Is Tax Advice Legal Advice subject to Attorney Client Privilege
By H Christopher Moss CPA Tax Attorney
Welcome to TaxView with H Christopher Moss CPA Tax Attorney
Are your tax communications with your tax attorney privileged under the attorney client confidentiality privilege? Are you receiving privileged communications from your tax attorney when there is tax advice being given? The United States Circuit Courts are split on the issue of attorney client privilege of tax advice and it was thought perhaps the US Supreme Court would settle the answer to the age old question is Tax advice Legal Advice when they agreed to hear oral arguments in Re Grand Jury The question presented to the US Supreme Court in 2023 almost would have answered this question--- almost---- in that after the Supreme Court heard oral argument In Re Grand Jury, the Court changed its mind with a DIG (dismissed as improvidently granted) and decided not to hear the case. Why did the Supreme Court hear oral arguments and then issue the DIG? Stay with us here on TaxView and find out the exciting answers to the age old questions is tax advice legal advice and is that legal advice subject to the attorney client privilege?
Attorney client privilege has been around hundreds of years. History shows that under Roman law and English law there were competing rationales of chivalry vs justice and truth. Embedded in all states bar association ethics is the attorney client privilege and is beyond argument that Courts in every state have enforced the fundamental backbone of the legal profession that communications between and attorney and their client are confidential. However, what if the communication involves tax advice?
What is tax advice? The US Code 26 U.S. Code Section 7525 states that with respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney. But when is tax advice “legal tax advice”? When is the advice legal advice?
It would seem very easy to say legal advice is advice given by an attorney to his client and the resulting communications from the client to his attorney as was decided in the 7th Circuit in USA vs Richard Frederick et al argued in 1999. Also see (Brief for the United States in Opposition. The facts are simple. The Government says the tax return preparation is not subject to the attorney client privilege. But Judge Posner, Chief Judge says the tax preparer here was also the taxpayers' lawyer, and it cannot be assumed that everything transmitted to him by the taxpayer was intended to assist him in his tax-preparation function and thus might be conveyed to the IRS, rather than in his legal-representation function. Cf. United States v. (Under Seal), 748 F.2d 871, 875-76 (4th Cir. 1984).
However, in the 9th Circuit in RE GRAND JURY the question was not so easy. On appeal from the US District Court in California Judge Lee starts the Opinion “Given our increasingly complex regulatory landscape, attorneys often wear dual hats, serving as both a lawyer and a trusted business advisor. Our court, however, has yet to articulate a consistent standard for determining when the attorney-client privilege applies to dual-purpose communications that implicate both legal and business concerns.” The District Court ruled that “dual-purpose” communications were at play here and those documents were not privileged because the primary purpose of the documents was to obtain tax advice not legal advice. The law firm (which is not identified) argued the documents were not subject to the “primary purpose” test but rather the “because of” test. Judge Lee concludes that the primary purpose test governs in assessing attorney-client privilege for dual-purpose communications.
Judge Lee continues his Opinion as follows “some communications might have more than one purpose, especially “in the tax law context, where an attorney’s advice may integrally involve both legal and nonlegal analyses.” Sanmina, 968 F.3d at 1118. Sanmina, for example, involved communications about the propriety of a particular tax deduction, which could have both a non-legal purpose (tax compliance considerations) as well as potentially a legal purpose (seeking advice on what to do if the IRS challenged the deduction). Id. at 1117–18. When dual-purpose communications are involved, there are two potential tests that courts have adopted’ The primary purpose” test and the “because of” test. Under the “primary purpose” test, courts look at whether the primary purpose of the communication is to give or receive legal advice, as opposed to business or tax advice. See In re County of Erie, 473 F.3d 413, 420 (2d Cir. 2007) (“We consider whether the predominant purpose of the communication is to render or solicit legal advice.”). The natural implication of this inquiry is that a dual-purpose communication can only have a single “primary” purpose. On the other hand, the “because of” test—which typically applies in the work-product context—“does not consider whether litigation was a primary or secondary motive behind the creation of a document.” In re Grand Jury Subpoena (Mark Torf/Torf Env’t Mgmt.), 357 F.3d 900, 908 (9th Cir. 2004). It instead “considers the totality of the circumstances and affords protection when it can fairly be said that the document was created because of anticipated litigation and would not have been created in substantially similar form but for the prospect of that litigation.” Id. (cleaned up). It is a broader test than the “primary purpose” test because it looks only at causal connection, and not a “primary” reason. See Visa U.S.A., Inc. v. First Data Corp., No. C-02-1786JSW(EMC), 2004 WL 1878209, at *4 (N.D. Cal. Aug. 23, 2004). In the attorney-client privilege context, the “because of” test might thus ask whether a dual-purpose communication was made “because of” the need to give or receive legal advice.
