1 / 43

Overview

INCOME AND OTHER TAXES COMMITTEE TAXATION SECTION OF THE STATE BAR OF CALIFORNIA 2016 ANNUAL INCOME TAX SEMINAR ATTORNEY/CPA PRIVILEGE ISSUES June 24, 2016. Overview. Types of Privileges/Protections Attorney-Client Privilege Attorney-Work Product Accountant-Client Privilege

dozier
Télécharger la présentation

Overview

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. INCOME AND OTHER TAXES COMMITTEETAXATION SECTION OF THE STATE BAR OF CALIFORNIA2016 ANNUAL INCOME TAX SEMINARATTORNEY/CPA PRIVILEGE ISSUESJune 24, 2016

  2. Overview • Types of Privileges/Protections • Attorney-Client Privilege • Attorney-Work Product • Accountant-Client Privilege • Defenses that Avoid Waiver of Privilege • Best Practices for IRS Examinations • Alternative Methods for Document Production

  3. ATTORNEY-CLIENT PRIVILEGE

  4. Attorney-Client Privilege • What is the attorney-client privilege? • When legal advice is sought from a legal advisor, the communications relating to that advice made in confidence are protected from disclosure unless the privilege is waived. • Purpose: • Intended to facilitate sound and comprehensive legal advice by eliminating the incentive the client would otherwise have to not fully inform his attorney of the facts • See Upjohn Co. v. United States, 449 U.S. 383 (1981)

  5. Test for Attorney-Client Privilege • Each prong must be analyzed and satisfied for the privilege to apply: • Communications • Made for the purpose of receiving legal advice • From a legal advisor • Made in confidence • The substance of which has not been disclosed to 3rd parties AND • Which the client insists on protecting from disclosure • Once the test is satisfied, the privilege applies at all stages of all proceedings, regardless of whether the client is a party to the proceeding

  6. Attorney-Client Privilege: Communications • What types of communications can be covered by the privilege? • Written • Consider: electronic communications • Oral • Is there blanket protection for all communications between the attorney and client? • No, generally privilege must be established by the party claiming its protection on a specific, document-by-document (or communication) basis • Privilege log must be kept to identify which documents are privileged and why

  7. Attorney-Client Privilege: Made for the Purpose of Receiving Legal Advice • What content is protected? • The privilege protects only communications that are necessary to seek professional legal advice • Examples: • Recommending to the client which CPA to use. • This is likely not protected because this is not legal advice and is merely a recommendation. • Advising the client of the tax consequences of a transaction. • This is likely protected because it involves counseling the client on the law and possible outcomes given the laws in place

  8. Attorney-Client Privilege: From a Legal Advisor • The advisor must be acting in his or her “lawyer” capacity • Consider: in-house counsel • Mixed Communications: • Some communications between a client and attorney contain both legal and business advice • Is the communication privileged? • Communications may not be privileged if they contain both legal and business advice

  9. Attorney-Client Privilege: Made in Confidence • The client must have an expectation that the communication remain private • Examples: • Attorney is to make a disclosure to the employees on behalf of the company • This is likely not protected because the client, the company, does not intend for this communication to be private.

  10. Attorney-Client Privilege: The Substance of Which Has Not Been Disclosed to 3rd Parties • Waiver to one 3rd party is generally deemed a waiver as to all • Examples: • Client cc’s his business partners (not represented by the client’s attorney) on an email to the client’s attorney • This is likely not protected because the client has disclosed the substance of the email to his business partners • Client cc’s his secretary on an email to the client’s attorney because the secretary assists with the client’s filing • Protection debatable, but likely protected. Generally, for a communication to a 3rd party to not constitute a waiver of the privilege, the 3rd party must be indispensable to the communication. • Consider this with the “made in confidence” prong. The client certainly intends for it to be confidential but is he in violation of this prong, thereby waiving privilege?

