Firm Required to Release Names of Investors in Tax Shelter
recent federal appellate court decision addresses whether
accounting and law firms may protect the names of clients
that participate in tax shelters. The Seventh Circuit case
of United States v. BDO Seidman and John and Jane Doe
[337 F.3d 802, certioari denied February 23, 2004] indicates,
for its facts and circumstances, that the IRS can successfully
obtain the names of such clients.
October 2000, the IRS received information that the accounting
firm BDO Seidman (BDO) was promoting potentially abusive
tax shelters without complying with the listing and registration
requirements of IRC sections 6111(a) and 6112(a). Because
the IRS suspected BDO had violated the registration requirements,
it issued summonses ordering BDO to produce documents and
the names of the investors in the transactions, the date
each investor acquired an interest, all shelter registrations
filed, and the investor lists prepared for each transaction.
BDO refused to comply, claiming attorney-client privilege,
the work-product doctrine, and the tax practitioner confidentiality
privilege of IRC section 7525.
October 2002, a federal district court ruled that the IRS
had not abused its powers and ordered BDO to comply with
the summonses. The clients who invested in the shelters
quickly filed a motion to intervene, claiming the release
of their names would violate the confidentiality provisions
of IRC section 7525. The district court denied their motion
to intervene, and both BDO and its clients appealed to the
Seventh Circuit Court of Appeals.
Obligations vs. Client Confidentiality
sole issue before the appellate court was whether the tax
shelter investors had a legitimate claim of privilege that
precluded the disclosure of their names to the IRS under
IRC section 7525:
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
to the extent that the communication would be considered
a privileged communication if it were between a taxpayer
and an attorney.
appeal, the clients argued that disclosing their names would
violate the confidential communications they expected in
the tax shelter agreement with BDO. In response, the court
looked to the rules concerning attorney-client privilege.
The court said that in asserting an enforceable attorney-client
privilege the client must show that the communication was
made to an attorney in confidence, and that the confidences
constituted information not intended to be disclosed by
the attorney. Applying the same rules to the communications
between the clients and BDO, the court decided that there
was no reasonable expectation of confidentiality on the
part of the clients.
decision reflects the special scrutiny directed toward deterring
abusive tax shelters. A seller or organizer of an interest
in a tax shelter is required by law to keep a list identifying
each purchaser of an interest under IRC sections 6111 and
6112. This list-keeping requirement precluded BDO’s
clients from establishing an “expectation of confidentiality.”
At the time the clients communicated their interest in participating
in the tax shelters organized by BDO, they knew that BDO
was legally obligated to disclose the identity of clients
engaging in such transactions. Finally, the appellate court
concluded that BDO’s affirmative duty to disclose
its clients’ participation in potentially abusive
tax shelters indicates that there was no reasonable claim
of privilege by the clients.
lawyers and accountants have relied on the theory that disclosing
the identity of a tax shelter client violates IRC section
7525 because it will also reveal the nature of their communications
with the client. The Seventh Circuit decision implies that
there can be no reasonable expectation of confidentiality
for tax shelters. This decision will surely have a nationwide
impact on the tax shelter industry as the IRS issues summonses
to other accounting and law firms that organize tax shelters.
decision also raises an ethical duty on the part of tax
shelter practitioners to advise their clients of the lack
of confidentiality in the case of IRS scrutiny.
Whitehead, JD, LLM, is an associate professor of
business law at the University of Central Arkansas, Conway,