The Does and Poes in the instant motion seek to protect only their identities as privileged
under §7525,? As noted in a similar case in this district, a client’s identity is not generally
considered a privileged communication under attorney-client privilege. United States v. BDO
Seidman, LLP, No. 02 C 4822, 2003 WL 932365, at “1 (N.D. Ill. Feb. 5, 2003). The court noted,
however, that “‘an exception to this general rule exists . .. where the disclosure of the client’s
identity would lead ultimately to disclosure of the client’s motive for seeking the advice . . .
because motivation is itself a confidential communication.” Jd. (internal quotations omitted).

The principles underlying the §7525 and attorney-client privileges governed the Seventh
Circuit’s inquiries on remand in the BDO Seidman case. Specifically, the Seventh Circuit
requested that the district court make factual findings on four topics, which the district court
framed as the following questions: (1) was the purpose of BDO’s representation to provide tax
advice; (2) would revealing the appellant’s identities reveal their motives for seeking tax advice;
(3) have the clients waived the privilege; and (4) were the documents at issue communicated or
generated for the purpose of preparing the client’s tax returns. See BDO Seidman, 2003 WL
932365, at *2. We examined the Does and Poes’ documents with these inquiries in mind, as
well as two questions of our own. We added to our analysis the question whether the corporate
exception of §7525(b) applied to either Intervenor, as well as whether the Transactions at issue

occurred after the effective date of the privilege, which in this case is July 1998. Thus, this six-

2 The Intervenors emphasize that they may wish to assert various privileges relating to the
documents themselves in future motions to compel. (R. 53, Does’ Br. re Privilege at 2.) In this
order we address only the IRS’s motion to compel compliance with Paragraph 2(B) of the agreed
order, which requests “[a] list (including name, address and taxpayer identification number) by
year or range of years, of investors that engaged in the Identified Transactions not previously
disclosed in response to [other paragraphs],” (R. 12, Agreed Order), and thus any future claims
of privilege relating to the documents themselves are preserved.



a

Accordingly, we decline to abrogate the Does’ and Poes’ §7525 privilege on the grounds of the
crime-fraud exception.

III. Intervention under Fictitious Names

This Court has not found any Seventh Circuit authority directly addressing the issue of
whether and when intervenors may use fictitious names. However, the Seventh Circuit’s order
remanding BDO Seidman implicitly suggests its willingness to accept this type of intervention in
circumstances where the intervenors assert privileged identity. Because we can find no Seventh
Circuit authority supporting the opposite conclusion, and since logic argues against recognizing
identity privilege only to remove an important method for protecting it, we will allow the Does and
the Poes to continue their use of fictitious names in the current proceedings. We stress, however,
that this decision is limited in scope, and does not extend beyond the Seventh Circuit’s implicit
recognition of anonymous intervention for individuals asserting that their identities are privileged
under §7525. Thus, the remaining intervenors in this case who have not asserted an indentity
privilege may not proceed under a pseudonym.

CONCLUSION

For the reasons stated above, both the Poes and the Does may continue to use fictitious
names in the proceedings. Petitioner’s motion to compel is also denied to the extent that it seeks
information relating to the Does and Poes’ identity, which we hold is privileged under §7525. (R.
34-1.) Any information related to their identities, including but not limited to their names and
taxpayer identification numbers, is to be redacted by Andersen prior to complying with Petitioner’s

summonses.

ENTERED: Por aa

Judge Ruben Castillo
United States District Court

Dated: June 30, 2003



“special circumstances” of the Cherney case with past criminal conduct; indeed, immediately
prior to noting the “special circumstances” of the case the court found that “disclosure of the
[client’s] identity would convey the substance of a confidential communication.” Jd. The most
straightforward interpretation of this language is the one that this Court will adopt—namely, that
where circumstances are such that revealing a client’s identity perforce reveals a confidential
communication, that identity is privileged. Thus, if the documents submitted by the Does and
Poes in this case satisfy the aforementioned six-pronged inquiry, they are entitled to assert an
identity privilege under §7525.

