Brief for the United States — United States v. Arthur Young & Co.

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Office -Supreme Court, U.S.

FILED

No. 82-687 JUN 6 1983

; cS EVAS,

3u the Supreme Court of the arte

OCTOBER TERM, 1982

UNITED STATES OF AMERICA, PETITIONER

ARTHUR YOUNG & COMPANY, ET AL.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES

Rex E. LEE

Solicitor General

GLENN L. ARCHER, JR.

Assistant Attorney General

PAUL M. BATOR

Deputy Solicitor General

STUART A. SMITH

Assistant to the Solicitor General

CARLETON D. POWELL

KRISTINA E. HARRIGAN

Attorneys

Department of Justice

Washington, D.C. 20530

(202) 633-2217

QUESTION PRESENTED

Whether tax accrual workpapers, prepared by a corpo

ration’s independent certified public accountant in the

course of regular financial audits, are privileged from

disclosure in response to an interna] revenue summons

issued under 26 U.S.C. 7602.

(I)

TABLE OF CONTENTS

EET LR ETP TENS SEARS BOA

Statement .....0.0000........ Ee ean oO Dre eB ER Us

Argument:

Tax accrual workpapers prepared by a corporation’s

independent certified public accountant in the course

of regular financial audits are subject to production

in response to an internal revenue summons issued

I I cieestniietanialieteiptints

Cases:

Congress has given the Internal Revenue Service

authority to obtain information relevant to its

EE VS ney Raa Y Raranee

. Tax accrual workpapers contain evidence that is

unquestionably relevant to the Internal Reve-

nue’s Service’s tax investigations .........................

The tax accrual papers are not protected from

disclosure by either a work-product privilege or

an accountant-client privilege ....................0.........

The rationale for a communications privilege is

not applicable to this case ...000.0.0...........cccccceeeeeeeee

The court of appeals erred in assuming a con-

flict between the IRS summons authority and

the securities regulation statutes .......0........0......

TABLE OF AUTHORITIES

Blackmer v. United States, 284 U.S. 421 ..... ........

Blair v. United States, 250 U.S. 2738 ..............-...........

Branzburg Vv. Hayes, 408 U.S. 665 —..........................

(mI)

o fo NW KY

Cases—Continued Page

Coastal States Gas Corp. v. Dept. of Energy, 617

i Sere NE 34

Couch v. United States, 409 U.S, 322......5, 9, 11, 14, 28, 32,

35, 36, 38

Donaldson v. United States, 400 U.S. 517......10, 16, 17, 19,

27, 28

Elkins v. United States, 364 U.S. 206 ..................... 15

Falsone v. United States, 205 F.2d 734, cert. denied,

GORI WRI TID xccneciccuscccaasnscosssacsieddaiieidlantecanibintaniaaccuan 36

Fisher v. United States, 425 U.S. 391 .......00000..... 12, 17, 39

a2, Rh. A 4 (3? | ae ee 44

Gold v. DCL 1.«., 399 F. Supp. 1128 ........................ 31

Gariepy V. United States, 189 F.2d 459 _................ 36

Goosman V. A. Duie Pyle, Inc., 320 F.2d 45 ............ 34

Grand Jury Subpoena, In re, 599 F.2d 504 ............. 33

Hawkins v. United States, 358 U.S. 74 ......0............. 40

Herbert v. Lando, 441 U.S, 158 .20.2.............ccccceeeeeeeees 15

Herzfeld v. Laventhol, Krekstein, Harwath & Hor-

2 | Ga a Se 32

Hickman Vv. Taylor, 329 U.S. 495 ............ 7, 10, 29, 33-34, 35

Himmelfarb v. United States, 175 F.2d 924, cert.

GR GS Bas GEO cccccientneinaneiaaiaal 36

Housler v. First Nat'l Bank of East Islip, 484

> GEA, TERIEIE accoccovesesitehinnnesesabditninedincsabdeteaaiiidiiniadans 36

John Doe Corp., In re, 675 F.2d 482 —..000000... 41

Morton Vv. Mancari, 417 U.S. 585 0.0000... eeeeeeee 44

Myerhoffer v. Empire Fire & Marine Insurance Co.,

kg ee ee 36

Geass V. FRR, GD FB Fae cccnctnitcniattinhetitisiiitin 32

Olender Vv. United States, 210 F.2d 795 ...........00.... 36

Pegasus Fund, Inc. v. Laraneta, 617 F.2d 1335 ...... 32

Regional Rail Reorganization Act Cases, 419 U.S.

ITE desisignenbbadiianedsetiinsiiiaeedi , 44

Rozier v. Ford Motor Co., 573 F.2d 1382 ................ 38

SEC v. Geotek, 426 F. Supp. 715, aff’d, 590 F.2d

WED mnconenateiautaiinainieenede 82

Sealed Cases, In re, 676 F.2d 798 .00..0..0...ccccccceeeeeneeeee 35

St. Regis Paper Co. v. United States, 368 U.S. 208.. 12, 43

Tasby V. United States, 504 F.2d 332 36

Trammel Vv. United States, 455 U.S. 40 .................... 9

Cases—Continued Page

United States v. Arthur Andersen & Co., 474 F.

Supp. 322, appeal of one party, dismissed, 623

F.2d 720, cert. denied, 449 U.S. 1021, aff’d as to

second party, 623 F.2d 725... SS Seo 5-6, 38

United States v. Bisceglia, 420 U.S. 141 ............. 10, 16, 17

United States v. Bryan, 339 U.S. 323 _....... octane 9, 15,17

United States v. City National Bank & Trust Co.,

ES ES a 39

United States v. Coopers & Lybrand, 413 F. Supp.

I ee 23, 39

United States v. El Paso Co., 682 F.2d 530....27, 34, 35, 37,

39, 40, 42, 44

United States v. Euge, 444 U.S. 707 10, 17, 28

United States v. Gurtner, 474 F.2d 297... 36

United States v. Kovel, 296 F.2d 918... ee 36

United States v. LaSalle National Bank, 437 U.S

ETE ES Ce 25

United States v. McKay, 372 F.2d 174... 27

United States v. Natelli, 527 F.2d311....... 32

United States v. Nizon, 418 U.S. 683 9,15

United States v. Noall, 587 F.2d 123, cert. denied,

441 U.S. 923 .......... SS A Rte 22, 23, 24, 39, 44

United States vy. Nobles, 422 U.S. 225... 10, 29

United States v. Powell, 379 U.S. 48 10, 16, 17, 20

United States v. Price Waterhouse & Co., 515 F.

NEE _ 27,37

United States v. Procter & Gamble, 356 U.S, 677... 38

United States v. Southwestern Bank & Trust Co.,

AEE Le CRS 39

United States v. Wainwright, 413 F.2d 796... 36

Upjohn Co. v. United States, 449 U.S. 383......10-11, 12, 29,

35, 39, 42

Wm. T. Thompson Co. v. General Nutrition Corp.,

EES ena ae 36

Statutes, regulations and rule:

Act of June 30, 1864, ch. 173, Section 14, 13 Stat.

A ae ee ei 19

Act of July 13, 1866, ch. 184, Section 9, 14 Stat.

SEIT Siiicibleeastaerstassensustiesetccssesitenustenencssnentdpenenditeissesasoemees 19

Statutes, regulations and rule—Continued

Act of July 20, 1868, ch. 186, Section 49, 15 Stat.

Act of Dec. 24, 1872, ch. 13, Section 1, 17 Stat.

GETIE _ <csosenssresenssnsnescscansestettensnnenegnignisismmiganppeciigammpatniiiee

Act of Mar. /‘ 1879, ch. 125, Section 3, 20 Stat.

BED. svcocenteecinigencapesinnnsncecvinticimnmendisamaintitiaaasdimtnaate

Act of Aug. 27, 1894, ch. 16, Section 34, 28 Stat.

Act of Oct. 3, 1913, ch. 16, Subsee. 1, 38 Stat. 177.

Act of Sept. 8, 1916, ch. 463, Section 16, 39 Stat.

773 EAE TE EM =o nS le BE

Act of Feb. 24, 1919, ch. ‘18, 40 Stat. 1047, et seq.:

Section 1305, 40 Stat. 1142 ............... poet

Section 1317, 40 Stat. 1146 ....................

Act of Nov. 23, 1921, ch. 136, 42 Stat. 227 et seq.:

Section 1308, 42 Stat. 310 nn...

li OE

Act of June 2, 1924, ch. 234, 43 Stat. 253 et seq.:

Section 1004, 43 Stat. 340 ...... saititiataliiedaasaate

Section 1018, 43 Stat. 344 ................ ate

Act of Feb. 26, 1926, ch. 27, 44 Stat. 9 et seq.:

Section 1104, 44 Stat. 118 ..............................

Section 1115, 44 Stat. 117 .......... eb aoe no Oe

Internal Revenue Code of 1939, 26 U.S.C. (1940

ed.):

Section 3614(a) ........................ csuiaaiieiieiabainaliadin

FS EERE Soe Se

EE ea os

Section 3615(c)(2) .............. ee ne a

Internal Revenue Code of 1954, 26 U.S.C. (& Supp.

v):

Section 952 et eee. scianansienitaasiastsisiitelaieMiacetid detail

Page

vil

Statutes, regulations and rule-—Continued Page

AD cceileieetaeeinaandainiian 25

I 25

Section 7601 a 2, 16

Section 7602 .................. vsciiahassishiaaeaiaidliamamanininaiaieal passim

DUD TIED is0nccsoccnessennnenigebannianenneosimniisenniis 18

Section 7602(2) ................ innenmandunaupnananeendeins 1s, 24

NS SERS KTR Coane 4-5

ERIE eR et ase ae ek 16, 20

I TIE 1 ssennenmeniemeenspniasingan 20

Internal Revenue Code of 1954, Table I, 68A Stat.

a 18,19

Census Act of 1958, Section 9(a), 13 USC. (1958

at 13, 43

Pub. L. No. 97-34, 95 Stat. 341 (Section 6659) _.... 25

Pub. L. No. 97-248, 96 Stat. 224 et seq.:

96 Stat. 613 (Section 6661) ... 25

96 Stat. 611 (Section 6700) 235

96 Stat. 615 (Section 6701) ....... ta Sone 25

Rev. Stat. (1878 ed.) :

ATES ial eae 19

Section $178 ................. EAL Set ES 19

SD Eee A= 3, 12, 40

17 C.F.R.:

| Saas a ec ea 3

es ee a 3

Section 210.1-02(a) occ eeenen 3, 40

Section 210.1-02(d) . cle at a at

CN ES See 3, 40

Section 210.2-01 ef seq. 3

Section 210.2-01 ...... ri OA 8 OO ee 40

Part 240:

Section 240.14a-3(b)(4) 0 41

Part 249:

0 41

Fed. R. Civ. P

IPE SRE see Se oe ot 34, 35

Advisory Committee Notes 33, 34

Vill

Miscellaneous :

AICPA-Professional Standards (1982):

ET Section 52 ................ FE ek Pe eee ee

ET Section 101 .............. intatinaneianetivianiisinantids

Commissioner of Internal Rovenss Service, 1981

BI cin ssentarneeerstneinaepeiinnuiiniatienmiaes

100 Cong. Rec. 3425 (1954) ES ae nee ea

4 Fed. Sec. L. Rep. (CCH) © 31,001 (May 4,

TTI * ciniciiath ceentniesnsiemsaneengaiaiieniemathinaiestadmaaiaee

Guidelines for Requesting Audit or Taz Accrual

Workpapers, [Andit] 1 Int. Rev. Man. (CCH)

ff “Et —x_— a

H.R. Rep. No. 1337, 83d Cong., 2d Sess. (1954)...

G. Johnson & J. Gentry, Finney and Miller’s Prin-

ciples of Accounting (Intermediate) (7th ed.

