U.S. v. Bdo Seidman, Llp, No. 05-3260.

• Court: United States Courts of Appeals. United States Court of Appeals (7th Circuit)
• Writing for the Court: Ripple
• Citation: 492 F.3d 806
• Parties: UNITED STATES of America, Petitioner-Appellant, Cross-Appellee, v. BDO SEIDMAN, LLP, regarding IRS examination of BDO Seidman, LLP, Respondent-Appellee, and Robert S. Cuillo, et al., Intervenors-Appellees, Cross-Appellants.
• Decision Date: 02 July 2007
• Docket Number: No. 05-3260.,No. 05-3518.

492 F.3d 806 UNITED STATES of America, Petitioner-Appellant, Cross-Appellee,
v.
BDO SEIDMAN, LLP, regarding IRS examination of BDO Seidman, LLP, Respondent-Appellee, and
Robert S. Cuillo, et al., Intervenors-Appellees, Cross-Appellants. No. 05-3260. No. 05-3518. United States Court of Appeals, Seventh Circuit. Argued September 11, 2006. Decided July 2, 2007.

[492 F.3d 808]

Frank P. Cihlar (argued), Karen D. Utiger, Michelle B. Smalling, Department of Justice, Tax Division, Appellate Section, Washington, DC, for Petitioner-Appellant.

Cary B. Samowitz (argued), DLA Piper US LLP, New York, NY, Michael S. Poulos, DLA Piper US LLP, Chicago, IL, for Respondent-Appellee.

George W. Connelly, Juan F. Vasquez, Jr., Chamberlain, Hrdlicka, White, Johnson & Williams, Houston, TX, David D. Aughtry (argued), Chamberlain, Hrdlicka, White, Williams & Martin, Atlanta, GA, for Intervenors-Appellees.

Before RIPPLE, KANNE and WILLIAMS, Circuit Judges.

RIPPLE, Circuit Judge.

This is the third appeal arising out of an effort by the Internal Revenue Service ("IRS") to enforce administrative summonses against BDO Seidman, LLP ("BDO"), an accounting firm that allegedly failed to disclose potentially abusive tax shelters that it promoted. See United States v. BDO Seidman, 337 F.3d 802 (7th Cir.2003) (BDO II); United States v. BDO Seidman, Nos. 02-3914 & 02-3915, 2002 WL 32080709 (7th Cir. Dec.18, 2002) (BDO I). The IRS now appeals the district court's ruling that sustained BDO's claim of attorney-client privilege with respect to a memorandum written by one of BDO's employees. The IRS also appeals a separate ruling that sustained the tax practitioner and/or attorney-client privilege asserted by a number of BDO's clients ("Intervenors") with respect to 266 documents. The Intervenors cross-appeal the district court's ruling that one document, Document A-40, fell within the crime-fraud exception to the attorney-client and/or tax practitioner privilege. For the reasons set for forth in this opinion,

492 F.3d 809

we affirm in part and vacate and remand in part.

I BACKGROUND

A. The Enforcement Action

In September 2000, the IRS received information suggesting that BDO was promoting potentially abusive tax shelters without complying with the Internal Revenue Code's ("IRC") listing requirements for such tax shelters. See 26 U.S.C. §§ 6111(a), 6112(a) (2000); BDO II, 337 F.3d at 806. Potentially abusive tax shelters included those transactions defined as "tax shelters" under § 6111(c) and arrangements identified by regulation as potentially abusive under § 6112(b).¹ Organizers of any potentially abusive tax shelter were required to maintain a list of persons to whom an interest in the shelter was sold. See 26 U.S.C. § 6112(a) (2000). Additionally, organizers and sellers of § 6111(c) tax shelters were required to register the tax shelter with the IRS. See id. § 6111(a). Failure to follow these registration and list-keeping requirements was sanctionable by penalties. See id. §§ 6707, 6708.²

The IRS commenced a compliance investigation into BDO's alleged violations. The IRS issued twenty summonses commanding production of documents, testimony relating to the transactions and information on the identity of the clients who had invested in the transactions. BDO II, 337 F.3d at 805-06. When BDO resisted these summonses, the IRS petitioned the United States District Court for the Northern District of Illinois for enforcement. Id. at 806. BDO contended that the summonses could not be enforced because the investigation had no legitimate purpose. It also contended that the summonses were overbroad, issued in bad faith and sought information already in the IRS' possession. Lastly, BDO submitted that the information sought was irrelevant to the investigation. Id. at 806. BDO further asserted that a number of the documents were protected by the attorney-client privilege, the tax practitioner privilege under 26 U.S.C. § 7525(a) or work product protection. BDO II, 337 F.3d at 806. The district court ruled that the IRS had issued the summonses in good faith and that enforcement would not constitute an abuse of process. It ordered BDO to produce all responsive documents except for those previously listed on privilege logs and submitted to the court by BDO for in camera inspection. Id. at 806-07.

