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UNITED STATES v. COTE
Factual and Procedural Background
The Internal Revenue Service issued summonses under 26 U.S.C. § 7602 to Donald E. Cote (a certified public accountant) and to Thomas Murphy (an attorney) seeking production of workpapers used in preparing John C. and Evelyn Erickson's original and amended federal income tax returns for 1966–1968. The Ericksons intervened. For several years Cote had prepared the taxpayers' returns from summaries of books and records. In early 1969 the IRS informed the taxpayers that the 1967 return was being examined. The taxpayers consulted Cote, who referred them to attorney Murphy. After consultation Murphy retained Cote to audit the taxpayers' books; the books were placed in Murphy's possession and Cote performed the audit in Murphy's office. Based on that audit Murphy advised the taxpayers to file amended returns for 1966–1968, which were filed disclosing increased income (without explanation). An IRS special agent summoned Cote to produce the workpapers; Cote refused, claiming the papers were in Murphy's possession. A similar summons to Murphy resulted in production of a copy of the original 1967 return but Murphy asserted attorney-client privilege as to the underlying workpapers. The district court ordered production of the workpapers supporting the original returns (a ruling not contested on appeal) and held that the attorney-client privilege did not attach to the accountant's workpapers for the amended returns. The appeal challenges whether the attorney-client privilege prevents disclosure of the accountant's memoranda and working papers prepared at the attorney's request in connection with legal advice concerning the filing of amended returns.
Legal Issues Presented
- Whether the attorney-client privilege prevents disclosure of memoranda and working papers prepared by an accountant retained at an attorney's request to assist in giving legal advice (here, in connection with filing amended tax returns for 1966–1968).
- Whether filing amended tax returns that disclose increased income constitutes a waiver of any privilege covering the underlying workpapers and the details supporting the reported data.
Arguments of the Parties
Appellants' Arguments
- Cote (the accountant) and Murphy (the attorney) asserted that the underlying workpapers were protected by the attorney-client privilege and therefore not subject to IRS summons.
- The taxpayers claimed a proprietary interest in the papers and asserted the privilege against self-incrimination; the district court rejected those claims (citing Bouschor v. United States).
- The taxpayers relied on Bauer v. Orser (D. N.D. 1966), in which a district court quashed a summons to an accountant acting under an attorney's direction; they relied on Bauer to support protection of the accountant's papers here.
Appellees' Arguments
- The government sought enforcement of the IRS summonses and the production of the workpapers; the district court already required production of papers supporting the original returns.
- The district court's position (adopted on appeal) was that the privilege did not attach to the accountant's workpapers for the amended returns because the accountant was not under the attorney's direct control and the papers were not prepared to assist counsel in giving legal advice.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Bouschor v. United States, 316 F.2d 451 (8 Cir. 1963). | Denial of taxpayers' claim of a proprietary interest and claim of privilege against self-incrimination. | Cited to support the district court's rejection of the taxpayers' proprietary and Fifth Amendment claims regarding the papers. |
| Olender v. United States, 210 F.2d 795, 805-806 (9 Cir. 1954). | Example where attorney gave advice first and accountant performed mechanical calculations thereafter (privilege would not apply). | Used by the court as a contrast: if the lawyer's advice preceded and the accountant merely executed mechanical calculations, privilege would not attach. |
| United States v. Kovel, 296 F.2d 918, 921-922 (2 Cir. 1961). | Accountant's aid to a lawyer can be integral to legal advice such that privilege attaches when the accountant assists the attorney in rendering legal services. | Applied to conclude that here the accountant's aid preceded and was an integral part of Murphy's legal advice so privilege attached to the accountant's workpapers under the circumstances. |
| Bauer v. Orser, 258 F. Supp. 338 (D. N.D. 1966). | Quashed a summons to an accountant acting under an attorney's direction (used by taxpayers to support privilege claim). | The district court distinguished Bauer because that attorney supervised and controlled the accountant; the court found prior employment alone did not control the privilege question here. |
| Sale v. United States, 228 F.2d 682, 686 (8 Cir. 1956), cert. denied, 350 U.S. 1006, 76 S.Ct. 650, 100 L.Ed. 868. | Principle that privilege cannot protect accountant's information gained prior to retention by the lawyer. | Cited for the proposition that information obtained by an accountant before being retained by counsel is not sheltered by the attorney-client privilege. |
| Gariepy v. United States, 189 F.2d 459, 463 (6 Cir. 1951). | Similar principle that prior-acquired accountant information is not protected by attorney-client privilege. | Cited alongside Sale to support the limitation on privilege for information acquired before accountant's retention by counsel. |
