Appeal from the United States District Court for the Northern District of Illinois, Eastern Division. No. 06 C 6730-Matthew F. Kennelly, Judge.
The opinion of the court was delivered by: Evans, Circuit Judge.
Before ROVNER, EVANS, and TINDER, Circuit Judges.
In this appeal, Valero Energy Corporation asks us to take a close look at the tax practitioner-client privilege. Valero sought to protect several documents under this privilege, and the result was a mixed bag-some documents were shielded from the Internal Revenue Service, while others were not.
Valero now contends that by reaching this decision, the district court misconstrued not only the privilege, but also an exception to the privilege, which grants the government access to certain documents when tax shelters are promoted.
Valero is a large company involved in crude oil refining (it's the largest refiner in the United States according to its Web site) and oil-product marketing. The Texas-based giant got even bigger in December 2001, when it acquired Ultramar Diamond Shamrock Corporation (UDS), an oil company with Canadian subsidiaries. This acquisition not only expanded Valero's reach north-ward, it also resulted in some pretty hefty tax savings. Before the deal took place, UDS consulted with Ernst & Young about restructuring and refinancing its Canadian operations. Valero, in turn, called on its long-time advisors at Arthur Anderson to review Ernst & Young's plan and provide further tax advice. At this time, the Canadian currency was in a slump vis-à-vis the United States dollar, and Valero took advantage. In 2002, shortly after the acquisition was completed, Valero realized $105 million in tax-deductible foreign currency losses (under 26 U.S.C. §§ 987, 988) through a complicated series of transactions implemented with Arthur Anderson's help. The transactions included the creation of spin-off entities, several same-day wire transfers of cash, a large distribution from one of the Canadian subsidiaries to a United-States-based parent, re-classification of a separate foreign subsidiary as a branch of Valero for tax purposes, and the extinguishment of debt.
This loss was big enough to catch the government's eye, and the IRS began investigating. The IRS eventually issued a summons to Arthur Andersen, seeking all documents related to tax planning, tax research, or tax analysis, by or for, Ultramar Diamond Shamrock (including any of its subsidiaries or partnerships, both domestic and foreign) and Valero Energy Corporation (including any of its subsidiaries or partnerships, both domestic and foreign) in connection with their 2001, 2002 and 2003 Canadian and U.S. income taxes . . . .
Valero, as a third party, asked the district court to quash the summons. See 26 U.S.C. § 7609(b). It argued that the summons was overbroad and that many documents were protected by either the work-product doctrine or the tax practitioner-client privilege. The privilege shields communications between a federally authorized tax practitioner and her client "to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney." 26 U.S.C. § 7525(a)(1). The government countered by arguing that the scope of the summons was appropriate and that even if the tax practitioner-client privilege ap-plied, the documents were discoverable since they were made in connection with the promotion of a tax shelter, a statutory exception to the privilege. Id. at § 7525(b). The government presented little evidence to back up this claim and rested, instead, on Valero's failure to deny that saving on taxes was one of its motivations for the 2002 transactions.
There was no clear victor in this first dispute. The district court concluded that the IRS issued the summons in good faith and that it was not overly broad. The court rejected Valero's claim of privilege under the work-product doctrine but, after an in camera, document-bydocument review, sustained its claim of privilege under the tax practitioner-client privilege. In doing so, the court rejected the government's argument regarding the tax shelter promotion exception, noting that it failed to meet its burden to prove the exception's applicability by simply relying on Valero's silence. The court then directed Valero to produce any documents withheld based only on the overbreadth and work-product objections.
This order resulted in a second round of document production. Valero found new documents responsive to the summons and sought to keep some of them out of the grasp of the government by again asserting the tax practitioner-client privilege. The government then filed a motion to enforce the summons before the district court, arguing, as it did before, that the privilege did not apply, and if it did, the tax-shelter exception required Valero to produce the documents. This time, though, the government acted with more gusto. It supported its argument with a detailed declaration from the IRS agent conducting the investigation into Valero's tax liabilities. Attached to this declaration were several exhibits- including e-mails, billing records, and minutes from Valero's board meetings-to bolster the contention that one of the driving purposes behind the multitude of transactions in 2002 was to avoid paying taxes. Valero responded by asserting that Arthur Anderson was not trying to sell or peddle a corporate tax shelter, and therefore the exception was inapplicable. It contended that the rigamarole was necessary for paying off public debt, saving some Canadian taxes, and restructuring the business operations. The foreign currency losses, Valero maintained, were a natural result of fulfilling these goals. The government, however, poked holes in these purported motivations, arguing that the savings in United States taxes were much more substantial than any savings in Canadian taxes and that Valero could have achieved these purposed aims in a more direct manner without triggering the foreign currency losses.
The added support won over the district court. After another round of in camera, document-by-document review, the court rejected some of Valero's claims of privilege outright. The court did sustain the privilege for other documents but held that some of these documents were discoverable since they fell within the exception for documents promoting tax shelters. This time, the court reasoned, the government had met its burden. The court found that it had laid a foundation in fact that Arthur Andersen promoted (by providing input and helping to organize) a multi-step plan, a significant pur-pose of which was to avoid federal income taxes.
Valero appeals this second ruling. It has combed through the documents that the district court found unprotected and has identified a subset that, it argues, should have been privileged. We granted a stay, allowing the contested documents to remain under seal, and Valero has provided a sealed appendix containing these documents for our review. Valero first attacks the district court's finding that a group of documents were not privileged since they concerned "business or accounting advice or state tax issues." Valero argues that the district court clearly erred in its assessment of 14 of these documents, emphasizing that they cover federal tax issues.
We begin by noting that there is no general accountant-client privilege. United States v. Frederick, 182 F.3d 496, 500 (7th Cir. 1999). In 1998, Congress provided a limited shield of confidentiality between a federally authorized tax practitioner and her client. This privilege is no broader than the existing attorney-client privilege. It merely extends the veil of confidentiality to federally authorized tax practitioners who have long been able to practice before the IRS, see 5 U.S.C. § 500(c); 31 C.F.R. § 10.3, to the same extent communications would be privileged if they were between a taxpayer and an attorney. 26 U.S.C. § 7525(a)(1) (privilege does not apply in criminal proceedings). Nothing in the statute "suggests that these non-lawyer practitioners are entitled to privilege when they are doing other than lawyers' work . . . ." Frederick, 182 F.3d at 502; see also United States v. BDO Seidman, 337 F.3d 802, 810 (7th Cir. 2003) (BDO II). Accounting advice, even if given by an attorney, is not privileged.
This means that the success of a claim of privilege depends on whether the advice given was general accounting advice or legal advice. Admittedly, the line between a lawyer's work and that of an accountant can be blurry, especially when it involves a large corporation like Valero seeking advice from a broad-based accounting firm like Arthur Anderson. But we have set some guide-posts to help distinguish between the two. For starters, the preparation of tax returns is an accounting, not a legal service, therefore information transmitted so that it might be used on a tax return is not privileged. In re Grand Jury Proceedings, 220 F.3d 568, 571 (7th Cir. 2000); Frederick, 182 F.3d at 500-01; United States v. Lawless, 709 F.2d 485, 487 (7th Cir. 1983). On the other side of the spectrum, communications about legal questions raised in litigation (or in anticipation of litigation) are privileged. In re Grand Jury Proceedings, 220 F.3d at 571; Frederick, 182 F.3d at 502. Of course, there is a grey area between these two extremes, but to the extent documents are used for both preparing tax returns and litigation, they are not protected from the government's grasp. In re Grand Jury Proceedings, ...