by Roger Russell
In a case that appears headed for the U.S. Supreme Court, BDO Seidman is in the middle of a fight to protect the identity of some of its tax prep clients.
The U.S. government has engaged in ongoing litigation against BDO, seeking the identity of the firm’s clients with tax-sheltered investments. This is one of several such suits that the Internal Revenue Service has filed against law and accounting firms seeking the identity of clients.
In the BDO case, those clients recently filed a petition seeking to overturn a Seventh Circuit panel decision by citing pre-existing tax preparer-client privileges. To protect their identities, the clients’ suit uses false names - John and Jane Doe and Richard and Mary Roe.
Steven Brown, the Chicago attorney representing the Roes, noted that, while similar suits were also filed against Arthur Andersen, KPMG and Deloitte & Touche, the BDO case “has gone the furthest. That’s why it’s so significant.”
The clients’ petition, filed in the Seventh Circuit in Illinois, cites the statutory tax advisor-client privilege that is co-extensive with the attorney-client privilege. The proceeding arises from an IRS investigation of law and accounting firms that gave advice on transactions that the IRS believes might be potentially abusive tax shelters, according to Brown. As part of the investigation, the IRS issued summonses seeking to discover the identity of the clients involved in these transactions.
A similar summons has been served on the Chicago office of the law firm Jenkins & Gilchrist. Since the firm office is also located in the Seventh Circuit, the result of the BDO case may determine the outcome of any action taken by Jenkins & Gilchrist.
The chairman and chief executive of the firm, William P. Durbin, said, “Our clients expected confidentiality when they sought legal advice concerning their taxes. It is well established that the privilege covering our dealings with clients belongs to them, and that we must assert it on their behalf.”
The purpose of the investigation, according to the petition, was to determine the potential liability of BDO - not of the clients themselves - for possible violation of tax shelter record-keeping and registration requirements. At the heart of the dispute is whether or not the transactions in question are “potentially abusive tax shelters” under the U.S. Tax Code, which requires tax shelter organizers to register shelters with the IRS and maintain lists of investors.
“The IRS already knows what the transactions are because of tips from disgruntled ex-BDO employees and taxpayers who came forward under an amnesty program,” said Brown. “We assert that they don’t fall into the abusive area, and there’s been no determination by this court or any other that they are abusive.”
The unnamed clients - the Does and Roes - attempted to intervene and assert their statutory tax advisor-client privilege with regard to the documents sought by the IRS. Under Code Sec. 7525, the confidential communication of tax advice between a tax practitioner and the client is protected by a statutory privilege as much as if the communication were between an attorney and a client.
The district court denied the motion to intervene, and a circuit panel upheld the decision. The petition for rehearing en banc to the Seventh Circuit argues that the advisor-client privilege prohibits the disclosure of the Does’ identities, because revealing their identities would reveal their very reason for seeking BDO Seidman’s advice in the first place. The decision supporting the government’s conduct is troubling, Brown observed, because of its effect on the attorney-client relationship in general.
Chris Rizek, a partner in the Washington law office of Caplin & Drysdale, agreed that the law is not well developed in this area. “The law is very much in flux right now,” he said.
The district court decision, according to the petition, “countenances the government’s ability to obtain client lists from lawyers based solely on those lawyer’s known areas of practice or expertise.”
Marked targets
The logical extension of this, Brown noted, is that “the very fact that a client seeks out professional legal or tax advice will be sufficient to target that client for further scrutiny - as has proven to be the case here.”
“Under that reasoning, all that is necessary to find out the clients of an accounting firm or law firm is to designate the advice we give as an ‘abusive tax shelter,’ at the sole discretion of the IRS,” he said. “They could widen their view of ‘abusive’ and get anyone’s client list. For example, they could say your house is an abusive tax shelter and serve a summons on an accounting firm for the clients it advised on deducting mortgage interest.”
The Does and Roes and BDO are not necessarily in the same position, Brown observed. “Our interests are not concurrent with BDO. There’s a stay from the Court of Appeals that prevents BDO from disclosing the Does’ identities,” he said. “Once the stay is set aside, the ballgame is over.”
However, he noted, a Third Circuit case that upholds the privilege in similar circumstances would create a conflict among the circuits, which opens the door for an appeal to the Supreme Court.
“If the stay is vacated, we will immediately file in the U.S. Supreme Court,” he said.
