Article on Benefits and Risks of Kovel Accountant, and Case on Topic (11/5/18)

I call readers attention to a very good succinct article on benefits and risk of using a Kovel accountant.:  Maintaining Privileges When Kovel Accountants Prepare Tax Returns by Evan Davis (Hochman, Salkin, Toscher & Perez Blog 10/29/18), here, which links to the article of that name in Tax Notes, here.  The author's bio is here.

On Kovel, I also offer readers the opinion in United States v. Adams, 2018 U.S. Dist. LEXIS 41165 (D. Minn. 2018), here.  (If the link is not working, please let me know at jack@tjtaxlaw.com or by posting a comment.,.  I cut and paste the relevant discussion (cleaned up, beginning on p. 2 of the opinion):

II. Murry LLC Communications 

Mr. Adams has invoked the attorney-client privilege over numerous communications between himself and accountants at Murry LLC, who were retained by his tax counsel under a so-called Kovel arrangement. See United States v. Kovel, 296 F.2d 918, 921–22 (2nd Cir. 1961) (holding that attorney-client privilege may apply to an individual’s communications with an accountant if the communications are “made in confidence for the purpose of obtaining legal advice from the lawyer”). The government raises three challenges to this assertion of privilege. First, the government argues that the protections provided under Kovel are not applicable to the individual communications before the Court for in camera review. Even if the protections of Kovel did apply, the government asserts that any protection was waived by Mr. Adams’s subsequent filing of amended tax returns. Finally, the government argues that the crime-fraud exception vitiates any claim of privilege. 

The Court has conducted an in camera review of the following Murry communications: In Camera Exhibits M, N, O, P, R, S, and T. For the reasons set forth below, the Court rejects the government’s challenge to the assertion of privilege regarding these documents. However, this Court’s decisions regarding the privileged nature of the specific documents at issue is expressly limited to these documents. The Court’s rulings should not be read to strengthen or weaken claims of privilege or discoverability as to other documents, evidence, or testimony as those issues are not now before the Court. 

A. Attorney-Client Privilege 

Federal common law governs questions of privilege in a criminal case such as this. The attorney-client privilege protects confidential communications between a client and an attorney that are made for the purpose of obtaining legal advice. The party asserting that a communication is protected by the attorney-client privilege has the burden to establish that it applies.  

B. Application of Kovel 

With respect to the government’s argument that the protections of Kovel do not apply to the Murry communications, the Court finds that Thomas Brever’s Declaration and Supplemental Declaration sufficiently demonstrate that the attorneyclient privilege extends to the documents at issue. In these declarations, Mr. Brever thoroughly explains how communications with Murry LLC and the information Mr. Adams provided to the accountants assisted in Mr. Brever’s provision of legal advice to his client regarding tax-related matters. This is sufficient to invoke the attorney-client privilege. See Kovel, 296 F.2d 921–22 (explaining that where an attorney retains an accountant to assist the lawyer in providing legal advice to a client concerning tax issues, the attorney-client privilege may extend to communications between the client and the accountant); see also United States v. Cote, 456 F.2d 142, 144 (8th Cir. 1972) (concluding that attorney-client privilege may apply where “the accountant’s aid to the lawyer preceded the advice and was an integral part of it”). The Court’s in camera review of the communications does not contradict Mr. Brever’s explanation. 

C. Waiver By Filing Amended Returns 

The Court also concludes that Mr. Adams’s subsequent filing of amended tax returns for 2008, 2009, and 2010 do not result in a waiver of the privilege as to the Murry communications submitted for in camera review. In Cote, after concluding that the privilege could apply to communications between a client and an accountant who is retained to assist an attorney in providing legal advice on tax matters, the Eighth Circuit reasoned as follows: 

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.  

456 F.2d at 144. 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. The Cote court distinguished between “workpapers [that] contain detail of unpublished expressions which are not part of the data revealed on the tax returns,” and other workpapers to which the rule of waiver would apply. Id. (emphasis in original). Here, Mr. Brever explains in his Supplemental Declaration that in responding to a subpoena from the government, he provided copies of files that contain data and
information that that was included on the amended returns for 2008–2010. However, he did not disclose information communicated by Mr. Adams in connection with requests for legal advice. Mr. Brever’s explanation distinguishes this case from Cote, where 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,” thereby waiving the privilege. The Court cannot conclude on this record, which includes the Court’s in camera review, that Mr. Adams is claiming privilege over the underlying details for the data that was ultimately transmitted to the IRS when he filed amended returns. Instead, the record suggests that the information conveyed to the accountants at Murry LLC comprised the type of unpublished expressions that were not later revealed on the amended tax returns.