U.S. v. Bdo Seidman

• Decision Date: 23 July 2003
• Docket Number: No. 02-3914.,No. 02-3915.,02-3914.,02-3915.
• Citation: 337 F.3d 802
• Parties: UNITED STATES of America, Petitioner-Appellee, v. BDO SEIDMAN, regarding promoter examination of BDO Seidman, Respondent-Appellee. Appeals of: John Doe and Jane Doe and Richard Roe and Mary Roe, Proposed Intervenors.
• Court: U.S. Court of Appeals — Seventh Circuit

337 F.3d 802

UNITED STATES of America, Petitioner-Appellee, v. BDO SEIDMAN, regarding promoter examination of BDO Seidman, Respondent-Appellee.

Appeals of: John Doe and Jane Doe and Richard Roe and Mary Roe, Proposed Intervenors.

No. 02-3914.

No. 02-3915.

United States Court of Appeals, Seventh Circuit.

Argued May 30, 2003.

Decided July 23, 2003.

Rehearing and Suggestion for Rehearing En Banc Denied August 26, 2003^*.

COPYRIGHT MATERIAL OMITTED

Kenneth W. Rosenberg, Frank P. Cihlar (argued), Dept. of Justice, Tax Div., Appellate Section, Washington, DC, for Petitioner-Appellee.

Donald R. Cassling, Jenner & Block, Chicago, IL, Peter Buscemi (argued), Morgan, Lewis & Bockius, Washington, DC, for Respondent-Appellee.

Joseph J. Duffy, Corey B. Rubenstein (argued), Stetler & Duffy, Chicago, IL, Royal B. Martin, Jr., Martin, Brown & Sullivan, Chicago, IL, for Appellants.

Before RIPPLE, KANNE and WILLIAMS, Circuit Judges.

RIPPLE, Circuit Judge.

Several unnamed clients of BDO Seidman, LLP ("BDO"), a public accounting and consulting firm, appeal from the district court's denial of their motions to intervene in an Internal Revenue Service ("IRS") enforcement action against BDO.

The IRS had issued twenty summonses to BDO as part of its investigation of BDO's compliance with Internal Revenue Code registration and list-keeping requirements for organizers and sellers of potentially abusive tax shelters. See 26 U.S.C. §§ 6111, 6112. The clients sought to intervene to assert a confidentiality privilege regarding certain documents that BDO intended to produce in response to those summonses. The clients argued that, because these documents reveal their identities as BDO clients who sought advice regarding tax shelters and who subsequently invested in those shelters, disclosure inevitably would violate the statutory privilege protecting confidential communications between a taxpayer and any federally authorized tax practitioner giving tax advice. See 26 U.S.C. § 7525. For the reasons that follow, we affirm the district court's denial of the clients' motions to intervene.

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 registration and listing requirements for organizers and sellers of tax shelters. See 26 U.S.C. §§ 6111, 6112. Section 6111(a) of the Internal Revenue Code requires organizers of tax shelters to register the tax shelter with the IRS. See 26 U.S.C. § 6111(a). Any tax shelter required to be registered under § 6111, as well as any "arrangement which is of a type which the Secretary determines by regulations as having a potential for tax avoidance or evasion," is considered to be "potentially abusive." 26 U.S.C. § 6112(b). Accordingly, the organizers and sellers of such tax shelters must keep a list identifying each person to whom an interest of the tax shelter was sold. See 26 U.S.C. § 6112(a). Failure to comply with the registration and listing requirements of § 6111 and § 6112 can lead to the imposition of penalties. See 26 U.S.C. §§ 6707, 6708. Because the IRS suspected that BDO had violated these statutory provisions by organizing and selling interests in potentially abusive tax shelters without complying with the registration and list-keeping requirements, it issued a series of summonses to BDO, identifying twenty types of tax shelter transactions in which it suspected that BDO's clients had invested.

The summonses command production of documents and testimony relating to the identified transactions, as well as information about BDO clients who invested in the identified tax shelters. For example, the summonses demand documents identifying the investors in the transactions, the date on which those investors acquired an interest, and all tax shelter registrations filed and investor lists prepared with respect to the transactions.