TE aE eee ns ES Se

E. Kohler, A Dictionary for Accountants (5th ed.

Tak, 2a il Spats ee aes RRR Sy SSE SETS PLS NS IN

N. Lenheart & P. Defliese, Montgomery's Auditing

I asa

Model Code of Professiona] Responsibility :

DR 7-102(A), at 36C (1976) —....................

DR 7-102(B), at 36C (1976) —................ 29,

ne Us, Sr a cemeaiials

Model Rules of Professional Conduct:

Rule 1.6 (Proposed Final Draft 1981)...

Final Draft 1982 . . aa

N.Y. Times, Feb. 9, 1983 codincsientiehiieialatieadiciti caine

R. Nixon, W. Kell, & N. Bedford, Accountants’

Handbook (5th ed. 1970) .

Note, The Duties and Obligations of the ‘Securities

Lawyer: The Beginning of a New Standard

for the Legal Profession?, 1975 Duke LJ. 121.

S. Rep. No. 1622, 83d Cong., 2d Sess. (1954) —........

8 J. Wigmore, ~aahaananincation a

14-15

SSS 85S & B&B B

rev. ed. 1961) .. — ssensens ...9, 12, 15, 39

Iu the Supreme Court of the Rnited States

OCTOBER TERM, 1982

No. 82-687

UNITED STATES OF AMERICA, PETITIONER

ARTHUR YOUNG & COMPANY, ET AL.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

BRIEF FOR THE UNITED STATES

OPINIONS BELOW

The order of the district court (Pet. App. la-l5a) is

reported at 496 F.Supp. 1152.’ The opinion of the court

appeals (Pet. App. 16a-39a) is reported at 677 F.2d

211.

JURISDICTION

The judgment of the court of appeals was entered on

April 13, 1982 (Pet. App. 40a'. The order denying the

government’s petition for rehearing, with suggestion for

rehearing en banc, was entered on June 22, 1982 (Pet.

1 The district court issued a modified order on February 23, 1981,

which was not reported and which is reproduced at J.A. 106-107.

(1)

App. 4la). By order dated September 13, 1982, Justice

Marshall extended the time within which the United

States might file a petition for a writ of certiorari to and

including October 20, 1982, and the petition was filed on

that date. The petition was granted on February 22,

1983 (J.A. 108). The jurisdiction of this Court rests on

28 U.S.C. 1254(1).

STATUTES INVOLVED

The pertinent provisions of Sections 7601, 7602 and

7604 of the Interna] Revenue Code of 1954 (26 U.S.C.)

are as follows:

Sec. 7601. CANVASS OF DISTRICTS FOR TAXABLE PER-

SONS AND OBJECTS.

(a) General Rule.—The Secretary shall, to the ex-

tent he deems it practicable, cause officers or em-

ployees of the Treasury Department to proceed, from

time to time, through each internal revenue district

and inquire after and concerning all persons therein

who may be liable to pay any internal revenue tax,

and all persons owning or having the care and man-

agement of any objects with respect to which any

tax is imposed.

Sec. 7602. EXAMINATION OF BOOKS AND WITNESSES.

For the purpose of ascertaining the correctness of

any return, making a return where none has been

made, determining the liability of any person for any

internal revenue tax or the liability at law or in

equity of any transferee or fiduciary of any person

in respect of any internal revenue tax, or

any such liability, the Secretary is authorized—

(1) To examine any books, papers, records, or

other data which may be relevant or material] to

such i ry;

(2) To summon the person liable for tax or

required to perform the act, or any officer or

employee of such person, or any person having

possession, custody, or care of books of account

containing entries relating to the business of the

person liable for tax or required to perform the

act, or any other person the Secretary may deem

proper, to appear before the Secretary at a time

and place named in the summons and to produce

such books, papers, records, or other data, and to

give such testimony, under oath, as may be rele-

vant or material to such inquiry; and

(3) To take such testimony of the person con-

cerned, under oath, as may be relevant or mate-

rial to such inquiry.

Sec. 7604. ENFORCEMENT OF SUMMONS.

(a) Jurisdiction of District Court. If any person

is summoned under the internal revenue laws to ap-

pear, to testify, or to produce books, papers, records,

or other data, the United States district court for the

district in which such person resides or is found

shall have jurisdiction by appropriate process to

coripel such attendance, testimony, or production of

books, papers, records, or other data.

STATEMENT

1. Respondent Arthur Young & Company, a firm of

certified public accountants, has served as Amerada Hess

Corporation’s independent auditor since November 1971.

In that capacity, resportdent conducted fin>ncial audits

of, and certified, Amerada’s financial] stater:.ents for 1972

through 1974 (Pet. App. 19a). Federal securities laws

require publicly-owned companies such as Amerada to file

certified financial statements annually. See 15 U.S.C. 781

and m and 17 C.F.R. Part 210, 210.1-01, 210.1-02(a), (d)

and (f), and 210.2-01 et seg. The certification process re-

quires the independent auditor to evaluate the reason-

ableness and adequacy of the corporation’s reserve for

potential tax liabilities.

As part of its certification of Amerada’s financial

statements, respondent prepared tax accrual workpapers,

which are documents and memoranda relating to respond-

ent’s evaluation of Amerada’s tax liability reserves as

they appeared in its financial statements. The tax ac-

crual workpapers include facts pertaining to Amerada’s

financial transactions based upon company records and

respondent’s interviews with company personnel and with

third parties, and may identify specific items whose treat-

ment on Amerada’s tax return for the year was question-

able. If the auditor determines that these items could

reasonably lead to additional tax liability upon examina-

tion by the Internal Revenue Service, it will recommend

the establishment of additional contingency reserves ( Pet.

App. 24a-25a).

In May 1975, the Internal Revenue Service began an

audit to determine Amerada’s corporate income tax lia-

bility for 1972 through 1974. Amerada is an integrated

oil company incorporated in Delaware, and it reported

gross revenues for the years under audit exceeded seven

billion dollars. During the course of the audit, Amerada

disclused to the revenue agents that it had maintained

a “special disbursement account,” a fund from which po

litical contributions, gifts to foreign government officials,

and other illegal or questionable payments were made,

and that it had convened a special committee to investi-

gate the company’s practices with respect to such pay-

ments. Amerada turned over the final report of its

special committee to the Interna] Revenue Service. The

report disclosed the deduction of some $7,830 in question-

able payments during the years in question (Pet. App.

2a-3a; id. at 19a).

Upon receipt of the report disclosing the deduction of

questionable payments by Amerada, the Internal Revenue

Service assigned Special Agent Kalemba of the Criminal

Investigations Division to join the investigation. In fur-

therance of the joint investigation, the Special Agent is-

sued an administrative summons to respondent pursuant

to 26 U.S.C. 7602, seeking, inter alia, the tax accrual

workpapers prepared by respondent. Pursuant to 26

U.S.C. 7609, notice of the summons was sent to Amerada,

which thereupon instructed respondent not to produce any

of the documents called for by the summons (Pet. App.

2a-3a; id. at 19a-20a).

On October 9, 1979, the government commenced this

proceeding to enforce the summons in the United States

District Court for the Southern District of New York.?

Pursuant to 26 U.S.C. 7609, Amerada intervened in the

proceeding. Both Amerada and respondent filed answers

to the petition opposing enforcement of the summons, ob-

jecting, inter alia, to the production of the tax accrual

workpapers (Pet. App. 3a; id. at 18a).

The district court ordered production of the tax ac-

crual workpapers. It found that the documents were rele-

vant to the Internal Revenue Service’s tax investigation

of Amerada and rejected respondent’s claim of an ac-

countant-client privilege. The district court noted that

this Court had refused to recognize such a privilege in

Couch v. United States, 409 U.S. 322, 335-336 (1973),

and that the First Circuit adhered to that view, even

where the client claimed that it gave the information to

the auditor under an expectation of privacy. See United

States v. Arthur Andersen & Co., 623 F.2d 725, 728

2 In support of its petition for enforcement of the summons, the

government submitted an affidavit by Special Agent Armstrong, who

had succeeded Special Agent Kalemba. In his affidavit, the agent

stated, inter alia, that the summons had been issued in the course of

a joint investigation by the Examination and Criminal Investigation

Divisions of the Internal Revenue Service to ascertain the correct-

ness of Amerada’s tax returns for the years 1972, 1978 and 1974:

that no decision or recommendation had been made regarding crimi-

nal prosecution of Amerada; and that the materia! sought was rele-

vant to the purpose of the examination and was not in the govern-

ment’s possession (J.A. 11-14). Subsequently, there were repeated

exchanges of affidavits between IRS officials, on the one hand, and

Arthur Young and Amerada, on the other, in which Arthur Young

and Amerada disputed the accuracy of the IRS agent’s affidavit

(J.A. 22-79). This factual dispute led to a hearing before the dis-

trict court on January 3, 1980 (J A. 80-88). After considering the

conflicting affidavits, the district court enforced the summons with

respect to the tax accrual workpapers.

(1980). As the district court concluded, “While there

may be an expectation of privacy insofar as the world at

large is concerned, Amerada cannot reasonably have such

an expectation [of privacy] with regard to the IRS

which, the taxparver knew, could call for all materials

underlying the tax returns and payments” (Pet. App.

9a).

2. A divided panel of the court of appeals reversed

the district court’s order with respect to the tax accrual

workpapers (Pet. App. 28a-32a).° The court agreed with

the district court’s finding that tax accrual workpapers

were relevant to the Internal Revenue Service’s audit of

Amerada’s tax liability (id. at 24a-27a). The court

nevertheless refused to enforce the summons because of

its belief that “these documents should remain confiden-

tial in order to protect the reliability of the independent

audit process” (id. at 19a).

In support of its decision, the court of appeals expressed

the view that the policies behind the disclosure require-

ments of the federal securities laws outweigh the policies

*The Internal Revenue Service’s summons directed respondent

to produce all files related to its client, Amerada Hess Corporation,

for which respondent served as independent auditor (Pet. App. 17a-

18a, 20a n.4). The district court ordered the production of all

items sought by the summons except respondent's audit program

and the documents prepared by the special committee that investi-

gated Amerada’s questionable payments. The government did not

appeal the district court’s refusal to enforce the summons with

respect to the audit program and the special committee documents.

Accordingly, the only issues considered by the court of appeals

were the production of audit workpapers and tax accrual workpapers

(Pet. App. 20a-2la). Since the court of appeals affirmed the dis-

trict court’s order with respect to the audit workpapers (id. at

2la-24a), the government's petition to this Court was limited to the

tax accrual workpapers. Although Arthur Young has sought te

raise the question of the production of the audit workpapers in its

cross-petition (No. 82-837), the Court has not granted that cross-

petition, which remains pending. Hence, the only question before

this Court is that presented by the government's petition, i.c., the

production of the tax accrual workpapers.

in support of the Internal Revenue Service’s summons au-

thority. As the court reasoned, these “countervailing pol-

icies” “require{d] * * * [it] to fashion protection for the

work that independent auditors, retained by publicly-

owned companies to comply with the federal securities

laws, put into preparation of tax accrual workpapers”

(Pet. App. 28a). The court apparently assumed that the

tax accrual workpapers contain material with respect to

the “thoughts and theories” (id. at 3la) of the taxpayer

and its auditor concerning potential tax liabilities, and

their strategies and plans for negotiations about these

liabilities. It stated that “the Service does not need to

know the taxpayer’s thoughts,” and that the IRS can ob-

tain “all the raw data” needed to calculate the taxpayer’s

tax from other sources (ibid.). The court feared that if

the summons were enforceable, corporate management

“might not be perfectly candid with independent audi-

tors” once it knew that such information would be reach-

able under § 7602 (id. at 30a). The court conciuded

that enforcement would therefore handicap investors, who

must rely on independent auditors for financial informa-

tion regarding publicly-traded securities (Pet. App. 3la).

