TAX CONTROVERSY 360
TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
TAX CONTROVERSY 360
McDermott’s Real-Time Tax Disputes Insights
Privilege and Non-Disclosure
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Supreme Court Punts on Attorney-Client Privilege Question

by , and | Feb 2, 2023 | , , , ,

In a surprising move, the Supreme Court of the United States (SCOTUS) dismissed a dispute involving the proper test to apply when determining whether an unnamed law firm’s mixed bag of communications involving both legal advice and discussions of tax preparation was privilege. The dismissal came less than two weeks after oral arguments, with SCOTUS stating that “[t]he writ of certiorari is dismissed as improvidently granted” (commonly known as a “DIG,” which infrequently happens when SCOTUS determines there is no conflict warranting review, one or both parties have changed their position, or no consensus can be reached by the Justices and dismissal is preferable to fractured opinions with no controlling rationale).

BACKGROUND

The law firm and an unnamed company were each served with subpoenas for documents and communication related to a criminal investigation. Both produced some documents but withheld others on the grounds of attorney-client privilege and the work-product doctrine. The government moved to compel production, which the district court granted in part, explaining that the documents were not protected by any privilege, and they were discoverable under the crime-fraud exception. The company and law firm continued to withhold the documents, and the government filed motions to hold them in contempt. The district court ruled that certain dual-purpose communications were not privileged because the “primary purpose” of the documents was to obtain tax advice, not legal advice. On appeal to the US Court of Appeals for the Ninth Circuit, the law firm and the company argued that the court should have relied on a broader, “because of” test, not the “primary purpose” test. The Ninth Circuit disagreed and concluded that the “primary purpose” test governs, and the primary purpose of the communications was tax advice. SCOTUS granted certiorari in October 2022.

SUPREME COURT

In its brief, the law firm asked SCOTUS to adopt a more expansive “significant purpose” test, which was applied by the US Court of Appeals for the District of Columbia Circuit in In re Kellogg Brown & Root, Inc. The law firm argued that the test applied in Kellogg “appropriately protects attorney-client dual purpose communications” and that the test “asks a single question that arises directly from the long-established test for attorney-client privilege: whether a client is seeking or obtaining confidential legal advice from his or her lawyer.”

The government argued that courts consistently emphasize the need to construe the attorney-client privilege narrowly and that the primary or predominant purpose test “thus molds the scope of the privilege to its purpose of encouraging effective legal advice, while avoiding sweeping in communications predominantly about a nonlegal matter.”

During oral argument, the Justices seemed skeptical of a need to change the test and expressed some confusion as to how any privilege analysis would change from a practice perspective. Justice Kagan invoked the saying “if it ain’t broke, don’t fix it.” Shortly thereafter, SCOTUS issued the DIG.

Practice Point: More [...]

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Stats Show Active Tax Whistleblower Caseload

by and | Jan 7, 2020 | , ,

On January 6, 2020, the IRS Whistleblower Office released its annual report to Congress. The Office reported that it collected $616.8 million in fiscal year 2019 as a result of information provided by whistleblowers, out of which $120.3 million was paid out as whistleblower awards, for net collections of $496.5 million. This is a decrease from the $1.13 billion in net collections in fiscal year 2018 (which has been described as an outlier year), but an increase from the $156.6 million in net collections in fiscal year 2017. A total of 3,640 whistleblowers filed claims in fiscal year 2019, including 282 whistleblowers from outside of the United States.

Practice Point:  Whistleblower actions are a good reminder to make sure that your privileged and confidential tax information remains in the hands and minds of only those employees and officers who have a need to know. A disgruntled or terminated employee may take the opportunity to play the “whistleblower lottery,” removing sensitive and privileged material and handing it over to the IRS. With the start of the new year, it’s a worthwhile investment of time and resources to make sure your sensitive tax strategies and information are stored and protected.



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Big Change for Witness Privilege in House Investigations

by and | Feb 15, 2019 | , ,

On Jan. 25, 2019, U.S. House of Representatives Rules Committee Chairman James P. McGovern, D-Mass., issued regulations governing staff deposition authority in the 116th Congress, pursuant to his authority under H. Res. 6. In passing H. Res. 6, the newly empowered House Democratic majority drastically increased House committees’ investigative power by allowing committee staff to conduct depositions without members present — a stark departure from precedent. This change was a dramatic first step in the House Democratic majority’s efforts to ramp up oversight of both the executive branch and the private sector.

