No. 99-719
In the Supreme Court of the United States
RICHARD A. FREDERICK, ET AL., PETITIONERS
v.
UNITED STATES OF AMERICA
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
BRIEF FOR THE UNITED STATES IN OPPOSITION
SETH P. WAXMAN
Solicitor General
Counsel of Record
LORETTA C. ARGRETT
Assistant Attorney General
FRANK P. CIHLAR
ANNETTE M. WIETECHA
Attorneys
Department of Justice
Washington, D.C. 20530-0001
(202) 514-2217
QUESTION PRESENTED
Whether accounting worksheets and related information prepared for tax returns
and tax audits are protected from disclosure pursuant to an Internal Revenue
Service summons by either the attorney-client privilege or the work-product
doctrine.
In the Supreme Court of the United States
No. 99-719
RICHARD A. FREDERICK, ET AL., PETITIONERS
v.
UNITED STATES OF AMERICA
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SEVENTH CIRCUIT
BRIEF FOR THE UNITED STATES IN OPPOSITION
OPINIONS BELOW
The opinion of the court of appeals (Pet. App. 1a-15a) is reported at 182
F.3d 496. The opinions of the district court (Pet. App. 16a-38a) are unreported.
JURISDICTION
The judgment of the court of appeals was entered on April 15, 1999, and
amended on May 18, 1999. A petition for rehearing was denied on July 26,
1999 (Pet. App. 39a-40a). The petition for a writ of certiorari was filed
on October 25, 1999 (a Monday). The jurisdiction of this Court is invoked
under 28 U.S.C. 1254(1).
STATEMENT
1. Petitioner Richard Frederick is an attorney. He prepared the tax returns
filed by petitioners Randolph and Karin Lenz and their company, KCS Industries,
Inc. (Pet. App. 2a). In connection with an investigation of the Lenzes and
their company, the Internal Revenue Service issued summonses to Frederick
directing him to produce various documents-including tax forms and worksheets-relating
to the preparation of these tax returns (ibid.). Although Frederick substantially
complied with the summonses, he claimed that approximately 800 pages of
documents were protected by the attorney-client privilege, the work-product
doctrine, or both (id. at 17a). When the United States brought this suit
to enforce the summonses, the Lenzes and their company intervened (id. at
2a, 33a).
2. The district court ordered the summonses enforced as to most of the tax
forms and worksheets which it found contained "information reported
to an accountant but not confidential communication between a client and
attorney" (Pet. App. 36a). Noting that "potential inferences of
confidential communication are not enough to warrant the privilege,"
the court held that petitioners failed to produce any evidence to establish
that the documents in fact represented privileged communications (id. at
36a-37a). The court concluded that the work-product doctrine was also inapplicable
to these documents, which reflected "accounting calculations but not
legal theories" (id. at 37a). The court held that "draft returns
and worksheets that do not contain written notations are not protected by
the work product doctrine" (ibid.).
The court then conducted an in camera review of the remaining documents
such as handwritten notes, letters, facsimiles, memoranda, redacted documents
and other draft returns (Pet. App. 34a, 38a). The court found that 16 of
these documents were privileged as confidential attorney-client communications
or attorney work-product (id. at 27a-28a). The court concluded that the
remainder of the documents were not privileged. Some were not privileged
because they were of a type that would be created by an accountant for preparation
of the tax returns (id. at 20a-21a). With respect to some documents, the
attorney-client privilege had been waived (id. at 22a). And, with respect
to several documents, petitioners had not offered evidence to fulfill their
burden of proof to sustain a privilege (id. at 23a-25a).
3. The court of appeals affirmed (Pet. App. 1a-15a). The court stated that
the clearly erroneous standard of review applies to the mixed question of
fact and law involved in determining "[w]hether a particular document
is privileged" (Pet. App. 3a), and the court found no clear error in
the findings of the district court.
The court observed that some of the contested documents were created both
for use in preparing tax returns and for use in litigation (Pet. App. 4a-6a).
The court held that this sort of "dual purpose" document must
be disclosed because, "otherwise, people in or contemplating litigation
would be able to invoke, in effect, an accountant's privilege, provided
that they used their lawyer to fill out their tax returns" (id. at
8a).
The court similarly held that documents created in connection with audits
of petitioners' tax returns were not protected by the work-product doctrine
(Pet. App. 9a). The court noted that "an audit is both a stage in the
determination of tax liability * * * and a possible antechamber to litigation"
(ibid.). The court stated that the work-product doctrine may not be invoked
to protect information prepared by an accountant to complete or "verify[]
the accuracy of a return" because "this is accountants' work and
it remains such even if the person rendering the assistance is a lawyer
rather than an accountant" (ibid.). Although the privilege unquestionably
applies when "the lawyer is doing lawyer's work," none of the
contested documents related to that type of representation (ibid.).
ARGUMENT
The decision of the court of appeals is correct and does not conflict with
any decision of this Court or any other court of appeals. Further review
is therefore not warranted.