In reaching its decision, the court relied on the attor-

ney’s work-product doctrine of Hickman v. Taylor, 329

U.S. 495 (1947). Its reasoning, however, was based pri-

marily on an asserted need to encourage confidential

client-accountant communications—that is, on the need

to create an accountant’s communications privilege. The

court concluded that the IRS may not obtain tax accrual

workpapers except in the “rare situation * * * where it

[the IRS] can make a sufficient showing of need to ade-

quately justify invading the integrity of the auditing

process” (Pet. App. 31a). No such showing, according

to the court, had been made here, since all the relevant

data were available to the IRS outside the tax accrual

workpapers (id. at 32a).

The dissenting judge would have enforce. d the summons

(Pet. App. 33a-39a). He believed that Congress had leg-

islated in favor of disclosure of all relevant documents not

subject to traditional common law privileges, which do

not include a privilege for either client communications

to an accountant or an accountant’s work-product. The

dissent observed that “[i]f there is to be recognition of

new privileges, we should leave that task to Congress”

(id. at 35a). The dissent found nothing in the lan-

guage or the legislative history of Section 7602 to indicate

that Congress intended to exempt an accountant’s work-

product from Interna] Revenue Service examination. Nor

could he find anything in Hickman v. Taylor, or the Fed-

eral Rules of Civil Procedure, that would permit a court

to depart from the broad command of Section 7602 ( Pet.

App. 36a-37a)}. As the dissent pointed out, there is no

proper analogy between the attorney-client relationship

and the relationship between a public corporation and its

independent public accountant. The attorney-client rela-

tionship is completely private and cloaked in confidence.

On the other hand, an independent public accounting firm

has public obligations to assure itself that contingent tax

liabilities have been accurately reflected, and must decline

to certify a statement if it is not satisfied that it is accu-

rate (id. at 37a-38a).

The dissenting judge also rejected the majority’s prem- -

ise that corporations would be so anxious to minimize

their tax payments that they would be willing to deceive

their own accountants about debatable tax items and

thereby violate their obligations under the securities law.

He doubted “that many corporations will be so anxious

to avoid that result [paying what the tax laws require]

that they will conceal these debatable items from their

accountants in violation of the securities laws” (Pet.

App. 36a). But even on the assumption that the ma-

jority’s speculation was accurate, the dissent concluded

that the courts should not afford publicly-held corpora-

tions “any shield behind which they can increase their

chances of avoiding detection that they have not paid

either the amount of taxes a court might rule was law-

fully required or whatever adjustment might result from

a post-audit settlement” (ibid.).

SUMMARY OF ARGUMENT

1. In refusing to enforce an Internal Revenue Service

summons directing a certified public accountant to pro-

duce tax accrual workpapers prepared in connection with

its regular financial audits of a publicly held corpora-

tion and its certification of the corporation’s financial state-

ments, the decision below has created an accountant work-

product privilege, under the rationale of an accountant-

client privilege, that threatens to impede the Internal

Revenue Service’s tax investigations of public corpora-

tions. The case therefore stands in derogation of this

Court’s ruling in Couch v. United States, 409 U.S. 322,

335 (1973), that “no confidential accountant-client priv-

ilege exists under federal law, and no state-created priv-

ilege has been recognized in federal cases * * *.”

As the Court most recently reaffirmed in Trammel v.

United States, 445 U.S. 40, 50 (1980), quoting United

States v. Bryan, 339 U.S. 323, 331 (1950), any claim of

privilege must overcome the settled principle that “ ‘the

public * * * has a right to every man’s evidence.’” Be-

cause testimonial privileges preclude the use of highly

relevant evidence and therefore tend to be “an obstacle

to the administration of justice” (8 J. Wigmore, Wig-

more on Evidence § 2192, at 73 (McNaughton rev. ed.

1961); see United States v. Nixon, 418 U.S. 683, 711-713

(1974)), such privileges are tolerable only when they

“are designed to protect weighty and legitimate compet-

ing interests” (id. at 709).

These considerations are fully applicable to the sum-

mons authority of the Internal Revenue Service. Section

7602 of the 1954 Code, authorizes the Secretary “[t]o

summon * * * any * * * person * * * to appear * * *

and to produce such books, papers, records, or other data

* * * as may be relevant or material” to ascertaining the

correctness of any return. This Court has consistently

construed this authority to embrace all appropriate meas-

ures for enforcement. See, e.g., United States v. Powell,

379 U.S. 48 (1964); Donaldson v. United States, 400

U.S. 517 (1971) ; United States v. Bisceglia, 420 U.S. 141

(1975) ; United States v. Euge, 444 U.S. 707 (19890).

2. Both courts below found that the tax accrual work-

papers sought from respondent were relevant to the In-

ternal Revenue Service’s investigation of Amerada (Pet.

App. 8a; Pet. App. 26a-27a). These papers consist of an

amalgam of materials bearing on the adequacy and rea-

sonableness of the contingency reserves established by a

corporation with respect to its tax liabilities. The papers

contain facts that may not appear on the corporation’s

books of account. They may also shed important light

on the taxpayer’s state of mind regarding the treatment

it ultimately presents on its tax returns; this evidence

may bear on liability for fraud and other penalties. Fi-

nally, the papers may also contain the accountant’s judg-

ments regarding the corporation’s reporting positions.

The purpose of obtaining tax accrual workpapers is

not primarily to allow the Service access to the account-

ant’s “opinions” and “theories”. Rather, the Service’s

chief interest is to discover the relevant facts to enable

it to make its own appraisal. Although production of

these papers may help the investigating agent by hig)-

lighting certain issues, there is no basis for cloaking

them in secrecy in the absence of an evidentiary privilege

barring their production.

3. The court erred in barring production of the tax

accrual workpapers on the authority of the attorney work-

product doctrine established by this Court’s decision in

Hickman vy. Taylor, 329 U.S. 495 (1947). In Hickman,

the Court recognized a qualified privilege against pre-

trial discovery for certain materials prepared by an

attorney “acting for his client in anticipation of litiga-

tion” (329 U.S. at 508). See United States v. Nobles,

422 U.S. 225, 236-240 (1975); Upjohn Co. v. United

States, 449 U.S. 383, 397-399 (1981). Here the papers

were prepared by accountants—not by attorneys—in the

course of a regular audit of financial statements—and

not in anticipation of litigation. Apart from the de-

cision below, we are aware of no case that extends the

attorney work-product rationale to accountants’ work-

papers.

The law recognizes an attorney work-product privilege

and not an accountant work-product privilege because

of important practical differences between the function

of an accountant and that of an attorney. The attorney

is the client’s confidential advisor who has an obligation

of undivided loyalty to the client. An independent cer-

tified public accountant, as the title states, is supposed

to be independent: its loyalty is not only to the client

whose books it is auditing but also to various govern-

mental agencies regulating its client’s industry, to his

client’s creditors and to investors in its client’s securities.

Further, the accountant’s role is not to give confidential!

advice but to give public reports on the adequacy of the

client’s financial statements. It was precisely these dif-

ferences between accountants and attorneys that this

Court recognized in Couch in rejecting the claim of an

accountant-client privilege as to a taxpayer’s records

turned over to an accountant. See 409 U.S. at 335-336.

4. Although the decision below is couched in terms

of the work-product privilege, it is plain that the court

believed it was fostering candid communications between

client and accountant for the benefit of the investing

public and the enforcement of the securities laws. Such

a rationale is the essence of a communications privilege.

The fundamental distinctions between attorneys and ac-

countants, to which we have referred, have led this Court,

and every court that has considered the issue, to reject

the creation of an accountant-client privilege. Couch v.

United States, supra, 409 U.S. at 335-336, and cases

cited therein. An accountant’s client has no justified

expectation of confidentiality with respect to communica-

tions with an accountant, and there is therefore no justifi-

cation for the creation of an accountant-client privilege.

Moreover, the rationale for such a privilege does not

exist in this case. The principal contemporary justifica-

tion for the attorney-client privilege is its presumed

value in enccuraging clients to make full disclosure to

their attorneys. Upjohn Co. v. United States, supra, 449

U.S. at 389; 8 J. Wigmore, supra, §§ 2291 and 2306, at

590. Accordingly, it protects only those disclosures-——

necessary to obtain legal advice—which might not have

been made absent the privilege. Fisher v. United States,

425 U.S. 391, 403 (1976). But the communications from

Amerada to respondent in this case were required to be

made quite apart from any accountant-client privilege.

As a publicly-held corporation, Amerada must file ac-

curate and complete financial statements, certified by its

independent auditors, with the SEC, if it wishes to con-

tinue to have its stock publicly traded. See 15 U.S.C.

78 and m; 17 C.F.R. 210.1-02(d).

5. The court of appeals further erred in assuming a

conflict between the federal statutes regulating securities

and those enforcing revenue collection. Section 7602 of

the 1954 Code unequivocally authorizes agents of the

Internal Revenue Service to summon and inspect records

that may be relevant to their investigation. On the other

hand, the securities regulations relate to the duty of

listed corporations to file annual audited statements, and

the duty of auditors to examine the statements under

generally accepted principles of public accounting. The

statutes and regulations do not even hint at any duty

by the accountants to keep their clients’ communications

confidential. It would therefore be incongruous to enjoin

accountants to do so—particularly since their basic func-

tion is to insure that the public is accurately informed.

As the Court made clear in St. Regis Paper Co. Vv.

United States, 368 U.S. 208 (1961), it requires a clear

statement of congressional purpose to create a special

rule that will prevent disclosure of information otherwise

relevant and unprivileged. In St. Regis Paper Co. the

Court held that Section 9/a) of the Census Act (13

U.S.C. (1958 ed.) 9(a)) preventing the Census Bureau

from disclosing census information except in the form

of statistical reports, did not curtai] the normal] inves-

tigatory powers of other government agencies. The pres-

ent case follows a fortiori from St. Regis Pap-r Co., since

the securities laws and regulations do not contain any

requirements of confidentiality for accountz ‘-.

Even assuming that the court below cor, .iy identi-

fied a conflict between the policies underiying the securi-

ties laws and the provisions regarding tax enforcement,

the resolution of such a conflict lies with Congress and

not in the courts. This is particularly true where, as

here, the securities laws provide no explicit defense to

an Intexnal Revenue Service summons and a literal read-

ing of the revenue provision directs that the documents

be produced. There is no justification for the conclusion

that the securities law has somehow repealed or cut back

on the scope of the Internal Revenue Service’s summons

authority.

ARGUMENT

TAX ACCRUAL WORKPAPERS PREPARED BY A

CORPORATION’S INDEPENDENT CERTIFIED PUB-

LIC ACCOUNTANT IN THE COURSE OF REGULAR

FINANCIAL AUDITS ARE SUBJECT TO PRODUC-

TION IN RESPONSE TO AN INTERNAL REVENUE

SUMMONS ISSUED UNDER 26 U.S.C. 7602

This case presents a question of great importance to

the enforcement of the internal revenue laws against

corporations that engage certified public accountants.

In refusing to enforce an Internal Revenue summons

directing a certified public accountant to produce tax ac-

crual workpapers prepared in connection with its regu-

lar financial audits of a publicly-held corporation and its

certification of the corporation’s financial statements, the

court of appeals has created an accountant work-product

privilege, which it justified by the rationale of an

accountant-client communications privilege. Its holding

threatens to impede the Internal Revenue Service’s tax

investigations of public corporations. The decision below

therefore stands in derogation of this Court’s ruling in

Couch v. United States, 409 U.S. 322, 335 (1973), that

“no confidential accountant-client privilege exists under

federal law, and no state-created privilege has been rec-

ognized in federal cases * * *.”

Moreover, the significance of the privilege created by

the court below is not limited to IRS summons enforce-

ment proceedings. The existence of such a privilege

would be relevant to many other disputes between federal

agencies and corporations, as well as to the conduct of a

grand jury investigation. Indeed, the court of appeals’

desire to promote candor between accountant and client

could not rationally be limited to questionable transac-

tions having tax significance; it would necessarily extend

to transactions questionable by other criteria as well.