In July 2002, when BDO failed to produce documents as required by the summonses, the IRS petitioned the district court for enforcement. BDO opposed enforcement. It argued that the investigation did not have a legitimate purpose, that the summonses were overbroad and issued in bad faith, and that the information sought was already in the possession of the IRS and was not relevant to the investigation. BDO also claimed that some of the summoned information was protected from disclosure by the attorney-client privilege, the work product doctrine, and the confidentiality privilege of § 7525 of the Internal Revenue Code. In October 2002, the district court ruled that the IRS had met its burden of showing that it issued the summonses in good faith, and that BDO had failed to show that enforcement of the summonses would constitute an abuse of process. See United States v. BDO Seidman, LLP, 225 F.Supp.2d 918, 920 (N.D.Ill.2002). The district court then directed BDO to produce, on or before November 4, 2002, all responsive documents except those that BDO previously had listed on privilege logs and submitted to the court for an in camera review.

B. The Motions to Intervene

Among the responsive documents not previously submitted for the court's in camera inspection were records that reveal the identities of the BDO clients who invested in at least one of the 20 types of tax shelters identified in the summonses. BDO informed its clients that it intended to produce these documents to the IRS. In response, two sets of unidentified taxpayers — the John and Jane Does and the Richard and Mary Roes (hereinafter referred to collectively as "the Does") — filed emergency motions to intervene in the enforcement proceedings pursuant to Federal Rule of Civil Procedure 24(a)(2). The Does, asserting that they are BDO clients who sought BDO's confidential advice regarding the potential tax effects of certain proposed financial transactions, argued that the documents revealing their identities are privileged under 26 U.S.C. § 7525, and that BDO was not adequately representing their interest in keeping that information confidential. The Does conceded that, aside from the fact that the documents reveal their identities as BDO clients who invested in at least one of the 20 types of tax shelters described in the summonses, the documents themselves do not contain any otherwise privileged communication. After a hearing, the district court denied the Does' emergency motions to intervene. The court concluded that information regarding a client's identity falls outside the scope of the § 7525 privilege. Because the district court did not believe that the Does would have a likelihood of success on the merits of an appeal, it denied the Does' motion for a stay of its enforcement order.

The Does filed timely notices of appeal from the denial of their motions to intervene and requested that this court stay the production of the documents to which they had asserted a privilege in the district court. We granted a temporary stay and remanded the case to the district court for the limited purpose of permitting the district court to enter more extensive findings regarding those documents to which the Does claim a privilege. The remand order directed the district court to perform an in camera inspection of the documents at issue and to enter specific findings considering the totality of the circumstances surrounding the Does' privilege claim.

C. The Limited Remand

On this limited remand, the district court did not perform a comprehensive review of all the documents that contained information identifying the Does, but instead requested counsel to produce a subset for in camera inspection. Specifically, the court ordered counsel to produce all confidentiality agreements, consulting agreements and engagement letters entered into between BDO and the Does. Upon reviewing this subset of documents, the court determined that the identities of at least 55 Does were not subject to privilege under § 7525. It noted that many of the confidentiality agreements establish that particular Does engaged BDO's services, in part, for the purpose of preparing income tax returns. In addition, several consulting agreements contained a "No Warranty" provision, which states that "BDO's Services hereunder do not include... any legal and/or tax opinions regarding any strategies that may be implemented." See United States v. BDO Seidman, LLP, No. 02 C 4822, 2003 WL 932365, at *3 (N.D.Ill. Feb.5, 2003). This language, the court determined, suggests that the relationship between BDO and the Does was not always that of tax advisor-client and that, in such cases, their communications would not be subject to the § 7525 privilege. See id. at *3-4. Accordingly, the district court found that 133 of the documents it had reviewed established that BDO's communications with 55 Does had not been for the purpose of providing tax advice, and were therefore not privileged. Furthermore, the court concluded, 28 of the documents were generated for the purpose of preparing tax returns, another unprivileged category of communication. See id. at *2 (citing United States v. Frederick, 182 F.3d 496 (7th Cir.1999)). Finally, with respect to 30 unidentified clients who sought intervention, the court was unable to make findings because no confidentiality agreements, consulting agreements or engagement letters had been produced on their behalf.

II DISCUSSION

On appeal, the Does submit that the district court erred when it denied their motions to intervene on the ground that the Does lacked a colorable claim of privilege under § 7525. Because the Does sought intervention as of right, Fed. R.Civ.P. 24(a)(2), they had the burden of establishing that: (1) their motions to intervene were timely; (2) they possess an interest related to the subject matter of the enforcement action; (3) disposition of the action threatens to impair that interest; and (4) the IRS and BDO fail to represent adequately their interest. See Vollmer v. Publishers...