After a thorough review of the documents we believe that both the Does and the Poes
may assert an identity privilege. As an initial matter, both the Does and the Poes’ Transactions
occurred after the effective date of the privilege. Further, it is abundantly clear from our review
of the documents that Andersen’s role was to provide tax advice to the Does and Poes with
respect to their particular transactions. Turning to the question whether revealing the clients’
identities would reveal their motives for seeking tax advice, we believe that the documents
support the Intervenors’ position that it would. The IRS is seeking information, including the
identities of the Poes and the Does, in an effort to determine whether or not Andersen was
complying with the IRS regulations governing potentially abusive tax shelters. (R. 30, Pet’r’s
Resp. at 1.) Under these circumstances, it is difficult to see how revealing the identities of the
Poes and the Does could amount to anything less than a revelation of their motivations in
seeking Andersen’s tax advice—to invest in potentially abusive tax shelters. This motivation,
the “very substantive reason that the client sought . . . advice in the first place,” is confidential
and therefore privileged under §7525. Cherney, 898 F.2d at 568. Finally, it does not appear that

the clients waived the privilege. The Does aver that their documents “were not transmitted or



pronged inquiry, when applied to the documents submitted by the Does and the Poes, should
answer the question of whether they may assert an identity privilege.

In holding that, under certain circumstances, the identities of investors in potentially
abusive tax shelters are covered by the confidentiality privilege conferred by §7525, the district
court in BDO Seidman relied primarily on two Seventh Circuit decisions dealing with identity in
the context of attorney-client privilege.? Jd. In the more recent decision, the Seventh Circuit
held that a client’s identity is privileged when “its disclosure would be tantamount to revealing
the premise of a confidential communication: the very substantive reason that the client sought
legal advice in the first place.” Jn re Grand Jury Proceeding (Cherney), 898 F.2d 565, 568 (7th
Cir. 1990). Similarly, in an earlier decision the Seventh Circuit noted “there may be
circumstances under which the identification of a client may amount to the prejudicial disclosure
of a confidential communication, as where the substance of a disclosure has already been
revealed but not its source.” Tillotson v. Boughner, 350 F.2d 663, 666 (7th Cir. 1965).

Both Cherney and Tillotson are cases where an attorney refused to disclose his client’s
identity on the grounds that such disclosure violated the attorney-client privilege and might
implicate the client in past criminal conduct. Cherney, 898 F.2d at 566; Tillotson, 350 F.2d at
664. Petitioner argues that for this reason these cases are distinguishable from the present one,
as both cases involved clients seeking advice concerning past criminal conduct rather than
advice on future tax planning. In support of this assertion, Petitioner cites the Cherney court’s
conclusion limiting its ruling to the “special circumstances of this case.” Cherney, 898 F.2d at

569. The IRS’s analysis of Cherney is unconvincing, Nothing in the opinion equates the

3 In addition, the court noted “if such a privilege did not apply to §7525 in the abstract, the
Seventh Circuit would not have remanded” with instructions that the court make specific
findings with regard to each document in question as to whether or not the identities of the
individual investors were privileged. BDO Seidman, 2003 WL 932365, at *2.



allow investors in potentially abusive tax shelters to assert identity privilege under §7525 would
gut §6112 of any meaning, a result Congress could never have intended. However, Petitioner
fails to account for the fact that the Treasury Regulations specifically address the interaction of
§7525 and.§6112, providing that “in any case in which an organizer or a seller of a potentially
abusive tax shelter believes that information required to be maintained as part of the list for that
tax shelter . . . constitutes confidential tax advice protected under Section 7525(a), such
information may be withheld from the Service .. .” Treas. Reg. § 301.6112-IT Q&A-
17(b)(2000). Given such clear instruction, we find it impossible to adopt Petitioner’s reasoning.
Finally, Petitioner urges the Court to apply the crime-fraud exception to attomey-client
privilege on the grounds that the advice was given in furtherance of civil tax fraud. In order for
the crime-fraud exception to apply, “there must be something to give colour to the charge; there
must be prima facie evidence that it has some foundation in fact. When that evidence is
supplied, the seal of secrecy is broken.” United States v. Davis, 1 F.3d 606, 609 (7th Cir. 1993)
(internal quotations and citations omitted). Petitioner acknowledges that, under the current
circumstances, it would be difficult for this Court to find sufficient evidence supporting
fraudulent conduct on the part of the Does and Poes. However, Petitioner contends that

Andersen’s purported failure to register potentially abusive tax shelters is sufficient to support an

inference that the Does and Poes sought Andersen’s advice for the purposes of perpetrating civil

tax fraud. This is at best bootstrapping; Petitioner in effect is asking the Court to assume that its
incomplete investigation of Andersen will prove fraud, and to use this assumption as the grounds
for enforcing Petitioner’s summonses in its efforts to make its case, even to the point of
abrogating privilege. Even if we were inclined to do this, however, Petitioner has not supplied

us with a link between Andersen’s purportedly fraudulent conduct and that of the Does and Poes,



