Court Opinion

ID: 9492258
Source: CourtListenerOpinion
Date Created: 2023-08-05 14:36:26.499726+00
Date Added: 2024-06-11T17:55:12.717861
License: Public Domain

POSNER, Chief Judge.
These appeals challenge an order enforcing summonses that the Internal Revenue Service issued to Richard Frederick. Frederick is both a lawyer and an accountant, and he both provides legal representation to, and prepares the tax returns of, Randolph and Karin Lenz and their company, KCS Industries, Inc. The IRS is investigating the Lenzes and their company, and the summonses directed Frederick to hand over hundreds of documents that may be germane to the investigation. Frederick balked at handing over all of them, claiming that some were protected by either the attorney-client privilege or the work-product privilege (or both). His refusal precipitated this enforcement proceeding. 26 U.S.C. § 7604(b). The district judge examined the documents in camera and ruled that some were privileged but others were not. The appeals challenge the latter ruling.
As is generally though not always the case when an appeal challenges the application of a legal rule to the facts (sometimes called a ruling on a “mixed question of fact and law,” Ornelas v. United States, 517 U.S. 690, 696-97, 116 S.Ct. 1657, 134 L.Ed.2d 911 (1996); Pullman-Standard v. Swint, 456 U.S. 273, 289 n. 19, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982)), our review of the judge’s ruling on the privilege claims is deferential; we ask not whether the ruling was erroneous but whether it was clearly erroneous, e.g., In re Teranis, 128 F.3d 469, 471 (7th Cir.1997); Williams v. Commissioner, 1 F.3d 502, 505 (7th Cir.1993), just as when we are reviewing simple factfindings. Fed. R.Civ.P. 52(a). Whether a particular document is privileged is a fact-specific and case-specific issue, the sort of issue that district judges are particularly experienced in resolving. It is not the sort of issue that lends itself to governance by a uniform rule that a court of appeals might prescribe and enforce. In these circumstances, a light appellate touch is best.
This is generally the case when the issue on appeal is whether the trial court or jury correctly applied a rule of law to the facts. Such an issue is fact- and case-specific, and so does not lend itself to uniform resolution across different cases, the sort of resolution that requires plenary appellate review. That is why we said in the preceding paragraph that “generally” the standard for reviewing such issues is deferential. Generally is not always, and the exceptions, illustrated by Ornelas, are important. But the only exceptions the Supreme Court has carved are for certain constitutional issues, where the risk of error is thought sufficiently serious to warrant a more searching than normal review for error, and in this circuit, at least, we have been reluctant to recognize exceptions outside the constitutional area. Other courts have not been so austere; it is easy to cite a string of cases in which a court describes the standard of review for a mixed question of nonconstitutional law and fact, such as fair use in a copyright case or likelihood of confusion in a trademark case, as being plenary; but we are not aware of any case which explains why such an issue requires plenary review, and we cannot think of any respect bearing on the optimal standard of review in which any of these issues differs from the issue of privilege in this case. The presumption in this circuit is and we hope will remain that the clear-error standard is the proper standard for appellate review of determinations of mixed questions of fact and law. This presumption is a helpful simplification of the law of appellate review, with no *500downside that we can see; and there is certainly nothing in the circumstances of the present case, or the class of cases that it exemplifies (nonconstitutional privilege cases), to rebut it.
Most of the documents in issue were created in connection with Frederick’s preparation of the Lenzes’ tax returns. They are drafts of the returns (including schedules), worksheets containing the financial data and computations required to fill in the returns, and correspondence relating to the returns. These are the kinds of document that accountants and other preparers generate as an incident to preparing their clients’ returns, or that the taxpayers themselves generate if they prepare their own returns, though in the latter case there is unlikely to be correspondence. The materiality of the documents to the IRS’s investigation of the Lenzes is not in issue.
