Court ruling on attorney-client privilege could have chilling effect on U.S. business.

Tax Executives Institute has asked the U.S. Court of Appeals to revisit a case in which the court ruled that documents prepared by an attorney in connection with the filing of tax returns be turned over to the IRS. TEI claims, in a "friend-of-the-court" brief filed June 18 with the U.S. Court of Appeals for the Seventh Circuit, that the documents could be subject to the attorney-client privilege and the work product doctrine. The court's decision, according to TEI, reflects a misapprehension of the nature of the tax examination process and could have a chilling effect on the ability of tax executives to work, candidly and unobstructedly, with counsel concerning legal issues affecting the tax treatment of business transactions.

The case (U.S. v. Frederick) involves a petition by the United States to enforce an IRS summons issued to a lawyer who prepared tax returns and provided legal representation for a company and its chief officers. The summons sought voluminous documents from the attorney, including draft tax returns, workpapers, and correspondence. The lawyer resisted enforcement of the summons, claiming that some of the documents were subject to the attorney-client privilege and the work-product doctrine. The United States sought enforcement of its summons in the U.S. District Court for the Eastern District of Wisconsin, which ordered production of substantially all of the withheld documents. The case was then appealed to the U.S. Court of Appeals, which in an April 15, 1999, opinion (subsequently amended on May 18, 1999) affirmed the District Court's order.

"The Court's discussion of the scope of the attorney-client privilege and the work-product doctrine raises two issues of concern," said TEI. "First, the Court held that so-called dual-purpose documents are not, by definition, privileged because they are used in preparing a taxpayer's return. Such an absolute rule, however, is neither justified by precedent nor consistent with the purpose underlying the attorney-client privilege. Unless clarified, the Court's denial of the privilege whenever the information sought is reflected on a tax return will stifle the free flow of advice assessing the legal consequences (including tax considerations) of complex business transactions."

The second reason for concern, TEI said, is the opinion's portrayal of the examination process, which reflects a misunderstanding of the IRS examination process, especially as it relates to sophisticated business transactions.

TEI's brief urges the Court to grant a Petition for Rehearing with a Suggestion for Rehearing En Banc to clarify the scope of the attorney-client privilege and the work-product doctrine relating to tax controversies. The court subsequently denied the petition.

TEI's brief is reprinted in this issue of The Tax Executive, beginning on page 352.