Case Information
*1 Before R IPPLE , K ANNE and W ILLIAMS , Circuit Judges . R IPPLE , Circuit Judge
. Several unnamed clients of BDO Seidman, LLP (“BDO”), a public accounting and consulting firm, appeal from the district court’s denial of their motions *2 2
to intervene in an Internal Revenue Service (“IRS”) enforce- ment action against BDO.
The IRS had issued twenty summonses to BDO as part of its investigation of BDO’s compliance with Internal Revenue Code registration and list-keeping requirements for or- ganizers and sellers of potentially abusive tax shelters. See 26 U.S.C. §§ 6111, 6112. The clients sought to intervene to assert a confidentiality privilege regarding certain docu- ments that BDO intended to produce in response to those summonses. The clients argued that, because these docu- ments reveal their identities as BDO clients who sought ad- vice regarding tax shelters and who subsequently invested in those shelters, disclosure inevitably would violate the statutory privilege protecting confidential communications between a taxpayer and any federally authorized tax prac- titioner giving tax advice. See 26 U.S.C. § 7525. For the rea- sons that follow, we affirm the district court’s denial of the clients’ motions to intervene.
I
BACKGROUND A. The Enforcement Action
In September 2000, the IRS received information suggest- ing that BDO was promoting potentially abusive tax shelters without complying with the registration and listing re- quirements for organizers and sellers of tax shelters. See U.S.C. §§ 6111, 6112. Section 6111(a) of the Internal Revenue Code requires organizers of tax shelters to register the tax shelter with the IRS. See 26 U.S.C. § 6111(a). Any tax shelter required to be registered under § 6111, as well as any “arrangement which is of a type which the Secretary determines by regulations as having a potential for tax *3 avoidance or evasion,” is considered to be “potentially abu- sive.” 26 U.S.C. § 6112(b). Accordingly, the organizers and sellers of such tax shelters must keep a list identifying each person to whom an interest of the tax shelter was sold. See 26 U.S.C. § 6112(a). Failure to comply with the registration and listing requirements of § 6111 and § 6112 can lead to the imposition of penalties. See 26 U.S.C. §§ 6707, 6708. Because the IRS suspected that BDO had violated these statutory provisions by organizing and selling interests in potentially abusive tax shelters without complying with the registration and list-keeping requirements, it issued a series of sum- monses to BDO, identifying twenty types of tax shelter transactions in which it suspected that BDO’s clients had invested.
The summonses command production of documents and testimony relating to the identified transactions, as well as information about BDO clients who invested in the identi- fied tax shelters. For example, the summonses demand doc- uments identifying the investors in the transactions, the date on which those investors acquired an interest, and all tax shelter registrations filed and investor lists prepared with respect to the transactions.
In July 2002, when BDO failed to produce documents as required by the summonses, the IRS petitioned the district court for enforcement. BDO opposed enforcement. It ar- gued that the investigation did not have a legitimate pur- pose, that the summonses were overbroad and issued in bad faith, and that the information sought was already in the possession of the IRS and was not relevant to the inves- tigation. BDO also claimed that some of the summoned information was protected from disclosure by the attorney- client privilege, the work product doctrine, and the confi- dentiality privilege of § 7525 of the Internal Revenue Code. In October 2002, the district court ruled that the IRS had *4 met its burden of showing that it issued the summonses in good faith, and that BDO had failed to show that enforce- ment of the summonses would constitute an abuse of proc- ess. See United States v. BDO Seidman, LLP , 225 F. Supp. 2d 918, 920 (N.D. Ill. 2002). The district court then directed BDO to produce, on or before November 4, 2002, all re- sponsive documents except those that BDO previously had listed on privilege logs and submitted to the court for an in camera review.