Even more important, recognizing such a privilege would

radically affect private litigation involving corporations.

As we shal! discuss in greater detail (pp. 24-27, infra),

the tax accrual workpapers at issue in this case record

the result of the auditor’s inquiry with respect to the

adequacy of a public corporation’s reserve for contingent

tax liabilities under generally accepted accounting stand-

ards. They include factual information obtained by the

auditor from the taxpayer and others with respect to fi-

nancial transactions, as well as the auditor’s analyses

of these transactions and its evaluation sf the correctness

of the various reporting positions taken on the corpora-

tion’s tax return. Accordingly, they are relevant to a

legitimate tax investigation. Although the Internal Reve-

nue Service does not routinely seek these accountants’

workpapers,* it does request them where necessary fac-

*The Internal Revenue Manual instructs agents that before

requesting information pertaining to the tax accrual account, they

should “first exhaust al] reasonable means to secure this informa-

tion from the corporate officer before looking to the independent

auditor to provide the information.” Guidelines for Requesting

tual data pertinent to a corporation’s tax liability can-

not be obtained from the taxpayer’s books of account.

Tax accrual workpapers therefore constitute a valuable

source of relevant evidence in determining the tax liabili-

ties of the nation’s largest corporations.

The refusal of the court below to enforce the summons

on the ground of a purported privilege it found to exist

for accountants’ tax accrual workpapers is contrary to

the well-established rule that “[{e]videntiary privileges in

litigation are not favored.” Herbert v. Lando, 441 U.S.

153, 175 (1979). Indeed, as the Court reaffirmed in

Trammell v. l/nited States, 445 U.S. 40, 50 (1980),

quoting United States v. Bryan, 339 U.S. 323, 331

(1950), any claim of privilege must overcome the settled

principle that “the public * * * has a right to every

man’s evidence.” Accord: Branzburg v. Hayes, 408

U.S. 665, 688 (1972). “Whatever their origins, these

exceptions to the demand for every man’s evidence are

not lightly created nor expansively construed, for they

are in derogation of the search for truth.” United States

v. Nivon, 418 U.S. 683, 710 (1974). See also Blackmer

v. United States, 284 U.S. 421, 438 (1932); 8 J. Wig-

more, supra, § 2192, at 73. Because testimonia! privileges

hide relevant evidence and therefore tend to be “an ob-

stacle to the administration of justice” (id. § 2192, at 73;

see United States v. Nixon, supra, 418 U.S. at 711-713),

such privileges are tolerable only when they “are de-

signed to protect weighty and legitimate competing inter-

ests” (id. at 709). See also Elkins v. United States, 364

U.S. 206, 234 (1960) (Frankfurter, J., dissenting).

These considerations are fully applicable to the sum-

mons authority of the Internal Revenue Service. Our

self-reporting tax system is premised upon the assump-

tion that the majority of taxpayers will honestly report

their income and deductions. But Congress has long rec-

ognized that if the Treasury is to discharge effectively

Audit or Taz Accrual Workpapers, | Audit) 1 Int. Rev. Man. (CCH)

§ 4024.4 (May 14, 1981).

its duty to administer and enforce the internal revenue

laws (26 U.S.C. 7801), it must have the statutory power

to obtain information with respect to persons who may

not have complied with the tax laws.

A. Congress has given the Internal Revenue Service

authority to obtain information relevant to its tax

investigations

1. Sections 7601 and 7602 of the 1954 Internal Reve-

nue Code (26 U.S.C.) (pp. 2-3, supra) provide the Treas-

ury with the authority necessary to support vigorous and

searching investigations of taxpayers’ liabilities for tax.

The former provision imposes upon the Secretary the duty

“to proceed * * * and inquire after and concerning all per-

sons * * * who may be liable to pay any internal revenue

tax.” “{T]he section thus flatly imposes upon the Secre-

tary the duty to canvass and to inquire” Donaldson v.

United States, 400 U.S. 517, 523-524 (1971). Section

7602 empowers the Secretary to require the submission

of records and testimony for that purpose. It authorizes

the Secretary “[t)o summon * * * any * * * person

* * * to appear * * * and to produce such books, papers,

records, or other data * * * as may be relevant or ma-

terial” to ascertaining the correctness of any return.

“The purpose of the statutes is not to accuse, but to in-

quire. Although such investigations unquestionably in-

volve some invasion of privacy, they are essential to our

self-reporting system, and the alternatives could well in-

volve far less agreeable invasions of house, business, and

records.” United States v. Bisceglia, 420 U.S. 141, 146

(1975).

Section 7602 is the Treasury’s principal information-

gathering authority, and this Court has construed it

broadly to achieve its purpose—effective investigations.

Thus the Court has frequently analogized the summons

power to the common law duty attaching to the issuance

of a testimonial summons. See United States v. Bisceglia,

supra, 420 U.S. at 147-148; United States v. Powell, 379

U.S. 48, 57 (1964). This common law duty has been ex-

pansively construed and is normally limited only by no-

tions of relevance and by certain well cabined doctrines

of privilege. See, c.g., Blair v. United States, 250 U.S.

273 (1919); United States v. Bryan, supra, 339 U.S. at

331. Although the Court has recognized that there may

be exemptions from the public duty to give evidence to a

competent authority, the “primary assumption” is tl.at a

summoned party must “give what testimony one is capa-

ble of giving” absent an exemption “grounded in a sub-

stantia] individual interest which has been found, through

centuries of experience, to outweigh the public interest

in the search for truth” (ibid.).

Moreover, the Court has consistently construed the sum-

mons authority Congress conferred in Section 7602 to em-

brace all appropriate measures for enforcement, repeat-

edly rejecting attempts to circumscribe the effective exer-

cise of the Interna] Revenue summons power. ,The Court

has upheld summons for tax-related accountant’s work-

papers, whether in the possession of the taxpayer’s ac-

countant (Couch v. United States, supra) or the taxpayer's

attorney (Fisher v. United States, 425 U.S. 391 (1976)).

See also United States v. Powell, supra, 379 U.S. at 57;

United States v. Bisceglia, supra; and United States v.

Euge, 444 U.S. 707 (1980). “There is thus a formidable

line of precedent construing congressional intent to up-

hold the claimed enforcement authority of the Service if

author y is necessary for the effective enforcement of the

revenu. laws and is not undercut by contrary legislative

purposes” (444 U.S. at 715-716; footnote omitted). An

Internal Revenue Service summons to produce evidence rel-

evant to a legitimate investigation is enforceable unless an

established privilege protects such evidence or there are

“unambiguous directions from Congress” to the contrary.

United States v. Bisceglia, supra, 420 U.S. at 150.

2. As the Court observed in Donaldson v. United

States, supra, 400 U.S. at 535, the history of Section

7602 confirms our submission that the statute authorizes

the use of a summons to compel the production of docu-

ments prepared by an accountant that may be material

in determining tax liability." The statutory history shows

that the summons power was derived from Sections 3614,

3615(a)-(c), aud 3654 of the Internal Revenue Code of

1939 (see Table II to 1954 Code, 68A Stat. 969) and that

these three provisions had independent roots in revenue

acts dating back to 1919, 1864, and 188, respectively.

These three sections of the 1939 Code are highly signifi-

cant because, in adopting Section 7602, Congress intended

“no material change from existing law.” H.R. Rep. No.

1337, 83d Cong., 2d Sess. A436 (1954); S. Rep. No.

1622, 83d Cong., 2d Sess. 617 (1954). See also H.R. Rep.

No. 1337, supra, at 99; S. Rep. No. 1622, supra, at 133;

100 Cong. Ree. 3425 (1954).

Section 3614/a) of the 1939 Code authorized the Com-

missioner “to examine any books, papers, records, or

memoranda bearing upon the matters required to be in-

cluded in the return, and [to require] * * *the attendance

of any other person having knowledge in the premises,

and [to] take his testimony with reference to the matter

required by law to be included in such return * * * .”*

* The tax accrual workpapers prepared by respondent fit com-

fortabiy within the statutory phrase “any books, papers, records,

or other data * * *.” Section 7602(1). Moreover, the statutory

summons power of the Internal Revenue Service unquestionably

extends to accountants who are or may have been engaged by the

taxpayer. Section 7602(2) broadly authorizes the Service to sum-

mon “any person having possession, custody, or care cf books of

account containing entries relating to the business of the person

liable for tax * * *, or any other person the Secretary may deem

proper, to appear * * * and to produce such books, papers, records,

or other data, and to give such testimony, under oath, as may be

relevant or material to such inquiry * * *.”

* The Commissioner was first given the power to examine records

and compel attendance of witnesses and take testimony in 1919.

Act of Feb. 24, 1919, ch. 18, Section 1305, 40 Stat. 1142. As evi-

denced by Section 3654 of the 1939 Code, which had its origins

in 1868 (pp. 19-20 n.8, infra), similar authority had been pre-

viously granted to the collectors. This authority was likewise

continued.

The 1919 provision was reenacted several times before becoming

part of the 1939 Code. Act of Nov. 23, 1921, ch. 136, Section

Esction 3615(a) empowered the collector to “summon any

person to appear * * * and to produce books * * *, and

to give testimony or answer interrogatories * * * re

specting any objects or income liable to tax or the returns

thereof * * *.” Section 3615(c) (2) and (3) extended the

summons power to “any other person having possession,

custody, or care of books of account containing entries

relating to the business of any person * * *” or “[a]ny

other person the collector may deem proper.” Finally,

the third source for the present summons authority—

Section 3654/a) of the 1939 Code—conferred upon the

collectors the ‘power to examine all persons, * * * books

and papers, accounts, and premises, to administer oaths,

and to summon any person to produce books and papers,

or to appear and testify under oath before him * * *.”*

1308, 42 Stat. 310; Act of June 2, 1924, ch. 234, Section 1004, 43

Stat. 340; Act of Feb. 26, 1926, ch. 27, Section 1104, 44 Stat. 113;

Act of May 29, 1928, ch. 852, Section 618, 45 Stat. 878.

* Section 3615(a)-(c) of the 1939 Code closely followed a provision

first adopted in 1864, Act of June 30, 1864, Section 14, 13 Stat. 226,

and reenacted several times prior to its codification in 1989. Act of

July 13, 1866, ch. 184, Section 9, 14 Stat. 101; Act of Dec. 24, 1872,

ch. 13, Section 1, 17 Stat. 401. In 1874, the provision was codified

as part of Section 3173 of the Revised Statutes (1878 ed.), which

was amended by Act of Mar. 1, 1879, ch. 125, Section 3, 20 Stat. 330-

331, Act of Aug. 27, 1894, ch. 16, Section 34, 28 Stat. 557: Act of

Oct. 3, 1913, ch. 16, Subsec. I, 38 Stat. 177; Act of Sept. 8, 1916,

ch. 463, Section 16, 39 Stat. 773; Act of Feb. 24, 1919, ch. 18, Sec-

tion 1317, 40 Stat. 1146; Act of Nov. 23, 1921, ch. 136, Section 1311,

42 Stat. 311; Act of June 2, 1924, ch. 234, Section 1018, 43 Stat. 344;

Act of Feb. 26, 1926, ch. 27, Section 1115, 44 Stat. 117.

* Section 3654 of the 1939 Code was derived from an essentially

identical provision first enacted in 1868, Act of July 20, 1868, ch.

186, Section 49, 15 Stat. 144, and codified as part of Section 3163

of the Revised Statutes of 1874 (1878 ed.).

Table II of the 1954 Code, 68A Stat. 969, states that Sections

3614 and 3615(a)-(c) of the 1939 Code were essentially carried

forward into Section 7602 of the 1954 Code. See also Donaldson v.

