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"You've got a friend in me": TEI's practice of filing amicus briefs.


I understand that I am an unusual speaker for this session. Normally, the luncheon speaker is a judge, or IRS official, or someone of a similar lofty position. Last spring, Tax Executives Institute became embroiled in a controversial case involving the potential release of advance pricing agreements under the Freedom of Information Act. We filed an amicus brief in a case brought by the Bureau of National Affairs after the government had announced it was conceding that the APAs were subject to release and redaction under section 6110 of the Internal Revenue Code. Not surprisingly, the BNA case garnered a lot of publicity. After all, when one picks a fight with the press, it is good to remember that the opponent buys its ink by the barrel. I suspect that it was the intense nature of this controversy that led Robin Greenhouse and the Court Procedure Committee to invite me to discuss how an organization such as TEI determines to file an amicus brief in a given case.

TEI's Selection of Cases

TEI is a voluntary, nonprofit association of corporate tax executives who are responsible for managing the tax affairs of their companies. 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. Most of the companies that employ TEI members are part of the IRS's Coordinated Examination Program (CEP). Because our membership rules bar individuals engaged in a public tax practice, most of the people in this room are ineligible to join.

TEI's current policy on the filing of amicus briefs was adopted by our Board of Directors in 1991. The policy requires that we be "judicious" in selecting cases in which to file briefs, noting that the persuasive value of a particular amicus brief is limited compared with the value of representations made to executive or legislative agencies. The policy also requires that the brief must bring a new or unique perspective to the issue before the court. Institute procedures thus prohibit the filing of "me, too" briefs and tracks the Supreme Court's rules for the filing of amicus briefs.(2) Finally, the positions taken in the brief must be crafted not to pit one segment of our diverse membership against another.

The vast majority of TEI's amicus briefs are filed in the Supreme Court of the United States and historically most have involved state tax issues. For example, in 1998 the Institute filed briefs both on the petition for certiorari and on the merits in the South Central Bell case, where the Court ultimately found Alabama's franchise tax unconstitutional as it applied to out-of-state corporations(3) More recently, we filed briefs in the Hunt-Wesson case, which questions the constitutionality of California's interest-offset rule.(4)

Two notable exceptions to filing briefs in state tax cases are Newark Morning Ledger(5) and INDOPCO.(6) Indeed, we were the only party to file an amicus brief in the INDOPCO case, though, given the result and the aftermath of that case, I am not sure how widely we should let that fact be known.(7)

In the past decade, there have been only four exceptions to TEI's general policy of filing briefs only in the Supreme Court. The issues in these four cases fall into two categories: (1)the attorney-client privilege in the corporate context, and (2) the confidentiality of tax return information under section 6103. It is these exceptional cases that I will discuss in more detail today.

Attorney-Client Privilege Issues

The most recent case to attract TEI's attention was United States v. Frederick, which was decided last year by the Seventh Circuit(8) That case involved the scope of the attorney-client privilege in the context of documents prepared by an attorney in connection with the preparation of tax returns and an IRS examination of those returns. (Mr. Frederick was the attorney.) One interesting aspect of this case is the characterization of Mr. Frederick as an attorney-accountant. It has been the focus of much of the commentary on this case, with particular emphasis on the effect of the decision on the multi-disciplinary practice debate. In fact, however, Mr. Frederick is not an accountant. He did assist in the preparation of the taxpayers' tax returns, so he may be more properly characterized as a return preparer. Another interesting point is the opinion's discussion of new section 7525 of the Code, relating to the so-called tax practitioner privilege. It was not at issue in the case and the idea of commenting on a statute that does not apply seems odd under the normal case or controversy rules.

The Seventh Circuit's discussion of the scope of the attorney-client privilege and the related work-product doctrine raised two issues of concern to 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. Second, the court totally misconstrued, or at least greatly oversimplified, the IRS examination process. For these reasons, the Institute filed an amicus brief in support of Mr. Frederick and the taxpayers' petition for rehearing.

The documents at issue in Frederick included draft tax returns, workpapers, and correspondence. The Seventh Circuit held that "a dual-purpose document -- a document prepared for use in preparing tax returns and for use in litigation -- is not privileged." The 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. In TEI's view, this was erroneous.