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Kovel Protections Upheld | Government Loses Aggressive Arguments for Waiver of Privilege for Controversy Advice

by | Nov 12, 2018 | , , , ,

On October 27, the US District Court for the District of Minnesota issued an opinion in United States v. Adams, No. 0:17-cr-00064-DWF-KMM (D. Minn. Oct. 27, 2018), addressing attorney-client privilege issues relevant to accountants working alongside tax attorneys. The court adopted a narrow, nuanced view of the waiver that applies when the taxpayer discloses an accountant’s work to the Internal Revenue Service (IRS) by filing an amended return.

In Adams, the taxpayer is facing a 17 count superseding indictment in which the government alleges he spearheaded a scheme to defraud investors in two companies and to embezzle corporate funds for his personal benefit. In late 2017, the government added three counts of tax evasion to the indictment, alleging that amended returns the taxpayer filed in late 2011 for the 2008, 2009 and 2010 tax years were willfully false under IRC § 7206(1).

The addition of the tax evasion charges is significant for the government’s arguments for waiver of privilege and work-product protection. It appears that the taxpayer filed the amended returns at issue in late 2011 under advice of counsel, working with the taxpayer’s accountant under a Kovel arrangement. (We have previously discussed the scope of Kovel protections here.) In our experience, filing of amended returns in advance of a criminal investigation or trial is one potential strategy to demonstrate good faith and lack of criminal intent and, if combined with payment, amended returns may have the added benefit of reducing the tax loss at issue in a criminal case. Of course, every case is different, but it appears this may have been the strategy at work in Adams. (more…)



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OVDP Ending September 28: Now Is the Time to Disclose

by | Aug 23, 2018 | , , ,

Earlier this year, the Internal Revenue Service (IRS) announced the ending of the 2014 Offshore Voluntary Disclosure Program (OVDP), its formal amnesty program for taxpayers with previously undisclosed interests in foreign assets and financial accounts. The program deadline is September 28, 2018, and all submissions must be substantially completed by that deadline. Partial or “placeholder” submissions will not qualify. All requests for preclearance into the program must be submitted by Friday, August 24, 2018.

A number of other disclosure options will remain available after September 28, 2018, including the popular IRS streamlined compliance procedures. Regardless, taxpayers with potential questions or concerns regarding reporting of their foreign holdings should seek advice immediately in light of upcoming deadlines.



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Expect Controversy in the Wake of Tax Reform

by and | Feb 7, 2018 | , , , ,

Tax reform is here to stay (at least for the foreseeable future). The Internal Revenue Service (IRS) may receive additional funds to implement the new tax law. With lowered tax rates, accelerated expensing and forced repatriation of foreign earnings comes an increased risk of an IRS audit. This brave new tax world has left so many questions that tax advisors’ phones have been ringing off the hooks! But as the end of the 2017 year and first quarter of 2018 dust settles, be mindful of the IRS audit to come. (more…)



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Maintaining Confidentiality While Navigating Cross-Border Transactions

by and | Dec 14, 2017 | , , ,

Today, taxing authorities across the globe, including the Internal Revenue Service (IRS), are increasing their efforts to gather and share sensitive taxpayer information, often aggressively seeking copies of tax advice, opinions and analysis prepared by counsel and other advisors. In some situations, tax advisors specifically draft their advice to be shared with third parties, but frequently the IRS seeks advice that was always intended to be confidential client communications—for example, drafts and emails containing unfinished analysis and unguarded commentary. Sharing this latter type of advice could be problematic for taxpayers because such advice could be used as a road map for examiners during an audit and may mislead the IRS regarding the strength or weakness of a taxpayer’s reporting positions.

Last month, we spoke to tax executives at Tax Executives Institute forums in Houston and Chicago about the IRS’s increased use of treaty requests to obtain US taxpayers’ documents and information from international tax authorities. (more…)



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Tax Court Says IRS’s “Drift-Net” Argument to Expand Privilege Waiver Must Be Anchored in Principles

by , , and | Nov 3, 2017 | , , , , ,

In Estate of Levine v. Commissioner, the US Tax Court (Tax Court) rejected an Internal Revenue Service (IRS) attempt to expand upon the privilege waiver principles set forth in AD Inv. 2000 Fund LLC v. Commissioner. As background, the Tax Court held in AD Investments that asserting a good-faith and reasonable-cause defense to penalties places a taxpayer’s state of mind at issue and can waive attorney-client privilege. We have previously covered how some courts have narrowly applied AD Investments.