United States, supra, 400 U.S. at 535. Although Table II does not

By combining Sections 3614, 3615 and 3654 into Sec-

tion 7602 in 1954 without intending to change existing

law, Congress affirmed the use of an Internal Revenue

summons to compel the appearance and testimony of all

persons who could further an investigation leading to the

discovery of all those who may be liable for unpaid taxes.

Like Section 7602, the prior provisions defined the sum-

mons power in the broadest possible manner, using terms

such as “books, papers, records, or memoranda bearing

upon the matters required to be included in the return”;

“require the attendance of any * * * person having

knowledge in the premises”; “to summons any person to

appear * * * to give testimony or answer interrogato-

ries,” and “to examine all persons, books, papers, ac-

counts, and premises.”

8. Thus, the history as well as the text, of both the

current provision and its authoritative predecessors, con-

firm the correctness of this Court’s statement in United

States v. Euge, supra, 444 U.S. at 712, that the testi-

monial requirement imposed by Section 7602 is “an ex-

pansive duty limited principally by relevance and privi-

lege.” * Here, both courts below found that the tax ac-

contain a reference to Section 3654(a) of the 1939 Code, that pro-

vision is likewise necessary as an aid to understanding the current

scope of the summons power because of Congress’ stated intention

not to change existing law. Moreover, there was no need to continue

the summons authority to collectors because the office of collector

had been abolished (26 U.S.C. 7804). Pursuant to Sections 7801

and 7802 of the 1954 Code, the authority to enforce the revenue

laws was vested in the Secretary of the Treasury and the Com-

missioner of Internal Revenue.

® For purposes of this case, the other requirements for enforce

ment of an Internal Revenue S« -vice summons have been met and

are not at issue. Thus, the Internal Revenue Service must demon-

strate that the investigation is conducted for a legitimate purpose,

the information sought may be relevant and is not already in the

Internal Revenue Service’s possession, and the administrative steps

prescribed by the Internal Revenue Code have been followed. United

States v. Powell, supra, 379 U.S. at 57-58. In practice, these re-

crual workpapers sought from respondent were “rele-

vant” to the inquiry the IRS was conducting under Sec-

tion 7602. The plain language of Section 7602 thus re

quires the courts to uphold the summons to produce

them. The court of appeals nevertheless refused to order

production on the unprecedented ground that the “integ-

rity of the auditing process” requires that a “privilege be

carved out” (Pet. App. 3la) insulating these papers

from summons in the absence of some extraordinary

showing of need.

As we shall show, the creation of this new privilege

was unwarranted, and rested on significant errors in the

court’s analysis. However, before we turn to a detailed

discussion of the decision below and to the question of

privilege, we deem it important to describe the nature and

contents of tax accrual] workpapers of the sort at issue

in this case. An understanding of the character of such

papers will confirm that they are not only fully relevant

—as the courts below correctly acknowledged—but also

that they should not be insulated from disclosure by a

newly-invented evidentiary privilege.

B. Tax accrual workpapers contain evidence that is

unquestionably relevant to the Internal Revenue

Service’s tax investigations

1. Every publicly-held corporation engages independ-

ent auditors who are qualified as certified public account-

ants to conduct regular financial audits of its books and

to certify its financial statements. These regular financial

audits generate audit workpapers and tax accrual work-

papers. As the court of appeals observed with respect to

the first category of documents referred to as audit work-

papers, these papers “consist almost entirely of factual

quirements are met by an affidavit from the agent issuing the sum-

mons, which states that the investigation has civil purposes and

that the summons was issued prior to a recommendation for crim-

inal prosecution, and further recites that the other requirements

prescribed by Powell have been met.

data generated from the books when accountants verify

the financial statements prepared by Amerada’s own per-

sonnel by spot-checking selected bookkeeping entries and

records” (Pet. App. 21a). The court further added that

these audit workpapers “include third-party confirma-

tions of transactions, as well as the auditor’s own judg-

ments about the implications of the company’s transac-

tions. Some of the workpapers contain material learned

during confidential discussions between Amerada and

[Arthur Young] employees” (ibid.).

But the fact that the audit workpapers contained in-

formation that was treated as confidential between Am-

erada and its outside auditor did not put such documents

beyond the reach of the Internal Revenue summons. In

enforcing the summons requiring the production of the

audit workpapers, the court of appeals concluded that “it

is clear that the audit workpapers pass the Powell test”

(Pet. App. 23a). In so ruling, it relied upon its prior

ruling in United States v. Noall, 587 F.2d 123 (2d Cir.

1978), cert. denied, 441 U.S. 923 (1979), enforcing a

summons to produce internal audit workpapers. Finding

no meaningful di tinction between the internal audit

workpapers in Noa! and the external audit workpapers

at issue in this case, the court reaffirmed its statement in

Noall that “the purposes of the internal audit include the

detection of overstatements or understatements of reve-

nues or expenses, and of identifying accounting proce-

dures that would lead to these. If the internal auditors

have ascertained an understatement of revenues or an

overstatement of expenses, this plainly might throw light

on the correctness of the returns” (587 F.2d at 126).

2. The court of appeals’ observations with respect to

the relevance of the audit workpapers are equally ap-

plicable to the tax accrual workpapers whose production

it refused to order. The tax accrual account (also known

as the tax pool analysis, the noncurrent tax account, or

the tax pool) is a reserve account that appears on the lia-

bility side of the corporate balance sheet. This account

reflects the sum of contingent tax liabilities relating to

the tax treatment of transactions occurring in prior

years that may give rise to possible, but not agreed to,

adjustments in the corporation’s tax liabilities for those

years. E. Kohler, A Dictionary for Accountants 119-120

(5th ed. 1975). See also G. Johnson & J. Gentry, Fin-

ney and Miller’s Principles of Accounting (Intermediate)

117-118 (7th ed. 1974). The purpose of the accountant’s

examination of the account is to determine the adequacy

and reasonableness of that reserve. N. Lenheart & P. De-

fliese, Montgomery’s Auditing 508 (8th ed. 1957).

Both courts below correctly concluded that respondent’s

tax accrual workpapers were relevant to the Service’s in-

vestigation of Amerada (Pet. App. 6a-8a; id. at 27a).

As the court of appeals observed, “we have consistently

used as our test of relevance whether the documents re-

quested ‘might have thrown light upon’ the correctness of

a return” [citations omitted]. The documents at issue here

certainly pass this low threshold of relevance. Different

tax positions lead to diffrent amounts of liability. It is

difficult to say that the assessment by the independent

auditor of the correctness of positions taken by the tax-

1” Both courts below rejected respondent’s arguments that (1)

only documents actually used in the preparation of federal income

tax returns are relevant, and (2) documents sought from any

third party are subject to an even higher threshold of relevance.

In so holding, they relied on United States v. Noall, 587 F.2d 123

(2d Cir. 1978), cert. denied, 441 U.S. 923 (1979), which ruled that

even documents not used in tax return preparation may, neverthe-

less, be relevant to an Internal Revenue Service audit as long as

the documents might throw some light on the correctness of the

return. Jd. at 125. But cf. United States v. Coopers & Lybrand,

413 F. Supp. 942 (D. Colo. 1975), aff'd, 550 F.2d 615 (10th Cir.

1977). See p. 39 n.23, infra. The court of appeals further held

that even assuming that a higher threshold of relevance might

apply to records in the hends of a third party who was in fact a

stranger to the taxpayer, respondent could not claim protection

under such a rule because it had been and continued to be inti-

mately involved in Amerada’s financial and tax affairs (Pet. App.

22a).

payer in his return would not throw ‘light upon’ the

correctness of the return” (id. at 27a)."'

3. As the name implies, tax accrual workpapers consist

of an amalgam of various sorts of materials bearing on

the adequacy and reasonableness of the contingency re-

serves established by a corporation with respect to its

tax liabilities.

(a) These papers will, of course, contain or refer to

large bodies of factual information about the corpora-

tion’s financial transactions that are relevant to its tax

liabilities. The data will come not only from the corpora-

tion’s books but also from information gathered from the

corporation s employees and from third parties.

Some of these data may in fact be readi'y available on

an ordinary audit of the corporation’s books. But not

necessarily al] of it. The data may include facts that do

not appear on the taxpayer’s returns or the supporting

schedules or attachments and that may not come to the

attention of the IRS during a normal audit of the tax-

payer’s books. For example, a multinational corporate

client may provide its accountant with facts about the

income, expenses, and level of bona fide business activity

of an off-shore subsidiary that the client does not include

in its tax return. An appraisal of the facts may suggest

the necessity for the Commissioner to make pricing ad-

justments under Section 482, the existence of Subpart F

(Sections 952 et seg.) income, or other adjustments that

may require assessment of additional taxes against the

U.S. parent. These are typical and frequently arising

issues in a multinational corporate tax audit. And

these facts may very well not be readily available on

a routine IRS audit; if discovered, they may, however,

cast serious doubt on the propriety of the decision not to

report, and may lead the independent auditor to recom-

1 “The statutory language [of Section 7602(2)] is ‘may be rele

vant or material.’ Congress acted advisedly in using the verb ‘may

be’ rather than ‘is,’ since the Commissioner cannot be certain that

the documents are relevant or material until he sees them.” United

States v. Noail, supra, 587 F.2d at 125.

mend the establishment of a tax reserve against the con-

tingency that the facts will be uncovered and additional

taxable income and deficiencies determined.

(b) The tax accrual workpapers may also shed impor-

tant light on the taxpayer’s state of mind regarding the

treatment it ultimately presents on its tax returns. If the

taxpayer chooses to disregard the accountant’s opinion

that the Code and Regulations require an item to be re-

ported in a certain manner and presents the transaction

in a way likely to mislead the Internal Revenue Service,

the taxpayer runs the risk of being held liable for the

penalty provided by Section 6653(a) of the 1954 Code

for “intentional disregard of rules and regulations” and

may also be liable for an additiona! fraud penalty." 26

U.S.C. 6653(b). Thus, the accountant’s appraisal may

bear on the taxpayer's liabilities for these penalties.”

(ce) Furthermore, as any sophisticated lawyer or ac-

countant knows, there is a vast difference between “raw”

data and “organized” data. The point of the tax accrual

workpaper process is to organize the facts; the papers

2 The court of appeals apparently believed that tax accrual work-

papers should be protected “so long as a case does not involve alle-

gations of fraud” (Pet. App. 3la). But as this Court recognized

in United States v. LaSalle National Bank, supre, 437 U.S. at

308-399, the purpose of a tax investigation is to determine all rele-

vant facts that may establish a basis for additional taxes, the im-

position of the fraud penalty, or even crim..al prosecution. Most

cases begin as routine audits, not as frauc .nvestigations. Hence,

Section 7602 necessarily permits the use of a summons at the very

outset of the investigation for the purpose of uncovering the basic

facts necessary for a determination of the taxpayer's correct lia-

bility, including liability for the fraud penalty.

The 1982 amendments to the Internal Revenue Code of 1954 (to

be codified in 26 U.S.C.) added additional! penalties that make the

taxpayer's state of mind even more relevant to an income tax inves-

tigation. See Pub. L. No. 97-34, 95 Stat. 341 (Section 6659) ( Addi-

tion to Tax in the Case of Valuation Overstatements); Pub. L. No.

97-248, 96 Stat. 324 ion 6661 (——+"’TSubstantial Un-

derstatement of Lidbility) ; Section 6700 (Promoting Abusive Tax

Shelters); and Section 6701 (Penalties for Aiding and Abetting

Understatement of Tax Liability).

will in effect embody the taxpayer’s and the accountant’s

judgments about which facts are relevant to the tax-

payer’s lawful tax liability.

In the case of a taxpayer with billions of dollars of

revenues arising from untold numbers of intricate trans-

actions, the integrity of a self-reporting tax system

comes under special strain. The fact that a needle is

there, present in the haystack, is not enough—the sum-

mons authority extends as well to available touls for dis-

covering it. And since it is the taxpayer’s duty to re-

port the needle in its return, and the accountant’s duty

to discover whether there may be unreported needles,

their judgments about what constitutes a needle—about

which facts are relevant to the taxpayer’s lawful tax

liabilities—are not entitled to be cloaked in secrecy.