For example, consider an attorney who opines 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, 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 may not be privileged,(9) the attorney's mental impressions and legal analyses of the alternatives are.(10) It is arguable, however, that the decision in Frederick makes the analyses subject to disclosure.

In the second part of the opinion, the appeals court discussed the audit process, attempting at one point to distinguish between "accountant's" work and "lawyer's" work. This portion of the opinion was revised by the court. In the original opinion, the Seventh Circuit explained that an audit is both a stage in the determination of a tax liability and "a possible antechamber to litigation." It also said, "Normally, however, taxpayers in audit proceedings are represented by accountants, or not represented at all, rather than by lawyers...." This sentence was eliminated in the amended opinion. Instead, the court wrote:
 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.

The amended opinion continues with the original sentence, "Throwing the cloak of privilege over the audit-related work of the taxpayer's representative would be to create an accountant's privilege usable only by lawyers," but then adds:
 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.

What does this tell us about the appellate court's view of the audit process? The court either focused myopically on smaller taxpayers or misapprehended the IRS's process of examining large sophisticated taxpayers like those involved in the Coordinated Examination Program. First, the court saw the audit as devoted to verifying the accuracy of a return. Second, it assumed that the audit usually takes place in the IRS's offices, not on the taxpayer's premises. Third, it viewed tax advisers as outside consultants, not employees of the taxpayer.

Although this view may be accurate for small businesses, it paints an incomplete and inaccurate world. Our concern about how the court's erroneous generalizations might be applied in other cases prompted TEI's involvement. It was the unique perspective the Institute endeavored to bring to the case -- that of the large taxpayer for whom little of an examination is merely verifying the accuracy of a return.

The Frederick case arguably creates a conflict with the second (albeit earlier) privilege case in which TEI filed an amicus brief United States v. Adlman.(11) The Second Circuit has precedent that views the attorney-client privilege more expansively than the Seventh Circuit, holding that it can cover documents prepared by an accountant under the supervision of an attorney. Indeed, the Second Circuit case law analogizes accounting principles as a foreign language and the accountant as a translator.(12) The Adlman case -- called Adlman I -- tested the bounds of this precedent. It also tested TEI's policy of only filing briefs in the Supreme Court, since it was the first case in which the Institute filed a brief in a lower court.

Why did TEI become involved in Adlman? The case struck close to home and, indeed, involved a TEI member, an in-house tax counsel who asserted a claim of privilege for memoranda prepared by outside accountants at the counsel's request. The purpose of the request was to obtain information on the tax ramifications on which to base the counsel's advice to the corporation's management about a proposed merger. In our view, the district court opinion had substantially threatened the application of the attorney-client privilege to in-house counsel -- a privilege upheld by the Supreme Court in Upjohn.(13)

The court in Adlman I ultimately found that the memoranda were not protected by the privilege because of the absence of contemporaneous documentation to show that the memoranda were prepared outside of the accounting firm's normal tax advisory services. The opinion provides a road map, however, to what in-house counsel need to do to preserve the privilege in the future.

The Second Circuit rejected the lower court's reasoning, however, that the preparation of the documents before litigation had begun precluded the application of the work-product doctrine. It remanded the case for a determination of the application of this doctrine.

Adlman II addressed the work-product claim. The appellate court held that where a document is created because of the prospect of litigation -- analyzing the likely outcome of that litigation -- it does not lose protection under Rule 26(b)(3) merely because it is created to assist with a business decision.(14) The court thus found that the work-product doctrine may apply to documents prepared before a tax return is filed(15) -- a concept expressly rejected by the Seventh Circuit in Frederick -- and further suggested that the work-product doctrine may apply to memoranda analyzing the tax aspects of a proposed transaction -- which seems to conflict with the Seventh Circuit's treatment of dual-purpose documents. The memoranda in Adlman II were definitely designed for two purposes -- to outline the litigation hazards and to assist in making a business decision. The documents presumably were also used in preparing the corporation's tax return after the transaction was completed.