As the Sanmina court recently noted, the Ninth Circuit has not explicitly adopted either the “primary purpose” test or the “because of” test in determining whether dual-purpose communications are entitled to attorney-client privilege. Sanmina, 968 F.3d at 1107 Sanmina itself declined to resolve this issue because the district court there had made a factual finding that the communications were not dual purpose. Id. at 1119. Without guidance from our court, district courts in this circuit have split, applying both tests for attorney-client privilege claims. Id. at 1118 n.5 (summarizing district court cases).
Judge Lee concludes because this case squarely involves dual-purpose communications, we now answer the question that Sanmina left open. We hold that the primary-purpose test applies to attorney-client privilege claims for dual-purpose communications.
There is a clear and obvious difference between the test the D.C. Circuit actually applies and the test that the Ninth Circuit announced and applied in this case. The D.C. Circuit asks whether obtaining or providing legal advice is "one of the significant purposes" of the communication. In re Kellogg Brown & Root, Inc., 756 F.3d 754, 760 (D.C. Cir. 2014). That test recognizes that attorney-client communications may have multiple purposes and is designed to avoid intractable inquiries into the relative importance of the legal and non-legal aspects of a communication. Id. at 759-760.
Surprisingly the US Supreme Court decided to hear the case on Writ of Certiorari. The Petitioner Brief supporting Writ of Certiorari perhaps because The Ninth Circuit's decision created a three-way split as to when dual-purpose communications are privileged. The government's opposition rests principally on the Ninth Circuit's assertion that there was no conflict with the D.C. Circuit. But the Ninth Circuit was able to make that assertion only by misconstruing the D.C. Circuit's approach.
The US opposition in their Brief asked the Supreme Court to decide: Whether the district court permissibly denied petitioner’s general claim of attorney-client privilege over communications, related to the preparation of a tax return, that did not have obtaining legal advice as their primary purpose, while instructing that all legal advice contained in the communications be redacted. The Ninth Circuit, by contrast, holds that a communication "can only have a single 'primary' purpose," Pet. App. 4a, and requires courts to determine whether a communication's legal purpose is at least as significant as its non-legal purpose, Pet. App. 12a. It thus requires precisely the kinds of intractable inquiries that the D.C. Circuit's test is designed to avoid. District courts in the Ninth Circuit were previously split on the primary purpose doctrine.
In a legal update article by Stephanie Adler and Stephanie Satterfield The Court granted certiorari in October 2022 to clarify the scope of attorney-client privilege in the context of dual-purpose communications. Adler and Satterfield say the Circuit courts are split on the issue, with the U.S. Courts of Appeals for the Second, Fifth, Sixth, and Ninth Circuits defining the scope of privilege by the primary purpose of the communication (primary purpose test). The Court of Appeals for the D.C. Circuit defines the scope of privilege by determining whether one of the significant purposes of the communication was to obtain or provide legal advice (significant purpose test).
