Court Opinion

ID: 9469162
Source: CourtListenerOpinion
Date Created: 2023-08-05 02:33:37.74898+00
Date Added: 2024-06-11T17:38:48.866943
License: Public Domain

NEWMAN, Circuit Judge,
concurring in part and dissenting in part:
The Court today creates a form of accountant’s work-product privilege to shield from scrutiny by the Internal Revenue Service an accountant’s tax accrual work papers. These papers, reflecting the accountant’s identification of doubtful items on the income tax return of the accountant’s corporate client, would be examined by the I.R.S. pursuant to its summons authority, 26 U.S.C. § 7602 (1976), but for today’s judicially-created exception. I respectfully dissent from this aspect of the Court’s decision,1 believing that Congress has legislated in favor of such examination, that if Congress has left the question open, the decision to create an accountant’s work-product privilege should be made by Congress and not by a court, and that if the merits of such a privilege are to be weighed by a court, we should reject it.
1. In enacting § 7602, Congress has given the I.R.S. a broad summons authority to seek all information “relevant to a legitimate investigative purpose,” United States v. Bisceglia, 420 U.S. 141, 146, 95 S.Ct. 915, 918, 43 L.Ed.2d 88 (1975). The majority agrees that Arthur Young’s tax accrual work papers are relevant to the legitimate investigative purpose of determining the correctness of the tax returns of its client, Amerada Hess Corporation. In the absence of a preexisting privilege, such as the privilege against self-incrimination or the attorney-client privilege, this determination that § 7602 applies should result in enforcement of the summons. The majority does not purport to find anything in the text or legislative history of § 7602 to support an *222exception for an accountant’s tax accrual work papers. I do not find anything in Hickman v. Taylor, 329 U.S. 495, 67 S.Ct. 385, 91 L.Ed. 451 (1947), or Rule 26 of the Federal Rules of Civil Procedure that requires or even permits this Court to depart from the broad command of § 7602.
The Supreme Court has observed that § 7602 is subject to the “ ‘traditional privileges and limitations,’ ” Upjohn Co. v. United States, 449 U.S. 383, 398, 101 S.Ct. 677, 686, 66 L.Ed.2d 584 (1981), quoting United States v. Euge, 444 U.S. 707, 714, 100 S.Ct. 874, 879, 63 L.Ed.2d 141 (1980), which do not include a privilege for either client communications to an accountant, e.g., United States v. Wainwright, 413 F.2d 796, 803 (10th Cir. 1969), cert. denied, 396 U.S. 1009, 90 S.Ct. 566, 24 L.Ed.2d 501 (1970); United States v. Bowman, 358 F.2d 421, 423 (3d Cir. 1966), or an accountant’s work product, e.g., United States v. Kelly, 311 F.Supp. 1216, 1217 (E.D.Pa.1969); In re Rashba & Pokart, 271 F.Supp. 946, 948 (S.D.N.Y.1967).2 In United States v. Noall, 587 F.2d 123 (2d Cir. 1978), cert. denied, 441 U.S. 923, 99 S.Ct. 2031, 60 L.Ed.2d 396 (1979), we were asked to create an exception for a corporation’s own internal audit reports and related work papers on the ground that their disclosure to the I.R.S. would run counter to public policy by inhibiting frank disclosure from corporate employees to internal auditors. In rejecting that argument, we stated, “With respect to enforcement of the tax laws, Congress itself has decided the policy issue, and it is not for the courts to challenge that determination.”3 Id. at 126. I would accept Congress’ judgment and enforce the summons fully.
2. If it were thought that the broad command of § 7602 leaves open the issue of whether to create an accountant’s work-product privilege for tax accrual work papers, the decision to create such a privilege should be made by Congress. We have been authoritatively instructed not to place restrictions on the scope of § 7602 “absent unambiguous directions from Congress.” United States v. Bisceglia, supra, 420 U.S. at 150, 95 S.Ct. at 920. I do not share the majority’s comfort in knowing that if Congress prefers not to maintain an accountant’s work-product privilege, it remains free to abolish it. That approach inverts the proper relationship between courts and Congress in this area. Congress has already legislated on the subject of the I.R. S.’s authority to examine relevant information, and it has thus far refrained from restricting the summons authority with any privileges unknown to the common law. If there is to be recognition of new privileges, we should leave that task to Congress. Cf. City of Milwaukee v. Illinois, 451 U.S. 304, 101 S.Ct. 1784, 68 L.Ed.2d 114 (1981) (presumption of preemption of federal courts’ common law role as to subjects on which Congress has legislated). Especially is this the proper approach in matters concerning the tax laws, perhaps the one area of all national legislation in which Congress is most alert to remedy perceived inequities.4
3. If we were to enter the policy debate as to whether to create a privilege to protect an accountant’s tax accrual work pa*223pers, the privilege should be rejected. The majority suggests the privilege is needed to ensure that public corporations will be truthful with their accountants in fulfilling their statutory obligations to file financial statements verified by independent accountants. See 15 U.S.C. § 781 (1976); 17 C.F.R. § 210.1-02(d) (1981). Analogy is drawn to the work-product privilege of attorneys* I am not persuaded by either the argument or the analogy.
