinancing and restructuring.  Ernst & Young responded by filing an action to quash the summons pursuant to 26 U.S.C. § 7609(b)(2).

U.S. District Court (SDNY) (“District Court”)

Attorney-Client Privilege

The District Court held that attorney-client privilege did not apply to the documents that the IRS requested because the Consortium did not have a “common legal interest” in the outcome of a tax dispute between Schaeffler and the IRS, and accordingly, Schaeffler waived attorney-client privilege when it shared the documents with the Consortium.  Even though the Consortium had an “enormous stake in the tax consequences of Schaeffler’s refinancing and restructuring” the District Court found that such stake was “an economic one.”  Therefore, the court held that the Consortium lacked any legal stake in Schaeffler’s putative action with the IRS, indicating that attorney-client privilege is not meant to apply to a “joint business strategy.”

Work Product Doctrine

While noting that work-product protection was not waived when Schaeffler shared documents with the Consortium, the District Court held that work product protection did not apply in this case because the EY Tax Memo and other documents were never entitled to work product protection.  The court’s rationale was that Schaeffler would have sought the same tax advice in connection with the transaction if Schaeffler had no concerns in regard to tax controversy or litigation and that the EY Tax Memo did not “specifically refer to litigation.”

The District Court was not persuaded by characterizations and discussions in the documents concerning risk of litigation with the IRS and chances of success upon such litigation, stating that such characterizations are “of no significance” for purposes of determining whether the document would have been created differently absent anticipated litigation, stating further that Ernst & Young had “an independent responsibility to engage in such legal analysis in order to advise Schaeffler on what transactional steps he should take.”

United States Court of Appeals for the Second Circuit (“Circuit Court”)

Attorney-Client Privilege

The Circuit Court began its analysis by discussing attorney-client privilege, and reviewing when such privilege is waived.  While acknowledging the District Court’s premise that “[c]ommunications that are made for purposes of evaluating the commercial wisdom of various options as well as in getting or giving legal advice are not protected[,]” the Circuit Court explained that a client does not waive attorney-client privilege when the client discloses information to another party that is engaged in a “common legal enterprise” (also referred to as “common legal interest”) with the client.  The court cited United States v. Schwimmer to support its assertion that such a common legal interest can be found even where there is no ongoing litigation, “where a joint defensive effort or strategy has been decided upon and undertaken by the parties and their respective counsel.”

The Circuit Court held that Schaeffler did not waive attorney-client privilege when it disclosed documents to the Consortium because Schaeffler and the Consortium did share a common legal interest.  In concluding that the Consortium’s common interest with Schaeffler was of a sufficient legal character to prevent a waiver by the sharing of those communications, the Circuit Court rejected the District Court’s assertion that the Consortium’s interest was purely economic, stating that the fact that the Consortium had an €11 billion financial interest at stake does not overshadow the legal issues and make them commercial.  “A financial interest of a party, no matter how large, does not preclude a court from finding a legal interest shared with another party where the legal aspects materially affect the financial interests.”

The Circuit Court further held that the tax treatment of the refinancing and restructuring, anticipated IRS scrutiny and the potential tax liability stemming therefrom all worked to shape the agreement between Schaeffler and the Consortium, and such considerations reflected a common legal strategy against IRS scrutiny, including tax controversy and litigation.  The parties even contractually tied their interests in IRS litigation by exchanging mutual obligations, whereby the Consortium agreed to subordinate debt and extend a line of credit to Schaeffler to allow Schaeffler to pay its tax debt, and in exchange for Schaeffler agreed to notify the Consortium of IRS audit and to consult with the Consortium before Schaeffler paid additional taxes or filed a refund claim.

Work Product Doctrine

The Circuit Court found that the EY Tax Memo and other documents were entitled to receive work product protection because they were prepared in anticipation of litigation, despite the fact that such documents were also intended to assist with the business transactions.  The Circuit Court cited United States v. Adlmanas the “governing precedent” in finding that work product doctrine applied, noting the closely-related facts of this case and Adlman,and using Adlman to differentiate when work product doctrine should and should not apply.

