Although the attorney-client privilege has long been recognized under common law, there is no corresponding taxpayer-accountant privilege [other than a limited privilege for “tax advice” in some non-criminal matters under Internal Revenue Code (IRC) section 7525]. Criminal and civil tax cases, however, often involve complex accounting principles that may necessitate the engagement of an accountant to aid the attorney in giving effective advice to the client. Under such circumstances, the attorney-client privilege extends to communications with the accountant for the purpose of assisting the attorney in rendering legal services to the client; this is known as the Kovel doctrine after United States v. Kovel [296 F. 2d 918 (2d Cir. 1961)]. The attorney-client privilege (and by extension, the Kovel privilege) belongs to the client, who has the burden of proving its applicability when asserting it. This applicability must be established by the existence of specific facts; a simple blanket assertion is insufficient.

In addition to the attorney-client privilege, there is the common law work product doctrine, which protects documents, interviews, statements, memoranda, correspondence, briefs, mental impressions, and other tangible things obtained or created by or for an attorney during or in anticipation of litigation by or for an attorney. The work product doctrine is also codified in Rule 26(b)(3)(A) of the Federal Rules of Civil Procedure and Rule 16(b)(2) of the Federal Rules of Criminal Procedure, which provide qualified protection for materials prepared by or at the direction of an attorney in anticipation of litigation or for trial. Under Rule 16 of the Federal Rules of Criminal Procedure, there is no exception for the discovery of documents constituting work product under the rule; however, the common law work product doctrine and Rule 26 can be overcome if the opposing party has a “substantial need” for the documents and cannot “without undue hardship, obtain their substantial equivalent by other means.” This exception is limited, however, and does not extend to documents that reflect an attorney’s or other representative’s mental impressions, conclusions, opinions, or legal theories.

Though the work product doctrine is separate and distinct from the attorney-client privilege, in the case of attorney-engaged accountants, the existence of a valid Kovel relationship may determine (or influence) whether a document or communication is protected work product. Accordingly, attorneys and accountants engaged in Kovel relationships should take appropriate steps in order to ensure that their communications and documents are in fact protected.

Adlman I: A Lesson on How to Preserve the Privilege

In United States v. Adlman [68 F.3d 1495 (2d Cir. 1995)] (Adlman I), the government brought an action to enforce an IRS summons issued to Monroe Adlman, the in-house counsel and vice president of taxes of the Sequa Corporation. The summons sought the production of a preliminary and final draft of a memorandum prepared by Sequa’s auditors, Arthur Anderson, at Adlman’s request, in order to determine the likely tax implications of a proposed merger. Adlman refused to produce the memoranda, contending (among other things) that they were prepared under a Kovel engagement and therefore protected by attorney-client privilege.

Under Kovel, the party asserting the privilege must establish that the communications or materials at issue were made for the purpose of obtaining legal advice from an attorney. [See also Schaeffler v. United States, 806 F.3d 34, 40 (2d Cir. 2015), stating that “the purpose of the communications must be solely for the obtaining or providing of legal advice,” emphasis added.] If the communications/materials were made for the purpose of obtaining accounting services, or if the advice sought was really the accountant’s rather than the attorney’s, no privilege exists. Accordingly, to satisfy the Kovel test, Adlman had to establish that the memoranda at issue were rendered to increase his understanding of the tax code so he could provide legal advice to Sequa.

The district court examined the structure of the relationship between Andersen, Adlman, and Sequa, as well as the nature of Andersen’s work, and found that the structure of the relationship and nature of that work supported a finding that Sequa provided information to Andersen in order to seek its advice on the tax implications of the proposed merger, and therefore the attorney-client privilege did not apply. The court noted that Adlman was also an officer of Sequa, there was no separate retainer agreement or billing statements distinguishing the preparation of the memoranda from other accounting work Andersen performed for Sequa, Andersen provided advising services directly to Sequa regarding the proposed merger, and Andersen prepared the memoranda because Adlman lacked the expertise to do so himself.

On appeal, the Second Circuit affirmed the district court’s decision. Though the district court’s denial of attorney-client privilege hinged largely on the lack of proof showing that Andersen was working under a different arrangement from that governing the rest of its work for Sequa, the Second Circuit stated that there is no per se requirement for a separate retainer agreement or individualized billing statements in order for Kovel to apply. The Second Circuit explained that the district court’s observation that the assertion of attorney-client privilege was weakened by the absence of a contemporaneous retainer agreement “was merely an application of common sense to the circumstances” and not “an elevation of form over substance.”

Adlman I makes clear that there are no uniform rules for making such a determination. Rather, deciding whether attorney-client privilege exists requires “common sense in light of reason and experience” and should be determined “on a case-by-case basis.” Nevertheless, Adlman I demonstrates the need to structure and document a Kovel arrangement with detail and care in order to ensure that the privilege is preserved.