There is no common law accountant’s or tax preparer’s privilege, Couch v. United States, 409 U.S. 322, 335, 93 S.Ct. 611, 34 L.Ed.2d 548 (1973); United States v. Arthur Young & Co., 465 U.S. 805, 817-19, 104 S.Ct. 1495, 79 L.Ed.2d 826 (1984), and a taxpayer must not be allowed, by hiring a lawyer to do the work that an accountant, or other tax preparer, or the taxpayer himself or herself, normally would do, to obtain greater protection from government investigators than a taxpayer who did not use a lawyer as his tax preparer would be entitled to. United States v. Lawless, 709 F.2d 485, 487-88 (7th Cir.1983); United States v. Bornstein, 977 F.2d 112, 116-17 (4th Cir.1992); In re Grand Jury Investigation, 842 F.2d 1223, 1224-25 (11th Cir.1987); United States v. Davis, 636 F.2d 1028, 1043 (5th Cir.1981). To rule otherwise would be to impede tax investigations, reward lawyers for doing nonlawyers’ work, and create a privileged position for lawyers in competition with other tax preparers — and to do all this without promoting the legitimate aims of the attorney-client and work-produet privileges. The attorney-client privilege is intended to encourage people who find themselves involved in actual or potential legal disputes to be candid with any lawyer they retain to advise them. Upjohn Co. v. United States, 449 U.S. 383, 389, 101 S.Ct. 677, 66 L.Ed.2d 584 (1981). The hope is that this will assist the lawyer in giving the client good advice (which may head off litigation, bring the client’s conduct into conformity with law, or dispel legal concerns that are causing the client unnecessary anxiety or inhibiting him from engaging in lawful, socially productive activity) and will also avoid the disruption of the lawyer-client relationship that is brought about when a lawyer is sought to be used as a witness against his client. The work-product privilege is intended to prevent a litigant from taking a free ride on the research and thinking of his opponent’s lawyer and to avoid the resulting deterrent to a lawyer’s committing his thoughts to paper. United States v. Nobles, 422 U.S. 225, 236-39, 95 S.Ct. 2160, 45 L.Ed.2d 141 (1975); Hickman v. Taylor, 329 U.S. 495, 510-11, 67 S.Ct. 385, 91 L.Ed. 451 (1947); id. at 516, 67 S.Ct. 385 (Jackson, J., concurring).
Communications from a client that neither reflect the lawyer’s thinking nor are made for the purpose of eliciting the lawyer’s professional advice or other legal assistance are not privileged. 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.
We do not, however, accept the government’s argument that there is no issue of privilege here because the information was transmitted to a tax preparer with the expectation of its being relayed to a third party, namely the IRS. It is time that “if the client transmitted the information so that it might be used on the tax return, such a transmission destroys any expectation of confidentiality.” United *501States v. Lawless, supra, 709 F.2d at 487; see also United States v. Windfelder, 790 F.2d 576, 579 (7th Cir.1986); In re Grand Jury Proceedings, 727 F.2d 1352, 1356 (4th Cir.1984). That is, the transmittal operates as a waiver of the privilege. But the tax preparer here was also the taxpayers’ lawyer, and it cannot be assumed that everything transmitted to him by the taxpayer was intended to assist him in his tax-preparation function and thus might be conveyed to the IRS, rather than in his legal-representation function. Cf. United States v. (Under Seal), 748 F.2d 871, 875-76 (4th Cir.1984).
We also reject the government’s argument that numerical information can never fall within the attorney-client or work-product privilege. Cf. United States v. Schwimmer, 892 F.2d 237, 242 (2d Cir.1989); United States v. Davis, supra, 636 F.2d at 1043; In re Grand Jury Proceedings, 601 F.2d 162, 171-72 (5th Cir.1979). Such cases are rare, but they can be imagined. Suppose a lawyer prepared an estimate of his client’s damages; the estimate would be numerical, but insofar as it reflected the lawyer’s professional assessment of what to ask the jury for it would be attorney work product. Similarly, if the lawyer asked his client how much he had obtained in the theft for which he was being prosecuted and the client answered, “$10,000,” the answer would be protected by the attorney-client privilege. But we do not agree with the appellants that the district judge based his ruling on the erroneous view that numbers can never be privileged. He found no basis for privileging these numbers, remarking, rightly, “It cannot be argued that numbers in the hands of the accountant are different from numbers in the hands of a lawyer.”