In Estate of Levine, the IRS served a subpoena seeking all documents that an estate’s return preparer and his law firm had in their files for a more-than-ten-year period, beginning several years before the estate return was filed and ending more than four years after a notice of deficiency (i.e., which led to the Tax Court case) was issued. The law firm prepared the estate plan and the estate tax return in issue. The law firm represented the estate during the audit, and after the notice of deficiency was issued, the law firm was engaged to represent the estate in “pending litigation with the IRS.”   (more…)



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Tax Court Requires Specific Factual Showing of Harm for Whistleblower Anonymity

by and | Sep 28, 2017 | , ,

In two recent cases, the United States Tax Court (Tax Court) has explored the bounds of the anonymity protection afforded to potential whistleblowers under the court’s rules and other authorities. Tax Court Rule 345 relates to privacy protections for filings in whistleblower actions.  Under paragraph (a), a whistleblower may move the court for permission to proceed anonymously.  In order to proceed anonymously, the whistleblower must provide a sufficient, fact-specific basis for anonymity.  Specifically, the Tax Court has held that “[a] whistleblower is permitted to proceed anonymously if the whistleblower presents a sufficient showing of harm that outweighs counterbalancing societal interest in knowing the whistleblower’s identity.”  (Whistleblower 10949-13W v. Commissioner, T.C. Memo 2014-94, at 5).  However, the balance of harm to societal interest may shift as the case progresses, thereby justifying disclosure after anonymity has been granted.  See Tax Court Rule 345(b). (more…)



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Tax in the City® New York Event Success

by | Sep 26, 2017 | , , , , ,

Female tax professionals gathered in McDermott Will & Emery’s New York office for an annual New York rendition of Tax in the City®: A Women’s Tax Roundtable on Thursday, September 14. Featuring a CLE/CPE presentation about Privilege and the Ethics of Social Media by Kristen Hazel and Robin Greenhouse, an update on tax reform by Sandra McGill and an overview of recent state and local tax news by Alysse McLoughlin, the event culminated in a networking reception over cocktails.

Topics covered at the event included:

  • Best practices for preserving attorney-client privilege and work product protection; strategies to prevent an inadvertent waiver.
  • Ethics of social media (think before you post).
  • Tax reform:
    • Where are we now (framework to be issued week of September 25 and legislation sometime in October, possibly after budget).
    • What could tax reform look like (e.g., reduced tax rate, one-time tax on unrepatriated foreign earnings, move to territorial tax with DRD and corresponding changes to foreign tax credit system, changes to IRS Subpart F, elimination of certain deductions and/or adjustments to the taxation of carried interests).
    • What should taxpayers be thinking about (e.g., taking steps to best position your organization to proactively react to tax reform both now and when the reform measures become effective).
  • Status of certain tax regulations identified in Notice 2017-38 per mandate of EO 13789: Treasury provided recommendations to President Trump on September 18, 2017, and its report should be published sometime this month. We discussed possible change/revocation/deferred effective dates for regulations under Sections 367, 385 and 987 and steps taxpayers are taking today to address these regulations.
  • Partnership Update:
    • New TEFRA rules are effective January 1, 2018: TEFRA partnership agreements should be reviewed; assess whether the agreement should be amended (or other agreements implemented) to address these new rules.
    • Grecian Magnesite Mining: Tax Court held that gain derived by foreign person from disposition of its interest in a partnership engaged in US trade or business was treated as the disposition of a capital asset not as the disposition of the partner’s share of the underlying partnership assets and was not subject to US federal income tax as effectively connected income. It is unclear whether this case will be appealed.
  • State tax apportionment issues: We discussed the difficulty in establishing the proper level of reserves due to both the uncertainty in applying the statutory sourcing methods and the state taxing authorities’ ability to use their discretionary authority to revise the statutory sourcing methods.

We invite all tax professionals who identify as female to join Tax in the City®’s official LinkedIn group to continue the conversation and share tax developments in between events and meetings! Click here to join.

Established in 2014 by McDermott Will & Emery LLP, Tax in the City® is a discussion and networking group for women in tax that fosters collaboration and mentorship and facilitates in-person connections and roundtable events around the country. This New York edition of [...]

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