Adlman II: The Expansion of the Work Product Doctrine

In addition to asserting attorney-client privilege, Adlman also refused to produce the memoranda at issue based on the work product doctrine. The district court held that the memoranda were not protected by the work product doctrine because they could not have been created in the anticipation of litigation. The district court’s reasoning was twofold: first, the memoranda were not protected by the work product doctrine because at the time of their creation neither the litigation nor the events giving rise to the memoranda (i.e., the proposed merger) had yet occurred; and second, in order for the memoranda to be prepared in anticipation of litigation, there must be a specific claim that makes the prospect of litigation identifiable, which was absent at the time the memoranda were prepared. In Adlman I, the Second Circuit reversed the district court’s holding that the work product doctrine was inapplicable based on its determination that the district court used the wrong legal standard, as the “in anticipation of litigation” requirement precludes documents created before the events that give rise to the anticipated litigation or the threat of an actual claim from work product protection (although it does necessitate that the documents were created with the “focus on a specific claim”). Under this definition, documents prepared in the course of an IRS examination may be characterized as “in anticipation” of future tax court, claims court, or district court litigation and afforded work product protection.

On remand, the district court held that the memoranda were still not protected by the work product doctrine based on its finding that the primary purpose in creating the memoranda was to determine whether or not Sequa should go through with the proposed merger, and the memoranda were therefore not created “principally or exclusively to assist in anticipated or ongoing litigation.”

The district court’s decision was again appealed and reviewed in United States v. Adlman [134 F.3d 1194 (2d Cir. 1998)] (Adlman II). In Adlman II, the Second Circuit held that the language “in anticipation of litigation” requires a showing that a document was “created because of anticipated litigation, and would not have been prepared in substantially similar form but for the prospect of that litigation.” Under this “because of” test, documents are not automatically excluded from work product protection simply because they were also motivated by a business purpose. As such, this test embraces the dual-purpose doctrine, under which documents motivated by more than one purpose are still eligible for work product protection.

The Third, Fourth, Seventh, Eighth and D.C. Circuits also employ the because of test in determining the applicability of the work product doctrine. By contrast, the Fifth Circuit applies the “primarily to assist in litigation” test, wherein work product protection extends only to documents created with the primary purpose of aiding in possible future litigation. This is a bright line rule that requires the automatic denial of work product protection to documents created for a business purpose. Furthermore, the First Circuit recently applied an alternate, more stringent “prepared for use in litigation” test in determining the applicability of the work product doctrine [U.S. v. Textron, Inc., 577 F.3d 21 (1st Cir. 2009)].

The “because of” test has its own limitations; the work product protection does not apply to documents that were “prepared in the ordinary course of business or that would have been created in essentially similar form irrespective of the litigation” (Adlman II). When a document was created because of the prospect of litigation in order to analyze the likely outcome of that litigation, it does not lose work product protection under this test merely because it was created in order to assist with a business decision influenced by the likely outcome of the anticipated litigation. As reasoned by the Second Circuit, the work product doctrine and Rule 26(3)(b) of the Federal Rules of Civil Procedure grant a special level of protection against the disclosure of documents that reveal an attorney’s (or her agent’s) opinions and legal theories concerning litigation. Excluding documents from work product protection merely because they were prepared to assist in the making of a business decision expected to result from the litigation would undermine not just the text of the rule, but also the purpose of the work product doctrine.

By adopting the because of litigation test instead of the primarily to assist in litigation test, the Second Circuit again rejected a bright line rule in favor of a facts and circumstances–oriented analysis.

A Common Sense Approach

In Adlman I, the Second Circuit refused to apply the attorney-client privilege to communications made to an accountant outside the scope of an attorney providing legal advice to the client. Whether communications with a Kovel accountant are privileged depends upon whether the purpose of the communications and work performed was to solicit and provide accounting services or aid in the rendering of legal services. Adlman I also suggests that the privilege is most likely to be recognized when: 1) there is contemporaneous documentation memorializing the engagement between the attorney and the accountant, 2) there is no preexisting relationship between the accountant and the client, 3) the attorney initiated or received the accountant’s communications, and 4) the accountant’s advice was provided directly to the attorney.

In Adlman II, the Second Circuit rejected the restrictive primarily to assist in litigation test, which would summarily exclude from work product protection any document analyzing an anticipated litigation if its purpose was to assist in making a business decision. Instead, the Second Circuit adopted the more expansive because of test. In so doing, the Second Circuit preserved the balance between the need for the disclosure of all relevant information and the need to encourage free and open discussions by clients in the course of legal representation established through the work product doctrine.

In both Adlman I and Adlman II, the Second Circuit rejected bright line rules in favor of case-by-case analyses that require courts to carefully examine all of the facts and circumstances in order to determine whether the production of the documents is consistent with the policy and purpose of the attorney-client privilege and work product doctrine.

Juliet L. Fink, JD is an attorney at Kostelanetz & Fink, LLP in New York, N.Y. Her practice focuses on federal and state criminal and civil tax matters.