B. The Motions to Intervene
Among the responsive documents not previously submitted for the court’s in camera inspection were records that reveal the identities of the BDO clients who invested in at least one of the 20 types of tax shelters identified in the summonses. BDO informed its clients that it intended to produce these documents to the IRS. In response, two sets of unidentified taxpayers—the John and Jane Does and the Richard and Mary Roes (hereinafter referred to collec- tively as “the Does”)—filed emergency motions to inter- vene in the enforcement proceedings pursuant to Federal Rule of Civil Procedure 24(a)(2). The Does, asserting that they are BDO clients who sought BDO’s confidential advice regarding the potential tax effects of certain proposed financial transactions, argued that the documents revealing their identities are privileged under 26 U.S.C. § 7525, and that BDO was not adequately representing their interest in keeping that information confidential. The Does conceded that, aside from the fact that the documents reveal their identities as BDO clients who invested in at least one of the 20 types of tax shelters described in the summonses, the documents themselves do not contain any otherwise priv- ileged communication. After a hearing, the district court denied the Does’ emergency motions to intervene. The *5 court concluded that information regarding a client’s iden- tity falls outside the scope of the § 7525 privilege. Because the district court did not believe that the Does would have a likelihood of success on the merits of an appeal, it denied the Does’ motion for a stay of its enforcement order.
The Does filed timely notices of appeal from the denial of their motions to intervene and requested that this court stay the production of the documents to which they had asserted a privilege in the district court. We granted a temporary stay and remanded the case to the district court for the limited purpose of permitting the district court to enter more extensive findings regarding those documents to which the Does claim a privilege. The remand order di- rected the district court to perform an in camera inspection of the documents at issue and to enter specific findings con- sidering the totality of the circumstances surrounding the Does’ privilege claim.
C. The Limited Remand
On this limited remand, the district court did not per-
form a comprehensive review of all the documents that
contained information identifying the Does, but instead re-
quested counsel to produce a subset for
in camera
inspec-
tion. Specifically, the court ordered counsel to produce all
confidentiality agreements, consulting agreements and en-
gagement letters entered into between BDO and the Does.
Upon reviewing this subset of documents, the court deter-
mined that the identities of at least 55 Does were not
subject to privilege under § 7525. It noted that many of the
confidentiality agreements establish that particular Does
engaged BDO’s services, in part, for the purpose of prepar-
ing income tax returns. In addition, several consulting
agreements contained a “No Warranty” provision, which
*6
states that “BDO’s Services hereunder do not include . . .
any legal and/or tax opinions regarding any strategies that
may be implemented.”
See United States v. BDO Seidman,
LLP
, No. 02 C 4822,
II
DISCUSSION
On appeal, the Does submit that the district court erred
when it denied their motions to intervene on the ground
that the Does lacked a colorable claim of privilege under
§ 7525. Because the Does sought intervention as of right,
Fed. R. Civ. P. 24(a)(2), they had the burden of establishing
that: (1) their motions to intervene were timely; (2) they
possess an interest related to the subject matter of the en-
forcement action; (3) disposition of the action threatens to
impair that interest; and (4) the IRS and BDO fail to repre-
*7
sent adequately their interest.
See Vollmer v. Publishers Clear-
ing House
,
Before us, the only factor that the IRS disputes is whether the Does satisfied their burden of demonstrating a legally protectable interest in preventing the disclosure of the doc- uments that would reveal their identities as individuals who sought BDO’s advice regarding tax shelters.
In the course of their submission, the Does advance sev- eral additional arguments that challenge the district court’s findings and conclusions on limited remand. For example, they argue that the district court’s factual findings were clearly erroneous because the court failed to consider the totality of the circumstances surrounding each document. They further argue that the district court erroneously con- cluded that the asserted privilege would not have attached even if the court properly found that BDO prepared tax re- turns for some unidentified clients who discussed tax shel- ters with BDO. Finally, the Does contend that there is no basis to uphold the district court’s production order with *8 respect to the 30 unidentified clients for whom no findings were made on the limited remand. These arguments all pre- suppose that the district court erroneously concluded that the § 7525 privilege cannot be asserted to prevent the dis- closure of their identities. If that initial premise proves wrong, there would be no reason to address any of these arguments.