The Circuit Court indicated that work product protection would not be appropriate for supporting records and papers that were collected in the ordinary course of business, such as documents collected annually while preparing Schaeffler’s tax returns.  Work product protection would be appropriate, however, for documents specifically drafted to address an urgent need to refinance and restructure, and necessarily geared to address the high likelihood of audit and litigation that such refinancing and restructuring created.  The Circuit Court explained that the highly-detailed memoranda and litigation-focused analysis indicated preparations above and beyond that which is required to prepare an ordinary tax return or tax document with clear application of law, and that Schaeffler and the Consortium requested the highly-detailed and technical tax advice and memoranda because of the anticipation of litigation.

The Circuit Court concluded that it would have been unrealistic, given the magnitude and complexity of the transaction, to conceive of the refinancing and restructuring transactions without the threat of litigation.  If the District Court’s interpretation of Adlman were to apply, tax analysis and opinions created to assist large and highly complex transactions with uncertain tax consequences would never receive work product protection.


While the District Court recognized the concept of a common legal interest, its application of the facts of this case in finding no common legal interest between Schaeffler and the Consortium appeared to be clearly erroneous.  Although the summons requested documents exclusively from Ernst & Young, and not documents prepared by the law firm, Dentons, the critical distinction (and error) the District Court made in its analysis of whether Schaeffler waived attorney-client privilege pertained to the conclusion that there was no common legal interest between Schaeffler and the Consortium, only an economic interest.  The facts indicated multiple instances where Schaeffler and the Consortium aligned their legal interests, and they did so with an eye toward preserving attorney-client privilege, even executing an agreement entitled “Attorney Client Privilege Agreement” (although not determinative of whether a document is protected by attorney-client privilege, the such a label is relevant, as the Circuit Court explained).  More importantly, Schaeffler and the Consortium not only acknowledged the potential for IRS scrutiny, including IRS controversy and litigation, they allocated risk and contractual obligations accordingly (as the Circuit Court described it, “the Consortium’s legal interest is underlined by the extent to which the Consortium essentially insured [Schaeffler].”).

In regard to work product doctrine, the District Court’s decision created the enigmatic result that documents analyzing large and complex transactions with uncertain tax results are less likely to receive work product protection, unless particular litigation is referenced.  As the U.S. Chamber of Commerce argued in an amicus curiae brief, if such a decision were allowed to stand, it would have a stifling effect on legal advice rendered in connection to complex litigation, and “lawyers will hesitate to give candid guidance for fear that their work product will later be revealed to opposing counsel.”

Questions still exist pertaining to the precise limits of attorney-client privilege and work product doctrine in the context of tax advice.  For instance, if Schaeffler is audited year after year, and if each year Schaeffler engages Ernst & Young to prepare documents in anticipation of audit and litigation, query whether the documents could be considered to be prepared in the ordinary course of business and therefore not entitled to work product protection.

While the contours of attorney-client privilege and work product doctrine relating to tax advice remain to be defined, Schaeffler broadened attorney-client privilege and work product doctrine by lowering the threshold for achieving such protections in instances where attorneys, accountants and other professionals (bankers in this case) have a common legal interest and share documents in anticipation of litigation.



Summary Opinions for the second half of May

Here is part two of the items from May we didn’t otherwise cover.  We’ll have the June items shortly, and then July.  Hopefully, I’ll get back on track for weekly summaries in the near future.

