Privilege in Tax and Accounting Matters (Portfolio 635)

Tax Management Portfolio, Privilege in Tax and Accounting Matters, No. 635, examines applicable testimonial and documentary protections in the tax advice and dispute context. Like any other regulatory field, common law privileges and protections will apply in the tax context. However, certain considerations are unique to the tax field such as the statutory privilege provided by §7525 and the protection of information contained in tax accrual workpapers. This Portfolio addresses the fundamentals of the attorney-client privilege, the work-product protection and other protections and considers important scenarios for their application.

Bloomberg Tax

This Portfolio is available with a subscription to Bloomberg Tax, a comprehensive research solution including over 500 Tax Management Portfolios™, practice tools, primary sources and timely news.

Description

Tax Management Portfolio, Privilege in Tax and Accounting Matters, No. 635, examines applicable testimonial and documentary protections in the tax advice and dispute context. Like any other regulatory field, common law privileges and protections will apply in the tax context. However, certain considerations are unique to the tax field such as the statutory privilege provided by §7525 and the protection of information contained in tax accrual workpapers. This Portfolio addresses the fundamentals of the attorney-client privilege, the work-product protection and other protections and considers important scenarios for their application.

This Portfolio can be cited as Boylan and Froelich, 635 T.M., Privilege in Tax and Accounting Matters.

Authors

Kim Marie Boylan, Esq.

Kim Marie Boylan, partner, White & Case LLP, Global Head of Tax and Head of U.S. Tax Disputes Practice. B.S. in Business Administration (Accounting), Georgetown University (1981); J.D., cum laude, Syracuse University College of Law (1986); LLM , with distinction, Georgetown University Law Center (1993); member, District of Columbia, U.S. Tax Court, U.S. Court of Federal Claims, U.S. Court of Appeals (Federal Circuit, District of Columbia Circuit, Second Circuit, Fourth Circuit, Fifth Circuit, Seventh Circuit, Ninth Circuit, Eleventh Circuit); Certified Public Accountant District of Columbia and New York (inactive); Syracuse Law Review; DC Bar Association; American Bar Associations (Section on Taxation); co-author BNA Tax and Accounting Portfolio 5511, Boylan, Erwin, and Froelich, The Section 7525 Tax Practitioner-Taxpayer Privilege and Related Issues (Accounting Policy and Practice Series).

Edward L. Froelich, Esq.

Edward Froelich, Of Counsel, Morrison & Foerster, LLP (2005–present), B.A. Thomas Aquinas College (1988), M.A. Catholic University of America (1991), J.D. University of Virginia (1994, LL.M. University Law Center (1999); member, District of Columbia, Maryland, United States Tax Court, U.S. Court of Federal Claims, U.S. Supreme Court bars; Fellow of the American College of Tax Counsel; author of the United States Chapter of The Tax Disputes and Litigation Review, published by Law Business Research; co-author BNA Tax and Accounting Portfolio 5511, Boylan, Erwin, and Froelich, The Section 7525 Tax Practitioner-Taxpayer Privilege and Related Issues(Accounting Policy and Practice Series).