  11. Attorney-Client Privilege: Client Insists on Protecting from Disclosure • The client holds the privilege • An attorney can generally claim the privilege on behalf of the client • If the client wants to disclose something and the attorney does not, the client is generally entitled to disclose unless some other exception applies • Neither the attorney nor the client can be forced to disclose privileged communications • Exception: • There is clear evidence that the client intended to waive the privilege

  12. Attorney-Client Privilege: Who is the Client? • A client is a person (or entity) who receives or seeks legal services from an attorney. • Privilege in the Corporate Setting • Entity as the client rather than employees or shareholders • Corporate client cannot immunize every document by sending a copy to its attorney(s) • Consider: Mixed communications • Some courts have required corporations claiming privilege to show that communications to in-house counsel were primarily for the purpose of obtaining legal advice as opposed to ordinary business advice

  13. Attorney-Client Privilege: Dual Purpose Correspondence • Taxpayers have been denied privilege claims when documents were prepared by both accountants and attorneys, or someone who serves both roles • Non-privileged use of dual-purpose documents can waive privileged use • Documents prepared for audits to substantiate positions taken on tax returns are not privileged because the preparation of tax returns and substantiating those returns is not considered to be the practice of law • Caveats: • Analysis of law is legal work even if done for an audit • Information can become so intertwined with legal advice that it becomes privileged

  14. Waiver of Attorney-Client Privilege • The attorney-client privilege can be waived when there is disclosure to a 3rd party, which may be deliberate or inadvertent. • Consider: “Advice of Counsel” Defense • The attorney-client privilege is waived when the client places an otherwise privileged tax opinion in controversy by asserting a reasonable cause defense to accuracy-related penalties. • See Ad Investments 2000 Fund LLC v. Commissioner (142 T.C. 248 [April 16, 2014]) (granting IRS’ motion to compel production of opinion letters issued by attorneys for the taxpayer where the taxpayer raised a reasonable cause defense to accuracy related penalties imposed on a Son-of-Boss transaction).

  15. Exceptions to the Attorney-Client Privilege • Crime/Fraud • Communication is not privileged if a client seeks advice from an attorney to assist with the furtherance of a crime or fraud or the post-commission concealment of the crime or fraud • Query: How might this apply in the (medical) marijuana context? Is the communication privileged? • “The lawyer should warn the client that, if the client becomes involved in civil or criminal litigation, there is a risk that the communications between them will not be held to be privileged and thus be subject to disclosure in testimony.” • San Francisco Bar Association Ethics Opinions, Opinion 2015-1 (June 2015) • Common Interest • Example: Joint Defense Agreements • Breach of Duty • Example: Malpractice

  16. Exceptions to the Attorney-Client Privilege (cont.) • Fiduciary Duty • Exception for when the corporation's shareholders wish to pierce the corporation's attorney-client privilege • Deceased Client • Privilege may be waived upon death of a testator-client if litigation ensues between decedent's heirsor other parties claiming under deceased client • Tax Return Preparation • Tax return preparation services rendered by an attorney are not protected by the attorney-client privilege

  17. Privilege vs. Duty of Confidentiality • Duty of Confidentiality: • Places ethical restrictions on a lawyer’s disclosure of information relating to the representation of the client • Attorney-Client Privilege: • An evidentiary principle; if the privilege applies to a communication, disclosure of that communication cannot be compelled • Comparison: • A lawyer may have a duty of confidentiality with regard to information about his or her representation of a client, but because the information is not a part of a confidential communication, it does not benefit from the protection of the privilege. A court could compel the client or the lawyer to disclose that information • Example: Nondisclosure/confidentiality agreements

  18. ATTORNEY-WORK PRODUCT DOCTRINE

  19. Attorney-Work Product Doctrine • Federal Rules of Evidence (“FRE”), Rule 502(g)(1) • The protection that applicable law provides for tangible material (or its intangible equivalent) prepared in anticipation of litigation or for trial • (i.e. document-based protection) • Federal Rules of Civil Procedure (“FRCP”) Rule 26(b)(3): • “[A] party may obtain discovery of documents and tangible things otherwise discoverable under subdivision (b)(1) … and prepared in anticipation of litigation or for trial by or for another party … only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party’s case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means. In ordering discovery of such materials the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.”

