Proposed restriction on attorney-client privilege for communications relating to corporate tax shelters.

On June 23, 1998, Tax Executives Institute submitted the following comments to the House-Senate conferees reviewing H.R. 2676, the IRS Restructuring and Reform Act of 1998.

As President of Tax Executives Institute, I am writing to express the Institute's concern about the deleterious effects of the proposed constriction of the attorney-client privilege in respect of corporate taxpayers. The proposal, recently announced as part of the House-Senate tentative conference agreement on pending legislation to restructure and reform the Internal Revenue Service, would provide that no privilege will attach to "communications relating to corporate tax shelters." TEI strongly urges Congress to defeat the proposal, which would upend centuries of well-founded legal experience, effectively overturn a unanimous decision of the Supreme Court of the United States confirming the application of the attorney-client privilege to corporations, and inject significant additional uncertainty into the tax law.

Background

Tax Executives Institute is a professional association of corporate tax executives. Our 5,000 members are accountants, attorneys, and other business professionals who work for the largest 2,800 companies in North America; they are responsible for conducting the tax affairs of their companies and for ensuring their compliance with the tax laws. TEI members deal with the tax laws and with the Internal Revenue Service on almost a daily basis, and the Institute believes that the professional training and experience of our members enable the Institute to bring an important and balanced perspective to the issues involved in efforts to restructure and reform the IRS.

Discussion

The House and Senate versions of the IRS restructuring bill each contain provisions that would create a privilege of confidentiality in respect of communications between taxpayers and their (nonattorney) tax advisers who are admitted to practice before the IRS. The purpose of the provision is to accord taxpayers dealing with accountants and enrolled agents the same confidentiality that they would enjoy if they were dealing with attorneys. Although the expanded privilege (which would apply in respect of civil tax matters involving taxpayers satisfying certain net worth requirements) raises numerous questions, its thrust is undeniable: to enhance the ability of qualified taxpayers to deal with their advisers on a confidential basis. As announced by the conference leaders on the IRS restructuring bill, however, the legislation would actually restrict the privilege of confidentiality in respect of corporate taxpayers, providing that no communications in respect of so-called corporate tax shelters would be privileged even if between a corporation and its counsel.

TEI has fundamental concerns about the proposal to restrict the attorney-client privilege in respect of corporate taxpayers. First, without any hearings or even serious consideration, the bill would limit the scope of the attorney-client privilege, the common law roots of which extend back centuries. That such a radical change would be made without due consideration by the House and Senate Committees on the Judiciary is especially troubling. The rush to judgment is fraught with danger.

The proposed change -- which would vitiate the attorney-client privilege in respect of corporations -- is especially astounding since it would effectively overturn the Supreme Court's decision in Upjohn Co. v. United States, 449 U.S. 383 (1981). In that case (which involved the determination of the federal income tax liability of a corporation), the Court unanimously affirmed that the attorney-client privilege applies to corporations, explaining the need for the privilege, as follows:

The attorney-client privilege

is the oldest of the privileges

for confidential communications 

known to the common

law. 8 J. Wigmore, Evidence

[sections] 2290 (McNaughton rev.

1961). Its purpose is to encourage

full and flank communication

between attorneys

and their clients, and

thereby promote broader

public interests in the observance

of law and administration

of justice. The privilege

recognizes that sound legal

advice or advocacy serves

public ends and that such advice

or advocacy depends

upon the lawyer's being fully

informed by the client.

The proposed change would narrow the attorney-client privilege (and also restrict the scope of the new tax-practitioner privilege) in respect of otherwise privileged communications. To overturn established precedent without hearings that could explore its potential effects is at once troubling and unwise. It would potentially diminish taxpayer rights at the very time Congress professes a commitment to enhance them.

Had hearings been held on the proposal, its clear deficiencies would have been revealed. Under the proposal, the privilege of confidentiality would not apply to communications in respect of so-called corporate tax shelters. But the definition of "corporate tax shelter" in section 6662(d)(2)(C)(ii) of the Internal Revenue Code is far from clear. Under legislation enacted in 1997, a corporate tax shelter is any partnership, entity, investment plan, or any other plan or arrangement a significant purpose of which is the avoidance or evasion of federal income tax. The Treasury Department, however, has failed to issue any guidance under the "significant purpose" test, and accordingly, taxpayers are wholly at the mercy of IRS field agents in determining what is or is not a corporate tax shelter. The Treasury's refusal to define a corporate tax shelter -- other than to intimate pejoratively that "you know it when you see it" -- underscores the perniciousness of the 1997 amendment. To be sure, an attack on "corporate tax shelters" may have certain populist appeal, but we suggest that it wholly misapprehends the importance of the attorney-client privilege (as explained by the Supreme Court in Upjohn and other cases). It would also diminish the rights of corporate taxpayers as part of a legislative package intended to better balance the interests of taxpayers vis-a-vis the IRS.

Conclusion

In summary, Tax Executives Institute is strongly opposed to the proposed restriction of the attorney-client privilege, and urges Congress to reject the proposed change.