Searching over 5,500,000 cases.


searching
Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

U.S. v. KPMG LLP

December 20, 2002

UNITED STATES OF AMERICA, PETITIONER,
V.
KPMG LLP, RESPONDENT.



The opinion of the court was delivered by: Thomas F. Hogan, Chief Judge

MEMORANDUM OPINION

Pending before the Court is the United States of America's Petition to Enforce Internal Revenue Service Summonses. In response to that petition, Respondent KPMG LLP ("KPMG") has filed a detailed privilege log. For the reasons set forth below, the Court is referring that privilege log to a Special Master in order to conduct an examination of the withheld documents and evaluate the asserted privileges.

I. BACKGROUND/PROCEDURAL HISTORY*fn1

Government's July 9, 2002 Petition to Enforce IRS Summonses As part of an Internal Revenue Service ("IRS") examination of KPMG's promotion of and participation in transactions that the IRS contends are tax shelters, the IRS served a total of twenty-five administrative summonses on KPMG seeking information and materials relevant to the investigation.

On January 28, 2002, the IRS issued a summons requesting information relating to two types of transactions, known as the Foreign Leveraged Investment Program ("FLIP") and the Offshore Portfolio Investment Strategy ("OPIS"). This summons is referred to as the "FLIP/OPIS Summons." See Petition to Enforce Internal Revenue Service Summons ("Pet. to Enf.") at 2-3. On March 19, 2002, the IRS issued six additional summonses to KPMG. These summonses are also referred to by the transactions to which they are directed, as the "BLIPS/TRACT/IDV Summons," the "401(k) ACCEL Summons," the "§ 6111(c) Summons," the "§ 6111(d) Summons," the "Foreign Transactions Summons," and the "MIDCO Summons." Id. at 4-6. On May 3, 2002, the IRS issued two more summonses to KPMG, the "Tax Treaty Summons" and the "FOCUS Summons." Id. at 6-7.

The IRS contends that although KPMG had produced eighty-four boxes of records [as of April 22, 2002] in response to the FLIP/OPIS Summons and had produced individuals who provided sworn testimony in response to this summons, KPMG failed to fully comply with the summons. See Pet. to Enf. at 2-4. The IRS also claims that despite granting KPMG additional time to comply with the summonses issued on March 19 and May 3, KPMG failed to produce all responsive materials for the BLIPS/TRACT/IDV Summons, the 401(k) ACCEL Summons, the § 6111(d) Summons, the Foreign Transaction Summons, the MIDCO Summons, and the Foreign Transaction Summons and has failed to respond at all to the § 6111(c) Summons and the Tax Treaty Summons. Id. at 7-9. Therefore, on July 9, 2002, the Government filed the Petition to Enforce Internal Revenue Summonses to enforce these nine administrative summonses issued to KPMG as part of the IRS examination. On July 11, 2002, this Court signed a "Show Cause Order" in response to the Government's Petition.

KPMG's Opposition to Petition

KPMG responded on September 6, 2002 with its Opposition to Petition ("Opp.").*fn2 KPMG contends that the twenty-five IRS summonses served over a five month period are "extremely broad, incredibly burdensome, and, in many respects, unenforceable." Opp. at 1. For example, the FLIP/OPIS Summons alone "demanded 50 categories of documents from every KPMG office in the nation (there are approximately 100) . . . [and] required KPMG to provide persons to testify about 37 different topics." Id. at 5. Despite this burden, KPMG claims that it has worked diligently to respond to the IRS summonses. Id. at 5-10. As of the date that the IRS filed the Petition to Enforce, KPMG had "continued its substantial efforts to comply in good faith" with the IRS requests, producing multiple witnesses, a total of 229 boxes of documents, and providing the IRS with a careful index of each box, even though this was not legally required. Id. at 8-10. KPMG asserts that it has continued to respond to the summonses even after the filing of this Petition to Enforce, producing an additional 183 boxes of documents. Id. at 11.