We have jurisdiction to review the district court’s orders
because they definitively preclude the Does’ future partici-
pation in the IRS enforcement action against BDO.
See
United States v. City of Milwaukee,
The primary issue before us is whether the district court erred when it denied the Does’ motions to intervene because it believed that they had failed to establish a colorable claim of privilege under § 7525. Unless the Does can establish that the § 7525 privilege can protect a taxpayer’s identity from disclosure in the IRS enforcement action, the Does will not prevail on appeal. Whether the scope of the § 7525 privilege includes protection against the disclosure of client identity is a question of law that this court reviews de novo. See In re Subpoenaed Grand Jury Witness, 171 F.3d 511, 512 (7th Cir. 1999).
1. Regulatory Context
We first consider the regulatory context in which the Does’ claim of privilege arises. The Does sought to inter- vene in proceedings involving the IRS investigation of BDO for potential violations of the tax code, including the pro- visions requiring organizers of tax shelters to register tax *9 9 shelters with the IRS, 26 U.S.C. § 6111, and organizers and sellers of such shelters to keep lists of the investors, 26 U.S.C. § 6112. These provisions were enacted by Congress as part of the Deficit Reduction Act of 1984, Pub. L. No. 98- 369, 98 Stat. 494 (1984), for the purpose of providing the IRS with means to better monitor tax shelters, and, conse- quently, to deter abusive tax shelters that can adversely impact public revenues. See Elizabeth K. Lewicki, The Reg- ulation of Tax Shelters and New Internal Revenue Code Section 469: A Complex and Unnecessary Addition to the War on Abusive Tax Shelters, 19 Pac. L.J. 101, 115-16 (1987). Before 1984, no systematic information was available to assist the IRS in identifying the shelters that should be investigated. H.R. Conf. Rep. No. 98-861, at 977 (1984), reprinted in 1984 U.S.C.C.A.N. 1445, 1665. The IRS could audit individual taxpayers, but such a process only randomly identified par- ticipants in potentially abusive tax shelters. Lewicki , 19 Pac. L.J. at 116. The statutory registration and list-keeping pro- visions allow the IRS to identify more easily those transac- tions that it deems to be abusive and “to identify quickly all of the participants in related tax-shelter investments.” H.R. Rep. No. 98-432, pt. 2, at 1351-52 (1984), reprinted in 1984 U.S.C.C.A.N. 697, 1004-05. These provisions also enable the IRS to examine every purchaser of a given type of tax shelter investment and to treat those taxpayers in a more uniform manner. Id.
Congress, by granting the IRS the broad power to issue
summonses to investigate violations of the tax code,
see
U.S.C. § 7602, further provides the IRS with great latitude
to verify compliance with these tax shelter registration and
list-keeping provisions.
See also Holifield v. United States
, 909
F.2d 201, 205 (7th Cir. 1990). Nevertheless, despite these
powerful investigative tools, the IRS’ investigatory power
is not absolute. If a taxpayer fails to comply with a sum-
*10
mons, the IRS must apply to the district court to secure an
enforcement order.
See
26 U.S.C. § 7604. Prior to enforcing
tax summonses, the court must scrutinize them to determine
whether they are made in good faith and seek information
relevant to a legitimate investigative purpose.
See United
States v. Powell
, 379 U.S. 48, 57-58 (1964);
Miller v. United
States
,
The IRS’ broad power to investigate possible violations of
the tax laws is understood to be vital to the efficacy of the
federal tax system, “which seeks to assure that taxpayers
pay what Congress has mandated and to prevent dishonest
persons from escaping taxation thus shifting heavier bur-
dens to honest taxpayers.”
United States v. Bisceglia
, 420 U.S.
141, 146 (1975). As the Supreme Court has noted, “the very
language of § 7602 reflects . . . a congressional policy choice
in favor of disclosure
of all information relevant to a legiti-
mate IRS inquiry.”