| United States v. Tellier, 255 F.2d 441, 448 (2 Cir. 1958), cert. denied, 358 U.S. 821, 79 S.Ct. 33, 3 L.Ed.2d 62. | Privilege attaches to the substance of a communication, not the particular words used. | Applied to hold that disclosure of the substance of privileged information on an amended return waives privilege as to the underlying details. |
| United States v. Shibley, 112 F. Supp. 734, 742 (S.D. Cal. 1953). | Support for the proposition that privilege protects substance but not disclosure of that substance. | Cited to reinforce the conclusion that disclosure of substance on a return waives privilege as to underlying memoranda. |
| Colton v. United States, 306 F.2d 633, 638 (2 Cir. 1962), cert. denied, 371 U.S. 951, 83 S.Ct. 505, 9 L.Ed.2d 499 (1963). | In tax cases, privilege often does not attach to information the taxpayer intends the attorney to report on a tax return. | Cited in a footnote to illustrate the principle that intended disclosure on a tax return may preclude invocation of the privilege; court references Colton to show this principle and to note limits on waiver. |
| United States v. Threlkeld, 241 F. Supp. 324, 326 (W.D. Tenn. 1965). | Application of the principle that privilege does not attach to information intended for disclosure on a tax return. | Cited in support of the statement that privilege often does not attach to such information in tax cases. |
| United States v. Merrell, 303 F. Supp. 490, 492 (N.D.N.Y. 1969). | Similar authority on non-attachment of privilege to information intended for tax returns. | Cited among authorities showing the principle applied in tax contexts. |
| United States v. Schlegel, 313 F. Supp. 177 (D.Neb. 1970). | Presented as a contrary or cautionary example concerning the extent of waiver by disclosure. | Cited to caution against overly broad waiver rules and to note limits on required disclosure of underlying memoranda. |
| Wilcoxon v. United States, 231 F.2d 384 (10 Cir. 1956), cert. denied, 351 U.S. 943, 76 S.Ct. 834, 100 L.Ed. 1469. | Non-tax cases where the principle that disclosure of substance waives the privilege has been applied. | Cited in a footnote to demonstrate that the substance-waiver principle has been applied in non-tax contexts as well. |
| In re Fisher, 51 F.2d 424, 425 (S.D.N.Y. 1931). | Another non-tax authority applying similar principles regarding waiver by disclosure. | Cited among cases showing the broader application of the substance-waiver principle. |
| Brown v. United States, 276 U.S. 134, 48 S.Ct. 288, 72 L.Ed. 500 (1928). | Authority for in camera consideration of disputed materials. | Referenced in the district court note instructing that disputes over particular workpapers alleged to contain unpublished expressions should be submitted to the district court for in camera ruling. |
Court's Reasoning and Analysis
The court framed the central issue as whether the attorney-client privilege protected the accountant's workpapers prepared in connection with the advice to file amended returns. The district court had already required production of workpapers supporting the original returns; that ruling was not contested on appeal.
The district court had concluded that the privilege did not attach to the workpapers for the amended returns because (a) the accountant was not under the attorney's direct control and (b) the workpapers were not prepared to assist counsel in giving legal advice. The opinion noted Murphy's contrary testimony that his advice to file amended returns was formulated after evaluating the audit results.
The panel explained two contrasting situations. If counsel first decided to file amended returns and then employed an accountant merely to perform mechanical calculations, privilege would not apply (citing Olender). By contrast, where an accountant's assistance precedes and is integral to the formulation of legal advice, the accountant's work may fall within the privilege (citing Kovel). The court concluded that in this case the accountant's aid preceded and was an integral part of Murphy's legal advice, so the attorney-client privilege did attach to the information in the accountant's workpapers under the circumstances.
However, the court then addressed waiver. It found that by filing the amended returns the taxpayers communicated, at least in part, the substance of the privileged information to the government. The accountant testified that the information on his workpapers was transcribed onto the amended returns filed with the IRS. Relying on the principle that the privilege protects the substance of communications (not merely particular words) (citing Tellier and Shibley, and treatise authority), the court held that disclosure of the substance on the returns waived the privilege as to both the transmitted data and the details underlying that information.
The opinion also qualified the scope of waiver: disputes about whether particular workpapers contain unpublished expressions not revealed on the returns should be presented to the district court for in camera review (citing Brown). The court cautioned against an overly broad rule of waiver that would destroy the protective purposes of the privilege and noted existing authority that limits disclosure of memoranda and worksheets to the extent they contain confidential data not published on the tax return (citing Colton).