  20. Attorney-Work Product:Purpose • To encourage lawyers to prepare thoroughly for litigation without fear of being forced to aid an adversary at the expense of the client • Compare to Attorney-Client Privilege: • The purpose is not to protect attorney-client communications • Protection can be pierced through no fault of the lawyer or the client because of the “in preparation of litigation” prong

  21. Attorney-Work Product:Test under FRCP 26(b)(3) • All 3 prongs must be satisfied for the privilege to apply: • Documents and tangible things • Prepared in anticipation of litigation or for trial AND • By or for a party (or by or for the party’s representative)

  22. Attorney-Work Product:Opinion & Factual Work Product • Factual Work Product: • Work product that pertains to discoverable documents and tangible things • Factual work-product may be discoverable in certain circumstances • Opinion Work Product: • “[T]he mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation” • Enjoys almost absolute immunity from discovery and can only be discoverable in rare and extraordinary circumstances

  23. Attorney-Work Product:Anticipation of Litigation • Circuit Court Split: • Majority: A document is privileged if it was prepared “because of potential or anticipated litigation” (United States v. Adlman 134 F.3d 1194 (2d Cir. 1998) • Minority: A document is privileged if the primary motivating purpose for preparing the document is preparation for litigation (U.S. v. El Paso Co., 682 F.2d 530 (5th Cir. 1982) • Not necessary that litigation have already been filed or be certain • That the work product relates to a proposed transaction is just one factor that suggests it was not prepared in anticipation of litigation and is not, in and of itself, dispositive

  24. Attorney-Work Product:Waiver • Test: Was the document disclosed to an adversary or conduit to an adversary? • If yes, there is a waiver of the work-product privilege. • Disclosure to a third party which is not inconsistent with maintaining secrecy against opponents is not a waiver • Consider: Disclosure to a financial auditor • See U.S. v. Textron, Inc. 577 F.3d 21 (1st Cir. 2009) (holding that there was no waiver where the auditor was actively engaged in evaluating the tax issues for the company with the lawyers and the auditor was not an adversary in this situation).

  25. ACCOUNTANT-CLIENT PRIVILEGE

  26. Accountant-Client Privilege • A statutory privilege enacted by Congress in 1997 • IRC § 7525(a)(1): • “With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.” • "Federally authorized tax practitioner" = any individual who is authorized under Federal law to practice before the Internal Revenue Service (“IRS”) • Examples: Lawyers, CPAs, and enrolled agents

  27. Accountant-Client Privilege:Limitations • A very weak privilege compared to the attorney-client privilege • There can be a waiver of the privilege • No work-product protection • IRC § 7525 Privilege does not apply to: • Criminal proceedings • IRC § 7525 applies to any noncriminal tax matter before the IRS and noncriminal tax proceeding in Federal court brought by or against the United States. • Civil Litigation • State tax matters • Consider consequences of FTB initiating audit and sharing information with IRS • See California Revenue and Taxation Code section 7099.1(a)(1), extending attorney-client type privilege to communications between federally authorized tax practitioners and clients. • Non-tax regulatory investigations • Written communications in connection with the promotion of an IRC § 6662 “tax shelter”

  28. Accountant-Client Privilege:Case Examples • Any information included in documents involved in preparation of a tax return or involved in verification of a tax return during audit loses both the attorney-client privilege and the IRC § 7525 privilege • United States v. Frederick, 182 F.3d 496 (7th Cir.1999) • Burden is on the IRS to establish that the tax shelter exception applies • United States v. BDO Seidman LLP, 492 F.3d 806 (2007) • See Countryside Limited Partnership v. CIR, 132 T.C. 347 (2009) (IRS could not demonstrate that handwritten notes were “written communications,” or that written minutes were in connection with the promotion of a tax shelter) • See Valero Energy Corp. v. United States, 569 F. 3d 626 (7th Cir. 2009) (Tax shelter exception applied to portion of documents sought in summons)

  29. Defenses that Avoid Waiver

  30. Defenses that Avoid Waiver:“Selective Waiver” • “Selective waiver” theory: The concept that the voluntary disclosure of otherwise privileged material to government agencies does not constitute a waiver for all purposes to all other third parties (See Diversified Industries v. Meredith, 572 F.2d 596 (8th Cir. 1978 en banc)) • Few federal appellate courts have upheld the theory of selective waiver • Exception: • A voluntary disclosure could be protected as a selective waiver if the disclosing party and the government enter into an explicit confidentiality agreement. In re Steinhardt Partners, L.P., 9 F.3d 230 (1993); but see United States v. Massachusetts Institute of Technology, 129 F.3d 681 (1st Cir. 1997).

