Sixth Circuit Agrees with D.C. and Not First that Disclosure of Privileged Matter to Client’s Accountant Does Not Effect Waiver — Fact Lawyer Has Conflict Does Not Affect Client’s Right to Assert Privilege

From New Phoenix Sunrise Corp. v. Comm’r IRS, 408 F. App'x 908 (6th Cir. 2010):

II. Reasonable Cause Exception

The Commissioner assessed a 40% underpayment penalty applicable to valuation misstatements of more than 400% against New Phoenix. See I.R.C. § 6662(h). New Phoenix seeks to avoid this penalty by invoking the reasonable cause exception outlined in Treasury Regulation § 1.6664-4, arguing that it reasonably and in good faith relied on the tax opinion it received from Jenkens & Gilchrist in claiming the loss from the BLISS transaction on its tax returns. The tax court determined that New Phoenix could not invoke the reasonable cause defense, concluding that, because Jenkens & Gilchrist "actively participated in the development, structuring, promotion, sale, and implementation of the BLISS transaction," it was unreasonable for New Phoenix to rely on the tax opinion "in the face of such a conflict of interest."

New Phoenix [argues] that the tax court improperly required the disclosure of certain documents, later admitted into evidence, that it claims are subject to protection as attorney work product or under the attorney-client privilege. New Phoenix asserts that by requiring disclosure of those documents and by admitting them into evidence, the tax court committed reversible error because the tax court relied on these documents in disregarding its defenses to penalties. The tax court admitted the documents after concluding that they were encompassed in New Phoenix's "subject-matter" waiver of any privileges applicable to material related to the Jenkins & Gilchrist tax opinion, by reason of New Phoenix's assertion of the reasonable cause defense. ***

Both the attorney-client privilege and work-product protection are waived by voluntary disclosure of private communications to third parties. United States v. Dakota, 197 F.3d 821, 825 (6th Cir. 1999); In re Columbia/HCA Corp., 293 F.3d 289, 306 (6th Cir. 2002) ("[T]here is no compelling reason for differentiating waiver of work product from waiver of attorney-client privilege.").

When the disclosure is made in a Federal proceeding or to a Federal office or agency and waives the attorney-client privilege or work-product protection, the waiver extends to an undisclosed communication or information in a Federal or State proceeding only if:

(1) the waiver is intentional;

(2) the disclosed and undisclosed communications or information concern the same subject matter; and

(3) they ought in fairness to be considered together.

Fed. R. Evid. 502(a); see also United States v. Collis, 128 F.3d 313, 320 (6th Cir. 1997).

New Phoenix first argues that "there is no evidence that Jenkens' [sic] opinion [in support of the BLISS transaction] was ever privileged," and therefore its disclosure did not waive any privileges protecting other documents. The attorney-client privilege attaches to confidential communications relating to any legal advice sought from a professional legal adviser in his capacity as such. See Reed v. Baxter, 134 F.3d 351, 355-56 (6th Cir. 1998) (citing Fausek v. White, 965 F.2d 126, 129 (6th Cir. 1992)). Despite New Phoenix's contention, the tax opinion constitutes just this sort of confidential communication: it recites facts communicated by New Phoenix for that purpose of obtaining legal advice, and it contains a prominent heading on the first page indicating "CONFIDENTIAL" and "ATTORNEY-CLIENT PRIVILEGED." New Phoenix's argument that it always intended to disclose this document to its accountants and auditors does not change the document's confidential and privileged nature, because it could make such a disclosure consistent with the privilege. See United States v. Deloitte LLP, 610 F.3d 129, 139-41, 391 U.S. App. D.C. 318 (D.C. Cir. 2010) (holding that there was no waiver if disclosed to auditor). Nor is this ruling inconsistent with the tax court's decision that the tax opinion was not the product of a neutral advisor. The fact that the advice of the attorneys cannot be relied upon for the purpose of evading a penalty does not mean that there was not an attorney-client relationship between New Phoenix and Jenkens & Gilchrist. In other words, the fact that an attorney has a conflict of interest does not mean that the client forfeits the benefit of the attorney-client privilege.

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