Holding and Implications
Holding: The district court's order enforcing the IRS summonses is AFFIRMED.
Implications and direct effects:
- The court affirmed production of the workpapers: the workpapers supporting the original returns must be produced (a point not contested on appeal), and the workpapers underlying the amended returns are not protected by the attorney-client privilege to the extent that their substance was disclosed on the filed amended returns.
- The court recognized that, under the facts here, the attorney-client privilege attached to the accountant's workpapers because the accountant's assistance was integral to legal advice; nonetheless, filing amended returns that disclosed the substance of that work resulted in waiver of the privilege as to the underlying details.
- The opinion instructs that any dispute over particular workpapers alleged to contain unpublished expressions or confidential matter not revealed on the returns should be submitted to the district court for in camera examination to determine whether those specific materials remain protected.
- The court emphasized limits on waiver and cautioned against an overly broad rule that would unnecessarily erode attorney-client confidentiality; it cited authority withholding disclosure of memoranda and worksheets to the extent they contain confidential data not published on the return.
LAY, Circuit Judge.
The issue on appeal concerns the enforcement of summonses issued under 26 U.S.C. § 7602 to Donald Cote, a certified public accountant, and Thomas Murphy, a lawyer. The taxpayers, John C. and Evelyn Erickson, were allowed to intervene. Both Murphy and Cote refused to produce any workpapers used in preparing taxpayers' original and amended returns for the years 1966, 1967 and 1968. The sole issue is whether the attorney-client privilege prevents disclosure of memoranda and working papers prepared by the accountant at the attorney's request for purposes of giving legal advice. We affirm the district court's order, 326 F. Supp. 444, enforcing the summonses.
For several years the taxpayers had employed Mr. Cote as an accountant to prepare their tax returns. The returns were made from summaries of the books and records furnished by the taxpayers. In early 1969 an internal revenue agent informed the taxpayers that their 1967 income tax return was being examined. Taxpayers consulted their accountant who in turn referred them to Thomas Murphy, an attorney. After consultation with the Ericksons, Murphy retained Cote to conduct an audit of taxpayers' books and records. The books were placed in Murphy's possession and Cote carried out the audit in Murphy's office. On the basis of what this audit revealed, Murphy advised his clients that they should file amended returns for the years in question. Amended returns were then prepared and filed for the years 1966, 1967 and 1968. These returns disclosed a greater amount of income for each of the three years than had been earlier reported but gave no explanation for the increase. Thereafter a special agent of the Internal Revenue Service summoned Cote to appear as a witness and produce all workpapers used in preparing both the original and amended returns. Cote refused to turn over these papers claiming they were in the possession and control of attorney Murphy. On August 27, 1970, a similar summons was issued to Murphy requesting essentially the same material. Murphy produced a copy of the taxpayers' original 1967 return but asserted the privilege as to the underlying workpapers.
The trial court ruled that the workpapers supporting the original returns must be produced. This ruling is not disputed. The only issue raised on this appeal is whether the attorney-client privilege extends to the accountant's work memoranda used in preparation of the amended returns.
Taxpayers claimed a proprietary interest in these papers and asserted the privilege against self-incrimination. This was properly denied. See Bouschor v. United States, 316 F.2d 451 (8 Cir. 1963).
The district court held that the privilege did not attach to these workpapers since the accountant was not under the direct control of the taxpayers' attorney and the workpapers were not prepared to assist counsel in giving legal advice. Murphy's testimony is to the contrary. He testified that his advice to file amended returns was formulated after evaluating the results of the audit. We would agree that if the advice to file the returns was first given by Murphy and thereafter the accountant was employed simply to make the correct mechanical calculations, the privilege would not apply. Cf. Olender v. United States, 210 F.2d 795, 805-806 (9 Cir. 1954). This did not happen here. Here the taxpayers did not consult Murphy for accounting advice. His decision as to whether the taxpayers should file an amended return undoubtedly involved legal considerations which mathematical calculations alone would not provide. It is clear that the accountant's aid to the lawyer preceded the advice and was an integral part of it. United States v. Kovel, 296 F.2d 918, 921-922 (2 Cir. 1961).