The policy argument rests on an indictment of corporate America that I do not accept. The premise is that some corporations are so anxious to minimize their tax payments that they are willing to deceive their accountants concerning the existence of debatable tax items and thereby violate their obligations under the securities laws.5 Doubtless all corporations are anxious to pay only the minimum taxes required, and, toward that end, many will take favorable positions on debatable items, some of which the I.R.S. will successfully challenge. But even when the I.R.S. prevails, the corporation ends up paying only what the tax laws required it to pay in the first place.6 I doubt that many corporations will be so anxious to avoid that result that they will conceal these debatable items from their accountants in violation of the securities laws. But if a few are so tempted, courts should not afford them any shield behind which they can increase their chances of avoiding detection that they have not paid either the amount of taxes a court might rule was lawfully required or whatever adjustment might result from a post-audit settlement. In Noall we declined to give corporations an opportunity to shield their own audit work papers from I.R.S. scrutiny, despite the argument that employees would be tempted to deceive internal auditors. I see no reason to be more solicitous of corporations when they elect to enter public capital markets where they are obliged to accept the requirements of complete and honest financial disclosure.
Moreover, the argument that corporate taxpayers will be reluctant to assist in creating records accurately reflecting their contingent tax liabilities proves too much. If that premise were followed, we should insulate from § 7602 all the taxpayer’s records supporting his claimed tax liabilities, since their inspection by the I.R.S. frequently results in an upward adjustment of tax payments and the taxpayer therefore has an incentive not to maintain them. It is entirely speculative whether the statutory disclosure obligations of the securities laws present a greater need to create new privileges than do the record maintenance obligations of the tax laws themselves. See, e.g., 26 U.S.C. § 7203 (1976).
Arguably, it is more important to protect the investing public with contingent-tax-liability disclosure obligations than to protect the public revenues with tax-record maintenance obligations and undiminished summons authority, but that is precisely the sort of policy choice to be made by Congress. A legislative hearing is a better forum than this appeal to determine how realistic is the threat that occasional instances of understated contingent tax liabilities that result in additional tax payments will prejudice investor decisions and whether such a threat justifies diminution of tax revenues by preventing the I.R.S. from focusing its limited auditing resources on identified questionable items.
Furthermore, it is far from clear that the absence of an accountant’s work-product privilege increases the risk that a corporation would have much success even if it were tempted to default on its disclosure obligations in the area of contingent tax *224liabilities. The corporation’s independent public accountant has public obligations to assure himself that contingent tax liabilities have been accurately reflected. If the corporation blocks the efforts of the accountant to ascertain the true state of the company’s contingent tax liabilities, the accountant would be obliged to decline to certify the financial statements.
This last consideration indicates why the work-product privilege of the attorney is not analogous. The attorney is retained by the client in a completely private relationship, frequently to protect his client against claims of the Government. The work-product privilege assures legitimate privacy to the activity of the attorney in discharging his obligations to the client in vindication of a constitutional right to effective counsel. If the client elects not to make full disclosure to his attorney, the attorney may still undertake the defense; though he may not knowingly abet perjury, he has no obligation to the public to elicit and disclose the true state of his client’s affairs. The certified public accountant, however, especially when he certifies financial statements of public corporations, has responsibilities to the public that far transcend his private employment relationship. In preparing and certifying such statements, he is not retained to defend his client against the Government; he is retained to assist his client in complying with government obligations to inform the investing public.
Finally, it is worth noting that privileges generally are created to serve some policy, independent of lawful obligations, that is thought to be impaired in the absence of the privilege. The law does not require spouses to confide in each other, but it nonetheless accords a marital privilege to promote family harmony. Similarly, the law does not require a client to confide in his attorney, but it nonetheless accords an attorney-client privilege to promote the effective assistance of counsel. The majority’s privilege for accountants may be the first instance of a court creating a privilege to facilitate compliance with duties already imposed by law.7
For all of these reasons,8 I respectfully dissent from the judicial creation of an accountant’s work-product privilege to insulate tax accrual work papers from the scope of § 7602.

