Two courts address tax shelter exception to tax practitioner privilege.

• Author: Beavers, James

The Tax Court and the Seventh Circuit recently decided cases dealing with the tax practitioner/client privilege under Sec. 7525. The Tax Court held that the tax shelter exception to the tax practitioner/client privilege did not apply to documents in the form of the minutes of meetings between a partnership and a federally authorized tax practitioner because the tax advice in the documents was not given in connection with the promotion of a tax shelter. In another case, the Seventh Circuit upheld a district court's order to a corporation to produce certain documents containing communications between a corporation and its accounting firm because the tax shelter exception applied to those documents.

Background of Tax Court Case

Timothy Egan is an accountant who is a partner with PricewaterhouseCoopers (PwC). Egan's clients at PwC include Arthur Winn and the "Winn organization," a group of corporations and partnerships controlled by Arthur Winn and his associates. Egan had provided tax compliance and tax planning and advisory services to Winn and the Winn organization entities over a long period. As part of his services to the Winn organization, Egan provided tax advice to the organization regarding transactions of the Countryside Limited Partnership. The IRS considered these transactions to be tax shelters.

During litigation with Countryside over these transactions, the IRS asked the Tax Court to compel Countryside to produce a series of 16 documents, all titled "Estate Planning Meeting Minutes" (the minutes), that constituted a cumulative chronicle of communications, in part confidential, from clients, including Countryside, to their attorneys for legal advice; to Timothy Egan, for tax advice; or from those individuals back to their clients. Countryside argued that it was not required to produce the documents because the IRS had failed to prove that minutes were related to the promotion of a corporation's participation in any tax shelter, so the Sec. 7525(b) tax shelter exception did not apply.

Background of Seventh Circuit Case

Valero Energy Corp. is a large oil refining company based in Texas. In December 2001, Valero acquired a Canadian oil company. Shortly after that acquisition, Valero, with the help of its accounting firm, Arthur Andersen, undertook a complicated series of transactions that allowed it to realize $105 million in foreigncurrency losses.

These large losses led to an IRS investigation. In the investigation, the IRS issued a...