Taxpayers rely on the decision of Bauer v. Orser, 258 F. Supp. 338 (D. N.D. 1966), wherein the district court quashed a summons issued to an accountant acting under the direction of an attorney. The trial court distinguished this decision because Bauer's attorney supervised and controlled the accountant. In the instant case the trial court found that since taxpayers had used the accountant for tax preparation in prior years, his accounting service was not under the attorney's express directions. The fact of prior employment, however, is not controlling to the issue. A more definitive test is whether the accountant's services are a necessary aid to the rendering of effective legal services to the client. Whether the accountant performed services for the taxpayers in years prior to the attorney-client relationship is essentially immaterial. The privilege, of course, cannot secrete the accountant's information gained prior to his retention by the lawyer. Sale v. United States, 228 F.2d 682, 686 (8 Cir. 1956), cert. denied, 350 U.S. 1006, 76 S.Ct. 650, 100 L.Ed. 868; Gariepy v. United States, 189 F.2d 459, 463 (6 Cir. 1951).
Cf. Rule 5-03(a)(4) and the Advisory Committee comments pertaining thereto of the Preliminary Draft of Proposed Rules of Evidence for the United States District Courts and Magistrates, Committee on Rules of Practice and Procedure of the Judicial Conference of the United States (March 1969).
Notwithstanding our recognition that the attorney-client privilege attached to the information contained in the accountant's workpapers under the circumstances existing here, we find that by filing the amended returns the taxpayers communicated, at least in part, the substance of that information to the government, and they must now disclose the detail underlying the reported data. A client may waive the privilege which protects what he earlier confided to his attorney or his attorney to him. See 8 Wigmore, Evidence § 2327 (McNaughton Rev. 1961). Here, Cote, the accountant, testified that the information on his workpapers was later transcribed onto the amended returns which were filed by the taxpayers with the government. This disclosure effectively waived the privilege not only to the transmitted data but also as to the details underlying that information. As stated in United States v. Tellier, 255 F.2d 441, 448 (2 Cir. 1958), cert. denied, 358 U.S. 821, 79 S.Ct. 33, 3 L.Ed.2d 62: "[T]he privilege attaches to the substance of a communication and not to the particular words used to express the communication's content." See also United States v. Shibley, 112 F. Supp. 734, 742 (S.D. Cal. 1953). Cf. Rule 5-11, Proposed Rules of Evidence, supra note 2 [disclosure of "any significant part" of a communication waives the privilege]; 8 Wigmore, supra, § 2327 at 638 [the "doctrine of completeness" is analogous to this principle]; McCormick, Law of Evidence § 93 (1954).
In tax cases waiver is often not even an issue since the privilege is said not to attach to information which the taxpayer intends his attorney to report in the contents of a tax return. See e. g., Colton v. United States, 306 F.2d 633, 638 (2 Cir. 1962), cert. denied, 371 U.S. 951, 83 S.Ct. 505, 9 L.Ed.2d 499 (1963); United States v. Threlkeld, 241 F. Supp. 324, 326 (W.D. Tenn. 1965); United States v. Merrell, 303 F. Supp. 490, 492 (N.D.N.Y. 1969). But cf., United States v. Schlegel, 313 F. Supp. 177 (D.Neb. 1970). Many nontax cases assert this same principle. See United States v. Tellier, 255 F.2d 441 (2 Cir. 1958), cert. denied, 358 U.S. 821, 79 S.Ct. 33, 3 L.Ed.2d 62; Wilcoxon v. United States, 231 F.2d 384 (10 Cir. 1956), cert. denied, 351 U.S. 943, 76 S.Ct. 834, 100 L.Ed. 1469; United States v. Shibley, 112 F. Supp. 734, 742 (S.D. Cal. 1953); In re Fisher, 51 F.2d 424, 425 (S.D.N.Y. 1931).
The district court's order of enforcement of the summonses is therefore affirmed.
Any dispute hereafter as to whether particular workpapers contain detail of unpublished expressions which are not part of the date revealed on the tax returns, should be submitted to the district court for an in camera ruling. See Brown v. United States, 276 U.S. 134, 48 S.Ct. 288, 72 L.Ed. 500 (1928).
Too broad an application of the rule of waiver requiring unlimited disclosure by reason of filing an income tax return might tend to destroy the salutary purposes of the privilege which invite confidentiality between the attorney and his client. See United States v. Schlegel, 313 F. Supp. 177 (D.Neb. 1970); cf. 8 Wigmore, Evidence § 2192 at p. 73 (McNaughton Rev. 1961). Such a rule is unnecessary to the recognition of the above principles. See Colton v. United States, 306 F.2d 633, 639 (2 Cir. 1962), cert. denied, 371 U.S. 951, 83 S.Ct. 505, 9 L.Ed.2d 499 (1963), which specifically withholds disclosure of memoranda and worksheets to the extent they contain confidential data not already published on the tax return.
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