United States of America Plaintiff-Appellee, v. Richard A Frederick, Defendant-Appellant, and Randolph W. Lenz, Karin Lenz, and KCS Industries, Inc., Intervening-Defendant-Appellants.

IN THE UNITED STATES COURT OF APPEALS FOR THE SEVENTH CIRCUIT

Nos. 98-2644 and 98-2700

On Appeal from the United States District Court for the Eastern District of Wisconsin

BRIEF OF TAX EXECUTIVES INSTITUTE, INC. AS AMICUS CURIAE IN SUPPORT OF APPELLANT AND INTERVENOR-APPELLANTS' PETITION FOR REHEARING WITH A SUGGESTION FOR REHEARING EN BANC

On June 18, 1999, Tax Executives Institute filed the following brief amicus curiae with the United States Court of Appeals for the Seventh Circuit. The brief was filed in a case involving, among other things, whether the attorney-client privilege and the work product doctrine applied in respect of documents prepared in connection with the preparation of tax returns and the Internal Revenue Service's examination of those returns. The brief was prepared under the aegis of TEI's IRS Administrative Affairs Committee, whose chair is Stephen W. Boocock of Allegheny Teledyne, Inc.

INTEREST OF AMICUS CURIAE

Pursuant to Rule 29 of the Rules of the United States Court of Appeals for the Seventh Circuit, Tax Executives Institute, Inc. (TEI) respectfully submits this brief as Amicus Curiae to urge the Court to grant the Petition for Rehearing with a Suggestion For Rehearing En Banc of the Appellant and the Intervenor-Appellants to clarify the scope of the attorney-client privilege and work-product doctrine as applied to controversies involving the tax law.

TEI is a voluntary, nonprofit association of corporate tax executives who are responsible for managing the tax affairs of their companies and who must contend daily with the provisions of the tax law relating to the operation of business enterprises. The Institute was organized in New York in 1944 and has more than 5,000 members who represent nearly 3,000 of the leading corporations in the United States and Canada, as well as a recently formed chapter in Europe. TEI is dedicated to promoting the uniform and equitable enforcement of tax laws throughout the nation and to reducing the costs and burdens of compliance to the benefit of both the government and taxpayers.

The companies that employ TEI's members are generally part of the Internal Revenue Service's Coordinated Examination Program (CEP), which seeks to examine the returns of the country's largest taxpayers on an on-going basis. That is to say, the IRS is an uninterrupted presence in their lives. The Institute's members are lawyers, certified public accountants, and other professionally trained tax professionals who, as circumstances dictate, retain the services of in-house or outside legal counsel to render advice and otherwise facilitate the performance of their duties. These duties include analyzing the legal aspects of proposed transactions (from a tax perspective), preparing tax returns complying with the tax laws of the United States and other jurisdictions, and defending positions taken in administrative proceedings involving tax authorities (such as the IRS) and in court.

One issue presented in this case is whether certain documents prepared by an attorney in connection with the filing of tax returns and an IRS examination of those returns may be subject to the attorney-client privilege and the work-product doctrine. Without addressing whether a properly construed privilege would protect the communications here, amicus TEI submits that the Court misapprehends the nature of the tax examination process and, as a consequence, the standard it propounds is at once unrealistic and improperly rigid. Amicus TEI is concerned that the Court's decision will adversely affect the ability of tax executives to work, candidly and unobstructedly, with counsel concerning legal issues affecting the tax treatment of business transactions. Thus, TEI's members and the companies they represent have a vital interest in this case.

STATEMENT OF THE CASE

This case involves a petition by the United States of America to enforce an IRS summons issued to Appellant Richard Frederick pursuant to section 7602(a) of the Internal Revenue Code (26 U.S.C.). Mr. Frederick, who is a lawyer, prepared tax returns and provided legal representation for Intervenor-Appellants Randolph and Karin Lenz and their corporation, KCS Industries, Inc. The summons sought voluminous documents from Mr. Frederick, including draft tax returns, workpapers, and correspondence. Mr. Frederick 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 Mr. Frederick to produce substantially all of the withheld documents. This appeal followed.

