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September 11, 1972


The opinion of the court was delivered by: Austin, District Judge.


On March 5, 1970, pursuant to 26 U.S.C. § 7602 (1964), an Internal Revenue Service summons was served on the accounting firm of Arthur Andersen & Company (hereinafter referred to as "Andersen") demanding the accountant's records pertaining to the IRS investigation of taxpayer Delbert W. Coleman (hereinafter referred to as "Coleman"). Fewer records than requested were turned over to the IRS and Andersen failed to indicate that some documents covered by the subpoena were withheld. In response to a second subpoena on May 26, 1971 Andersen objected to the disclosure of certain documents. On June 7, Andersen filed objections to the IRS summons. At a hearing on October 20, 1971 this court approved a stipulation entered into by the parties by which taxpayer Coleman was permitted to intervene, agreeing to restrict his defenses to that of attorney-client privilege and attorney's work product doctrine. Mr. Earl Brown of Andersen then waived all objections to production of the documents which were in his possession at the time the summons was served upon him. Coleman is therefore the only party presently challenging the summons.

In the stipulation, Coleman agreed to examine all documents in the possession of Andersen relating to Coleman and to turn over to the IRS those documents as to which no objections would be raised. This was subsequently done and most of the documents originally objected to were delivered to IRS during November, 1971. The remaining five documents at issue here are numbered 4, 7, 8, 10 and 11.

On April 3, 1972 a hearing was held with regard to these remaining documents and thereafter post-hearing briefs were filed.

In substance, Coleman argues that each of the five documents is covered by both the attorney-client privilege and the work product doctrine.

Attorney-Client Privilege

The Supreme Court has never expressed its view of the scope of the attorney-client privilege in tax fraud investigations, or more specifically, to what extent the privilege will protect the workpapers and reports prepared by an accountant at the attorney's direction. The issue was before the Court in Reisman v. Caplin, 375 U.S. 440, 84 S.Ct. 508, 11 L.Ed.2d 459 (1964) but was not decided, since the case was disposed of on procedural grounds.

No accountant-client privilege is recognized by either the common law or the federal courts in tax investigation proceedings. United States v. Balistrieri, 403 F.2d 472, 481 (7th Cir. 1968). Therefore, if communications to an accountant or his reports and workpapers are to be protected, they must be brought within the scope of other categories of privilege, specifically the attorney-client privilege.

Dean Wigmore has stated the attorney-client privilege as follows:

  (1) Where legal advice of any kind is sought, (2)
  from a professional legal adviser in his capacity as
  such, (3) the communications relating to that
  purpose, (4) made in confidence (5) by the client,
  (6) are at his instance permanently protected (7)
  from disclosure by himself or by the legal adviser,
  (8) except the protection be waived. 8 J. Wigmore,
  Evidence, Sec. 2292 at 554.

There appear to be two key factors in determining whether the attorney-client privilege is applicable to the workpapers of an accountant. First, has the attorney been retained by the taxpayer prior to the preparation of the workpapers and reports by the accountant? Second, have the workpapers and reports been prepared by the accountant at the direction of the attorney?

Following the rationale of the attorney-client privilege, there is no protection for workpapers prepared prior to the retention of the attorney since there is no communication between client and attorney to be protected and the accountant is not directed by the attorney as his agent. The leading case upholding this view is Bouschor v. United States, 316 F.2d 451 (8th Cir. 1963). The transfer of possession of the workpapers to an attorney who was subsequently retained would not bring them within the privilege under the Bouschor reasoning, but United States v. Kovel, 296 F.2d 918, 922 n. 4. (2nd Cir. 1961) left the question open. Whether these documents could be protected under the privilege against self-incrimination need not be considered here. Coleman has expressly limited his objections to the attorney-client privilege and work product doctrine, thereby waiving other grounds for objection.

Where the accountant is employed directly by the attorney the cases appear to extend the protection of the privilege. The earliest case to consider this issue is Himmelfarb v. United States, 175 F.2d 924 (9th Cir.) cert. denied, 338 U.S. 860, 70 S.Ct. 103, 94 L.Ed. 527 (1949) which narrowly construed the attorney-client privilege to exclude the accountant as not essential to an attorney's provision of effective legal representation in a tax fraud case, and therefore found that an accountant's communications with the attorney or client were not privileged. Himmelfarb was approved in Gariepy v. United States, 189 F.2d 459 (6th Cir. 1951).