It is in this sense that tax accrual workpapers may be

characterized as a roadmap (to use the figure employed

by the court of appeals (Pet. App. 3la))—a roadmap

through the raw data. They organize the terrain under

standards of relevance derived from the necessity to

certify the taxpayer’s financial statements. And the fact

that the roadmap has been created by the taxpayer and

the accountant—rather than the IRS itself—does not

meaningfully distinguish it from other data amenable to

summons or justify enshrouding it in secrecy.

(d) Finally, tax accrual workpapers may also contain

the accountant’s—and, indirectly, the taxpayer’s—opin-

ions and judgments abovt the propriety of the corpora-

tion’s reporting positions and about the potentials for

and strength of an IRS challenge to those positions.

These opinions and judgments will, of course, be inex-

tricably mixed in with factual data and characterizations

of the factual data. So also, of course, the taxpayer’s

return is an amalgam of facts, opinions and judgments.

The purpose of obtaining tax accrual workpapers is

not primarily to allow the Service access to the account-

ant’s and the taxpayer’s “opinions” and “theories” about

what is the correct tax liability. Once the relevant facts

are brought to its attention, the Service will make its

own appraisal. The Service’s chief interest is to discover

all of the relevant facts—and these workpapers may be

of critical importance in allowing it to do so.

It may, however, be the case that in a given instance

the papers will help the investigating agent by high-

lighting the vulnerabilities of the taxpayer’s positions

and by suggesting alternative theories with respect to

the appropriate tax treatment of a given transaction.

But, absent any evidentiary privilege barring production

of such documents (see pp. 28-39, infra), disclosure of

the accountant’s appraisals is consistent with the policy

that the audit process and the attendant summons proce-

dure “is to determine the truthful scope of the taxpayer's

liability, rather than to engage in a sophisticated game

of hide and seek.” United States v. Price Waterhouse

& Co., 515 F. Supp. 996, 1000 (N.D. Ill. 1981). See

also United States v. McKay, 372 F.2d 174, 176 (5th

Cir. 1967).

As the Fifth Circuit noted in United States v. El Paso

Co., 682 F.2d 530, 534 (1982), the number of potential

disputes over the tax treatment of items by a large cor-

poration is “enormous.” For fiscal year 1981, while cor-

porate returns constituted 6.1% of returns examined,

60.3% of the dollar deficiencies (totalling $4.33 billion)

proposed, involved corporate taxes. Commissioner of In-

ternal Revenue and the Chief Counsel for the Internal

Revenue Service. 1981 Annual Report 12-13. The task

facing the Internal Revenue Service in insuring com-

pliance with the tax law is correspondingly enormous

and should not be stultified by limiting access to relevant

material in the absence of compelling factors. See Don-

aldson v. United States, supra, 400 U.S. at 535-536;

United States v. EF! Paso Co., supra, 682 F.2d at 545.

To be sure, Amerada may find disclosure of respond-

ent’s tax accrual workpapers to be disagreeable. “The

divulgence of potentially incriminating evidence azainst

[the taxpayer! is naturally unwelcome. But [the tax-

payer’s] distress would be no less if the divulgence came

not from [its] accountant but from some other third

party with whom [it] was connected and who possessed

substantially equivalent knowledge of [its] business af-

fairs.” Couch v. United States, supra, 409 U.S. at 32y.

If Amerada had sought to obtain a substantial line of

credit from a bank which, as a condition of advancing

the credit, had engaged an accountant to conduct an

independent audit of Amerada, neither that auditor, nor

Amerada, nor its own regular auditor, could seriously

contend that tax accrual workpapers generated in such

an audit would be immune from compelled disclosure pur-

suant to an IRS summons. Like any other third-party

evidence, the bark’s papers and those of its outside audi-

tor would be subject to disclosure. See Donaldson V.

United States, supra, 400 U.S. at 535-536.

There is, we submit, no significant difference between

the foregoing example and the tax accrua] workpapers at

issue here, because—as we shall now show—nothing in

the relationship between Amerada and its independent au-

ditor, respondent Arthur Young & Co., warrants the crea-

tion of an evidentiary privilege barring the production of

such concededly relevant evidence. “* * * [T]his Court

has consistently construed congressiona! intent to require

that if the summons authority claimed is necessary for

the effective performance of congressionally imposed re-

sponsibility to enforce the tax code, that authority should

be upheld absent express statutory prohibition or sub-

stantial countervailing policies.” United States v. Euge,

supra, 444 U.S. at 711. No such statutory policies or

countervailing policies bar the production of the papers at

issue.

C. The tax accrual papers are not protected from dis-

closure by either a work-product privilege or an

accountant-client privilege

1. In refusing to order production of the tax accrual

workpapers prepared by respondent in connection with its

determination of the adequacy of Amerada’s reserve for

contingent tax liabilities and its certification of Amerada’s

financial statements, the court of appeals relied upon the

attorney work-product doctrine established by this Court’s

decision in Hickman v. Taylor, 329 U.S. 495 (1947). In

Hickman, the Court recognized a qualified privilege

against pretrial discovery for certain materials prepared

by an attorney “acting for his client in anticipation of

litigation” (329 U.S. at 508). See United States v.

Nobles, 422 U.S. 225, 236-240 (1975); Upjohn Co. Vv.

United States, 449 U.S. 383, 397-399 (1981). In so hold-

ing, the Court expressed the view that a lawyer should

have “a certain degree of privacy, free from unnecessary

intrusion by opposing parties and their counsel” so that he

may “prepare his legal theories and plan his strategy

without undue and needless interference” (Hickman V.

Taylor, supra, 329 U.S. at 510-511).

a. The policies underlying the Hickman rationale dem-

onstrate that the work-product doctrine should not be ex-

tended from lawyers to accountants. Indeed, we are aware

of no case, apart from the decision below, that has proposed

such an extension. The fact that the law has recognized

an attorney work-product privilege but not an accountant

work-product privilege rests on important practical dif-

ferences between the function of an accountant and that

of an attorney. The attorney is the client’s confidential

advisor, and an advocate whose duty it is to present the

client’s case to the whole world in the most favorable light

possible.* An independent certified public accountant

14 There are, of course, certain ethical restrictions imposed upon

an attorney in the conduct of his advocacy. For example, Disci-

plinary Rule 7-102(A) of the Model Code of Professional Responsi-

bility (1976) forbids the knowing use of perjured testimony or

false evidence, or counseling a client to engage in illegal or fraudu-

lent conduct. But section (B) of that same rule prohibits revealing

even perjury to the relevant tribunal if the attorney's knowledge of

the perjury rests on privileged communications, i.e., from the client.

Moreover, Ethical Consideration 7-4 requires the attorney to urge

any construction of law or facts favorable to his client if the con-

struction is “supportable by a good faith argument for an exten-

performs a sharply different function. As the title im-

plies, he reports not to the client but to the public. He

does not serve as the client’s private and confidential ad-

visor, but rather as an instrument of public oversight.

The law shields the mental processes of the attorney be-

cause the product of those processes—the rendering of

thoughtful lega] advice—has long been deemed to be en-

titled to privacy. But the product of the accountant’s

mental processes is in no way designed to be private ad-

vice. It is designed to constitute a public report on the

adequacy of the client’s financial disclosures. There is no

doubt whatever that if respondent had concluded that

Amerada’s tax reserves were inadequate, it would have

been duty-bound publicly to disclose that opinion, presum-

ably through a qualification in its certification. There

is, therefore, no good reason to cloak in privacy the facts

and analytical processes that led to the very judgment

that all concede must be fully disclosed to the public as a

public judgment.

An attorney, however, is not supposed to be “independ-

ent” of the client. His duty is to give the client undivided

loyalty. On the other hand, the independent certified pub-

lie accountant—again as the title implies—is meant to

be “independent.” His responsibility is not only to the

client whose books he is auditing but also to various gov-

ernmental agencies regulating his client’s industry, to his

client’s creditors, and to investors in his client’s securi-

ties. Thus, ET Section 52 of the Code of Ethics adopted

sion, modification, or reversal of the law” (emphasis added), i.e.,

even if the attorney himself does not believe in the argument. Model

Code of Professional Responsibility 36C, 32C (1976). See also Rule

1.6 Model Rules of Professional Conduct (Proposed Final Dra/t

1981), dealing with confidentiality of information. Model Rules of

Professional Conduct 9 (Final Draft 1982). The ABA House of

Delegates amended this proposal to protect against disclosure of in-

formation by an attorney that his client is about to commit a non-

violent crime (e.g., fraud), but the ABA itself has not taken final

action on the proposed rules. See N.Y. Times, Feb. 9, 1983, at A24,

col. 1.

by the American Institute of Certified Publie Accountants

states that “[A] certified public accountant should main-

tain his integrity and objectivity and when engaged in

the practice of public accounting, be independent of those

he serves.” AICPA-Professional Standards 4291 (1982;

emphasis in original). The independent public accounting

firm is expected to maintain financial as well as mental

independence from the client. Neither the firm nor its

employees is permitted any direct or indirect interest in

the client (ET Section 101, AICPA, supra, et 4411-4412)

and its attitude to the client should be “a judicial im-

partiality that recognizes an obligation for fairness not

only to management and owners (shareholders) of a busi-

ness, but also to creditors and those who may otherwise

rely (in part, at least) upon the auditor’s report, as in

the case of prospective owners or creditors” (R. Wixon,

W. Kell & N. Bedford, Accountants’ Handbook 26.10 (5th

ed. 1970) [hereinafter cited as Accountants’ Handbook),

quoting AICPA Committee on Auditing Procedure (£‘ate-

ment on Auditing Procedure No. 33) }.

The independence of an outside accounting firm, when

it is engaged to render an opinion on financial state-

ments (as respondent was in this instance), requires that

it avoid not only outright misstatements or omissions but

also “any type of presentation that would tend to favor

the client company at the expense of those who read and

rely on the financial statements examined” ( Accountants’

supra, at 26.10). See also Gold v. DCL Inc., 399 F. Supp.

1123 ‘(S.D.N.Y. 1973). Its responsibilities to the public

require it to inform the public when the client has not

presented its financial status fairly, by qualifying its

opinion. Accountants’ Handbook, supra, at 26.27. Fi-

nally, in contrast to the attorney’s qualified duty to cor-

rect frauds on the court provided his knowledge does

not come through privileged client communications (DR

7-102(B) Model Code of Professional Responsibility, su-

pra), the independent public accountant has a continuing

duty to inform the public of misstatements or errors in

the client’s audited statements when the accountant has

certified them. “The accountant owes a duty to the public

not to assert a privilege of silence until the next audited

annual statement comes around in due time.” United

States v. Natelli, 527 F.2d 311, 319 (2d Cir. 1975).

The public accountant’s multiplicity of .valties ex-

poses accountants to suits by regulatory agencies, credi-

tors, and investors on the theory that the accountant ig-

nored his duty to them in favor of his loyalty to his client.

In such suits, it is common for accountants to disclose

their clients’ confidential communications and their own

work product in order to demonstrate that they properly

discharged their duties to all."* Indeed, it was precisely

those differences between accountants and attorneys that

this Court recognized in Couch in rejecting an analogous

claim of an accountant-client privilege as to a taxpayer’s

records turned over to an accountant. As the Court

stated (409 U.S. at 335-336) :

[T}here can be little expectation of privacy where

records are handed to an accountant, knowing that

mandatory disclosure of much of the information

therein is required in an income tax return. What in-

formation is not disclosed is largely in the account-

ant’s discretion, not * * * [the taxpayer’s]. Indeed,

15 See Note, The Duties and Obligations of the Securities Lawyer:

The Beginning of a New Standard for the Legal Profession?, 1975

Duke L. J. 121, for a detailed analysis of the distinction between

the roles of lawyers and acco intants and the unique responsibilities

to the public imposed on securities lawyers by the courts and by the

regulations of the Securities and Exchange Commission.