The Court's opinion affirming the District Court's order was issued on April 15, 1999, and amended on May 18, 1999. The Court's discussion of the scope of the attorney-client privilege and the work-product doctrine raises two issues of concern. 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 is the opinion's portrayal of the examination process. In its amended opinion, the Court stated,

   When a revenue agent is merely verifying the accuracy of a return, often
   with the assistance of the taxpayer's accountant, this is accountant's work
   and it remains such even if the person rendering the assistance is a lawyer
   rather than an accountant. Throwing a cloak of privilege over this type of
   audit-related work of the taxpayer's representative would create an
   accountant's privilege usable only by lawyers. If, however, the taxpayer is
   accompanied to the audit by a lawyer who is there to deal with issues of
   statutory interpretation or case law that the revenue agent may have raised
   in connection with his examination of the taxpayer's return, the lawyer is
   doing lawyer's work and the attorney-client privilege may attach.

Slip. Op. at 4. Unfortunately, this statement reflects a misunderstanding of the IRS examination process, especially as it relates to sophisticated business taxpayers, and requires significant clarification.

"If the purpose of the attorney-client privilege is to be served, the attorney and client must be able to predict with some degree of certainty whether particular discussions will be protected. An uncertain privilege, or one which purports to be certain but results in widely varying applications by the courts, is little better than no privilege at all." Upjohn Co. v. United States, 449 U.S. 383, 393 (1981). This Court's opinion threatens to muddle the scope of the privilege and work-product doctrine in the return preparation and examination context, and hence undermines their purpose. For this reason, the Institute urges the Court to grant the Appellant and Intervenor-Appellants' 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.

SUMMARY OF ARGUMENT

1. The attorney-client privilege "rests on the need for the advocate and counselor to know all that relates to the client's reasons for seeking representation if the professional mission is to be carried out." Trammel v. United States, 445 U.S. 40, 51 (1980). In the corporate context, the privilege serves at least two laudable ends: It renders individuals within the corporation more willing to speak to corporate attorneys; and it promotes compliance with the law by permitting corporations to consult freely with attorneys on the "vast and complicated array of regulatory legislation confronting the modern corporation." Upjohn Co. v. United States, 449 U.S. 383, 392 (1981).

In this case, the Court held that the documents at issue were not subject to the attorney-client privilege. In the course of its opinion, the Court stated that "a dual-purpose document -- prepared for use in preparing tax returns AND for use in litigation -- is not privileged." Slip Op. at 7 (emphasis in original). Such a mechanical, black-or-white test is incorrect and threatens to eviscerate the attorney-client privilege in respect of tax matters.

The Court's conclusion seems to flow from the unfounded premise that all information developed by an attorney involved in tax return preparation work is scrivener's work and intended for disclosure. That simply is not the case. Although some facts provided to the attorney (the size of the transaction, the parties involved, etc.) may not be privileged, United States v. Lawless, 709 F. 2d 485 (7th Cir. 1983), the attorney's mental impressions and legal analyses of the alternatives are, see, e.g., Upjohn Corp, 449 U.S. at 397-402. Attorneys can, and do, play a vital role in the preparation of a return -- as attorneys. The Court's rigid test impermissibly constricts a taxpayer's right to seek legal advice concerning tax matters; its analysis should be corrected.

2. The Court's discussion of the IRS examination process seriously misconstrues and minimizes that process, especially as it relates to large corporations. For these corporations, precious little of an examination is "merely verifying" the accuracy of a return.

The tax returns of the largest 1,700 taxpayers in the United States are generally examined under the IRS's Coordinated Examination Program (CEP), which reflects the IRS's efforts to deal with the factual and legal complexities posed by these companies' operations and, hence, their tax returns. Although the vast majority of issues raised during CEP audits are settled administratively, more than a few issues may result in litigation -- often years after the filing of the original return. The end product of this process may be the preparation of an amended return, but that is not inevitable. Equally important, even if an amended return is filed, that does not transmute the attendant legal advice into clerk's work.

