Document prepared by CPA for corporate attorney - no attorney-client privilege available.

In Adlman, DC N.Y., 5/16/94, the district court has upheld the Service's attempt to obtain, pursuant to its summons power, a memorandum prepared by a CPA firm and sent to a corporate vice president for taxes who was an attorney. In the case (now on appeal to the Second Circuit), the summons sought the CPA firm's analysis of a proposed corporate restructuring. Adlman, the corporation's vice president for taxes, defended against enforcement of the summons on several grounds, including an assertion of the attorney-client privilege.

The attorney-client privilege has been held to apply to communications made by a client to an accountant retained by the law firm representing the client, when the accountant's communication interpreted the client's financial data for his tax attorney (Kovel, 296 F2d 918 (2d Cir.1961)). Adlman described himself as the corporation's tax attorney and attempted to characterize the memorandum in controversy as the accountant's interpretation of financial information provided by the company. Adlman also asserted that he gave his employer legal advice based on that memorandum.

The IRS sought to cast the relationship between Adlman and the CPA firm in a different light. It sought to characterize these tax services as part of a larger set of services the CPA firm performed for the company incident to the reorganization, rather than as a Kovel-type arrangement. Among the factors cited by the Service were: (1) the CPA firm's invoices did not specifically distinguish the charge for preparing the memorandum from the other work it performed in connection with the transaction; (2) the memoranda or summaries of their conclusions were communicated to corporate officials other than Adlman (presumably these officials were not attorneys); and (3) there was no contemporaneous documentation (e.g., an engagement letter) showing that the CPA had been retained for the purpose of providing the company with assistance in connection with legal advice or a separate retainer agreement relating to the firm's engagement for this purpose.

The three factors cited by the district court appear to elevate the form of the relationship between the CPA and the client over the substance of their communications. These factors should not be relevant to the determination of whether such communications are privileged. Clearly, the corporation and the CPA firm cannot be criticized for failing to anticipate that adhering to these factors would be necessary to avoid jeopardizing the confidentiality of the related communications. Until the issue is definitively resolved, however, CPAs should carefully craft the form of these engagements to address each of the factors cited by the court.