  • The Sixth Circuit in Ednacot v. Mesa Medical Group, PLLC affirmed the lower court tossing a physician assistant’s claim that an employer wrongfully withheld employment taxes.  The Court determined this was tantamount to a refund suit, which required the taxpayer to first file an administrative claim for refund with the IRS prior to bringing suit.  There seems to be a lengthy past between the parties in this case.  The petitioner brought up a valid seeming point that she did not know if the withholdings were paid to the IRS, and therefore wasn’t sure if the refund was appropriate, but the Court held that Section 7422 was designed to funnel these issues through the administrative process.
  • Couple interesting privilege cases recently, including the Pacific Management Group decision blogged by Joni Larson for us.  In a case that may have a somewhat chilling effect on making reasonable cause claims, the Tax Court has held that claiming reasonable cause to the substantial valuation misstatement penalty waived attorney client privilege and the work product doctrine for certain communications between the taxpayer and its lawyer and accountant.  See Eaton Corp. and Sub. v. Comm’r.  This holding was the affirming of a motion for reconsideration.  The Court found that although there was an objective determination under Section 6662(e)(3), whether relying on the advice on Section 482 was based on the facts and circumstances, including the advice of the lawyer.  By claiming reasonable cause, the privileges were waived for that issue.
  • Taxpayer was successful arguing against the substantial understatement penalty in Johnston v. Comm’r, but it was because the taxpayer didn’t actually owe the tax.  The IRS had argued that a debt between the taxpayer (an executive of a telcom company) and his company was discharged by his employer when he moved to a related entity.  There was credible evidence that it was not discharged and payment continued.  There was the pesky issue that the loan wasn’t paid until the IRS audited the individual, but the Court found that the audit prompted the company to do something with the loan and it hadn’t been tax avoidance…must have been persuasive testimony.
  • LAFA issued guidance on the effect on the limitations period on assessment for payroll tax when the wrong form is filed. (LAFA 20152101F).  Employers are generally required to file quarterly returns on Form 941 for employment taxes when they are paid in that period.  A different form, Form 944 is used for certain employers with little  employment tax liability, and that is required annually.  The statute generally runs from the date of the deemed filing of employment tax returns, which is April 15 the following year.  See Section 6501(a)&(b).  The LAFA reviews the following three situations:
  1. Employer is required to file Form 944, but instead timely files four quarterly Forms 941.

  2. Employer is required to file Form 944, but timely files Form 941 for the first and second quarters of the year instead, and files nothing for the third or fourth quarters of the year.

  3. Employer is required to file quarterly Forms 941, but timely files annual Form 944 instead.


The quick conclusions were:

  1.  Assuming the Forms 941 purport to be returns, are an honest and reasonable attempt to satisfy the filing requirements, are signed under penalty of perjury, and can be used to determine Employer’s annual FICA and income tax withholding tax liability, the Forms 941 meet the Beard formulation and should be treated as valid returns for purposes of starting the period of limitations on assessment.

  2.  An argument can be made that the Forms 941 for the first and second quarters of the tax year constitute valid returns under the Beard formulation since they purport to be returns and are signed under penalty of perjury. However, given that Employer’s FICA and income tax withholding tax liability for the third and fourth quarters will not necessarily be equal to that reported for the first two quarters, the Forms 941 arguably are not sufficient for purposes of the determining Employer’s annual FICA and income tax withholding tax liability and may not be honest and reasonable attempts to satisfy the tax law.

  3.  Assuming the Form 944 purports to be a return, is an honest and reasonable attempt to satisfy the filing requirements, can be used to determine Employer’s annual FICA and income tax withholding tax liability, and is signed under penalty of perjury, Employer’s Form 944 meets the Beard formulation and should be treated as a valid return for purposes of the period of limitations on assessment.