BDO then notified its clients that it intended to produce documents that would reveal their identities to the IRS. In response, a number of clients sought to intervene as of right in order to assert the

492 F.3d 810

tax practitioner privilege under 26 U.S.C. § 7525(a).³ The district court denied the motions to intervene, holding that the tax practitioner privilege would not prevent disclosure of the clients' names. See BDO II, 337 F.3d at 807. The clients appealed this denial to this court.

On December 18, 2002, we entered an order remanding the case to the district court to permit it to undertake an in camera inspection of the documents for which the would-be anonymous intervenors asserted a privilege. See BDO I, 2002 WL 32080709, at *1. We ordered the district court to make more extensive findings with respect to the claim of tax practitioner privilege for each document, taking into account the totality of the circumstances. Id. After conducting this in camera review, the district court determined that the tax practitioner privilege did not prevent disclosure of the clients' identities. R.73 at 7-31. The clients again appealed, and we affirmed the district court's ruling on the question of privilege and its denial of the motions to intervene. BDO II, 337 F.3d at 813.

After our decision affirming the district court's denial of the anonymous clients' motion to intervene, the Intervenors sought intervention as of right in order to assert a claim of privilege under the attorney-client privilege, tax practitioner privilege or work product doctrine with respect to 267 documents. The IRS filed a document titled "United States' Concurrence in Intervenors' Motions to Intervene and Challenge to Claims of Privilege" in which it argued that the district court should grant the motion, or, in the alternative, deny the claim of privilege. The IRS and the Intervenors also filed a joint motion in which the IRS consented to the intervention and the parties set forth a proposed briefing schedule. On July 15, 2004, the district court granted the Intervenors' motion.

B. Intervenors' Claims

The Intervenors asserted attorney-client privilege, tax practitioner privilege or work product protection with respect to 267 documents. The IRS submitted that the documents either were not covered by the tax practitioner privilege under the tax shelter exception found in 26 U.S.C. § 7525(b), as it existed at the time of the communications, or that the documents fell within the crime-fraud exception to both the attorney-client and tax practitioner privileges.

According to the IRS, BDO, in conjunction with other firms, had engaged in the practice of selling prepackaged tax shelters, the sole purpose of which was the unlawful attempt to evade tax liability. The district court determined that the IRS had failed to make a prima facie showing of crime or fraud that would justify a blanket determination that all of the documents fell within the crime-fraud exception. R.178 at 16. The court noted that, just because the IRS characterized the transactions "as abusive and unlawful cookie cutter tax shelters," such a characterization did not make them so. Id. at 17. The court added that the question of whether BDO and the Intervenors had violated the IRC was the ultimate issue in the IRS' investigation and that a finding of fraud based solely on the IRS' allegations "would place the proverbial `Cart before the Horse.'" Id. In a footnote, the district court added that, based on these same considerations, it could not hold that the Intervenors or BDO were engaged in tax shelters which would fall within the tax

492 F.3d 811

shelter exception to the tax practitioner privilege. Id. at n. 6.

Although the district court was unwilling to apply the crime-fraud exception in blanket fashion, it proceeded to review each document in camera to determine whether individual documents fell within the crime-fraud exception. Id. at 18. In conducting the review, the district court looked to the totality of the circumstances to determine whether there was sufficient evidence of crime or fraud to bring a document within this exception. Id. at 23. To guide this evaluation, the district court identified eight non-exclusive, non-determinative "potential indicators of fraud" which it drew from arguments made by the IRS, from two other cases involving allegedly fraudulent practices by BDO and from an unrelated IRS enforcement action against another accounting firm. R.178 at 23.⁴ Based on these cases and other factors that the IRS had submitted were indicative of fraud, the district court arrived at the following eight factors to guide its in camera review of each of the 267 documents:

(1) the marketing of pre-packaged transactions by BDO; (2) the communication by the Intervenors to BDO with the purpose of engaging in a pre-arranged transaction developed by BDO

492 F.3d 812

or [a] third party with the sole purpose of reducing taxable income; (3) BDO and/or the Intervenors attempting to conceal the true nature of the transaction; (4) knowledge by BDO, or a situation where BDO should have known, that the Intervenors lacked a legitimate business purpose for entering into the transaction; (5) vaguely worded consulting agreements; (6) failure by BDO to provide services under the consulting agreement yet receipt of payment; (7) mention of the COBRA transaction; and (8) use of boiler-plate documents.

R.178 at 23. The court further noted that the presence of these factors alone would not be sufficient to establish a prima facie case of fraud. See id. at 23-24. Rather, the potential indicators of fraud were intended to...