1. a. As this Court has noted, summonses are "subject to the traditional
privileges and limitations." United States v. Euge, 444 U.S. 707, 714
(1980). See also Upjohn v. United States, 449 U.S. 383, 397 (1981). The
attorney-client privilege and the work-product doctrine may therefore be
invoked in summons enforcement proceedings. These evidentiary privileges,
however, are limited by their very nature. The attorney-client privilege
"has the effect of withholding relevant information from the factfinder,
[and] it applies only where necessary to achieve its purpose. Accordingly,
it protects only those disclosures-necessary to obtain informed legal advice-which
might not have been made absent the privilege." Fisher v. United States,
425 U.S. 391, 403 (1976). The work-product doctrine similarly applies only
to the extent that it is necessary to protect documents prepared in anticipation
of litigation. See United States v. Nobles, 422 U.S. 225, 238 (1975); Hickman
v. Taylor, 329 U.S. 495, 510-511 (1947).
Apart from these traditional privileges, other restrictions on the summons
power do not exist "absent unambiguous directions from Congress."
United States v. Bisceglia, 420 U.S. 141, 150 (1974). In particular, "no
confidential accountant-client privilege exists under federal law, and no
state-created [accountant-client] privilege has been recognized in federal
cases." Couch v. United States, 409 U.S. 322, 335 (1973). See also
United States v. Arthur Young & Co., 465 U.S. 805, 817-819 (1984).
b. Petitioners err in contending (Pet. 8-14) that "dual purpose"
accounting documents-created for use both in preparation of a tax return
and in assisting the attorney in giving legal advice-are protected by the
attorney-client privilege or the work-product doctrine. Information intended
"for use in connection with the preparation of tax returns" constitutes
"an unprivileged category of numbers" (Pet. App. 8a). The performance
of such tax return calculations, while requiring some understanding of tax
law, is an accounting exercise that does not constitute a privileged communication.
See United States v. Davis, 636 F.2d 1028, 1043 & fn. 17 (5th Cir.),
cert. denied, 454 U.S. 862 (1981); United States v. Gurtner, 474 F.2d 297,
299 (9th Cir. 1973); Canaday v. United States, 354 F.2d 849, 857 (8th Cir.
1966). Non-privileged communications do not become privileged merely because
they are made to or by an attorney. As the courts have consistently held
in rejecting petitioners' claim, if a taxpayer who uses an attorney to perform
an accounting service were allowed to shield his communications in this
manner, the result would be to create an improper "accountant-client"
privilege that would be available only to attorneys. United States v. Lawless,
709 F.2d 485, 487 (7th Cir. 1983); United States v. Bornstein, 977 F.2d
112, 116-117 (4th Cir. 1992); In re Grand Jury Investigation, 842 F.2d 1223,
1224-1225 (11th Cir. 1987).
For these same reasons, documents prepared in connection with tax return
preparation are not encompassed within the work-product doctrine. Such documents
represent accountant's work-product, not attorney's work-product, even if
some legal analysis is inescapably reflected in the financial calculations.
As the court of appeals stated, "the documents in issue do not, so
far as we are able to determine, relate to [legal] representation"
(Pet. App. 9a). That factual determination is not clearly erroneous and
does not warrant further review.
c. Petitioners err in contending (Pet. 10-14) that the decision in this
case conflicts with the decisions in United States v. Adlman, 134 F.3d 1194
(2d Cir. 1998), United States v. Abrahams, 905 F.2d 1276, 1284 (9th Cir.
1990), and Colton v. United States, 306 F.2d 633, 637 (2d Cir. 1962), cert.
denied, 371 U.S. 951 (1963). Those decisions are consistent with the decision
of the court of appeals in this case.
In Adlman, the court of appeals held that the work-product doctrine may
be invoked only with respect to documents that "were prepared 'because
of' existing or expected litigation." 134 F.3d at 1198. The court remanded
in that case for the district court to determine whether the contested document
"would have been prepared irrespective of the expected litigation with
the IRS." Id. at 1204. In the present case, by contrast, the court
of appeals correctly concluded that the draft returns and worksheets were
intended "for use in connection with the preparation of tax returns"
(Pet. App. 8a) and would thus have been prepared irrespective of any expected
or subsequent litigation (id. at 8a-9a). The fact that these documents were
prepared for this additional, independent purpose is what makes them "dual
purpose" documents and explains why they are not protected by any privilege.
See United States v. Adlman, 134 F.3d at 1204 (the privilege is inapplicable
if "substantially the same" document would have been prepared
for the non-privileged purpose).
Petitioners incorrectly assert that the Ninth Circuit broadly ruled in United
States v. Abrahams, 905 F.2d at 1284, that all communications between a
taxpayer and an attorney who prepares a tax return are privileged. Instead,
the court held in Abrahams only that a taxpayer may attempt to establish
that the information disclosed to his lawyer was, in fact, made for the
purpose of obtaining legal advice rather than preparing the return. Ibid.