+ Moute Order Boitn (06797)
, United States District Court, Northern District of Illinois

Secs | Ruben Casto | inet

CASE NUMBER 02 C 6790 DATE 6/30/2003

CASE United States of America vs. Arthur Andersen, LLP

TITLE

[In the following box (a) indicate the party filing the motion, ¢.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the nature

MOTION: of the motion being presented.]
DOCKET ENTRY:
qd) im} Filed motion of [ use listing in “Motion” box above.]
Q) oO Brief in support of motion due
(3) a Answer brief to motion due___. Reply to answer briefdue__.
(4) 0 Ruling/Hearingon___sset fora
(5) Oo Status hearing[he!d/continued to] [set for/re-set for]on__setfor__—_at
(6) a Pretrial conference[held/continued to} [set for/re-set for]on__setfor__—at_—
(i) Oo Trial[set for/re-set for}on__—__at
(8) Oo [Bench/Jury trial] [Hearing] held/continuedto__at
(9) Qa This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to}

OFRCP4m) ClLocal Rule 41.1 OO FRCP41(a\(1) [1 FRCP41(a)(2).

ao i [Other docket entry] Petitioner’s March 17, 2003 motion to compel compliance with agreed order
[34-1] is denied. Enter Memorandum Opinion and Order.

(1) [For further detail see order attached to the original minute order.]

‘No notices required, advised in open court.

No notices required.

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Notices mailed by judge’s staff.
Notified counsel by telephone, JUL due 2 2003
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Mail AO 450 form. Junod Laiwisia "sn
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’

created in connection with, or for the purpose of, the preparation of tax returns for any of the
Does.” (R. 53, Does’ Br. re Privilege, Ex. E., Doe. Aff. at 49.) There is no other indication in
the documents before us that this tax advice was created for the purpose of filing tax returns or
any other public purpose.‘ Our review of the documents satisfies us that the revelation of the
Does’ and Poes’ identities would likewise reveal their motives and that all of the other
requirements for asserting the privilege are satisfied. Thus, we hold that the Intervenors may
assert an identity privilege under §7525.

II. Petitioner’s Proposed Exceptions to §7525 Privilege

Petitioner contends that, even if the identities of the Does and the Poes are protected
under §7525, their privilege is superseded by the disclosure requirements of LR.C. §6112,a
statute enacted prior to §7525. The regulations promulgated under the statute require that
promoters of potentially abusive tax shelters maintain logs listing the investors in these shelters

as well as details of their transactions. Treas. Reg. §301.6112-1(a). Petitioner argues that to

“ We reject Petitioner’s over-broad argument that the §7525 privilege should not apply in the
event that Andersen prepared tax returns for either the Poes and Does, noting that the privilege
only extends to communications concerning tax advice, and does not extend to communications
made for the purposes of tax preparation. “The information that a person furnishes the preparer
of his tax return is furnished for the purpose of enabling the preparation of the return, not the
preparation of a brief or an opinion letter. Such information therefore is not privileged.” United
States v. Frederick, 183 F.3d 496, 500 (7th Cir. 1999). Petitioner correctly notes that the
privilege will only be upheld when advice is sought “from a professional legal adviser in his
capacity as such,” and that the burden of proof rests upon the individual asserting privilege.
United States v. Evans, 113 F.3d 1456, 1461 (7th Cir. 1997). However, in the current matter it is
Petitioner itself that has fixed Andersen’s capacity as tax advisor and not as tax preparer.
Petitioner is seeking to obtain documents relating to Andersen’s activities as a promoter of tax
shelters, an activity that necessarily involves dispensing tax advice to potential investors. While
it is certainly true that the Does’ and the Poes’ tax returns were likely impacted by the advice
that they received, whether and how Andersen prepared those returns is irrelevant for the
purposes of Petitioner’s investigation and has no bearing on their motivations in seeking
Andersen’s advice on the tax shelters. Given this fact, and the very nature of Petitioner’s
investigation, we cannot say that the Does and the Poes have failed to meet their burden; in fact,
Petitioner has met it for them.


the Intervenors may assert this privilege as well as the IRS’s March 17, 2003 motion to compel
compliance with this Court’s agreed order.
ANALYSIS