The leading case to expand the scope of the attorney-client privilege to cover employees or agents of an attorney with more than menial or ministerial duties is United States v. Kovel, 296 F.2d 918 (2nd Cir. 1961). It was followed by the Ninth Circuit in United States v. Judson, 322 F.2d 460 (9th Cir. 1963) apparently overruling sub silentio its earlier decision in Himmelfarb. This view was followed also in Bauer v. Orser, 258 F. Supp. 338 (D.C.N.D. 1966). The Kovel court stressed the essential criteria for inclusion within the privilege "that the communication be made in confidence for the purpose of obtaining legal advice from the lawyer." 296 F.2d at 922.

A practical consequence of these decisions is the practice that previously retained accountants insist that an attorney be retained and accounting services be provided only at the attorney's direction and to refrain from any communications or service until the attorney is retained. Peterson, "Attorney-Client Privilege in Internal Revenue Service Investigations" 54 Minn.L.Rev. 67 at 91. Further, in order to avoid any question as to the title to the documents, an irrelevant factor discussed in Bouschor which confuses the relevance of title to the availability of the attorney-client privilege with its relevance to the validity of a fifth amendment claim of self-incrimination, attorneys will obtain a surrender of title from the accountant for all reports and workpapers. Peterson supra at 88.

It appears from the hearing and briefs that Andersen was employed by Coleman in 1957 or 1958, and that the law firm of Marshall, Bratter, Green, Allison and Tucker (hereinafter referred to as "Marshall Bratter") was retained by Coleman during this same period. There is testimony to indicate that Andersen was subsequently employed by another law firm which was retained by Coleman on March 4, 1970 to perform accounting services related to the IRS examination of Coleman's income tax returns. This law firm was subsequently replaced by the Marshall Bratter firm which proceeded to similarly employ Andersen to provide these same services for the examination of the income tax returns of Coleman for the taxable years 1964 to 1969. The terms of this employment are indicated by Intervenor's Exhibits B and C, letters dated May 11, 1970 and June 10, 1970.

Document No. 4.

It appears that Document No. 4, a 3-page memorandum, was prepared on August 2, 1967 by R.W. Ruther, an accountant associate of Andersen, at the request of Mr. Brown, a partner of Andersen, for the Andersen files. The document records a summary of telephone discussions and accounting assistance given by Mr. Brown to a member of the Marshall Bratter firm and discussions which he had with Mr. Seiden, an aide of Mr. Coleman, and Mr. Coleman.

From the discussion of the law relating to the attorney-client privilege it appears that the privilege does not apply to Document No. 4. It was not prepared by Coleman's attorney. At this time Andersen was presumably employed directly by Mr. Coleman, but not employed by Marshall Bratter. The privilege does not extend to protect an accountant's papers prepared while employed by a taxpayer. The fact that the accountant is subsequently employed by taxpayer's attorney does not cloak all papers prepared prior to that employment in the attorney-client privilege. Bouschor v. United States, 316 F.2d 451 (8th Cir. 1963). Further, the document was not requested by Marshall Bratter but was requested by Mr. Brown for inclusion in the files of Andersen.

While intervenor does not raise the point, it appears that Ruther is both an accountant and an attorney. However, any argument that the privilege should protect the memorandum of an accountant-attorney prepared in his capacity as an accountant, without having been retained as an attorney by a client and without a confidential communication flowing directly from client to attorney would be fruitless. In order for communications between an attorney and client to be privileged, the attorney must have been acting in his capacity as a professional legal advisor at the time any disclosures were made. 8 J. Wigmore, Evidence Sec. 2292 at 554. Peterson supra 91-97.

Document No. 7.

Document No. 7 is a 3-page memorandum dated October 7, 1968 prepared by David N. Hurwitz, Esq. for the Marshall Bratter file and a cover letter dated the same day regarding the memorandum written by Hurwitz addressed to F.N. Gerard, Esq. A copy of Document No. 7 was subsequently sent to Andersen for its file.

It appears that the memorandum was a summary of notes and legal judgments made by Hurwitz at an October 2, 1968 meeting attended by Mr. Seiden, an aide of Mr. Coleman, and Mr. Ruther, an associate of the Arthur Andersen firm employed by Mr. Coleman. Andersen was not retained by the Marshall Bratter firm at this time nor did Mr. Ruther of Andersen attend the meeting at the request of Mr. Hurwitz of Marshall Bratter.

This privilege does not concern the issue of whether writings are prepared by counsel in anticipation of litigation. Disclosure is sought from the taxpayer's accountant and not from the taxpayer or his attorney. This document falls outside the scope of the attorney-client privilege. Hickman v. Taylor, 329 U.S. 495, ...

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