Finally the case arrived at the Supreme Court and Oral Argument was set for January 9, 2023 and various Brief Amicus curiae were filed by various organizations in 9th Circuit in RE GRAND JURY. After oral arguments the US Supreme Court on January 23 2023 in a shocking development created a DIG and dismissed the case.
Adler and Satterfield summarize as follows: “perhaps foreshadowing the disposition of the case, Justice Elena Kagan asked counsel for the petitioner-law firm at oral argument to comment on “the ancient legal principle ‘if it ain’t broke, don’t fix it.’” Justice Sonia Sotomayor was similarly skeptical of the need to weigh in on the split, noting that courts are not struggling to apply the primary purpose test. On the other hand, the justices appeared to struggle to obtain clarity on the limits and contours of the significant purpose test.”
In conclusion, there are various splits in US Circuits on what exactly is privileged for a tax attorney and his clients. Dual purpose communications between attorney and his tax client are looked at very closely particularly now in the 9th Circuit. Ask your attorney what is the “primary purpose test” vs the “because of test”. The “because of test” according to the NY Law Journal “looks at the totality of circumstances to assess whether it was made “because of” the need to provide or receive legal advice. Jeremy Temkin concludes “given the absence of clarity from the Supreme Court, disputes will continue to arise over the application of the attorney-client privilege to dual-purpose communications. Tax practitioners need to be especially conscious of this issue. While attorneys can and do give legal advice in connection with the preparation of tax returns, the legal and nonlegal purposes of such advice are frequently entangled, thereby creating a risk that a court applying the primary purpose test will reject a claim of privilege since it is hard to conclude that the legal aspect of the attorney’s advice predominates. See Brief for American College of Tax Counsel as Amicus Curiae Supporting Petitioner at 7-8, In re Grand Jury, No. 21-1397 (Nov. 23, 2022)
Ask your CPA Tax Attorney whether they understand the “primary purpose test” from the 9th Circuit vs the “because of test” from the DC Circuit. Keep on the look out for updates on TaxView by H Christopher Moss CPA Attorney soon.
Thank you for joining H Christopher Moss CPA Attorney on TaxView
By H Christopher Moss CPA Tax Attorney
Welcome to TaxView with H Christopher Moss CPA Tax Attorney
Are your tax communications with your tax attorney privileged under the attorney client confidentiality privilege? Are you receiving privileged communications from your tax attorney when there is tax advice being given? The United States Circuit Courts are split on the issue of attorney client privilege of tax advice and it was thought perhaps the US Supreme Court would settle the answer to the age old question is Tax advice Legal Advice when they agreed to hear oral arguments in Re Grand Jury The question presented to the US Supreme Court in 2023 almost would have answered this question--- almost---- in that after the Supreme Court heard oral argument In Re Grand Jury, the Court changed its mind with a DIG (dismissed as improvidently granted) and decided not to hear the case. Why did the Supreme Court hear oral arguments and then issue the DIG? Stay with us here on TaxView and find out the exciting answers to the age old questions is tax advice legal advice and is that legal advice subject to the attorney client privilege?
Attorney client privilege has been around hundreds of years. History shows that under Roman law and English law there were competing rationales of chivalry vs justice and truth. Embedded in all states bar association ethics is the attorney client privilege and is beyond argument that Courts in every state have enforced the fundamental backbone of the legal profession that communications between and attorney and their client are confidential. However, what if the communication involves tax advice?
What is tax advice? The US Code 26 U.S. Code Section 7525 states that with respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney. But when is tax advice “legal tax advice”? When is the advice legal advice?
It would seem very easy to say legal advice is advice given by an attorney to his client and the resulting communications from the client to his attorney as was decided in the 7th Circuit in USA vs Richard Frederick et al argued in 1999. Also see (Brief for the United States in Opposition. The facts are simple. The Government says the tax return preparation is not subject to the attorney client privilege. But Judge Posner, Chief Judge says the tax preparer here was also the taxpayers' lawyer, and it cannot be assumed that everything transmitted to him by the taxpayer was intended to assist him in his tax-preparation function and thus might be conveyed to the IRS, rather than in his legal-representation function. Cf. United States v. (Under Seal), 748 F.2d 871, 875-76 (4th Cir. 1984).