During an examination, companies may consult lawyers on an issue-by-issue basis to (1) provide legal support for the positions taken on a return, or (2) assess the hazards of litigating a particular issue. The Court's opinion regrettably blurs the scope of the privilege by improperly drawing a distinction between the government's administrative review of tax law issues and other regulatory matters.

Moreover, although it is not inevitable, examination activities may well be a prelude to litigation and, hence, the application of the work-product doctrine. In Upjohn, the Supreme Court commended the government's "wise[]" concession that the work-product doctrine applied in the context of an IRS summons. 449 U.S. at 397. Summons activity is integrally related to an IRS audit. Accordingly, the Court's opinion on this issue should be clarified to acknowledge that the work-product doctrine may well apply in the audit context.

For the foregoing reasons, amicus Tax Executives Institute respectfully urges the Court to grant the Appellant and Intervenor-Appellants' Petition for Rehearing with a Suggestion for Rehearing En Banc.

ARGUMENT

I. The Court's Opinion Incorrectly Holds that Dual-Purpose Documents Are Not Subject to the Attorney-Client Privilege

The attorney-client privilege is the oldest of privileges for confidential communications known to common law. 8 Wigmore Evidence [sections] 2290 (McNaughton rev. 1961). Crafted to ensure that clients will receive the benefit of fully informed legal advice, the privilege recognizes that a lawyer's "assistance can only be safely and readily availed of when free from the consequences or the apprehension of disclosure." Hunt v. Blackburn, 128 U.S. 464, 470 (1888). The privilege thus recognizes that sound legal advice or advocacy serves public ends and depends upon the lawyer being fully informed by the client. "The lawyer-client privilege rests on the need for the advocate and counselor to know all that relates to the client's reasons for seeking representation if the professional mission is to be carried out." Trammel v. United States, 445 U.S. 40, 51 (1980). "The availability of sound legal advice inures to the benefit not only of the client who wishes to know his options and responsibilities in given circumstances, but also of the public which is entitled to compliance with the ever growing and increasingly complex body of public law." In re Grand Jury Subpoena Duces Tecum Dated September 15, 1983, 731 F. 2d 1032, 1036-37 (2d Cir. 1984) (citations omitted).(1)

The attorney-client privilege applies when the client is a corporation, operating to protect communications between corporate management and in-house, as well as outside, counsel. Upjohn Co. v. United States, 449 U.S. 383, 389-90 (1981) (citation omitted). The Supreme Court of the United States has confirmed that the application of the privilege in the corporate context serves at least two laudable ends: It renders individuals within the corporation more willing to speak to corporate attorneys, thereby fostering the free flow of information necessary for legal advice; and it promotes compliance with the law by permitting corporations to consult freely with attorneys on the "vast and complicated array of regulatory legislation confronting the modern corporation." Id. at 392.

The Court's decision in this case would frustrate this purpose. Specifically, the Court held that the documents at issue -- draft tax returns, workpapers, and correspondence -- were not subject to the attorney-client privilege. The Court flatly stated that "a dual-purpose document -- a document prepared for use in preparing tax returns AND for use in litigation -- is not privileged." Slip Op. at 7 (emphasis in original). This is an astonishingly broad ruling. Slip. Op. at 12 (Wood, J., concurring) (the majority has made an "important legal ruling that affected its review"). Such a mechanical, black-or-white test is incorrect and threatens to eviscerate the attorney-client privilege in respect of tax matters.

