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Fifth Circuit Rules that Law Firm Clients’ Identities Are Not Privileged

In Taylor Lohmeyer Law Firm P.L.L.C. v. United States, No. 19-50506, the United States Court of Appeals for the Fifth Circuit held that a Texas-based estate and tax-planning law firm (Firm) could not invoke the attorney-client privilege against an Internal Revenue Service (IRS) summons seeking the identity of its clients.

According to an IRS revenue agent’s declaration submitted in support of the summons, the Firm became a target for IRS investigation following an audit of one of its clients, an individual who had used the Firm’s services to establish and operate various foreign accounts and entities, through which the individual had funneled millions of dollars of unreported income. The IRS issued a John Doe summons to the Firm seeking, amongst other things, the identities of other clients for whom it had established foreign accounts or entities.

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

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…)




A 360-Degree View: September and October 2017

Wrapping Up September – and Looking Forward to October

Upcoming Tax Controversy Activities in October:

October 12, 2017: Cate Battin, Kristen Hazel, Britt Haxton, Jane May, Sandra McGill, Diann Smith and Elizabeth Chao are hosting and presenting at the inaugural Tax in the City® event in Seattle, Washington. They will cover topics such as attorney-client privilege and the ethics of social media (CLE/CPE), recent developments around US Tax Reform, and updates on state and local tax issues for Seattle and the surrounding areas.

 October 25, 2017: Todd Welty and Lowell Yoder are speaking at the TEI 72nd Annual Conference in Toronto, Ontario, and will present “Repatriation: Strategy, Practice and the Road Ahead.”

November 2, 2017: Laura Gavioli, Kristen Hazel, Michael Louis, Cym Lowell, Damon Lyon, Denise Mudigere, Dave Noren, Kristina Novak, Andrew Roberson, Jay Singer, Mark Thomas and Michael Wilder are speaking at the TEI Global Tax Symposium in Houston, Texas, and covering the following topics: Multilateral Instruments & European Developments, Country by Country Reporting, Repatriation Strategies and the IRS Repatriation Campaign, Disclosures for Global Tax Strategies, and Treasury Center/Currency Issues. (more…)




Tax in the City® New York Event Success

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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The IRS Is Struck Down Again in Privilege Dispute

Courts continue to strike down the Internal Revenue Service (IRS) as it continues to test the bounds of the attorney-client privilege and work product doctrine through the issuance of improper summonses. In the last several years, the IRS has filed numerous summons enforcement proceedings related to the production of documents generally protected by the attorney-client privilege, tax-practitioner privilege, and/or work product doctrine. These summonses include overt requests for “tax advice” and “tax analysis,” which several courts have refused to enforce. For example, see Schaeffler v. United States, 806 F.3d 34 (2d Cir. 2015).

Once again, in United States v. Micro Cap KY Insurance Co., Inc. (Eastern District of Kentucky), a federal district court rejected the IRS’s arguments and refused to enforce an inappropriate summons. The opinion is available here. The IRS filed this enforcement proceeding seeking to compel the production of confidential communications between taxpayers and the lawyers that assisted them in forming a captive insurance company. After conducting an in camera review (where the judge privately reviewed the documents without admitting them in the record), the judge found the taxpayers had properly invoked privilege since each document “predominately involve[d] legal advice within the retention of [] counsel.”

The court also rejected the government’s argument that the attorney-client privilege was waived by raising a reasonable cause and reliance on counsel defense to penalties in the taxpayers’ case filed in Tax Court. Because the government’s argument was untimely, it was waived and rejected outright. The court, however, proceeded to explain how the argument also failed on its merits. (more…)




John Doe Intervenes in Virtual Currency Summons Enforcement Case

The Internal Revenue Service (IRS) has broad authority under Internal Revenue Code (IRC) Section 7602 to issue administrative summonses to taxpayers and third parties to gather information to ascertain the correctness of any return. If the IRS does not know the identity of the parties whose records are covered by the summons, the IRS may issue a “John Doe” summons only upon receipt of a court order. The court will issue the order if the IRS has satisfied the three criteria provided in IRC Section 7609(f):

  • The summons relates to the investigation of a particular person or ascertainable group or class of persons,
  • There is a reasonable basis for believing that such person or group or class of persons may fail or may have failed to comply with any provision of any internal revenue law, and
  • The information sought to be obtained from the examination of the records (and the identity of the person or persons with respect to whose liability the summons is issued) is not readily available from other sources.

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The Interplay Between Tax Planning and IP Planning

On November 3, 2016, we presented at the Chicago Tax Club’s symposium regarding tax planning and intellectual property (IP) planning within a multinational corporation. The presentation covered various areas, including the importance of coordination between IP and tax groups when engaging in IP planning, the differences in the IP arena and the tax arena with respect to IP matters that can impact tax planning positions, and tax planning with IP holding companies. From a tax controversy perspective, we discussed being prepared for an Internal Revenue Service (IRS) audit with respect to IP planning, with a focus on contemporaneous documentation to support the taxpayer’s position, having audit ready files (including adhering to document retention policies), reviewing IRS audit materials (e.g., International Practice Units) to understand what the IRS may ask for during the audit, and being cognizant of the various privileges (e.g., attorney-client, tax practitioner and work product) and recent positions taken by the IRS with respect to whether certain advice provided by accountants is privileged.




Facebook Battles IRS In Summons Enforcement Case

Facebook is in a protracted battle with the IRS related to its off-shoring of IP to an Irish affiliate. Read more here. The IRS issued an administrative summons for the documents, and Facebook has refused to comply with the summons. The IRS is asking the court to enforce the summons and force Facebook to turn over the requested documents. The court agreed that on its face, the summons was issued for a legitimate purpose. Facebook will now have to tell the court why it refuses to turn over the documents. Review the court order here. Assumedly, Facebook is asserting that it is not required to disclose the requested materials based upon a claim of privilege. The case demonstrates that the IRS is aggressively seeking documents and information from taxpayers and their representatives in cases involving international tax issues.




Two Current Tax Controversies Utilize ‘Quick Peek’ Agreements to Resolve Privilege Disputes

Due to the enormous amount of electronic data stored by companies in the modern era, discovery requests can involve millions of documents which need to be reviewed prior to being turned over to the opposing party.  In conducting their analysis of this overwhelming quantity of information, litigants must, amongst other things, detect and exclude any privileged material.  Should a party inadvertently fail to do so before such records reach the hands of the opposing counsel, he/she will be deemed to waive privilege in many jurisdictions.  Given the massive quantity of data, however, such mistakes are practically unavoidable.

Federal Rule of Evidence (FRE) 502 was enacted in 2008 in an attempt to combat the issue of inevitable human error and the costs associated with parties’ efforts to avoid it.  FRE 502(d) allows parties to request the court to grant an order stipulating that a disclosure of privileged material does not waive any claims of privilege with respect to those documents.  If the court agrees to enter the order, it is controlling on third parties and in any other federal or state proceeding.

FRE 502(d) has led to the possibility of “quick peek” agreements where the parties give over all or a portion of their documents to opposing counsel without any privilege review whatsoever so that the recipient can identify which material he would like to retain.  The recipient, in turn, agrees not to assert a waiver claim on any document that the producing party intends to withhold from the requested documents as privileged.  These arrangements can dramatically ease the temporal and financial burdens of conducting a privilege review because they allow the producing party to focus only on those documents desired by the recipient while at the same time preserving their right to claim privilege on such documents. (more…)




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