To lawyers, protecting clients' confidentiality is a cornerstone of the practice of law. So it is with considerable anxiety that they are watching a brewing battle between one law firm and the government over the confidentiality of the firm's client list.
The Internal Revenue Service issued a court-approved summons last month to the law firm of Jenkens & Gilchrist, seeking the names of about 600 clients who invested in specific types of tax shelters. The transactions may have been abusive, according to the I.R.S.
Jenkens & Gilchrist, which is based in Dallas, has refused to turn the names over to the government, saying that would violate the privilege that protects the confidentiality of communications between lawyers and clients. The firm's action sets the stage for a legal battle -- though a spokesman for the I.R.S. did not comment on the agency's plans -- over just what the privilege protects and what it does not.
"Every lawyer is concerned that this effectively is an attempt to breach the dam," said Stefan F. Tucker, a partner in the Washington office of Venable, a law firm. If the I.R.S. ultimately wins the battle, Mr. Tucker said, then clients will be more reluctant to seek out some kinds of legal advice -- and not necessarily just advice about how to reduce or avoid taxes.
Lawyers for the I.R.S. have argued that the information the agency has requested is merely the identity of clients, something that may not be protected. The agency has also asserted that promoters of tax shelters are required to keep records -- and produce them upon the government's request -- of who invests in certain kinds of transactions.
The issue may be more clear cut for accounting firms. Earlier this month Ernst & Young agreed to pay the government $15 million because it did not properly register tax shelters or properly maintain lists of people who bought them; the accounting firm will now deliver the details of the transactions and the names of investors to the I.R.S.
"As a general rule, the privilege does not protect the name, address, or whereabouts of the investor who receives the tax advice," B. John Williams, chief counsel to the I.R.S., said in a speech at the Texas Federal Tax Institute early last month. He added that neither the fact that a lawyer-client relationship exists nor the fees paid by that client are privileged.
Lawyers view the privilege differently and see their role as distinct from that played by, for example, an accounting firm in a client's tax planning. Jenkens & Gilchrist has indicated that it merely advised clients and did not sell tax shelters. William P. Durbin, the firm's chairman, said the privilege protected both that advice and the identity of a client if revealing the client's name would also reveal the advice given by the lawyer.
"The way the question has been put to us is, 'We want to know which clients received this specific advice from you,' " Mr. Durbin said. "That is tantamount to telling someone who is not our client, what advice our client received."
At least as worrisome to lawyers is the risk that clients who invest in tax shelters may turn and sue their advisers if the investments do not pan out as forecast. Members of a wealthy family who invested in a tax shelter later questioned by the I.R.S. have filed a lawsuit against their New York law firm, Milbank Tweed Hadley & McCloy.
The issue turns on a series of exceptions to lawyers' rules of professional conduct, according to lawyers not involved in the dispute.
Communications between lawyers and clients generally are protected and may not be disclosed unless the client permits, said Roger C. Cramton, a law professor at Cornell University. There is an exception: The fact that a particular person has hired a particular lawyer and the amount the lawyer is paid are not privileged, he said.
But there is also an exception to the exception, protecting the identity of the client, Mr. Cramton added.
"The clear case when it is privileged is when the client comes in having committed a past crime or wanting to get advice about a past event and retains the lawyer to help them defend his position," he said.
For example, a taxpayer might want to confess to having filed fraudulent tax returns. The taxpayer's lawyer might approach the I.R.S. to find out whether the agency would agree not to impose penalties if the taxpayer came forward. In that case, the lawyer would have to protect the identity of the taxpayer, or else there would be no incentive to come forward voluntarily, lawyers said.
"If Jenkens & Gilchrist is not successful here, it would be my concern that it might start to erode that exception, and lawyers who really need it to protect their clients may not be able to use it," said Elliott H. Kajan, a lawyer at Kajan Mather & Barish, in Los Angeles. "This is very important."
Some lawyers fear that a broader effort is under way to weaken the privilege protecting lawyer-client communications.
"It's another one of those attempts to erode the attorney-client privilege by government regulators," said Alfred P. Carlton Jr., president of the American Bar Association. Federal regulators are considering rules that would require lawyers to notify the government under certain circumstances when they withdraw from representing clients, he said, and the U.S.A. Patriot Act, passed in the wake of the Sept. 11 terror attacks, makes it harder to protect communications between a lawyer and an accused terrorist.
"It's sort of a pattern," he said.
Copyright 2003 The New York Times Company