Amicus TEI acknowledges that it may be difficult to differentiate between accounting and legal advice when it is rendered in connection with the preparation and filing of a taxpayer's return. But the difficulty of making the determination should not obscure that tax law is still law, that advice about the tax law is legal advice if it is given by an attorney, and accordingly that such advice merits protection by the attorney-client privilege.(2)

The Court's conclusion seems to flow from the unfounded premise that all information developed by an attorney involved in tax return preparation work is scrivener's work and intended for ultimate disclosure to the IRS. That simply is not the case. Consider, for example, an attorney who is asked to opine on the tax consequences of a proposed transaction. There may well be several ways in which the transaction can be structured, each generating a different set of tax consequences. Because of the complicated nature of the tax law (including the availability of certain elections), there may also be several ways in which the completed transaction may be reported on the taxpayer's return. The attorney may provide advice on how the law applies to various factual scenarios, and some of this assessment may involve complex calculations of tax liability. The attorney's advice concerning the tax consequences of the transaction or how it should be reported on the return clearly constitutes legal advice. In other words, although some facts provided to the attorney (the size of the transaction, the parties involved, etc.) may not be privileged, United States v. Lawless, 709 F. 2d 485 (7th Cir. 1983), the attorney's mental impressions and legal analyses of the alternatives are. See, e.g., Upjohn Corp., 449 U.S. at 397-402 (documents and notes prepared by counsel investigating compliance with tax laws found privileged); In re Grand Jury Subpoena, 731 F. 2d at 1037 (documents prepared by law firm assessing tax consequences of alternate employee compensation plans and corporate reorganizations subject to attorney-client privilege).(3)

The Court's rigid test imprudently constricts a taxpayer's right to seek legal advice concerning tax matters. Attorneys can, and do, play a vital role in the preparation of a tax return. See United States v. Cote, 456 F.2d 142, 144 (8th Cir. 1972) (attorney's decision concerning whether taxpayers should file an amended return "undoubtedly involved legal considerations which mathematical calculations alone would not provide"). Lawyers in such cases act as lawyers, using their skills and legal education to resolve issues or render advice. That the law involved is tax law, that its effect is often reduced to numbers -- work that in many respects is the province of accountants -- does not change the result. The Court's discussion of this issue is in error and should be corrected.

II. The Court's Opinion Misapprehends the Nature of the IRS Examination Process, Especially In Respect of Large Corporations

Much of the Court's opinion is devoted to documents prepared in connection with the IRS's examination of the taxpayers' returns. In its amended opinion, the Court stated,

   An audit is both a stage in the determination of tax liability, often
   leading to the submission of revised tax returns, and a possible
   antechamber to litigation. When a revenue agent is merely verifying the
   accuracy of a return, often with the assistance of the taxpayer's
   accountant, this is accountant's work and it remains such even if the
   person rendering the assistance is a lawyer rather than an accountant....
   If, however, the taxpayer is accompanied to the audit by a lawyer who is
   there to deal with issues of statutory interpretation or case law that the
   revenue agent may have raised in connection with his examination of the
   taxpayer's return, the lawyer is doing lawyer's work and the
   attorney-client privilege may attach.

Slip Op. at 2. The Institute is concerned that the Court's discussion of the IRS examination process seriously misconstrues and minimizes that process, especially as it relates to large corporations.(4) For these corporations, precious little of an examination is "merely verifying" the accuracy of a return.

The tax returns of the largest 1,700 taxpayers in the United States are generally examined under the IRS's Coordinated Examination Program (CEP), which reflects the IRS's efforts to deal with the factual and legal complexities posed by these companies' operations and, hence, their tax returns. Companies in the CEP program are under continual examination by the IRS. A team of two or more agents maintain offices on the taxpayer's premises and interact on a daily basis with the taxpayer's personnel. The IRS team will often include economists, engineers, international examiners, and computer specialists. These agents will issue a multitude of "Information Document Requests" and prepare a plethora of "Notices of Proposed Adjustments" to which the taxpayer must respond and ultimately consolidate their recommendations into a "Revenue Agent's Report" that can easily exceed a hundred pages in length. Issues that are not agreed to at the examination level may be protested to the IRS's Appeals function, which is charged with assessing the hazards of litigation and settling legal and factual issues. (The Appeals function can be accessed either before or after a case is docketed in the United States Tax Court.) Although the vast majority of issues raised during the examination are settled administratively, more than a few issues may result in litigation -- often years after the filing of the original return. The end product of this process may be the preparation of an amended return, but that is not inevitable. Equally important, even if an amended return is filed, that fact alone does not transmute the attendant legal advice into clerk's work.