KPMG's Privilege Log and Motion for Protective Order

KPMG withheld from the IRS certain documents that are responsive to the various summonses on grounds that these documents are privileged. Id. KPMG provided the IRS with a privilege log of the documents withheld in response to the FLIP/OPIS summons ("FLIP/OPIS privilege log") and supplemented this log as KPMG has continued to produce materials responsive to the summons. Id. The FLIP/OPIS privilege log provides a document-by-document description of the documents withheld from production, "setting forth the document number assigned to each privileged document, the date of the document, the names of the author(s) and recipient(s), a brief description of the contents of the documents, and the privileges applicable to each document." Reply in Opp. to Protective Order at 4-5; see also Petition to Enforce at Ex. 3 (the FLIP/OPIS privilege log). As of September 23, 2002, this log includes 1,293 entries. Id. However, despite the level of detail included in the privilege log, the IRS asserts that these withheld documents "are not in fact privileged." Petition to Enforce at 3. KPMG filed a Motion for a Protective Order to avoid the additional burden of preparing a document-by-document privilege log of the materials responsive to the summonses that were withheld on privilege grounds. KPMG states that a document-by-document privilege log for transactions other than FLIP and OPIS would contain at least 8,500 entries, and requests this Court to permit it to prepare a categorical privilege log describing by category the documents withheld on privilege grounds. See Motion for Protective Order at 2-4. The Government claimed that it needed a comprehensive, document-by-document privilege log in order to assess the validity of KPMG's claims of privilege. Opp. to Protective Order at 2-3.

Magistrate Judge Kay's Resolution of the Protective Order

On September 11, 2002, this Court referred KPMG's Motion for a Protective Order to Magistrate Judge Kay for resolution. At the motions hearing in front of Magistrate Judge Kay, counsel for the United States argued that KPMG has failed to demonstrate a valid claim of privilege in the FLIP/OPIS privilege log, which provides a document-by-document description, and contended that a category-by-category privilege log would be even less helpful in assisting the Court and the Government in assessing KPMG's various claims of privilege.

However, KPMG argued that a document-by-document privilege log is not necessary, particularly in light of the Government's blanket negative response to KPMG's claims of privilege. Reply in Opp. to Protective Order at 2. KPMG argued that the additional details included in the FLIP/OPIS privilege log (e.g., names of KPMG personnel, names of client representatives, and dates of correspondence) would not assist the court in making the privilege determination. Magistrate Judge Kay issued a Memorandum Opinion and Order on September 30, 2002 in which he denied KPMG's motion for the following reason:

Magistrate Judge Kay concluded that the categorical privilege log suggested by KPMG would not provide the trial court with sufficiently detailed information to make a determination on the validity of the privileges asserted. This Court finds that Chief Judge Hogan will be better able to evaluate the asserted privilege claims after reviewing in camera the details contained in the FLIP/OPIS privilege log accompanied by a random sample of the documents falling within each category of the privileges KPMG has asserted. This will assist Chief Judge Hogan in determining whether the FLIP/OPIS privilege log provides adequate detail to make a ruling on the validity of the claimed privileges, by affording the Court an opportunity to compare the sufficiency of the document description contained in the privilege log with the actual documents, and ultimately determining the validity of KPMG's assertion of privilege.

Accordingly, KPMG's Motion for a Protective Order is DENIED. In addition, the Court orders that KPMG produce the following numbered documents listed in the FLIP/OPIS privilege log to Chief Judge Hogan for an in camera review. These documents shall be submitted to the Chief Judge's chambers by close of business on Tuesday, October 1, 2002. Document numbers: 22-28, 42-51, 158-161, 435-447, 537-547, 549, 815-825, 835-870, 976-987, 1019-1034, 1040-1051, 1133-1148. Id. at 7-8 (emphasis added).

This Court received the above numbered documents on October 1, 2002.

II. LEGAL STANDARD

KPMG has asserted the following privileges: (1) 26 U.S.C. § 7525 Confidentiality Privilege; (2) Attorney-Client Privilege; (3) Attorney Work Product Privilege; and (4) "It's Own Privilege." The Court here briefly reviews the legal standard for each of these privileges.