  • A taxpayer in a chapter 11 case, Francisco Rodriquez (not the current Brewers closer who pitched for the Mets before choking out his relative in the clubhouse) was successful in avoiding a lien under 11 USC 506 on property held by the taxpayer that was already underwater with three prior liens.  In re Rodriguez, 115 AFTR2d 2015-1750 (Bktcy D MD 2015).  Section 506 allows liens to be stripped if the property lacks equity, which was what the taxpayer was attempting.  SCOTUS in Dewsnup v. Timm held that  a chapter 7 debtor cannot “strip down” an allowed secured claim (clearly, I was not the debtor, otherwise SCOTUS would have tossed on some Its Raining Men, and granted my right to strip down—I only did it to pay for college, I swear—and yet, still so many student loans).  Various other cases have held that Dewnsup does not extend to other chapters in bankruptcy, and the District Court held that lien stripping was appropriate in chapter 11 under the taxpayer’s circumstances.
  • The Tenth Circuit continues its clear prejudice and hatred towards Canadians (I completely made that up and that link is NSFW) in Mabbett v. Comm’r, where it found the Tax Court properly tossed a petition as being untimely that was filed by a resident of the US, who was a Canadian citizen.  The Court found the Service had properly sent the stat notice to the taxpayer at her last known address (and even if that was not the case, her representative had forwarded her a copy well before the due date of the petition).  The taxpayer also claimed that she was entitled to the 150 day period to file her petition to the court under Section 6213(a) because she was a Canadian citizen.  The Court stated, however, that the statute was clear that the 150 day rule only applies when “the notice is addressed to a person outside the United States.”  The taxpayer had been traveling, and was Canadian, but failed to show she was outside of the United States at the time the notice was sent.
  • In case you haven’t seen, the Service has started a cybercrimes unit to combat stolen ID tax fraud.  In my mind, this is sort of like the IRS and Tron having a lovechild, which I would assume to look like this.  Jack Townsend has real coverage on his Federal Tax Crimes Blog.
  • Jack also has coverage of the new IRS FBAR penalty guidance, which can be found here


Failing to Prove the Attorney-Client Privilege Applies

Today returning guest blogger, Joni Larson, writes about a recent Tax Court case involving a failure to successfully invoke the attorney-client privilege.  As with her last post, she takes us into the practical world of transforming information into evidence.  Sheis the perfect person to discuss the privilege because she authors the book on evidentiary issues in Tax Court.  She teaches at Western Michigan University – Cooley Law School where she is also the Director of the Graduate Tax Program. Keith

One of the most well-known privileges is the attorney-client privilege.  Rule 501 of the Federal Rules of Evidence allows common law privileges, such as the attorney-client privilege, to be claimed in the Tax Court (see also IRC section 7453).  The privilege protects communications made in confidence by a client to an attorney when the client is seeking legal advice.  It also applies to confidential communications made in the opposite direction, from the attorney to the client, if the communications contain legal advice or reveal confidential information on which the client sought advice.  The purpose of the privilege is to allow for full and frank communications between attorneys and their clients—the client is able to fully inform the lawyer and the lawyer can be frank and honest with his advice to the client. See Upjohn Co. v. United States, 449 U.S. 383, 389-90 (1981).

The privilege is not an absolute privilege that covers every communication between the attorney and the client.  It does not apply to underlying facts, business or other non-legal advice given by the attorney (see Ford v. Commissioner, T.C. Memo. 1991-354), information received from third parties, information given to the attorney that the attorney is expected to disclose to a third party, the identity of a client, or the fact that an individual has become a client.


If a party wants to claim that a communication is covered by the attorney-client privilege, he has the burden of establishing it applies. See Fu Inv. Co. v. Commissioner, 104 T.C. 408, 415 (1995).  “Blanket claims of privilege without any allegations that the production of documents requested would reveal, directly or indirectly, confidential communications between the taxpayer and the attorney, or without any allegations that the particular documents were related to the securing of legal advice, are insufficient. . . .”See Bernardo v. Commissioner, 104 T.C. 677, 682 (1995).

The privilege may be waived.  If the client voluntarily discloses the information or fails to take precautions to preserve the confidentiality of the privileged material, the privilege is waived.  See Moore v. Commissioner, T.C. Memo. 2004-259.  While disclosing the actual communication with the attorney will waive the privilege, disclosing only the subject of the communication will not.  See WFO Corp. v. Commissioner, T.C. Memo. 2004-186.

This tension between, on the one hand, disclosing enough information to satisfy the burden of proving the privilege applies and, on the other, not disclosing so much information that the privilege is considered waived, provides an interesting challenge for those claiming the privilege.  In Pacific Management Group v. Commissioner, T.C. Memo. 2015-97, this tension was the focus of the Tax Court’s decision regarding a motion to compel production of documents.

