Supreme Court Report

Supreme Court will consider 'huge' attorney-client privilege case

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The case has an air of mystery about it. Many documents have been filed under seal. A federal appeals court referred to the central entities only as “company” and “law firm.”

In the U.S. Supreme Court, redacted copies of briefs reveal that that “law firm” is one specializing in international tax law, and the owner of “company” is an “early promoter of bitcoin” who “expatriated from the United States in 2014.”

But the legal question before the high court in the case of In Re Grand Jury, to be argued Monday, is attracting wide notice in the legal profession. The issue is whether a communication involving both legal and nonlegal advice is protected by attorney-client privilege when obtaining or providing legal advice is one of the significant purposes for the communication.

“This is a tax case, but the issue presented is much broader than that,” says Mary-Christine Sungaila, a shareholder with Buchalter law firm in Irvine, California, who filed an amicus brief in support of the unidentified tax law firm on behalf of the Federation of Defense & Corporate Counsel.

“The second this case was granted, every in-house counsel all over the country—all over the world even—was saying, ‘Oh my goodness, this is huge for us,’” Sungaila adds.

No privilege for ‘normal tax preparation assistance’

The Supreme Court appeal stems from a federal criminal investigation of the unidentified owner of cryptocurrency assets. In response to subpoenas, the company and the international tax firm produced some 20,000 pages of records but withheld others, citing attorney-client privilege as well as work-product doctrine. The firm was retained by the client in 2012 to provide tax advice on the expatriation process and to prepare the client’s 2014 federal tax return.

The government moved to compel production of the documents, which a federal district court granted in part. The court said that while communications only about tax return preparation are not covered by the attorney-client privilege, communications seeking legal advice about what to claim on tax returns or other tax-related legal advice “may be privileged” when “the primary purpose of the communication was to obtain or provide such legal advice.”

The court said the tax treatment of cryptocurrencies was unsettled at the time and that some of the firm’s advice on some such matters was legal advice protected by privilege. Thus, the court allowed the firm to withhold some documents, but it ordered it to disclose 54 documents that were primarily about the procedural aspects of the client’s tax preparation.

When the company and law firm refused to comply with that order, the government moved to hold them in civil contempt, which the district court did.

Ruling on an appeal in 2021, a panel of the San Francisco-based 9th Circuit U.S. Court of Appeals held that in determining whether a communication that involves both legal and nonlegal analyses is entirely protected by attorney-client privilege, courts should look to the communication’s “primary purpose.”

The 9th Circuit said that “normal tax return preparation assistance—even coming from lawyers—is generally not privileged” and that “courts should be careful to not accidentally create an accountant’s privilege where none is supposed to exist.”

The 9th Circuit declined to adopt a test that the U.S. Court of Appeals for the District of Columbia Circuit had established in a 2014 decision by then-Judge Brett Kavanaugh. Under the D.C. Circuit’s test, attorney-client privilege applies if obtaining legal advice was one of the “significant purposes” of the communication. Instead, the 9th Circuit relied on a “primary purpose” test—whether legal advice was the central basis of the communication.

US argues privileges ‘obstruct the search for truth’

In the Supreme Court, the law firm argues that the 9th Circuit’s test “fails to protect the ability of clients to seek and obtain the full and frank advice of their lawyers.”

The firm is represented by former U.S. Solicitor General Donald B. Verrilli and others from Munger, Tolles & Olson. (Verrilli did not respond to an interview request.)

“Every day, clients seek lawyers’ advice for overlapping legal and nonlegal purposes,” the firm’s merits brief argues. By withdrawing the attorney-client privilege from such dual-purpose communications whenever a court later makes its own judgment that the nonlegal purpose outweighs the legal purpose, the 9th Circuit’s single primary-purpose test “undermines the public interest in protecting confidential communications between lawyers and clients,” the brief says.

The significant-purpose test adopted by the D.C. Circuit “appropriately protects attorney-client dual-purpose communications,” the firm contends, adding 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 U.S. Department of Justice, in its merits brief filed by Solicitor General Elizabeth B. Prelogar, argues that legal privileges such as attorney-client confidentiality “obstruct the search for truth and demand a compelling justification.”

The Supreme Court has declined to create an accountant-client privilege because of the importance of disclosing materials related to tax-return preparation, Prelogar says in the brief. And the high court “has repeatedly emphasized the need to construe the attorney-client privilege narrowly to closely track the privilege’s rationale of ensuring unfiltered legal advice and encouraging communications that would not have been made in its absence,” the brief says.

Such a rationale does not apply to tax-preparation advice that is typically performed by accountants and “is not the special domain of lawyers,” the government’s brief continues. “The common law of privilege does not accord special status to communications about tax-return preparation simply because a taxpayer can afford to hire an attorney to help prepare his tax returns.”

The significant-purpose test favored by the law firm in this case would shepherd in “a vast expansion” of attorney-client privilege, the government argues.

“Given the reality of widespread regulation,” Pregolar argues, “and the broad participation by in-house counsel in ‘regular business matters’ … petitioner’s novel and expansive ‘significant purpose’ standard would open the gates to a flood of attorney-client privilege claims” asserting that at least some significant purpose of a communication was related to legal advice.

Tax advisers, the ABA and in-house counsel offer views

The government stands alone in the case, as no group filed an amicus brief on its side. The law firm has many friends in the case, from tax experts to the American Bar Association to groups representing in-house counsel.

The American College of Tax Counsel argues that “determining what positions to take on a tax return often raises significant legal questions, given the complexities of determining both what to disclose and how to disclose it.”

The group cites examples such as advice on disclosing “reportable transactions” under the tax code, advice on structuring transactions for favorable tax treatment, and even counsel about reporting income from criminal conduct without divulging incriminating information. (The brief makes clear that the group is not enamored with the current line between extending the attorney-client privilege for tax legal advice but not for a lawyer’s help in tax return preparation that may also be done by an accountant.)

The ABA, in its amicus supporting the law firm, argues that the 9th Circuit’s primary-purpose test is unworkable.

“Under the 9th Circuit’s test, to determine whether a given communication was covered by the privilege, a lawyer (and later, a reviewing court) would have to determine what the client’s primary purpose was when they communicated,” the ABA brief says. “Such an arcane parsing of motivations is difficult, time-consuming, and subject to a wide range of present and post-hoc variations.”

Sungaila, the author of the Federation of Defense & Corporate Counsel brief in support of the law firm, says the significant-purpose test favored by the firm and its allies would better reflect the growing role of in-house lawyers and the realities of modern communications in disbursing advice, whether legal or business.

Corporate lawyers have also become involved much earlier in company decisions, she says, and the rise of email and, more recently, technologies such as Zoom and Slack have sped up the pace of legal analysis and advice.

“Legal could be involved with decisions issues that intersect between law and business advice, and you have these interactions happening quickly in all these digital arenas,” Sungaila says. “The impact of a decision that says your primary purpose has to be a legal one to be protected by attorney-client privilege really would open up more uncertainty to a lot more communications.”

See also: “ABA asks SCOTUS to preserve long-standing attorney-client privilege”

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