26 U.S.C. § 7525 Confidentiality Privilege*fn3

26 U.S.C. § 7525 was enacted on July 22, 1998 and provides a limited confidentiality privilege for communications between a taxpayer and a tax practitioner. There are few reported federal cases that address 26 U.S.C. § 7525 in detail.*fn4 However, United States v. Frederick, 182 F.3d 496 (7th Cir. 1999), cert. denied, 528 U.S. 1154 (2000), sheds some light on this statute. Frederick notes that this "statute protects communications between a taxpayer and a federally authorized tax practitioner `to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.'" Id. at 502 (quoting 26 U.S.C. § 7525(a)(1)). Following as it must the text of § 7525, this Court will address any claims of § 7525 privilege in the same manner as it would for the attorney-client privilege.

The new statute "does not protect work product," and nothing in the statute "suggests that these nonlawyer practitioners are entitled to privilege when they are doing other than lawyers' work. . . ." Id. (emphasis added). Accordingly, through application of the plain meaning of the statute and the persuasive guidance of the Frederick court, this Court finds that the privilege does not protect communications between a tax practitioner and a client simply for the preparation of a tax return. See also, e.g., United States v. Lawless, 709 F.2d 485, 488 (7th Cir. 1983) (finding that "information transmitted for the purpose of preparation of a tax return, though transmitted to an attorney, is not privilege information").

Attorney-Client Privilege

The D.C. Circuit Court of Appeals has set forth the following concise summary of the attorney-client privilege:

The privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.

In re SEALED CASE, 737 F.2d 94, 98-99 (D.C. Cir. 1984) (citation omitted).

Further, "[c]ommunications from attorney to client are shielded if they rest on confidential information obtained from the client," and "when an attorney conveys to his client facts acquired from other persons or sources, those facts are not privileged." Id. at 99.

Tangentially related to the attorney-client privilege is the rule that a lawyer is barred from practicing law as a member or employee of an accounting firm. Typical of state regulation is the prohibition on accounting firms either practicing law or holding themselves out as law firms. See, e.g., D.C. Bar Rule 5.4(b). However,

[c]ommunications made by and to in-house lawyers in connection with representatives of the corporation seeking and obtaining legal advice may be protected by the attorney-client privilege just as much as communications with outside counsel. By contrast, communications made by and to the same in-house lawyer with respect to business matters, management decisions or business advice are not protected by the privilege. When a lawyer acts merely to implement a business transaction or provides accounting services, the lawyer is like any other agent of the corporation whose communications are not privileged. A corporation can protect material as privileged only upon a "clear showing" that the lawyer acted "in a professional legal capacity." Because an in-house lawyer often has other functions in addition to providing legal advice, the lawyer's role on a particular occasion will not be self-evident as it usually is in the case of outside counsel. A court must examine the circumstances to determine whether the lawyer was acting as a lawyer rather than as business advisor or management decision-maker. One important indicator of whether a lawyer is involved in giving legal advice or in some other activity is his or her place on the corporation's organizational chart. There is a presumption that a lawyer in the legal department or working for the general counsel is most often giving legal advice, while the opposite presumption applies to a lawyer . . . who works for the Financial Group or some other seemingly management or business side of the house. A lawyer's place on the organizational chart is not always dispositive, and the relevant presumption therefore may be rebutted by the party asserting the privilege.

Boca Investerings Partnership v. United States, 31 F. Supp.2d 9, 11-12 (D.D.C. 1998) (citations omitted) (emphasis added).

Attorney Work-Product Doctrine

KPMG's "Own Privilege"

KPMG also asserts its "own privilege" with regard to 185 documents.*fn5 KPMG asserts that the documents withheld under this asserted privilege "generally are correspondence with or work product of KPMG's attorneys or tax practitioners, memoranda of meetings involving attorneys where legal advice was given or sought, and work product of individuals delegated by attorneys to prepare factual or legal analyses for the purposes of giving legal advice to KPMG." Opp. at 17. This privilege is related to the attorney-client privilege, and in some instances the attorney work-product doctrine. The Court will therefore follow the tenets discussed above regarding those two privileges when reviewing any of the 185 documents in which KPMG's "own privilege" is asserted.

III. FINDINGS OF IN CAMERA REVIEW

As noted above, the Court received document numbers 22-28, 42-51, 158-161, 435-447, 537-547, 549, 815-825, 835-870, 976-987, 1019-1034, 1040-1051, 1133-1148 on October 1, 2002. The Court has since reviewed its own random "sample of that ...


Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.