16 See, e.g., Pegasus Fund, Inc. v. Laraneta, 617 F.2d 1335 (9th

Cir. 1980) (respondent Arthur Young & Co. produced its work-

papers to show that it had no reason to know of fraud by its

client); Oleck v. Fischer, 623 F.2d 791 (2d Cir. 1980) (Arthur

Andersen & Co. testified regarding reserves for notes payable

appearing in client’s financial statement); Herzfeld v. Laventhol,

Krekstein, Horwath & Horwath, 540 F.2d 27 (2d Cir. 1976); SEC

v. Geotek, 426 F. Supp. 715 (N.D. Cal. 1976), aff'd, 590 F.2d 785

(9th Cir. 1979).

the accountant risks criminal prosecution if he will-

fully assists in the preparation of a false return.

* * * His own need for self-protection would often

require the right to disclose the information given

him. * * * Accordingly, * * * [the taxpayer] can-

not reasonably claim * * * an expectation of * * °

privacy or confidentiality.

Given the independence of the certified public account-

ant from his client, and given the fact that his function

is to make public reports rather than to give confidential

advice, it is plain that the Hickman doctrine should not

apply to the accountant’s workpapers. Privacy is ac-

corded to a lawyer in the preparation of his legal theories

and strategy because they are undertaken for the sole

benefit of his client and because we want clients to have

access to confidential legal advice. In contrast, the ac-

countant’s opinion of the adequacy of the tax contingency

reserve account is designed to be public knowledge for the

benefit of a public corporation’s creditors, investors, and

the Securities and Exchange Commission. There is there-

fore no policy justification under the Hickman rationale

for enshrouding in secrecy the facts and interpretations

which lead to that publicly-available judgment by the

accountant.

b. The work-product doctrine is also inapplicable to

the accountant tax accrual workpapers because they were

prepared in the course of a regular audit of financial

statements and not in connection with litigation no matter

how remotely contemplated.” According some degree of

confidentiality to lawyers’ work product prepared in con-

nection with litigation is consistent with “the public pol-

icy underlying the orderly prosecution and defense of

legal claims.” Hickman v. Taylor, supra, 329 U.S. at

17 The work-product doctrine would, of course, protect workpapers

that an accountant prepares when engaged by an attorney in

preparation for litigation. Jn re Grand Jury Subpoena, 599 F.2d

504, 513 (2d Cir. 1979); ef. Fed. R. of Civ. P. 26(b) (3), advisory

committee.

510. If such materials were open to opposing counsel on

demand, the Court in Hickman concluded that “Ineffi-

ciency, unfairness and sharp practices would inevitably

develop in the giving of legal advice and in the prepara-

tion of cases for trial” (id. at 511). The result would be

that counsel would be able to derive advantage from the

efforts of his opponent.

These policies have no bearing upon the instant case

because the papers at issue were not prepared in con-

nection with litigation. Rather, the tax accrual work-

papers were prepared to comply with the regulations of

the Securities and Exchange Commission. See United

States v. El Paso Co., 682 F.2d 530 (1982), petition for

cert. pending, No. 82-716 (tax accrual analyses prepared

by house counsel not work product because they were not

prepared w.th even the remotest contemplation of litiga-

tion). 682 F.2d at 542-544.

Neither respondent nor Amerada claims that the tax

accrual workpapers would qualify as traditional work

product, and the record fails to support any inference that

litigation was, in fact, contemplated when these work-

papers were created. As codified in Fed. R. Civ. P.

26(b), the work-product doctrine protects against discov-

ery “the mental impressions, conclusions, opinions, or

legal theories of an attorney or other representative of a

party concerning litigation” (emphasis added}. It does

not protect the mental impressions, ete. of anyone, in-

cluding an attorney, if they do not concern litigation.

Rather, the rule contemplates that “documents not ob-

tained or prepared with an eye toward litigation” should

be freely produced on a showing of relevance. See Fed.

R. Civ. P. 26(b) advisory committee notes. Accord:

Coastal States Gas Corp. v. Department of Energy, 617

F.2d 854, 864 (D.C. Cir. 1980) (“[{work-product doctrine]

has uniformly been held to be limited to documents pre-

pared in contemplation of litigation”); Goosman Vv.

A. Duie Pyle, Inc., 320 F.2d 45, 52 (4th Cir. 1963) (reports

prepared in ordinary course of business under Interstate

Commerce Commission regulations are not work product).

Accordingly, the attorney work-product privilege, whether

founded on Hickman v. Taylor, or on Rule 26(b) (3), does

not extend to respondent’s tax accrual workpapers.

2. Although the court of appeals cited Hickman Vv.

Taylor, supra, 329 U.S. at 495, as the principal authority

in support of its decision, it is plain that its reasoning

was not primarily based on the Hickman rationale.

Rather, the court’s concern focused on fostering candid

communications from client to accountant. As the court

of appeals stated, “The prejudice involved in exposing

to the Service appraisals of a taxpayer’s weaknesses and

settlement positions on audits is of such proportions that

a prudent organization might not be perfectly candid

with independent auditors once it knew that the informa-

tion revealed would be reachable under § 7602” (Pet.

App. 30a).

The court’s emphasis on candid communications be-

tween client and accountant—for the supposed benefit of

the investing public and the enforcement of the securities

laws—indicates that the court was establishing the basis

for a communications privilege. Upjohn Co. v. United

States, supra, 449 U.S. at 389; United States v. El Paso

Co., supra, 682 F.2d at 541 n.13; In re Sealed Cases,

676 F.2d 793, 808-809 (D.C. Cir. 1982). But this Court

and every court that has considered the issue (apart from

the court below) has rejected the creation of an account-

ant-client privilege. Couch v. United States, supra, 409

USS. at 335.

In Couch, the Court ruled that the Fifth Amendment

rights of a taxpayer were not violated by the enforce-

ment of a documentary summons directed to her accountant

and requiring production of the taxpayer’s own records

in the possession of the accountant. It did so on the

ground that in such a case “the ingredient of personal

compulsion against an accused is lacking” (409 U.S. at

329). In so holding, the Court rejected the taxpayer’s

argument that “the confidential nature of the accountant-

client relationship and her resulting expectation of pri-

vacy in delivering the records protect{ed] her, under the

Fourth and Fifth Amendments, from their production”

(409 U.S. at 335). The Court flatly stated, “Although not

in itself controlling, we note that no confidential account-

ant-client privilege exists under federal law, and no state-

created privilege has been recognized in federal cases”

(ibid.) .**

The reasons underlying the judicial rejection of an

accountant-client communication privilege derive from the

distinctions between lawyers and accountants that we

have discussed (pp. 29-35, supra) in connection with the

attorney work-product doctrine. The lawyer’s work prod-

uct and the communications between lawyer and client

are protected from compelled disclosure because the law-

yer owes undivided loyalty to champion his client’s in-

terests against all others and because the relationship is

meant to be confidential."° The accountant, however,

makes public judgments and reports based on a duty to

the public and to public law enforcement bodies. The

18 See, e.g., Wm. T. Thompson Co. v. General Nutrition Corp.,

671 F.2d 100, 103-104 (3d Cir. 1982); United States v. Gurtner,

474 F.2d 297, 299 (9th Cir. 1973); United States v. Wainwright,

413 F.2d 796, 803 (10th Cir. 1969) ; United States v. Kovel, 296 F.2d

918, 922 (2d Cir. 1961); Falsone v. United States, 205 F.2d 734

(5th Cir.), cert. denied, 346 U.S. 864 (1953). See also Gariepy Vv.

United States, 189 F.2d 459, 463-464 (6th Cir. 1951); Himmelfarh

v. United States, 175 F.2d 924, 939 (9th Cir.), cert. denied, 338 U.S.

860 (1949), Olender Vv. United States, 210 F.2d 795, 806 (9th Cir.

1954).

#2 The attorney may reveal confidential communications if the

client sues him about the quality of representation (Tasby v.

United States, 504 F.2d 332, 336 (8th Cir. 1974)), or if the com-

munication was made in furtherance of on-going or future criminal

activity and the attorney’s defense against criminal prosecution

regarding the criminal activity requires disclosure of the com-

munication (Housler v. First Nat'l Bank of East Islip, 484 F. Supp.

1321 (E.D.N.Y. 1980)). Cf. Myerhoffer v. Empire Fire & Marine

Insurance Co., 479 F.2d 1190 (2d Cir. 1974) (attorney permitted

to reveal confidences when he was a defendant in a civil suit

involving the securities law).

very pr-pose of client communications to him is to en-

able the accountant to exercise his discretion to disclose

all relevant information to the public or public agencies.

Hence, there is no justification for cloaking in secrecy

a client’s communications with his accountant, and the

accountant’s tax accrual papers should not be protected

by either a work-product or a communications privilege.

3. In light of the foregoing, it is not surprising that

no other court has protected tax accrual workpapers from

an Internal Revenue summons on the ground of privilege

or policy. In United States v. El Paso Co., supra, the

Fifth Circuit enforced an Interna] Revenue summons for

tax accrual workpapers prepared by a public corpora-

tion’s in-house accountants and attorneys, and communi-

cated to its independent accountants in connection with

the establishment of a reserve for contingent tax liabili-

ties and the certification of its financial statements. The

court relied on this Court’s admonition in Couch that

there is no federal accountant-client evidentiary privilege,

and rejected “[t]he logic of [the decision below that] im-

plies that the taxpayer’s revelation of tax accrual work-

papers to an accountant should be considered a commu-

nication in confidence” (682 F.2d at 540-541) .”

In United States v. Price Waterhouse & Co., 515 F.

Supp. 996 (N.D. Ill. 1981), the district court rejected

Price Waterhouse’s claim that its “thoughts, ideas and

2° E] Paso resisted the summons arguing, inter alia, that because

the tax accrual analysis was conducted by employees who were

attorneys, the documents were privileged either under the attorney- .

client privilege or the attorney work-product doctrine. The court

assumed that the attorney-client privilege might have been appli-;

cable (682 F.2d at 539). However, it enforced the summons be-

cause E] Paso had discussed the tax accrual analyses with its out-

side auditors and thereby waived any privilege that might have

applied to these records (id. at 540). The court held that El] Paso

waived any presumed attorney-client privilege because no accountant-

client privilege existed. By communicating to a non-privileged party

—the outside auditor—E]) Paso forfeited whatever privileged status

might have been accorded to the communication.

opinions” (id. at 998 n.4) are not subject to an Internal

Revenue summons. The court understood Price Water-

house to be objecting to revealing its thoughts and opin-

ions on issues that the Internal Revenue Service may

not have pinpointed on its own in the course of the audit

(ibid.). But the court concluded that protection of such

documents is not justified because it would turn the audit

into “a sophisticated game of hide and seek” (id. at

1000), in which the accountants would turn material over

if the agent guesses right and claim privilege if the agent

guesses wrong.”

Finally, in United States v. Arthur Andersen & Co.,

474 F. Supp. 322 (D. Mass. 1979), appeal of one party

dismissed, 623 F.2d 720 (‘lst Cir.), cert. denied, 449

U.S. 1021, aff'd as to second party, 623 F.2d 725 (1st Cir.

1980) ,” the district court refused to create a privilege to

protect Arthur Andersen’s tax accrual workpapers. It re-

lied on this Court’s opinion in Couch, and this Court’s

21 Compare United States v. Procter & Gamble, 356 U.S. 677,

682-683 (1:58) (“Modern instruments of discovery serve a useful

purpose * * *. They together with pretrial procedures make a

trial less a game of blindman’s buff and more a fair contest with

the basic issues and facts disclosed to the fullest practicable ex-

tent * * *. Only strong public policies weigh against disclosure.” ) ;

see also Rozier Vv. Ford Motor Co., 573 F.2d 1332, 1345-1346 (5th

Cir. 1978).

