In grand jury tax fraud inquiry, because federal courts did not recognize an "accountant-client" privilege, the order for production and withholding of certain client documents in the possession of accountants hired by client's attorneys was remanded for entry of "specific findings regarding the purpose and history of each document" as well as "more extensive findings on whether, in light of the purpose, use, or transmission of these documents," the attorney-client privilege still applied, in In re Grand Jury Proceedings: Osman, 220 F.3d 568, 571 (7th Cir. 2000) (Nos. 99-3131, 99-3317)
The application of an accountant-client privilege in federal courts was discounted by the Supreme Court before the FRE was a matter adopted by Congress. Yet, some elements of the privilege exists as a derivative of the attorney-client work-product doctrine. On one hand, “no confidential accountant-client privilege exists under federal law, and no state-created privilege has been recognized in federal cases,” United States v. Arthur Young & Co., 465 U.S. 805, 817 (1984) (quoting Couch v. United States, 409 U.S. 322, 335 n.1 (1973)). But when an attorney hires an accountant to help deliver legal services to a client, the attorney-accountant-client communication could be privileged if it was made in confidence with the accountant as an agent of the lawyer. A decade ago, the Seventh Circuit attempted to lay down some of the general considerations that govern such a derivative privilege for accountant-client communications.
In the case, the government sought to compel compel production of documents subpoenaed from accountants (Terrell, Czurylo) who had been hired by attorneys (von Mandel, Cotsirilos), representing defendant Osman in a grand jury inquiry into tax fraud with respect to his personal and medical business tax filings. When the government sued the accountants for the documents, the defendant "filed an emergency motion to intervene, and tendered the documents themselves for in camera review by the district court." As a result, "the district court entered an order requiring the production of specific pages of the withheld documents: 37 Terrell pages in their entirety, 2 Terrell pages in redacted form, 50 Czurylo pages in their entirety, and 2 Czurylo pages in redacted form. The district court allowed Dr. Osman to retain the remaining pages of the documents. In its order, the district court explained that it relied on a document-by-document in camera examination of the contested materials to decide whether the attorney-client privilege applied to particular pages. It did not provide an explanation of why each particular page was or was not privileged." As noted by the circuit, the defendant "produced all of the documents ordered disclosed except for 8 pages of the Terrell documents. He now appeals, asking that he be allowed to retain those 8 pages. The Government cross-appeals, arguing that it is entitled to view the 12 Terrell pages and 26 Czurylo pages that the district court allowed Dr. Osman to continue to withhold and that it should be allowed to view the redacted pages in their entirety." In re Grand Jury Proceedings, 220 F.3d at 570-71.
In considering this appeal, the circuit quickly established the scope of argument - as there was "no accountant-client privilege," the matter turned on the degree to which "material transmitted to accountants may fall under the attorney-client privilege if the accountant is acting as an agent of an attorney for the purpose of assisting with the provision of legal advice.“ In re Grand Jury Proceedings, 220 F.3d at 571. In reaching this conclusion, the circuit cited the following authorities:
- United States v. Arthur Young & Co., 465 U.S. 805, 817 (1984) (finding the Second Circuit's attempt to shield accountant-client communications because of a "‘chilling effect’ of the disclosure of tax accrual workpapers" to be "misplaced" because there was no "testimonial accountant-client privilege" but rather it might be part of attorney "work-product immunity” since a separate privilege conflicted "with what we see as the clear intent of Congress” to allow government access to the kind of accountant documents)
- Couch v. United States, 409 U.S. 322, 335 (1973) (rejected claim of accountant-client privilege indicating in dicta that there was no accountant-client privilege under federal law nor had such a privilege when created by the states been recognized in the federal courts)
- United States v. Frederick, 182 F.3d 496, 500 (7th Cir. 1999) (rejecting that there was a common law accountant's or taxpayer's privilege)
This left to the Seventh Circuit to examine whether the attorney-client privilege was correctly applied by the trial court to the withheld documents. In this particular, the circuit declined to make "specific findings concerning whether any of the documents" were convered by the privilege because the record did not reflect any findings as to the pruposes for which the documents were generated, nor did "the record before us ... address the possibility that a document created for a privileged purpose might have been handled in a manner that destroyed that privilege." Accordingly, the circuit remanded the case back to the trial court so the trial judge could "enter more extensive findings on whether, in light of the purpose, use, or transmission of these documents, any privilege exists. In making these findings, the district court should ... enter specific findings regarding the purpose and history of each document in order to allow for meaningful appellate review." In re Grand Jury Proceedings, 220 F.3d at 572 (footnotes omitted)
In addition to remanding the case, the circuit also set forth some of the basics about considering whether an accountant-client communication was covered by the attorney-client privilege. These principles included:
- Where Privilege Exists: "[M]aterial transmitted to accountants may fall under the attorney-client privilege if the accountant is acting as an agent of an attorney for the purpose of assisting with the provision of legal advice. '[W]hat is vital to the privilege is that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer. If what is sought is not legal advice but only accounting service ... or if the advice sought is the accountant's rather than the lawyer's, no privilege exists.'" In re Grand Jury Proceedings, 220 F.3d at 572 (citing United States v. Brown, 478 F.2d 1038, 1040 (7th Cir. 1973); Linde Thomson Langworthy Kohn & Van Dyke, P.C. v. Resolution Trust Corp., 5 F.3d 1508, 1514-15 (D.C.Cir. 1993); United States v. Bornstein, 977 F.2d 112, 117 (4th Cir. 1992); United States v. Davis, 636 F.2d 1028, 1043 (5th Cir. Unit A 1981); United States v. Cote, 456 F.2d 142, 144 (8th Cir.1972))
- Tax Return Reporting Materials: "[W]e have held that material transmitted to an attorney or the attorney's agent for the purpose of using that information on a tax return is not privileged. The preparation of tax returns is an accounting service, not the provision of legal advice." In re Grand Jury Proceedings, 220 F.3d at 572 (citing United States v. Frederick, 182 F.3d 496, 500-01 (7th Cir. 1999); United States v. Lawless, 709 F.2d 485, 487 (7th Cir. 1983))
- Accounting Documents Solely For Legal Advice: "[I]nformation transmitted to an attorney or to the attorney's agent is privileged if it was not intended for subsequent appearance on a tax return and was given to the attorney for the sole purpose of seeking legal advice. Documents used in both preparing tax returns and litigation are not privileged. In re Grand Jury Proceedings, 220 F.3d at 572 (citing United States v. Frederick, 182 F.3d 496, 500-01 (7th Cir. 1999))
- Nature Of Court Determination: "The inquiry into whether documents are subject to a privilege is a highly fact-specific one. An assertion of privilege therefore must be made on a document-by-document basis. In re Grand Jury Proceedings, 220 F.3d at 572 (citing Holifield v. United States, 909 F.2d 201, 204 (7th Cir. 1990) (“Only when the district court has been exposed to the contested documents and the specific facts which support a finding of privilege under the attorney-client relationship for each document can it make a principled determination as to whether the attorney-client privilege in fact applies.”))
Despite the limited recognition of an accountant-client privilege, federal law still recognizes some versions of the privilege in statutory law. These statutory privileges will be covered in tomorrow's blog essay
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