. I concur in those portions of Chief Judge Feinberg’s opinion upholding enforcement of the summons for Arthur Young’s audit work papers and determining that its tax accrual work papers are relevant to the I.R.S.’s civil audit of Amerada Hess Corporation.

. Federal law does not recognize accountant privileges even when the law of the forum state accords protection. William T. Thompson Co. v. General Nutrition Corp., 671 F.2d 100 (3d Cir. 1982); FDIC v. Mercantile National Bank of Chicago, 84 F.R.D. 345, 349 (N.D.Ill.1979).

. I recognize that Noall explicitly left open the issue of whether § 7602 authorizes inspection of an accountant’s tax accrual work papers, 587 F.2d at 127 n.5. However, several courts, including the District Court in this case, have found the rationale of Noall persuasive in upholding an I.R.S. summons for an accountant’s tax accrual work papers. United States v. Riley Co., 80-1 U.S.Tax Cas. (CCH) ([ 9157 (N.D. Ill. Jan. 8, 1980); United States v. Arthur Andersen & Co., 474 F.Supp. 322, 330 (D.Mass. 1979), appeal dismissed as moot, 623 F.2d 720 (1st Cir.), cert. denied, 449 U.S. 1021, 101 S.Ct. 588, 66 L.Ed.2d 483 (1980); cf. In re Grand Jury Subpoenas Duces Tecum Involving Charles Rice, 483 F.Supp. 1085, 1088 (D.Minn.1979).

. Congress, which annually amends the tax laws, sometimes as to details concerning a single taxpayer, has had notice that federal courts are enforcing I.R.S. summonses for accountant’s tax accrual work papers, at least since 1979 when United States v. Arthur Andersen & Co., supra, was decided.

. To the extent that the majority is creating a privilege to encourage communication from the client to the accountant, it is creating a testimonial privilege for the corporation, not a work-product protection for the work of the accountant.

. I assume the majority’s privilege will protect an accountant’s analysis of potential liability only of a civil nature. An accountant’s privilege, no more than the attorney-client or attorney work-product privileges, should surely not insulate on-going attempts by the corporation or its accountants to carry out criminal evasion of taxes.

. The majority suggests that the Supreme Court in Upjohn Co. v. United States, supra, 449 U.S. at 393 n.2, 101 S.Ct. at 684 n.2, has discounted the significance of a legal obligation of communication and disclosure in determining the scope or existence of a privilege. The footnote in Upjohn replied to the argument that the corporate client had an incentive to consult with its attorney and therefore did not need an attorney-client privilege broader than the “control group” test. In declining to restrict an existing privilege because the client had an incentive to communicate, the Court had no occasion to assess whether a legal obligation to disclose conclusions (here, contingent liabilities) should be ignored in determining whether to create a new privilege to protect underlying details (here, questionable tax items).

. An additional reason advanced by the majority for favoring an accountant’s work-product privilege is to prevent the I.R.S. from obtaining “back door” implementation of the suggestion of former I.R.S. Commissioner Jerome Kurtz that taxpayers should flag their questionable tax items. Kurtz, et al., Discussion on “Questionable Positions,” 32 Tax Law. 13, 15-16 (1978). Whether or not the I.R.S. can or should add such a sweeping self-questioning feature to the self-reporting tax system is fairly debatable. But once the I.R.S. has decided to devote its limited resources to an audit or investigation of a particular taxpayer, it should not be obstructed from concentrating its efforts on questionable items nor barred from identifying such items either by inquiry of the taxpayer and his accountant or, more profitably, by inspection of relevant documents.