In 1999 the taxpayers met with an attorney, Mr. Ryder, who pitched to them a program designed to minimize their tax liability; the taxpayers elected to participate.  Several years down the road, the Commissioner contended the program lacked economic substance, the taxpayers disagreed, and the parties ended up in Tax Court.

Over the years, Mr. Dunning, an attorney, had provided legal, corporate, and business advice to the taxpayers.  Prior to trial, counsel for Commissioner served a Subpoena Duces Tecum on Mr. Dunning.  He appeared at trial and produced some of the requested documents but declined to produce all.  He claimed the documents he did not produce (mostly emails), were protected by the attorney-client privilege.  For the 2,000 or so emails he claimed were privileged, he supplied a privilege log that stated who the email was from, name or email address of to whom it was sent, name or email address of who was copied, and the date and time sent.  No other information was provided.

A few days into the trial, the Commissioner filed a Motion to Compel Production of Documents Responsive to a Subpoena Duces Tecum Served on Steven Dunning and the court heard oral arguments on the motion.  Judge Lauber indicated he was inclined to grant the motion because the privilege log was inadequate.

To be adequate, a privilege log must set forth each element of the privilege and be sufficient to establish that the confidence was by a client to an attorney for the purpose of obtaining legal advice or by the attorney to the client where the communication contains legal advice or reveals confidential information about the client’s request for advice.  Mr. Dunning’s log did not contain any information about the subject of the email, describe the contents of the email, or include facts as to why the communication was intended to be confidential.

Mr. Dunning was in the courtroom on the first day of trial to hear counsel for Commissioner state he was going to challenge the log as insufficient, effectively alerting Mr. Dunning to the fact that he needed to prepare a more detailed log.  During the oral arguments, Judge Lauber noted that Mr. Dunning had been put on notice that the Commissioner considered the log inadequate and that Mr. Dunning had been given a second bite at the privilege log apple, but had chosen not to take it.

Because Mr. Dunning was the corporate and general business attorney for the taxpayers and had served as such for a long time, it was possible the email communications contained general business advice or discussed transactional matters.  If they did, because they did not contain legal advice, the communications would not be protected.  The minimal information supplied in the privilege log made it impossible for the Court to determine what the communications were about.  Having failed to meet his burden of proof, Mr. Dunning’s emails were not protected by the attorney-client privilege and the Commissioner’s Motion to Compel was granted.

It could be that Mr. Dunning decided not to provide a more detailed privilege log because, even if he had, the emails would not have been protected.  In its opinion, the court noted that the Commissioner also had argued that the taxpayers had waived the privilege, presumably by disclosing the information to a third party.  No further information about the suggested waiver was provided.

Noteworthy, the privilege also would have been waived by the taxpayers if they affirmatively placed Mr. Dunning’s advice at issue.  The Tax Court uses a three-prong test to determine if the privilege is waived by a taxpayer’s affirmative actions.   First, the taxpayer’s assertion of the privilege must have been the result of some affirmative act, such as the taxpayer filing suit in Tax Court.  Second, through this affirmative act, the taxpayer put the protected information at issue by making it relevant to the case.  Finally, application of the privilege would have denied the Commissioner access to information vital to his defense. See Karme v. Commissioner, 73 T.C. 1163, 1184 (1980), aff’d 673 F.2d 1062 (9th Cir. 1982); Hartz Mountain Industries, Inc. v. Commissioner, 93 T.C. 521, 522–23 (1989).

With few facts about the underlying controversy in Pacific Management disclosed in the opinion, it is not possible to determine if the communications had been disclosed to third parties or if the taxpayers had placed Mr. Dunning’s advice at issue.  Perhaps most curious of all is the fact that Mr. Ryder, presumably the same Mr. Ryder who pitched the tax-savings structure, is representing the taxpayers before the Tax Court.  It will be interesting to see how his role in the case plays out.