In the present case, as in Abrahams, the taxpayers were given that opportunity
but failed to meet their burden of proof. Pet. App. 7a-9a; see 905 F.2d
at 1284. As the court stated in Abrahams, the burden of establishing the
existence of the privilege rests on the taxpayer and there is no "presumptive
application of the attorney-client privilege in these circumstances."
Id. at 1283.
Nor does Colton v. United States, 306 F.2d at 640, support petitioners'
broad proposition. In that case, the court of appeals held that an attorney
cannot invoke the work-product doctrine unless the "papers involved
were collected or prepared in anticipation of litigation." Ibid. In
Colton, the court rejected the same "blanket" assertion made by
petitioners in this case that every communication between a taxpayer and
an attorney who prepares the taxpayer's return is privileged. Ibid.
2. a. Contrary to petitioners' contention (Pet. 15-20), the court of appeals
correctly held that the work-product doctrine does not apply to documents,
numerical and otherwise, prepared in connection with audits of petitioners'
tax returns. Documents that address tax planning or audit issues or that
relate to the characterization of a taxpayer's finances for tax reporting
purposes are not created because of the prospect of litigation. The mere
possibility of future litigation stemming from a tax return or tax audit
is not sufficient to invoke the work-product doctrine. Binks Mfg. Co. v.
National Presto Indus., Inc., 709 F.2d 1109, 1119 (7th Cir. 1983). Instead,
the "motivating purpose behind the creation of a document * * * must
be to aid in possible future litigation." Ibid. Petitioners failed
to establish that the contested documents were created because of the prospect
of litigation rather than to facilitate or ensure compliance with their
tax reporting obligations. Pet. App. 9a. See also United States v. El Paso
Co., 682 F.2d 530, 543 (5th Cir. 1982), cert. denied, 466 U.S. 944 (1984).
Because petitioners failed to meet their required burden of establishing
that the documents related to legal representation rather than tax return
preparation, the court of appeals correctly denied petitioners' claim of
work-product protection.
b. The court of appeals also correctly held that petitioners failed to establish
that documents created in connection with audits of their tax returns were
protected by the attorney-client privilege. As the court stated, "[w]hen
a revenue agent is merely verifying the accuracy of a return, often with
the assistance of the taxpayer's accountant, this is accountants' work and
it remains such even if the person rendering the assistance is a lawyer
rather than an accountant. Throwing the cloak of privilege over this type
of audit-related work of the taxpayer's representative would create an accountant's
privilege usable only by lawyers." Pet. App. 9a. The court explained
that, although the attorney-client privilege may attach to documents created
in connection with a lawyer's interpretation of statutory or case law, documents
prepared in connection with an agent's verification of the accuracy of a
return are not privileged because "this is accountants' work and it
remains such even if the person rendering the assistance is a lawyer rather
than an accountant." Ibid.
This holding is consistent with the established principle that the attorney-client
privilege protects only communications made in confidence by the client
in the course of seeking legal advice from a lawyer acting as a lawyer.
See United States v. Lawless, 709 F.2d at 487. There is no "accountant-client"
privilege. Couch v. United States, 409 U.S. at 335. Petitioners failed to
demonstrate that the contested documents were created by Frederick while
he was providing services other than accounting services.
3. Finally, petitioners err in asserting (Pet. 20-22) that the court of
appeals applied an incorrect standard of review. According to petitioners,
the court of appeals should have applied a de novo standard of review in
applying the law to the facts of this case (Pet. 22). The question whether
the contested documents are privileged, however, is primarily a factual
one. As the court stated, "[w]hether a particular document is privileged
is a fact-specific and case-specific issue." Pet. App. 3a. The proper
application of an evidentiary privilege does not readily lend itself to
the formulation of a general rule; instead, it "requires a judgment
based on the idiosyncratic facts of a particular case." Williams v.
Commissioner, 1 F.3d 502, 505 (7th Cir. 1993). As the court stated in United
States v. Abrahams, 905 F.2d at 1282 "rulings on essentially factual
matters underlying claims of privilege are reviewable for clear error."
See also United States v. Laurins, 857 F.2d 529, 541 (9th Cir. 1988), ("rulings
on the scope of the privilege involve mixed questions of law and fact and
are reviewable de novo, unless the scope of the privilege is clear and the
decision made by the district court is essentially factual; in that case
only clear error justifies reversal"), cert. denied, 492 U.S. 906 (1989).
Further review of such findings "concurred in by two lower courts"
(Rogers v. Lodge, 458 U.S. 613, 623 (1982)) is, in any event, not warranted.
See Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 317-318 n.5
(1985).
CONCLUSION
The petition for a writ of certiorari should be denied.
Respectfully submitted.
SETH P. WAXMAN
Solicitor General
LORETTA C. ARGRETT
Assistant Attorney General
FRANK P. CIHLAR
ANNETTE M. WIETECHA
Attorneys
DECEMBER 1999