Where do these cases leave us? Frederick seemingly narrows the scope of the privilege in the context of an audit, at least in the Seventh Circuit, while Adlman II suggests that tax planning memoranda can be protected. This may well be an issue that will be decided by the Supreme Court since Mr. Frederick and the affected taxpayers have filed a petition for a writ of certiorari.(16)

Was TEI's advocacy effective in these cases? In Adlman I, the Second Circuit substantially modified the lower court's decision, outlining how the privilege may be preserved in the corporate context. In Frederick, however, the Seventh Circuit formally denied our motion to file the amicus brief and the Institute's leadership subsequently declined to file a brief in support of the petition for a writ of certiorari. Part of TEI's decision not to proceed in the Supreme Court was based on our belief that the court may well have reached the right result -- that the documents are not privileged, even if its formulation of the applicable standard was unfortunate. Hence, TEI's brief in the Seventh Circuit was carefully crafted to avoid arguing that the result was incorrect. Rather, the Institute urged the appellate court to grant the petition for rehearing in order to modify its language.

In Frederick, the Institute was faced with a fait accompli -- an appellate court decision that we believed was overreaching in its rejection of the claim of privilege. Our brief to the Seventh Circuit was aimed at modifying the language of the court opinion. If we had not been so far along in the process when the amended opinion was issued, however, we may well have decided not to file an amicus brief. In contrast, our decision to forgo urging the Supreme Court to grant review of the case was based, in part, on a determination that, given the facts of the case, we could end up with a much worse opinion. If review is granted, however, I dare say the Institute will weigh in on the merits.

Disclosure Issues

The second set of cases involves the potential disclosure of tax return information under section 6103 of the Code. About a year ago, the IRS stunned the business tax community by conceding in a lawsuit brought by the Bureau of National Affairs that advance pricing agreements (APAs) were subject to the disclosure requirements of section 6110 of the Code. TEI has a long history of support for the APA program. Ten years ago, we met with the IRS and filed comments on early outlines of the program(17) TEI has argued from its inception that APAs should be subject to the confidentiality provisions of section 6103. Thus, we believed that the IRS's concession threatened not only taxpayer confidentiality but also the future of the program itself. This concern produced another exception to the Institute's general policy of filing briefs only in the Supreme Court or even an appellate court. For the first time, we filed an amicus brief in a district court. The Institute's decision was based on a determination that, given the posture of the case (the IRS, as defendant, conceding what the plaintiff was seeking), there may well not be an appeal.

In the brief that TEI filed with the federal district court in Washington, TEI tried to balance the public's interest in safeguarding taxpayer privacy and the principles underlying "government in the sunshine." Our actions were based on a concern that the release of APAs and supporting materials, even in redacted form, would adversely affect the program. We were also concerned about promises made to taxpayers to induce participation in the program. Taxpayers submitted the pricing information to the IRS with the understanding that the information would be subject to the same confidentiality restrictions as tax returns. In addition, the Institute concluded that releasing APAs and their background files could well diminish the willingness of taxpayers -- and our treaty partners -- to participate in the program. Our concerns were not unfounded. At a recent GWU-IRS international tax seminar, a representative of the German competent authority stated that his country would not participate in the APA program if the agreements were to subject to public disclosure.

I would characterize the Institute's efforts in support of the confidentiality of APAs as successful, not because the court embraced the Institute's legal arguments but because TEI's brief help shine light on the issue, thereby making a legislative response more likely. Hence, TEI also met with the IRS, Treasury, and media representatives in an effort to craft an appropriate solution. In addition, the Institute included comments about the APA program in a statement filed in respect of an ongoing study by the staff of the Joint Committee on Taxation on taxpayer confidentiality, and we also urged the tax-writing committees to address the issue sooner rather than later.

Our second filing in respect of the Code's confidentiality provisions was technically not an amicus brief at all. Last spring, TEI became concerned about a decision of a district court in Puerto Rico. In a case involving several subsidiaries of Bristol-Myers Squibb, the federal court in Puerto Rico ordered the IRS to produce tax return information in respect of unrelated third parties(18) The order grew out of the plaintiffs' efforts to secure information relating to their claim that the IRS had improperly denied them the favorable treatment accorded other taxpayers, and it was resisted by the IRS on section 6103 grounds(19) The efforts of some affected taxpayers to voice their objections to the disclosure of confidential tax return information -- and to recommend alternative, less-drastic solutions -- proved unsuccessful.(20)

Because the court had already denied the motion of several third parties affected by the order to file an amicus brief, the Institute decided to take another tack. We sent a letter to the Attorney General and the Treasury Secretary expressing our concern about the case and urging the government of resist production of the returns.