Table of Contents

Detailed Analysis
I. Introduction
A. Privileges and Protections
1. Attorney-Client
2. Section 7525
3. Fifth Amendment
4. Settlement
5. Work-Product
B. Tax Matters
1. Planning and Advisory
2. Audit
3. Appeals
4. Litigation
II. Privileges and Protections
A. Attorney-Client
1. Standards
a. Definition
(1) Legal Advice
(2) Communication
b. Burden of Proof
c. Privilege Belongs to the Client
d. Who Is the Client?
e. Attorney-Client Privilege Does Not Extend to Tax Return Preparation
(1) General Rule
(2) ‘Research and Interpretation’ Generally Not Necessary
(3) Lawyer as ‘Scrivener’
(4) Information Intended to Be Disclosed on Return
(5) What Constitutes ‘Tax Return Preparation’?
f. Accountant-Attorneys — Dual Capacity Advisors
g. Advice Underlying a Return Position
h. Information Underlying Data on Return
i. Privilege May Not Apply to Client Identity and Nature of Fee Arrangement
(1) Client Identity Generally Not Privileged
(2) Fee Arrangements Generally Not Privileged
(3) Exceptions to General Rule
(a) Legal Advice Exception
(b) Last Link Exception
(c) Confidential Communication Exception
j. Privilege Does Not Apply to Communications in Furtherance of a Crime or Fraud
k. Privilege Does Not Apply to Transfer of Pre-Existing Records
2. Waiver
a. In General
b. Failure to Claim Privilege
c. Intentional Disclosure
d. Inadvertent Disclosure
e. The Effect of Waiver: Subject-Matter Waiver
f. Effect of Filing Amended Return
g. Electronic Communications and Waiver
3. Extensions of the Attorney-Client Privilege
a. The Kovel Doctrine
b. Extension of Kovel
c. Kovel Factors
(1) Assisting Attorney in Providing Legal Advice
(2) Assisting vs. Providing Legal Advice
(3) Tax Return Preparation Exception
(4) Serving as a ‘Translator’
(5) Under Direction of Attorney
(6) Attorney's Understanding of Subject Matter
d. Types of Communications Protected by Kovel
e. The Kovel Letter
f. Common Interest Doctrine
4. Whistleblowers
B. Section 7525
1. Background
a. Case Law History
(1) Couch v. United States
(2) United States v. Arthur Young & Co.
(3) United States v. Frederick
b. Legislative History
2. Standards
a. Applies Only to ‘Federally Authorized Tax Practitioners’
b. Applies Only to ‘Tax Advice’
(1) Meaning of ‘Tax Advice’
(2) Oral Advice
(3) Pre-Return Advice
(4) ‘Tax Advice’ Contrasted with ‘Business Advice’
(5) Section 7525 Does Not Apply to Tax Return Preparation
(6) IRS Position on Representation Letters
(7) IRS Position on Tax Reconciliation/Tax Audit Workpapers
(8) Case Law
c. Applies Only to ‘Communications’
(1) ‘Communications’ Do Not Include Underlying Facts
(2) Communication Must Be Made ‘by or for the Client’
(3) Applies Only to Communications that are ‘Confidential’
(4) Privilege Extends to Email and Other Electronic Communications
d. Exception for Written Communications in Connection with the Promotion of a Statutorily Defined ‘Tax Shelter’
(1) In General
(2) Promotion of Direct or Indirect Participation in a ‘Tax Shelter’
e. Statutory Exception for Criminal Matters
f. Privilege Applies Only to Certain Federal Tax Matters and Proceedings
g. Client Identity
h. The Privilege Must Be Claimed
(1) IRS Position on Oral Assertions of §7525
(2) Privilege Logs
(3) Burden of Proof
i. Interaction of §7525 and §6112
(1) List Maintenance Requirements for Reportable Transactions
(2) Asserting the §7525 Privilege in Response to a Request for List Information
j. In-House Tax Practitioners
k. The Kovel Doctrine in the §7525 Context
C. Fifth Amendment
1. Standards
2. Waiver
D. Settlement
E. Work-Product
1. Contrasted with Privileges
a. Long-Term Capital Holdings v. United States
b. Black & Decker Corp. v. United States
2. Standards
a. Federal Rule of Civil Procedure 26(b)(3)(A)
b. Requirements for Application
c. May Be Overcome by Opposing Party
d. Meaning of ‘In Anticipation of Litigation’
e. Dual Purpose Documents
(1) In General
(2) Tax Accrual Workpapers/Documents Prepared During Audit
f. Application to Attorneys and Other Party Representatives
g. Accountants as Consultants
h. Ordinary Work-Product Protection
i. Core or Opinion Work-Product Protection
j. Claiming Work-Product Protection
k. Crime-Fraud Exception
3. Waiver
a. Putting Information at Issue
b. Disclosure to a Third Party
c. Disclosure to Outside Auditors
d. No Subject Matter Waiver as a General Rule
III. Potential Privileges Available in the Life of a Tax Matter
Introductory Material
A. Planning
1. Transactional Planning
a. Structures Considered and Not Used
b. Opinion Letters
2. Tax Return Reporting
3. Transfer Pricing Documentation
B. Audit
1. IDRs
2. Summons
a. Civil Matters
b. Criminal Matter Being Contemplated
c. Designated Summons
C. Appeals
1. Retention of Privilege
2. FRE 408 Considerations
D. Litigation
IV. Special Considerations
A. Foreign-Based Documents
B. Mergers
V. State Privileges
Introductory Material
A. Types of State Privileges
B. Not Subject to Limitations of §7525

Working Papers

Table of Worksheets
Worksheet 1 Sample Privilege Log Entries
Worksheet 2 Federal Rule of Civil Procedure 26
Worksheet 3 Federal Rules of Evidence 408 and 501