United States v. Arthur Young & Co.
, 465
U.S. 805, 816 (1984). Because the IRS’ investigatory powers
are essential to the proper functioning of the tax system,
courts are reluctant to restrict the IRS’ summons power,
absent unambiguous direction from Congress.
See 2121
Arlington Heights
, 109 F.3d at 1225 (citations omitted).
Nevertheless, a court’s power to enforce a summons is not
absolute; it is subject to traditional privileges.
Arthur Young
& Co.
,
2. 26 U.S.C. § 7525
Having described the general framework of this regula-
tory authority, we now turn to the specific context of the
Does’ claim. The Does seek to intervene to prevent the dis-
closure, through IRS summonses, of documents that the
Does contend are privileged. The Does’ privilege claim rests
entirely on § 7525, a statute enacted on July 22, 1998, to
provide a confidentiality privilege for communications be-
tween a taxpayer and a tax practitioner. This limited
privilege applies only to communications occurring after the
date of the statute’s enactment.
See Frederick
,
With respect to tax advice, the same common law pro- tections of confidentiality which apply to a communica- tion between a taxpayer and an attorney shall also ap- ply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged com- munication if it were between a taxpayer and an at- torney.
26 U.S.C. § 7525(a)(1). Thus the § 7525 privilege is no
broader than that of the attorney-client privilege, and
“[n]othing in [§ 7525] suggests that . . . nonlawyer practi-
tioners are entitled to privilege when they are doing other
than lawyers’ work.”
Frederick
,
The attorney-client privilege is “one of the oldest recog-
nized privileges for confidential communications” known
to the common law.
Swidler & Berlin v. United States
, 524
*12
U.S. 399, 403 (1998). The purpose of the privilege is to en-
courage full disclosure and to facilitate open communica-
tion between attorneys and their clients.
Id.
However,
because “the privilege has the effect of withholding
relevant information,” courts construe the privilege to
apply only where necessary to achieve its purpose.
Fisher v.
United States
,
A party that seeks to assert a § 7525 privilege bears the
same burden. Among the essential elements of the attorney-
client privilege are the requirements that the communication
be made to the attorney in confidence,
see Thullen
, 220 F.3d
at 571, and that the confidences constitute information that
is not intended to be disclosed by the attorney,
see United
States v. Weger
, 709 F.2d 1151, 1154 (7th Cir. 1983) (“the
privilege protects only the client’s confidences, not things
which, at the time, are not intended to be held in the breast
of the lawyer”) (citation omitted);
In re Grand Jury Proceed-
ings
, 727 F.2d 1352, 1356 (4th Cir. 1984) (“[C]ourts have
consistently ‘refused to apply the privilege to information
that the client intends his attorney to impart to others . . .,’
or which the client intends shall be published or made
known to others.”) (collecting cases). Furthermore, the party
asserting a privilege must show that the attorney-client
communication was made for the purpose of obtaining legal
advice, or, more precisely in the case of the § 7525 privilege,
tax advice.
See Thullen
,
The attorney-client privilege protects confidential
commu-
nications
made by a client to his lawyer, and so ordinarily
*13
the identity of a client does not come within the scope of the
privilege.
Tillotson v. Boughner
,
In their discussion of this narrow exception, the parties
primarily focus on two cases in which we held that attor-
ney-client privilege could prevent the disclosure of a
client’s identity. In
Tillotson
, an unidentified taxpayer had
determined that he understated his tax liability on previ-
ously filed returns and retained an attorney to deliver a
cashier’s check in the amount of $215,499.95 to the IRS. 350
F.2d at 663-65. The IRS sought to enforce a summons it had
served on the attorney, demanding that he testify about his
client. The attorney asserted the attorney-client privilege
and refused to disclose his client’s identity.
Id.