  31. Defenses that Avoid Waiver:KovelAgreements • Named after the case United States v. Kovel, 296 F.2d 918 (2d Cir. 1961) • Kovel recognizes that the inclusion of a third party in attorney-client communications does not destroy the privilege if the purpose of the third party’s participation is to improve the understanding of the communication between the attorney and client. • Thus, experts engaged by an attorney to assist in rendering tax advice and representation to a taxpayer fall under the attorney-client privilege

  32. Defenses that Avoid Waiver:KovelAgreement Factors • Factors for Kovel protection: • Written engagement letter in place between the expert and the attorney setting forth the terms of this engagement • Expert works under the attorney’s direction and control • Work papers and documents are the attorney’s property • Attorney pays the expert’s bill • The work must be for the purpose of rendering legal advice, not simply for the preparation of tax returns

  33. Defenses that Avoid Waiver:What Experts Get KovelProtection? • Generally, any experts who act as the attorney’s agent retained for the purpose of the purpose of improving the understanding of the communication between the attorney and client, including: • CPA’s • Public relations firms • Appraisers • But see United States v. Ackert, 169 F.3d 136 (2d Cir. 1999). Circuit Court held that conversations between an investment banker and an in-house attorney were not privileged. Court would not extend Kovel because, rather than translating or interpreting communication between the attorney and the client, the banker was simply providing factual information about a transaction to the attorney

  34. Defenses that Avoid Waiver:Joint Defense Doctrine • Preserves the attorney-client privilege, despite disclosure of the privileged information to third parties, when a client shares privileged communication among parties with common interests pursuant to a joint defense agreement. • Aka “common interest doctrine” or “common interest privilege” • The Doctrine does not apply when parties share only a common business or commercial interest.

  35. Defenses that Avoid Waiver:Joint Defense Doctrine Factors • Requirements for Joint Defense Doctrine application: • Underlying communication is privileged • Communication disclosed in course of joint defense effort • Parties share a common legal interest • Parties have not waived the underlying privilege

  36. Defenses that Avoid Waiver:“Common Interest” Under the Joint Defense Doctrine • No uniform definition of “common interest” • Some courts require “identical” legal interest • Other courts do not require a complete unity of interests among the participants. • Court split with regard to whether the common interest doctrine can apply absent anticipated or pending litigation • See United States v. BDO Seidman LLP, 492 F.3d 806 (7th Cir. 2007)(holding communication did not need to be made in anticipation of litigation

  37. Defenses that Avoid Waiver:Non-Disclosure/Confidentiality Agreements with the IRS • A potential scenario is when the taxpayer and the IRS enter into a settlement agreement which limits disclosure by the taxpayer and the IRS of the settlement terms. • Can these settlement terms later be used against the taxpayer under the guise of waiver in other proceedings?

  38. Best Practices for IRS Examinations

  39. Pre-Examination • Avoid actions inconsistent with the confidential nature of the communication • Preserving the privilege in the corporate setting • Keep distribution of confidential materials to designated group within the corporation (“need to know” standard)

  40. Pre-Examination (cont.) • Establishing Work Product • Key element: creation in anticipation of litigation • Memorialize litigation-oriented aspects of document • Counsel involvement/oversight in creation of document • Duty to Preserve • Duty to preserve arises when litigation is reasonably anticipated • Special considerations in tax cases: • Burden of proof always on taxpayer • IRS can ask for finding that missing documents are adverse to taxpayer • Intentional destruction of documents outside normal record retention policy brings about issues of fraud, concealment, and obstruction of justice.

  41. During Examination • Rigorous document review and scrutiny to avoid accidental waiver • Evaluate grounds for good faith argument for privilege • Involvement of counsel does not guarantee privilege • Maintain adequate privilege log • Documents created during audit to assist in defense of audit can be work product/privileged

  42. Alternative Methods for Document Production • Goal in examination: • Preserve privilege and protections while at the same time satisfying the IRS with its request for information • If privileged documents are implicated by an IDR, assert all privileges and protections and prepare a privilege log • IRS input: at audit stage, revenue agents with no legal training do not request a privilege log but it may be insisted upon by IRS counsel if they assisting in audit • Consider: IRS counsel involvement in audits arising out of Panama Papers fiasco

  43. Alternative Methods for Document Production (cont.) • Alternatives to Producing Documents • Persuade IRS that it is not necessary for them to evaluate the issue • Provide fresh analysis • Provide redacted documents

More Related