Appeals Court clarifies standard for establishing in-house attorney-client privilege; Second Circuit decides Adlman case.

The United States Court of Appeals for the Second Circuit has issued its decision in United States v. Adlman (Docket No. 94-6143), which involves a company's right to shield from the Internal Revenue Service a memorandum prepared by its public accounting firm concerning the tax implications of a reorganization. Monroe Adlman, who is a member of TEI's New York Chapter, is an attorney and Vice President-Taxes for Sequa Corporation. He argued that he obtained the memorandum (by an Arthur Andersen partner) in the course of rendering legal services to Sequa. The IRS issued a summons for the AA memorandum and Adlman opposed it on two grounds: attorney-client privilege and work product doctrine (on the ground the memorandum was prepared in connection with anticipated litigation concerning the transaction). The district court rejected both arguments, and the case was appealed to the Second Circuit, which held oral argument on January 6, 1995.

TEI filed an amicus brief with the court of appeals, urging the court to quash the summons and to clarify that the same standard for establishing the attorney-client privilege applies to in-house attorneys as applies to outside counsel. (The district court's decision could be interpreted as requiring a higher, more formalistic standard in respect of in-house attorneys.) TEI'S brief was reprinted in the September-october 1994 issue of The Tax Executive.

On October 26, 1995, the Second Circuit issued its opinion in the case. The court held that the district court did not abuse its decision in rejecting Adlman's attorney-client privilege argument. The evidence in the case, the court observed, was subject to competing interpretations, and the lower court did not clearly err in finding that Adlman had not established that he was seeking the advice of Arthur Andersen to facilitate his rendition of legal services. In reaching this decision, the court of appeals acknowledged that the attorney-client privilege could extend to the advice rendered by AA because, under the teaching of United States v. Kovel, 296 F.2d 918 (1961), the advice was provided to Adlman in order to assist him in giving legal advice to his client (Sequa). At the same time, the appeals court noted that the burden of proof rests with the party seeking to establish the privilege (in this case, Adlman) and held that burden was not satisfied.(1)

The Second Circuit noted that AA had routinely provided tax advice to the company and that no...