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Disclosure waives privilege.

Communications between taxpayers and attorneys are protected against forced disclosure by the doctrine of attorney-client privilege. The prohibition against forced disclosure has been extended to materials collected or prepared by an attorney in anticipation of litigation under the so-called work-product doctrine. Occasionally, protected documents are disclosed inadvertently. In such cases, the courts must decide if the disclosure waives the right of privilege. One view is that a document's disclosure automatically waives privilege. Another is that inadvertent disclosure win not waive privilege because the disclosure was not sanctioned by the holder of the privilege.

A third view exists. In National Helium Corp. v. United States (219 Ct. C1. 612, 1979), the court considered whether the taxpayer intended to waive the right of privilege and the precautions taken to prevent disclosure. More recently, in Carter v. Gibbs (909 F.2d 1450, 1990), the Federal Circuit Court appeared to adopt a rule that all disclosures waive privilege but stopped short of overruling National Helium.

In August 1996, IBM filed a motion for partial summary judgment -- maintaining that -- as a matter of law -- it was entitled to certain foreign tax credits. As part of the litigation, IBM turned over to the Internal Revenue Service a large number of documents as part of the discovery process. Included were four documents covered by attorney-client privilege. In its suit, IBM requested that the documents be returned since it had not intended to waive its right of privilege. The IRS refused, on the grounds their disclosure automatically waived the right of privilege.

Result: For the IRS. The court applied the test enunciated in National Helium. Although IBM was able to prove it did not intend to waive privilege, it was unable to prove it took sufficient precautions to prevent the inadvertent disclosure. Taxpayers need to review their procedures for preventing disclosure, including those for computer files and programs -- given the IRS's ability to obtain these items. In a footnote, the court said any disclosure should waive privilege and that it expects prior precedent, including National Helium, to be overturned. If this occurs, it is essential that taxpayers guard against accidental disclosure of privileged material.

* IBM v. United States, U. S. Court of Federal Claims, 37 Fed. C1. 599; 1997 US. Claims Lexis 33.
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Publication:Journal of Accountancy
Date:Feb 1, 1998
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