The confidentiality issue in the Bristol-Myers case involved an interpretation of sections 6103(h)(4)(B) and 6103(h)(4)(C) of the Code, which provide that third-party taxpayer information can be provided in situations where the treatment of an item reflected on the taxpayer's return is directly related to the resolution of an issue in the proceeding in which the information is sought or where there is a direct transactional relationship between the party seeking the information and the taxpayer and that relationship directly affects the resolution of the issue.

We believe that the district court misconstrued these provisions to include third-party tax returns. The provisions have generally been limited to situations where there is some relationship between the taxpayers and the third party.(21) We argued that, quite simply, tax returns of unrelated parties should not be released to litigants in a pending case. As noted by a federal appellate court in quashing a subpoena from the Commodities Futures Trading Commission for copies of individual traders' tax returns, "Income tax returns are highly sensitive documents."(22)In our filing on the confidentiality study, the Institute urged that the exceptions be clarified to require a direct relationship between the taxpayer and the third party. We also suggested that the IRS might be directed to develop alternative means of allowing taxpayers to pursue claims of "disparate treatment" based on the IRS's actions in respect of unrelated parties.


If TEI were a ball player, I would say that it is batting 1-for-2, or perhaps 1.5-for-2. We succeeded in protecting APAs, albeit in legislation rather than in court. In the Bristol-Myers case, the IRS released the tax returns to the taxpayers, subject to a confidentiality agreement that was eventually worked out between the taxpayers and the third parties. Perhaps our efforts in that case encouraged the parties to reach an accommodation. I would certainly like to think so.(23)

My comments today have focused on cases in which TEI decided to move ahead and file a brief. But for every brief that we file, there are at least two or three other cases where we decline to participate. Indeed, in one week last year, TEI had eight requests for amicus briefs pending. We filed in only one case -- the Frederick case.

What cases do we turn down? In some cases, the issue is outside our area of expertise, for example, involving an interpretation not of tax but of administrative law. In others, such as one involving an interpretation of the Code's insurance provisions or an interpretation of a transition rule under the Tax Reform Act of 1986, the issue was too narrow for a broad-based membership. And in one case, the deadline had passed for doing anything other than filing a letter supporting the views of other parties -- an action contrary to TEI's policy of not filing "me, too" briefs. We depend in large measure on the assessment of our committee chairs in determining whether the case deserves the Institute's time and attention.

That, in a nutshell, is how one organization views its role in the judicial system. Thank you for inviting me today to speak to you.

(1) See Toy Story 2 (Soundtrack, Robert Goulet).

(2) Rules of the Supreme Court of the United States, Rule 37 (1997).

(3) South Central Bell Telephone Co. v. Alabama, 119 S.Ct. 1180 (1999).

(4) Hunt-Wesson Inc. v. Franchise Tax Board, No. 98-2043 (Sup. Ct.).

(5) Newark Morning Ledger Co. v. United States, 507 U.S. 546 (1993) (relating to the deductibility of customer lists).

(6) INDOPCO v. United States, 503 U.S. 79 (1992) (relating to the capitalization of certain takeover expenses).

(7) The Institute also filed a brief in support of the respondent in United States v. Arthur Young & Co., 465 U.S. 805 (1984), involving the protection to be afforded the workpapers used in preparing a tax return.

(8) United States v. Frederick, 182 F.3d 496 (7th Cir. 1999).

(9) United States v. Lawless, 709 F.2d 485 (7th Cir. 1983).

(10) See., e.g., Upjohn Corp. v. United States, 449 U.S. 383, 397-402 (1981) (documents and notes prepared by counsel investigating compliance with tax laws found privileged); In re Grand Jury Subpoena Duces Tecum Dated September 15, 1983, 731 F.2d 1032, 1037 (2d Cir. 1984) (documents prepared by law firm assessing tax consequences of alternate employee compensation plans and corporate reorganizations subject to attorney-client privilege).

(11) United States v. Adlman, 68 F.3d 1495 (2d Cir. 1995) (Adlman I).

(12) United States v. Kovel, 296 F.2d 918 (2d Cir. 1961) (holding that the privilege attached to communications between a lawyer and an accountant he had hired to assist him in advising a client).

