accountant to audit the taxpayer’s books and records, then used the accountant’s work-product to support his conclusion that the taxpayer should file amended returns disclosing an increase in taxable income. Because the accountant’s work-product was prepared for the purpose of assisting the attorney in providing legal advice, the Eighth Circuit considered the work-product protected by the attorney-client privilege. 2. WHETHER THE THIRD PARTY PROVIDED ADVICE DIRECTLY TO THE CLIENT. Courts have ruled that the Kovel doctrine does not apply when the accountant is providing legal advice to a client rather than to an attorney.5 In United States v. Adlman, the Second Circuit held that the district court did not abuse its discretion in concluding that the corporation failed to demonstrate that it came within the principle of Kovel when the facts supported a finding that the corporation consulted an accounting firm for tax advice, rather than the corporation’s counsel consulted the tax firm for support in reaching a better understanding to provide legal advice to the corporation. 3. WHETHER THE COMMUNICATIONS INVOLVING THE THIRD PARTY WERE FOR THE PURPOSE OF TAX RETURN PREPARATION. Communications involving accountants are not ordinarily considered privileged under the Kovel doctrine if they relate to the preparation or filing of tax returns because the Kovel doctrine requires that the information seeking to be protected is intended to be confidential. Further, an accountant preparing a client’s tax return will not likely be considered analogous to a translator or interpreter, but rather such preparation is an accounting service and not generally subject to privilege.6 4. WHETHER THE THIRD PARTY SERVED AS A TRANSLATOR OR MERELY PROVIDED FACTS. As noted above, an accountant serving as an agent to an attorney to provide explanation or interpretation will generally be subject to privilege in its communications. 5. WHETHER THE ATTORNEY DIRECTED THE ACTIONS OF THE THIRD PARTY. An attorney who retains an accountant to assist them in understanding their client’s problems and directs the actions of the accountant will be treated more favorably on a claim of privilege under Kovel.7 On the other hand, when the accountant is acting at the direction of the client, courts will be less likely to consider the communications privileged.8 6. WHETHER THE ATTORNEY HAD AN INDEPENDENT UNDERSTANDING OF THE THIRD PARTY’S AREA OF EXPERTISE. If an attorney is capable of advising its client sufficiently without the help of an accountant, courts may consider the communications involving the accountant to be not privileged. Thus, if an attorney has subject-matter expertise in a particular field, courts may be less willing to apply the Kovel doctrine to communications provided by a third party in the same field.9 5 See United States v. Adlman, 68 F.3d 1495, 1500 (2d Cir. 1995). 6 See United States v. El Paso Co., 682 F.2d 530, 539 (5th Cir. 1982). 7 See Bauer v. Orser, 258 F. Supp. 338 (D.N.D. 1966) (accountant’s paperwork determined to be protected by privilege because the attorney directed actions of the accountant); see also Golden Trade, S.r.L v. Lee Apparel Co, 143 F.R.D. 514, 518 (S.D.N.Y. 1992) (agent working under the direction of the attorney and performing tasks relevant to client obtaining legal advice from the attorney was subject to its communications being protected by the attorney-client privilege). 8 See United States v. Brown, 478 F.2d 1038, 1040 (7th Cir. 1973) (communications held to not be privileged where accountant was directed to attend meetings by client as opposed to the attorney). 9 See United States v. Chevron Texaco Corp., 241 F. Supp. 2d 1065 (N.D. Cal, 2002) (tax counsel had significant expertise requiring no assistance in understanding communications by Chevron or Chevron’s financial situation). B. The Kovel Letter In asserting privilege under the Kovel doctrine, the attorney, client, and third-party accountant should memorialize their relationship in an engagement letter—known as a Kovel letter—to establish the privileged nature of the communications with the third party. Among other things, the Kovel letter should include: 1. a provision for payment of the accountant by the attorney; 2. a provision clarifying that the attorney is hiring the accountant to assist the attorney in providing legal advice; 3. a determination of the scope of the accountant’s duties as an agent to the attorney; 4. a determination that the work produced by the accountant will be the sole property of the attorney; and 5. a determination that upon execution of the accountant’s duties, all work produced will be delivered to and retained by the attorney—not the accountant. A Kovel letter in isolation will not ensure privilege. In order to best ensure the Kovel letter establishes privilege, the conduct of the attorney, client, and third party should satisfy the elements of the Kovel doctrine above, in addition to conduct that demonstrates the communications are confidential. Any time a client needs assistance with a tax controversy or other issue that could potentially lead to litigation, accountants and other advisors should consider whether a Kovel arrangement would be wise. If the situation warrants it, practitioners should work closely with counsel to put a Kovel arrangement in place and to conduct themselves accordingly. Hannah Fischer Frey and Jesse Sitz are partners at Baird Holm LLP, focusing their law practices in the areas of federal and state income tax law and business succession planning. Fischer Frey and Sitz work closely with other tax practitioners and preparers to document and structure deals for their clients in a tax-efficient manner. Mychal McAdoo participated in the firm’s 2022 summer associate program and is a JD candidate at Howard University School of Law. For more information, you may contact Fischer Frey or Sitz at hfrey@bairdholm.com or jsitz@bairdholm.com, respectively. 15 www.nescpa.org
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