Waiving the Attorney-Client Privilege By Seeking Tax Advice

john-adams-courthouse for the Mass SJC

The Massachusetts Supreme Judicial Court focused on the issue of whether the attorney-client privilege protected  communications between an in-house corporate counsel and outside tax accountants. Commissioner of Revenue v. Comcast Corporation, et al., SJC-10209 (March 3, 2009). The general rule is that the voluntary disclosure of privileged information to a third party consultant for the company’s business purposes will be deemed to waive the privilege.

We saw a similar issue addressed in the context of SEC filings in the case of  Roth v Aon. In the Roth case, they were trying to compel the release of draft SEC filings. That court rejecting the request and recognized that the process of preparing SEC filings involves legal judgments throughout, even where the disclosure in question concerns operational rather than legal matters.

In Comcast, Corporate counsel retained two Massachusetts-based Arthur Andersen partners to provide Massachusetts tax law advice in connection with a proposed stock sale. The Andersen partners spoke with in-house counsel and prepared several memoranda discussing options for the company relating to the stock sale. Litigation ensued concerning the tax implications of the stock sale. The Commissioner of Revenue sought production of the Arthur Andersen memoranda, which Comcast withheld on the basis of the attorney-client privilege and/or work product doctrine.

The SJC held that the memoranda were not protected by the attorney-client privilege.

In addressing whether the attorney-privilege exists, Comcast bears the burden of proof and needed to show:

“(1) the communications were received from a client during the course of the client’s search for legal advice from the attorney in his or her capacity as such; (2) the communications were made in confidence; and (3) the privilege as to these communications has not been waived.”

Comcast argued that the memoranda fell within the “derivative privilege” recognized in United States v. Kovel, 296 F.2d 918 (2d Cir.1961). In the Kovel decision, the Second Circuit held that the attorney-client privilege is not waived when disclosure to a third party consultant is necessary to facilitate communication between the attorney and the client and assist the attorney in rendering legal advice to the client. One example of the derivative privilege is that of an interpreter brought in to translate for a client and his attorney who speak different languages.

With respect to accountants, the Court in Kovel held that the privilege is waived unless the communication is made for the specific purpose of the client obtaining legal advice from the lawyer. The privilege is waived if  (a) what is sought is not legal advice but only accounting services, or (b) if the advice sought is the accountant’s rather than the lawyer’s . In Comcast, the SJC agreed that the Kovel doctrine applies only when the accountant’s role is to clarify or facilitate communications between attorney and client. The majority of courts take the same position.

Lesson? Tax advice from your accountant is unlikely to be protected by attorney-client privilege.

Before disclosing attorney-client communications to a third party, ask yourself whether the third party is being consulted in order to (a) simply to provide her own advice, or (b) facilitate communication between the attorney and the client. If your answer is (b), disclosure of the confidential information will likely waive the attorney-client privilege.

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