However, in the 9th Circuit in RE GRAND JURY the question was not so easy. On appeal from the US District Court in California Judge Lee starts the Opinion “Given our increasingly complex regulatory landscape, attorneys often wear dual hats, serving as both a lawyer and a trusted business advisor. Our court, however, has yet to articulate a consistent standard for determining when the attorney-client privilege applies to dual-purpose communications that implicate both legal and business concerns.” The District Court ruled that “dual-purpose” communications were at play here and those documents were not privileged because the primary purpose of the documents was to obtain tax advice not legal advice. The law firm (which is not identified) argued the documents were not subject to the “primary purpose” test but rather the “because of” test. Judge Lee concludes that the primary purpose test governs in assessing attorney-client privilege for dual-purpose communications.
Judge Lee continues his Opinion as follows “some communications might have more than one purpose, especially “in the tax law context, where an attorney’s advice may integrally involve both legal and nonlegal analyses.” Sanmina, 968 F.3d at 1118. Sanmina, for example, involved communications about the propriety of a particular tax deduction, which could have both a non-legal purpose (tax compliance considerations) as well as potentially a legal purpose (seeking advice on what to do if the IRS challenged the deduction). Id. at 1117–18. When dual-purpose communications are involved, there are two potential tests that courts have adopted’ The primary purpose” test and the “because of” test. Under the “primary purpose” test, courts look at whether the primary purpose of the communication is to give or receive legal advice, as opposed to business or tax advice. See In re County of Erie, 473 F.3d 413, 420 (2d Cir. 2007) (“We consider whether the predominant purpose of the communication is to render or solicit legal advice.”). The natural implication of this inquiry is that a dual-purpose communication can only have a single “primary” purpose. On the other hand, the “because of” test—which typically applies in the work-product context—“does not consider whether litigation was a primary or secondary motive behind the creation of a document.” In re Grand Jury Subpoena (Mark Torf/Torf Env’t Mgmt.), 357 F.3d 900, 908 (9th Cir. 2004). It instead “considers the totality of the circumstances and affords protection when it can fairly be said that the document was created because of anticipated litigation and would not have been created in substantially similar form but for the prospect of that litigation.” Id. (cleaned up). It is a broader test than the “primary purpose” test because it looks only at causal connection, and not a “primary” reason. See Visa U.S.A., Inc. v. First Data Corp., No. C-02-1786JSW(EMC), 2004 WL 1878209, at *4 (N.D. Cal. Aug. 23, 2004). In the attorney-client privilege context, the “because of” test might thus ask whether a dual-purpose communication was made “because of” the need to give or receive legal advice.
As the Sanmina court recently noted, the Ninth Circuit has not explicitly adopted either the “primary purpose” test or the “because of” test in determining whether dual-purpose communications are entitled to attorney-client privilege. Sanmina, 968 F.3d at 1107 Sanmina itself declined to resolve this issue because the district court there had made a factual finding that the communications were not dual purpose. Id. at 1119. Without guidance from our court, district courts in this circuit have split, applying both tests for attorney-client privilege claims. Id. at 1118 n.5 (summarizing district court cases).
Judge Lee concludes because this case squarely involves dual-purpose communications, we now answer the question that Sanmina left open. We hold that the primary-purpose test applies to attorney-client privilege claims for dual-purpose communications.
There is a clear and obvious difference between the test the D.C. Circuit actually applies and the test that the Ninth Circuit announced and applied in this case. The D.C. Circuit asks whether obtaining or providing legal advice is "one of the significant purposes" of the communication. In re Kellogg Brown & Root, Inc., 756 F.3d 754, 760 (D.C. Cir. 2014). That test recognizes that attorney-client communications may have multiple purposes and is designed to avoid intractable inquiries into the relative importance of the legal and non-legal aspects of a communication. Id. at 759-760.