Besides the information supplied to Frederick by the Lenzes, there are the worksheets, which Frederick prepared and which doubtless reflect some of his own thinking. But the Supreme Court has held that an accountant’s worksheets are not privileged, United States v. Arthur Young & Co., supra, 465 U.S. at 817-19, 104 S.Ct. 1495, and a lawyer’s privilege, as we explained earlier, is no greater when he is doing accountant’s work. A complicating factor is that when Frederick was doing these worksheets and filling out the Lenzes’ tax returns, he knew that the IRS was investigating the Lenzes and their company, albeit in connection with different tax years, and he was representing them in that investigation. But people who are under investigation and represented by a lawyer have the same duty as anyone else to file tax returns. They should not be permitted, by using a lawyer in lieu of another form of tax preparer, to obtain greater confidentiality than other taxpayers. By using Frederick as their tax preparer, the Lenzes ran the risk that his legal cogitations born out of his legal representation of them would creep into Ms worksheets and so become discoverable by the government. The Lenzes undoubtedly benefltted from having their lawyer do their returns, but they must take the bad with the good; if his legal thinking infects his worksheets, that does not cast the cloak of privilege over the worksheets; they are still accountants’ worksheets, unprotected no matter who prepares them.
Put differently, a dual-purpose document—a document prepared for use in preparing tax returns and for use in litigation—is not privileged; otherwise, people in or contemplating litigation would be able to invoke, in effect, an accountant’s privilege, provided that they used their lawyer to fill out their tax returns. And likewise if a taxpayer involved in or contemplating litigation sat down with his lawyer (who was also his tax preparer) to discuss both legal strategy and the preparation of his tax returns, and in the course of the discussion bandied about numbers related to both consultations: the taxpayer could not shield these numbers from the Internal Revenue Service. This would be not because they were numbers, but because, being intended (though that was not the only intention) for use in connection *502with the preparation of tax returns, they were an unprivileged category of numbers.
The most difficult question presented by this appeal, and one on which we cannot find any precedent, relates to documents, numerical and otherwise, prepared in connection with audits of the taxpayers’ returns. An example is a memo from Frederick to a paralegal asking her for the amount that Mr. Lenz and his corporation had paid Frederick for legal services rendered personally to Lenz in 1992. The memo was prepared to help Frederick respond to questions raised in an audit of the Lenzes’ and the corporation’s tax returns. An audit is both a stage in the determination of tax liability, often leading to the submission of revised tax returns, and a possible antechamber to litigation. When a revenue agent is merely verifying the accuracy of a return, often with the assistance of the taxpayer’s accountant, this is accountants’ work and it remains such even if the person rendering the assistance is a lawyer rather than an accountant. Throwing the cloak of privilege over this type of audit-related work of the taxpayer’s representative would create an accountant’s privilege usable only by lawyers. If, however, the taxpayer is accompanied to the audit by a lawyer who is there to deal with issues of statutory interpretation or case law that the revenue agent may have raised in connection with his examination of the taxpayer’s return, the lawyer is doing lawyer’s work and the attorney-client privilege may attach. But the documents in issue do not, so far as we are able to determine, relate to such representation.
We should consider the possible bearing of a new statute, 26 U.S.C. § 7525, which extends the attorney-client privilege to “a federally authorized tax practitioner,” that is, a nonlawyer who is nevertheless authorized to practice before the Internal Revenue Service. § 7525(a)(3)(A). Nonlawyers (including tax preparers, many of them accountants) have long been allowed to practice before it. 5 U.S.C. § 500(c); 31 C.F.R. §§ 10.3, 10.7(c)(viii). The new statute protects communications between a taxpayer and a federally authorized tax practitioner “to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.” § 7525(a)(1). (It does not protect work product.) Nothing in the new statute suggests that these nonlawyer practitioners are entitled to privilege when they are doing other than lawyers’ work; and so the statute would not change our analysis even if it were applicable to this case, which it is not, because it is applicable only to communications made on or after July 22, 1998, the date the statute was enacted. See Note following 26 U.S.C. § 7525.
We have looked at all the documents that Frederick argues are privileged. Most are dual-purpose documents, about which no more may be said; some were not even submitted to the district judge for consideration of whether they might be privileged; in others as well, privilege was waived. We cannot find any clear errors in the district judge’s rulings.
AFFIRMED.