Subscribe Sign In Dec 31, 2020,09:43pm EST|861 views U.S. District Judge Denies Blanket Assertion Of Attorney-Client Privilege In Moore Ingram Microcaptive Promoter Audit Case Jay AdkissonContributor Personal Finance I cover Wealth Preservation in its legal permutations Listen to article The IRS has given a red light to microcaptive tax shelter promoters. GETTY This is a follow-up on my previous article Microcaptive Tax Shelter Promoter Investigation Of Moore Ingram Law Firm Leads To Attorney-Client Privilege Issues With Client Documents (7/27/2020), which involved a law firm's objection to an IRS summons for information to that law firm, which was also acting as a manager of so-called microcaptive insurance companies, i.e., captive insurance companies that made the 831(b) election and were using risk pools to attempt to meet risk distribution requirements. Basically, the law firm (Atlanta-based Moore Ingram) attempt to claim that many of its communications with its microcaptive clients were protected by attorney-client privilege, which privilege claim the U.S. Magistrate Judge rejected on the basis that Moore Ingram really wasn't acting as an attorney so much as a non-attorney in performing non-legal services such as managing the captives. In my prior article, I suggested that the U.S. Magistrate Judge's Report and Recommendation would next go to the U.S. District Court for the Northern District of Georgia for review, which is what happened. You can read the new Order here. The District Judge noted that Moore Ingram had produced a full set of documents to the IRS for only 4.5% of its insurance clients. The Court also rejected Moore Ingram's argument that it could somehow avoid producing all documents to the IRS by only producing some "representative" documents, pointing out that "each captive insurance client and tax year potentially constitute separate basis for liability." The Court likewise rejected Moore Ingram's claims that it was not required to re-produce documents that had already allegedly been produced by third parties, such as actuaries, noting that "a party must still produce documents that have been provided by a third party when those documents are only a portion of those summonsed." Moore Ingram also complained that the IRS summons was overbroad and burdensome because it covered 27 categories of documents over an eleven-year period which basically related to every aspect of every captive insurance company with which the law firm was involved with. But the Court noted that "a summons is not overbroad simply because a complete response would be voluminous and difficult." Here, the documents were either relevant to the IRS's promoter investigation of Moore Ingram, or were potentially relevant which is about the same thing when it comes to producing documents. Thus, the law firm had to produce them even if voluminous and difficult. This now brings us to the attorney-client privilege issues, with the Court noting that Moore Ingram sought to assert a blanket privilege by which they could "withhold hundreds of thousands or millions of pages of documents relating to 95.5% of its 202 captive clients." The Court also rejected the law firm's so-called "last link" argument that in complying with the IRS summons, the identity of their clients would become known to the IRS and thus "reveal the participation of [Moore Ingram's] clients in a captive insurance scheme", with the Court noting that the IRS was presently conducting only a civil investigation and not a criminal investigation where such an objection might require further consideration. MORE FOR YOU Accountants In Syndicated Conservation Easement Shelter Plead Guilty The #1 New Year’s Resolution To Try For 2021: Determine Your Enough The U.S. Tax Court Drives A Stake Into The Heart Of Microcaptives In Caylor Land The Court further noted that it was Moore Ingram that bore the burden of proving that each and every document that it claimed was privileged was in fact so, and the burden was not on the IRS to prove otherwise. Thus, if Moore Ingram wanted to assert attorney-client privilege, then at the very least it needed to provide a log of such documents (called a "privilege log"), albeit it could do so in a categorial format where the Court could review and rule on each category. Where the District Court disagreed with the U.S. Magistrate Judge's recommendation that a special master be appointed to review documents and resolve Moore Ingram's claims of attorney-client privilege. Since Moore Ingram had not show that any particular documents were subject to the privilege but had only made a blanket assertion to that effect, the District Court did not find that the law firm had made a sufficient showing for the appointment of a special master. Top Articles READ MORE Finally, Moore Ingram argued that many of the documents requested by the IRS contained confidential client information, which would require the law firm to notify its clients that the IRS was seeking the information. However, the District Court noted that the IRS's authority is based on federal law which overrides any Georgia confidentiality concerns, and at any rate Moore Ingram had not identified the documents that it claimed were confidential. With that, the Court ruled in favor of the IRS and against Moore Ingram, which can now either attempt to comply by producing the documents, producing a categorical privilege log, or appeal further to the U.S. District Court for the Eleventh Circuit. ANALYSIS This episode illustrates the folly of a law firm attempting to provide non-legal services (here, captive insurance company management) and then trying to claim that all their communications are protected by attorney-client privilege. It just doesn't work that way. While attorney-client privilege is amongst the most sacrosanct of all the evidentiary privileges, it is also like Swiss Cheese — about half-hollow and with gigantic holes. One of those gigantic holes is where the communication is for non-legal purposes, i.e., the communication was not made or received by the client for purpose of receiving legal advice and counsel. When you consider that 99.9% of all communications that a captive insurance company manager has with its clients has utterly nothing to do with legal advice and counsel, then you realize that maybe something like 0.1% of Moore Ingram's documents might be privileged and the rest is fair game for the IRS. Another thing about a captive insurance manager is that their documents are typically generated for the very purpose of being used by third parties, not the least of which being the local insurance commissioner, the banks used by the captive, the captive's actuaries and underwriters and accountants, etc., etc. When documents are shared with such third parties, any possible attorney-client protection for those documents completely evaporates because they are no longer held within the confidence of the attorney-client relationship. And, no, it doesn't matter than an attorney was involved in the communication since it ceases upon being shared to lose its confidential nature at that point. What happens is that when a law firm — and particularly a tax law firm — manages captive insurance companies, the arrangement almost inevitably looks and smells much less like anything approaching a commercial risk-shifting arrangement as it does a tax shelter. Then, when that law firm starts asserting attorney-client privilege to try to protect documents that any ordinary captive manager wouldn't care about disclosing, more than enough smoke is generated to allow quite reasonable inference that maybe there is a fire. One certainly get the impression reading between the lines of this opinion that the U.S. District Judge has seen enough smoke to start thinking that indeed there is a fire going on somewhere. Certainly, the IRS seems to have come to that conclusion already. CITE AS Follow me on Twitter or LinkedIn. Check out my website or some of my other work here. Jay Adkisson I am a partner of Adkisson Pitet LLP and licensed to practice law in Arizona, California, Nevada, Oklahoma and Texas. My... 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