Surprisingly the US Supreme Court decided to hear the case on Writ of Certiorari. The Petitioner Brief supporting Writ of Certiorari perhaps because The Ninth Circuit's decision created a three-way split as to when dual-purpose communications are privileged. The government's opposition rests principally on the Ninth Circuit's assertion that there was no conflict with the D.C. Circuit. But the Ninth Circuit was able to make that assertion only by misconstruing the D.C. Circuit's approach.
The US opposition in their Brief asked the Supreme Court to decide: Whether the district court permissibly denied petitioner’s general claim of attorney-client privilege over communications, related to the preparation of a tax return, that did not have obtaining legal advice as their primary purpose, while instructing that all legal advice contained in the communications be redacted. The Ninth Circuit, by contrast, holds that a communication "can only have a single 'primary' purpose," Pet. App. 4a, and requires courts to determine whether a communication's legal purpose is at least as significant as its non-legal purpose, Pet. App. 12a. It thus requires precisely the kinds of intractable inquiries that the D.C. Circuit's test is designed to avoid. District courts in the Ninth Circuit were previously split on the primary purpose doctrine.
In a legal update article by Stephanie Adler and Stephanie Satterfield The Court granted certiorari in October 2022 to clarify the scope of attorney-client privilege in the context of dual-purpose communications. Adler and Satterfield say the Circuit courts are split on the issue, with the U.S. Courts of Appeals for the Second, Fifth, Sixth, and Ninth Circuits defining the scope of privilege by the primary purpose of the communication (primary purpose test). The Court of Appeals for the D.C. Circuit defines the scope of privilege by determining whether one of the significant purposes of the communication was to obtain or provide legal advice (significant purpose test).
Finally the case arrived at the Supreme Court and Oral Argument was set for January 9, 2023 and various Brief Amicus curiae were filed by various organizations in 9th Circuit in RE GRAND JURY. After oral arguments the US Supreme Court on January 23 2023 in a shocking development created a DIG and dismissed the case.
Adler and Satterfield summarize as follows: “perhaps foreshadowing the disposition of the case, Justice Elena Kagan asked counsel for the petitioner-law firm at oral argument to comment on “the ancient legal principle ‘if it ain’t broke, don’t fix it.’” Justice Sonia Sotomayor was similarly skeptical of the need to weigh in on the split, noting that courts are not struggling to apply the primary purpose test. On the other hand, the justices appeared to struggle to obtain clarity on the limits and contours of the significant purpose test.”
In conclusion, there are various splits in US Circuits on what exactly is privileged for a tax attorney and his clients. Dual purpose communications between attorney and his tax client are looked at very closely particularly now in the 9th Circuit. Ask your attorney what is the “primary purpose test” vs the “because of test”. The “because of test” according to the NY Law Journal “looks at the totality of circumstances to assess whether it was made “because of” the need to provide or receive legal advice. Jeremy Temkin concludes “given the absence of clarity from the Supreme Court, disputes will continue to arise over the application of the attorney-client privilege to dual-purpose communications. Tax practitioners need to be especially conscious of this issue. While attorneys can and do give legal advice in connection with the preparation of tax returns, the legal and nonlegal purposes of such advice are frequently entangled, thereby creating a risk that a court applying the primary purpose test will reject a claim of privilege since it is hard to conclude that the legal aspect of the attorney’s advice predominates. See Brief for American College of Tax Counsel as Amicus Curiae Supporting Petitioner at 7-8, In re Grand Jury, No. 21-1397 (Nov. 23, 2022)
Ask your CPA Tax Attorney whether they understand the “primary purpose test” from the 9th Circuit vs the “because of test” from the DC Circuit. Keep on the look out for updates on TaxView by H Christopher Moss CPA Attorney soon.
Thank you for joining H Christopher Moss CPA Attorney on TaxView
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