IL Identity Privilege Under §7525

Under §7525, “with respect to tax advice, the same common law protections of
confidentiality which apply to a communication between a taxpayer and an attorney shall also
apply to a communication between a taxpayer and any federally authorized tax practitioner.” 26
U.S.C. §7525(a)(1).!_ A claim of attorney-client privilege is recognized under the common law
where: (1) legal advice of any kind is sought (2) from a professional legal adviser in his capacity
as such, (3) the communications are made in confidence and (4) relate to that purpose, and (5)
are made or received by the client. United States v. Evans, 113 F.3d 1457, 1461 (7th Cir. 1997)
(citations omitted). Thus, applying these principles to the privilege under §7525, a client seeking
tax advice must obtain that advice from a tax professional acting as such, and in a manner
indicating that those communications will be kept in confidence. Confidentiality in the tax
context may be waived when the communications with the tax adviser ultimately are used to
prepare the client’s tax returns, a non-confidential document. United States v. Frederick, 182
F.3d 496, 500 (7th Cir. 1999) (stating “if the client transmitted the information so that it might
be used on the tax return, such a transmission destroys any expectation of confidentiality,” but
noting that where tax preparer was also client’s lawyer, “it cannot be assumed that everything
transmitted to him by the taxpayer was intended to assist him in his tax-preparation function ... ,

rather than in his legal-representation function.”).

’ This privilege does not extend, however, to “any written communication between a federally
authorized tax practitioner and a director, shareholder, officer or employee, agent, or
representative of a corporation in connection with the promotion of the direct or indirect
participation of such corporation in any tax shelter.” 26 U.S.C. §7525(b).



summonses requested the log information required under the IRS regulations, as well as the
production of various documents underlying the potentially abusive transactions. (R. 2, IRS
Summonses, Ex. 1.) On September 23, 2002, Petitioner filed a petition to enforce the IRS
summonses on Andersen, and on November 19, 2002, this Court entered an agreed order
outlining how and when Andersen was to produce the requested information. (R. 28, Doe Br. at
2.)

In January 2003 Andersen sent letters to investors in the relevant tax shelters informing
them of the nature of the IRS summonses and the agreed order. Jd. After receiving this
communication from Andersen, two independent groups of investors, the Does and the Poes,
petitioned the Court to intervene in this enforcement action in order to assert a privilege under 26
US.C. §7525. (R. 28, Does’ Br. at 2-3; R. 32, Poes’ Br. at 2.) We granted the Does’ January 27,
2003 motion to intervene, but requested that the parties brief whether or not the Does could
intervene under fictitious names as well as whether they could properly invoke the 26 U.S.C.
§7525 privilege. (R. 32, Does’ Br. at 1.) In addition, we required any additional investors in the
tax shelters at issue to assert a privilege by February 12, 2003. Jd. Subsequently, the Poes filed
their motion intervene on February 12, 2003, which we granted on June 20, 2003. In light of the
Seventh Circuit’s remand for fact-finding in a similar IRS enforcement action addressing the
same identity privilege issue, see United States v. BDO Seidman, No. 02-3914, 02-3915 (7th Cir.
2002), we ordered the Intervenors to produce to this Court for in camera inspection documents
that the Intervenors believed supported their claim of an identity privilege under §7525. This
Court has since reviewed these documents in light of the relevant inquiries identified by the

Seventh Circuit in remanding the BDO Seidman case, and is now in a position to rule on whether



»

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION DOCKETED

UNITED STATES OF AMERICA, ) JUL 2 2003
)
Petitioner, )
) No. 02 C 6790
ve. )
)
ARTHUR ANDERSEN, L.L.P., ) Judge Ruben Castillo
)
Respondent. )

MEMORANDUM OPINION AND ORD!

The United States of America (“Petitioner”) petitioned this Court to enforce nineteen
summonses issued by the Internal Revenue Service (“IRS”) to Arthur Andersen, L.L.P.
(“Andersen”). Subsequently, we entered an agreed production order outlining the terms of
Andersen’s compliance with the summonses. Currently before this Court is Petitioner’s March
17, 2003 motion to compel compliance with Paragraph 2(B) of the agreed production order as
well as the matter of whether Intervenors Does and Poes may assert an identity privilege under
26 U.S.C. §7525. For the reasons set forth below, Petitioner’s motion to compel compliance
with Paragraph 2(B) is denied as to the Poes and the Does because we believe they may properly
assert an identity privilege in this case. (R. 34-1.)

RELEVANT FACTS

In April 2002 the IRS issued nineteen summonses to Andersen as part of its investigation
into Andersen’s compliance with Internal Revenue Code regulations governing potentially
abusive tax shelters. (R. 30, Pet’r’s Resp. at 1.) Under the applicable regulations, the marketer
of a potentially abusive tax shelter is required, inter alia, to maintain a log listing the identities

of individual investors in that shelter as well as certain details about their transactions; the

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