(13) Upjohn Co. v. United States, 449 U.S. 383 (1981) (the attorney-client privilege attached to communications by Upjohn's employees to its in-house counsel in respect of an investigation into the company's compliance with tax and securities laws).

(14) Rule 26 (b)(3) of the Federal Rules of Civil Procedure provides that materials prepared in anticipation of litigation are not discoverable unless the party seeking access has a substantial need for the materials.

(15) United States v. Adlman, 134 F.3d 1194, 1202 (2d Cir. 1998) (Adlman H) (the work-product 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 was prompted by expected litigation). The court remanded the case for determination whether the work-product doctrine applied in light of its newly articulated standard. The case was settled, however, before the district court reached this issue.

(16) Petition for a Writ of Certiorari to the United States Court of Appeals for the Seventh Circuit in Richard A. Frederick, Randolph W. Lenz, Karin Lenz, and KCS Industries, Inc. v. United States, No. 99-719 (filed Oct. 27, 1999).

(17) Indeed, at least one of the IRS officials involved in the establishment of the APA program -- Charles S. Triplett, former Deputy Associate Chief Counsel (International) -- has remarked that the genesis of the program was a discussion at an IRS-TEI liaison meeting.

(18) Bristol-Myers Barceloneta, Inc., Bristol Caribbean, Inc., and Bristol Laboratories Corp. v. United States, Civil 97-2567CCC (D.P.R.).

(19) The plaintiffs had sought to change their taxable year to maximize the tax benefits accorded by section 936 of the Code, following Congress's 1993 amendment of that provision. Plaintiffs argued that several similarly situated corporations were successful in their efforts to change their taxable years, and that the disparate treatment accorded them was improper, citing IBM Corp. v. United States, 343 F.2d 914 (Ct. Cl. 1965). It was the return information of taxpayers filing for a change in taxable year that was the subject of the district court's order. The return information was produced in July under conditions of confidentiality agreed to by the affected parties.

(20) Following the district court's initial February 5, 1999, order requiring the IRS to produce the confidential third-party information, the IRS's Chief Counsel notified the affected taxpayers. Several of those taxpayers sought to participate in the case as amici curiae, but their motion -- along with the government's motion for reconsideration -- was denied on May 14, 1999.

(21) Thus, for example, in Davidson v. Brady, 559 F. Supp. 456 (W.D. Mich. 1983), aff'd on other grounds, 732 F. 2d 552 (6th Cir. 1984), the court found that the disclosure of a third party's financial statement submitted to the IRS during a criminal investigation was proper under section 6103(h)(5)(C) because of the debtor-creditor relationship between the two parties. See also Mindell v. United States, 693 F. Supp. 847 (D. Cal. 1988) (IRS permitted under section 6103(h)(5)(B) to disclose taxpayer's return to tax preparer to permit defense against preparer penalty).

(22) Commodities Futures Trading Comm'n v. Collins, 997 F. 2d 1230 (7th Cir. 1993). The court also noted, "The self-reporting, self-assessing character of the income tax system would be compromised were they promiscuously disclosed to agencies enforcing regulatory programs unrelated to tax collection itself."

(23) In its study on the Code's confidentiality provisions (which was released on January 28, 2000), the Joint Committee staff discussed the Bristol-Myers Squibb case, and recommended that when nonparty tax returns and return information are to be disclosed under section 6103(h)(4)(A)-(C) (relating to disclosures in the context of a judicial or administrative proceeding), the taxpayer should be given notice prior to the disclosure and only the portions of the nonparty return that directly relate to the resolution of an issue in the proceeding should be disclosed; the nonparty would also be given an opportunity to participate in the redaction process. This recommendation seems to flow directly from TEI's comments.

MARY L. FAHEY is Tax Counsel for Tax Executives Institute in Washington, D.C. She received her law degree from the American University Law School and practiced law with the U.S. Department of Justice (Tax Section -Appellate Division) and Covington & Burling before joining TEI's staff in 1988. This article is adapted from a speech Ms. Fahey gave to the Administrative Practice and Court Procedure Committees of the American Bar Association's Section of Taxation on January 21, 2000.
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Author:Fahey, Mary L.
Publication:Tax Executive
Geographic Code:1USA
Date:Jan 1, 2000
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