Recent Developments in Privilege Law

April 1, 1999 Advisory

Tax Advice Privilege As part of the Internal Revenue Restructuring and Reform Act of 1998, Congress created a new accountant-client privilege. Section 7525 of the Internal Revenue Service Code applies, in certain contexts, the common-law protection of the attorney-client privilege to communications between a taxpayer and a federally authorized tax practitioner. While the privilege appears broad at first glance, the statutory provisions severely limit the scope of the privilege's coverage. Consequently, it is important to understand that the new protection is fraught with potential pitfalls.

First, the privilege covers only "tax advice," which the statute defines as "advice given by an individual with respect to a matter which is within the scope of an individual's authority to practice." Because the statute attempts to parallel the protection given under the attorney-client privilege, it appears that business and accounting advice are not covered communications.

Second, the privilege extends only to communications between a taxpayer and a "federally authorized tax practitioner," which the statute defines as "any individual who is authorized under Federal law to practice before the Internal Revenue Service..." Federally authorized practitioners include certified public accountants, attorneys, enrolled agents and enrolled actuaries.

Third, the statute limits the privilege to "noncriminal tax matters before the Internal Revenue Service" and "noncriminal tax proceedings in Federal court brought by or against the United States." Therefore, the privilege does not apply in criminal matters, state tax proceedings, private civil matters and proceedings before administrative agencies other than the IRS.

Finally, the privilege applies only to communications made on or after July 22, 1998, and it does not apply to written communications between an authorized practitioner and a corporation or its representative "in connection with the promotion of" a corporate tax shelter.

Work-Product Doctrine
The work-product doctrine protects from disclosure materials an attorney prepares in anticipation of litigation. The doctrine allows attorneys to prepare for litigation in privacy and without fear that the adversary will benefit from one party's preparatory work.

A recent case from the U.S Court of Appeals for the District of Columbia revisited the test for triggering the work-product doctrine. In re Sealed Case, decided June 19, 1998, reiterated that the basic test for deciding whether materials constitute work product is whether the materials were prepared "because of" anticipated litigation. The court concluded that the creation of the materials need not be triggered by a specific claim. Rather, the court allowed protection for documents prepared by lawyers after reviewing a matter that a client feared might lead to litigation.

The presence or absence of a specific claim is just one factor considered along with the nature of the document and the factual situation of the case. In rejecting the need for a specific claim, the court reasoned that, "[i]t is often prior to the emergence of specific claims that lawyers are best equipped either to help clients avoid litigation or to strengthen available defenses should litigation occur."

The D.C. Circuit's view mirrors that followed by the Second Circuit. The Second Circuit's work-product rule, outlined in U.S. v. Adlman, allows work-product protection for materials "created prior to the event giving rise to litigation." Thus, the protection applies when the anticipation of litigation causes a party to prepare materials, whether or not the event causing the litigation has happened or is yet to occur.