Many income tax examinations present complex and difficult legal issues. Companies may consult lawyers on an issue-by-issue basis to (1) provide legal support for the positions taken on a return, or (2) assess the hazards of litigating a particular issue. This advice may address highly complex statutory language, legislative history, the interpretation of government regulations, an assessment of judicial precedent, and the risk of civil or even criminal penalties -- issues that if addressed by attorneys in non-tax fields would clearly be subject to the privilege. See United States v. Judson, 322 F. 2d 460, 462 (9th Cir. 1963) (memoranda and net worth statement prepared by accountant retained by attorney during tax investigation within attorney-client privilege). The Court's opinion regrettably blurs the scope of the privilege by improperly drawing a distinction between the government's administrative review of tax law issues and other regulatory matters.

Moreover, although it is not inevitable, examination activities may well be a prelude to litigation, and, hence, the application of the work-product doctrine. This doctrine is designed to protect material prepared by an attorney acting for his client in anticipation of litigation, see, e.g., In re Grand Jury Proceedings, 604 F.2d 798, 801 (3d Cir. 1979), but not materials prepared "in the ordinary course of business, or pursuant to public requirements unrelated to litigation," United States v. El Paso Co., 682 F. 2d 530, 542 (5th Cir. 1982), cert. denied, 466 U.S. 944 (1984) (citation and internal quotation marks omitted). A document is prepared in anticipation of litigation, if "in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation." United States v. Adlman, 134 F. 3d 1194, 1202 (2d Cir. 1998) (quoting Wright, Miller, & Marcus, 8 FEDERAL PRACTICE & PROCEDURE [sections] 2024, at 343 (1994)) (emphasis in original and internal quotation marks omitted). When a document is created because of the prospect of litigation and analyzes "the likely outcome of that litigation, it does not lose protection under this formulation [of the work-product doctrine] merely because it is created in order to assist with a business decision." Id.

In Upjohn, the Supreme Court commended the government's "wise[]" concession that the work-product doctrine applied in the context of an IRS summons. 449 U.S. at 397. Summons activity is integrally related to an IRS examination. Accordingly, the Court's opinion on this issue should be clarified to acknowledge that the work-product doctrine may well apply in the examination context.

CONCLUSION

For the foregoing reasons, amicus Tax Executives Institute respectfully urges the Court to grant the Appellant and Intervenor-Appellants' Petition for Rehearing with a Suggestion for Rehearing En Banc.

Respectfully submitted,

Timothy J. McCormally *Mary L. Fahey Tax Executives Institute, Inc. 1200 G Street, N.W. Suite 300 Washington, D.C. 20005-3814 [phone] Counsel for Amicus Curiae

Tax Executives Institute, Inc. *Counsel of Record

June 18, 1999

(1) The privilege attaches: "(1) where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client (6) are at his instance permanently protected (7) from disclosure by himself or by his legal adviser, (8) except the protection be waived." United States v. Lawless, 709 F.2d 485, 487 (7tn Cir. 1983) (quoting Wigmore Evidence [sections] 2292, at 554).

(2) The work-product doctrine may also apply to documents prepared before a tax return is filed. See, e.g., United States v. Adlman, 134 F. 3d 1194, 1202 (2d Cir. 1998) (the doctrine may apply to a document assessing the strengths and weaknesses of a proposed transaction, even if prepared for a business purpose, if preparation of the document were prompted by expected litigation).

(3) Many of the documents at issue in In re Grand Jury Subpoena were ultimately found not subject to the attorney-client privilege because of the continuing fraud exception, which has no application here. 731 F.2d at 1038-39.

(4) Part of the confusion may stem from the terminology used by the Court. The term "audit" may conjure up visions of green eyeshades and "ticking" and "tying." Thus, accountants conduct audits -- a verification of the client's financial condition. IRS agents, however, rigorously examine a return -- reviewing the treatment of specific items and confirming their consistency with the tax code and regulations. That a lawyer involved in the latter process can provide legal advice subject to the attorney-client privilege seems clear.3