= Neither the corporate taxpayer nor the independent auditor in

Arthur Andersen & Co. obtained a stay of the district court de

cision. Hence, the auditor produced the 1 « accrual papers, and its

appeal with respect to that issue was dismissed as moot (623 F.2d

720 (1st Cir. 1980)). The taxpayer's appeal challenged, inter alia,

the relevance of the Service’s questioning the auditor with respect

to the workpapers. Before addressing the taxpayer’s claim that the

requested testimony of the auditor was not relevant, the court of

appeals first expressed agreement with this Court’s admonition in

Couch v. United States, supra, 409 U.S. at 335, that there is no

recognized accountant-client privilege. See pp. 5-6, supra. The

court of appeals held that the taxpayer’s appeal as to the relevancy

of the auditor’s testimony was premature until such questioning was

in fact resisted (623 F.2d at 729-730).

broad construction of the Internal Revenue Service's stat-

utory summons power (474 F. Supp. at 327).*

D. The rationale for a communications privilege is not

applicable to this case

Even if some communications between client and ac-

countant could be deemed privileged, the rationale for

such a privilege does not exist in this case. The prin-

cipal contemporary justification for the attorney-client

privilege is its presumed value in encouraging clients to

make full disclosure to their attorneys, Upjohn Co. Vv.

United States, supra, 449 U.S. at 389; 8 J. Wigmore,

supra, §§ 2291 and 2306, at 590. Clients, of course, have

no legal duty fully to inform their lawyers; without the

privilege, therefore, disclosure might be deterred and it

might be difficult to obtain fully informed legal advice.

“(Slince the privilege has the effect of withholding rele-

vant information from the factfinder, it applies only

where necessary to achieve its purpose. Accordingly, it

protects only those disclosures—necessary to obtain legal

advice—which might not have been made absent the

privilege.” Fisher v. United States, 425 U.S. 391, 403

(1976).

There is no substantial basis for the court of appeals’

assumption that the production of tax accrual work-

papers would cause corporations to withhold information

23Cf. United States v. Coopers & Lybrand, 413 F. Supp. 942

(D. Col. 1975), aff'd, 550 F.2d 615 (10th Cir. 1977). There, the

court refused to enforce a summons for tax accrual workpapers on

the ground that they were not relevant to ‘he Internal Revenue

audit, relying, in part, on the fact that they were not created in

the course of preparing the taxpayer's tax return. This narrow

definition of relevance has not been followed in subsequent decisions

of other courts, including the Tenth Circuit itself. United States v.

El Paso Co., supra; United States v. Noall, 587 F.2d 123, 125-126

(2d Cir. 1978), cert. denied, 441 U.S. 923 (1979) ; and United States

v. Southwestern Bank & Trust Co., 693 F.2d 994 (10th Cir. 1982) ;

United States v. City National Bank & Trust Co., 642 F.2d 388

(10th Cir. 1981).

from their outside auditors.* As a publicly-held corpora-

tion, Amerada was required to file accurate and complete

financia] statements, certified by its independent auditors,

with the SEC, if it wished to continue to have its stock

publicly traded. See 15 U.S.C. 781 and m; 17 C.F.R.

210.1-01, 210.1-02(a), (d), and (f), 210.2-01. Thus, Am-

erada had an independent lega] duty to make full dis-

closures to respondent, without reference to or encour-

agement by any privilege. As the dissenting judge

pointed out, there is accordingly no justification for the

majority’s premise “that some corporations are so anxious

to minimize their tax payments that they are willing to

deceive their accountants concerning the existence of de-

batable tax items and thereby violate their obligations

under the securities law” (Pet. App. 36a; footnotes

omitted). See also United States v. El Paso Co., supra,

682 F.2d at 544.

** There is certainly nothing in the record to support such an

inference. The only factual submission put forward by respondent

on this point was the unsupported self-serving statement of its coun-

sel that (J.A. 32):

Clients would be reluctant to provide necessary information

* * * [if the tax accrual workpapers were disclosed). The

devastating impact of this to the auditing profession and to the

primary objectives of that audit, the integrity of the financial

statements, is obvious.

Surely an evidentiary privilege that undercuts the powerful

governmenta! interest in collecting taxes should rest on something

more substantia! than the self-serving speculation by an interested

party. In Branzburg v. Hayes, supra, this Court rejected similar

arguments advanced in support of creating a newsman’s privilege.

The reporters in that case had argued that their confidential sources

would dry up if the sources believed that the reporter might be

required to testify before a grand jury regarding the identity of

the source or the information obtained from the source. The Court

found the argument unpersuasive because the asserted result was

highly speculative (408 U.S. at 693-694) and because, even if the

ill-effect were assumed to occur in the future, it would not out-

weigh the present public interest in obtaining the information

from the reporters (id. at 695). Cf. Hawkins v. United States, 358

U.S. 74, 81-82 (Stewart, J., concurring).

The cost of engaging in the financial deceit that the

court below predicted would occur in the absence of a

privilege is very high. If an accountant refuses to certify

a public corporation’s financial statements, the corpora-

tion may be excluded from the public capital markets and

may be exposed to private causes of action. Respondent

was, therefore, hardly at the mercy of its client in these

circumstances. When confronted with an independent ac-

countant’s demand for additional information, the client

has only three choices: (1) to provide the accountant the

information requested; (2! to reconcile itself to receiving

a qualified opinion, or (3) to discharge the accountani.

See In re John Doe Corp., 675 F.2d 482, 484-489 (2d Cir.

1982).

From the client’s point of view, the latter two alterna-

tives are highly undesirable. A qualified opinion would

damage the client by revealing the nature, if not the

facts, of the problem. Discharging the accountant would

likewise harm the client because, under the securities reg-

ulations, a listed company must inform the Securities and

Exchange Commission, as well as its shareholders, when-

ever its independent accountant resigns or is discharged

(see 17 C.F.R. 249.308 and 240.14a-3'b) (4); 4 Fed. Sec.

L. Rep. (CCH) { 31,001, Form 8-K, Item 4, at 21,995

(May 4, 1983) ) ; explain whether there had been any dis-

agreements over an accounting treatment or principle in

connection with the audits of the two most recent fiscal

years; and request the former accountant to inform the

Commission whether the accountant agrees with the com-

pany’s response to Item 4. In addition, if a change of ac-

countants has been reported in a Form 8-K during the 24

months immediately preceding the registration of new

securities, the registrant must disclose the nature of the

disagreement with the accountant and explain the effec

on the financial statement of not having followed the

former accountant’s opinion (17 C.F.R. 229.304).

It is therefore the accountant’s public duty to withhold

certification of a false, incomplete or misleading state-

ment, and it is the sanctions of the securities laws—not

the existence of any privilege—that provide the corpo

ration with the necessary incentive to be candid with its

independent auditor (see Pet. App. 37a-38a). The ra-

tionale for a communications privilege is accordingly in-

applicable to this case.~

E. The court of appeals erred in assuming a conflict

between the IRS summons authority and the securi-

ties regulation statutes

1. The court of appeals further erred in assuming a

conflict between the federa] statutes regulating securities

and those enforcing revenue collection. Section 7602 of

the 1954 Code unequivocally authorizes agents of the In-

ternal Revenue Service to summon and inspect records

that may be relevant to their investigation. On the other

hand, the securities regulations relate to nothing more

than the duty of listed corporations to file annual audited

= Upjohn Co. v. United States, supra, upon which the court of

appeals relied (Pet. App. 30a n.9), is not to the contrary. There,

the Court held that the attorney-client privilege protected com-

munications from a corporation's employees to its genera! counsel,

who was conducting an investigation of questionable payments

made by one of the corporation's foreign subsidiaries. In so hold-

ing, the Court rejected the government’s argument that the privi-

lege was inapplicable because the risk of civil or criminal liability

would ensure that corporations would seek legal advice even in the

absence of the privilege. The Court observed that absent the

privilege, the depth and quality of any investigations to insure com-

pliance would suffer. The Court added that the argument proved

too much because even a corporation seeking to comply with the

law has a strong incentive to disclose information to its lawyer

(449 U.S. at 393 n.2).

But these considerations have no application here where the

securities laws independently require certified financial statements

made by accountants who have a separate and distinct obligation

to the public. Hence, the law and not any privilege ensures candid

communications between the public corporation and its outside

auditor. In sharp contrast, consultation with an attorney is a volun-

tary act that the attorney-client privilege is designed to facilitate.

See United States v. El Paso Co., supra, 682 F.2d at 544-545 n.16.

statements, and the duty of auditors to examine the

statements under generally accepted principles of public

accounting. The statutes and regulations do not even

hint at any duty of accountants to keep their clients’ com-

munications confidential. It would be particularly incon-

gruous to order accountants to do so when their basic

function is to insure that the public is informed accu-

rately.

As the Court made clear in St. Regis Paper Co. Vv.

United States, 368 U.S. 208 (1961), a clear statement

of congressional purpose is required to create a special

rule preventing the disclosure of relevant information to

a duly authorized government agency. In St. Regis Paper

Co., the Court construed Section 9/a) of the Census Act,

13 U.S.C. (1958 ed.) 9'a), which prohibits the Census

Bureau from disclosing census information except in the

form of statistical reports. St. Regis asserted that this

prohibition was, in effect, a pledge of confidentiality and

protected the company from having to disclose the same

information to the Federal Trade Commission. This

Court disagreed, holding that the statute merely forbade

dissemination of the information by the Census Bureau;

the statute did not curtail] the norma! investigatory pow-

ers of other government agencies: “Ours is the duty to

avoid a construction that would suppress otherwise com-

petent evidence unless the statute, strictly construed, re-

quires such a result. * * * [W)hen Congress has in-

tended like reports not to be subject to compulsory proc-

ess it has said so. See 45 U.S.C. § 41, 49 U.S.C. § 320/f)

(footnotes omitted).” 368 U.S. at 218. The present case

follows a fortiori from St. Regis Paper Co., since the

securities laws and regulations do not contain any re

quirements of confidentiality for accountants.

2. Even if there were a potential conflict between the

policies underlying the securities laws and the tax en-

forcement laws, the resolution of such a conflict of policy

properly lies in Congress and not in the courts. The secu-

rities laws do not, on their face, create any exception to

the Internal Revenue Service’s summons authority; a lit-

eral reading of the revenue provision plainly directs that

relevant documents be produced. There is no justification

for the assumption of the court below that the securities

laws somehow limit or cut back on the scope of the Internal

Revenue Service’s summons authority. “One canon of con-

struction is that repeals by implication are disfavored.”

Regional Rail Reorganization Act Cases, 419 U.S. 102,

133 (1974). Since the IRS summons statutes and the

securities laws are “ ‘capable of co-existence, it is the

duty of the courts, absent a clearly expressed congres-

sional intention to the contrary, to regard each as ef-

fective.’” Id. at 133-134, quoting Morton v. Mancari,

417 U.S. 535, 551 (1974). “W respect to enforce-

ment of the tax laws, Congress itse as decided the pol-

icy issue, and it is not for the courts to challenge that

determination.” United States v. Noall, supra, 587 F.2d

at 126. See also FTC v. TRW, Inc., 628 F.2d 207, 210

(9th Cir. 1980). As the Fifth Circuit put it in El Paso

Co. in reaching the opposite conclusion from that of the

court below (682 F.2d at 545): “Im the absence of a

more profound clash between congressional policies, we

cannot cut back on the summons power that Congress

has given to the Service. We do not feel free to reweave

the fabric of national] legislation in accord with our no-

tions of how various statutory schemes mesh. Such pol-

icy choices belong to the Congress.”

CONCLUSION

The judgment of the court of appeals should be re-

versed, and the summons ordering production of the tax

accrual workpapers should be enforced.

Respectfully submitted.

REx E. LEE