## Facts

- The IRS investigated whether an accounting firm promoted potentially abusive tax shelters without complying with federal registration and investor-listing requirements under 26 U.S.C. §§ 6111 and 6112, enforceable through penalties under §§ 6707 and 6708.
- The IRS issued administrative summonses to the firm seeking documents about the shelters and related client transactions.
- The firm and certain clients asserted protections over responsive materials under attorney–client privilege and the tax practitioner privilege in 26 U.S.C. § 7525.
- After remand from earlier appeals and with client intervention permitted, the district court:
  - Sustained privilege over a memorandum prepared in connection with legal advice and shared among parties claiming a shared legal interest.
  - Sustained privilege over 266 client-related documents, except one document (A-40), which it held fell within the crime–fraud exception.
- The IRS appealed the privilege rulings as to the memorandum and the 266 documents; the intervening clients cross-appealed the crime–fraud ruling as to A-40.

## Issues

1. Whether disclosure of a memorandum among parties asserting a shared legal interest waived attorney–client privilege, and whether the common interest doctrine requires imminent or ongoing litigation.
2. What showing the IRS must make to invoke the crime–fraud exception to attorney–client and § 7525 privileges, and whether the exception applied beyond document A-40.
3. Whether § 7525’s tax shelter limitation is an element of the privilege or a true exception, who bears the burden of proof, and whether the limitation is confined to corporate tax advice.

## Decision

- Affirmed the district court’s ruling that the memorandum remained protected by attorney–client privilege under the common interest doctrine and that sharing it did not waive privilege.
- Affirmed the finding that A-40 fell within the crime–fraud exception and upheld the refusal to extend the exception to the remaining documents.
- Held that § 7525’s tax shelter limitation is a true exception for which the IRS bears the burden, and that it is not limited to corporate tax matters.
- Vacated and remanded the § 7525 rulings because the district court did not adequately determine which documents were protected by attorney–client privilege versus only by § 7525, preventing proper application of the tax shelter exception.

## Legal Principles

- Attorney–client privilege protects confidential communications made for the purpose of obtaining or providing legal advice within an attorney–client relationship.
- Under the common interest doctrine, privileged communications may be shared among parties with a common legal interest, in furtherance of that interest, without waiver; litigation need not be imminent.
- The crime–fraud exception applies upon a prima facie showing that the client was engaged in or planning a crime or fraud and that the communication furthered it; the proponent need not plead or prove every element of a specific offense.
- Section 7525 provides a limited privilege for confidential taxpayer communications with federally authorized tax practitioners to the extent the communication would be privileged if made to an attorney, but it does not expand attorney–client privilege.
- The § 7525 tax shelter limitation operates as a true exception; the party opposing privilege bears the burden to show the exception applies, and it is not restricted to corporate tax advice.

## Conclusion

The court upheld privilege protection for shared legal communications under the common interest doctrine, upheld a narrow crime–fraud finding limited to one document, and required further proceedings to separate attorney–client materials from those protected only by § 7525 so the IRS’s burden under the tax shelter exception can be properly evaluated.


United States v. BDO Seidman, LLP, 492 F.3d 806 (7th Cir. 2007)