We upheld
the invocation of the privilege because “under the peculiar
facts of this case, the attorney-client privilege includes,
within its scope, the identity of the client.”
Id.
at 665. We
reasoned that the IRS had become aware of the substantive
content of the confidential communication between the un-
known taxpayer and his attorney—namely, the taxpayer’s
tax liability—the moment the cashier’s check was deliv-
ered. Because revealing the taxpayer’s identity would also
reveal the content of the confidential communication, the
privilege attached.
Id.
at 666. Similarly, in
Cherney
, we held
that the privilege encompasses the identity of a client when
the Government knows that the unidentified client paid
*14
fees for a criminal defendant out of concern about his own
involvement in the charged drug conspiracy. 898 F.2d at
568. In that case, we explained, the client’s identity was
privileged “because its disclosure would be tantamount to
revealing the premise of a confidential communication: the
very substantive reason that the client sought legal advice
in the first place.”
Id.
In other words, “the privilege protects
an unknown client’s identity where its disclosure would
reveal a client’s motive for seeking legal advice.”
Id.; see In
re Subpoenaed Grand Jury Witness
,
Relying on these cases, the Does submit that the IRS’ summonses set forth such detailed descriptions about sus- pect types of tax shelters under investigation that any doc- ument produced in response that also reveals a client’s identity will inevitably reveal that client’s motivation for seeking tax advice from BDO. The Does define their “mo- tive” for retaining BDO’s services as the “desire to engage in financial transactions which the government might later decide to be questionable, or . . . ‘potentially abusive.’ ” Appellants’ Br. at 16. Because a client’s “motive” for seeking legal advice is considered a confidential communication, the Does contend that the § 7525 privilege should protect against the disclosure of their motive for seeking tax advice, a motive that would be known if their identities are re- vealed.
The Does have not established that a confidential com- munication will be disclosed if their identities are revealed in response to the summonses. Disclosure of the identities of the Does will disclose to the IRS that the Does partici- pated in one of the 20 types of tax shelters described in its summonses. It is less than clear, however, as to what mo- tive, or other confidential communication of tax advice, can be inferred from that information alone. Compared to the *15 situations in the Tillotson and Cherney cases, where the Government already knew much about the substance of the communications between the attorney and his unidentified client, in this case the IRS knows relatively little about the interactions between BDO and the Does, the nature of their relationship, or the substance of their conversations. More- over, the Does concede that the documents that BDO in- tends to produce in response to the summonses are not sub- ject to any other independent claim of privilege beyond the Does’ assertion of privilege as to identity.
More fundamentally, the Does’ participation in potentially
abusive tax shelters is information ordinarily subject to full
disclosure under the federal tax law.
See
26 U.S.C §§ 6111,
6112. Congress has determined that tax shelters are subject
to special scrutiny, and anyone who organizes or sells an
interest in tax shelters is required, pursuant to I.R.C. § 6112,
to maintain a list identifying each person to whom such an
interest was sold. This list-keeping provision precludes the
Does from establishing an
expectation of confidentiality
in
their communications with BDO, an essential element of the
attorney-client privilege and, by extension, the § 7525
privilege.
See Evans
,
BDO’s affirmative duty to disclose its clients’ participa- tion in potentially abusive tax shelters renders the Does’ *16 situation easily distinguishable from the limited circum- stances in which we have determined that a client’s identity was information subject to the attorney-client privilege. The district court committed no error when it concluded that the Does failed to establish a colorable claim of privilege under § 7525.
Conclusion
Because the Does cannot demonstrate a colorable claim of privilege, they have failed to establish a legally protectable interest in preventing the disclosure of the documents revealing their identities as individuals who participated in tax shelters promoted by the BDO. For the reasons stated above, the district court’s judgments denying the Does’ mo- tions for intervention are affirmed.
A FFIRMED A true Copy:
Teste:
_____________________________ Clerk of the United States Court of Appeals for the Seventh Circuit USCA-02-C-0072—7-23-03