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privilege remains only when the communication is related to one, other than the attorney, with a menial duty.175

The Ninth Circuit apparently overruled Himmelfarb in United States v. Judson.17 There, a net worth statement and memorandum prepared by an accountant at an attorney's request were held privileged. Thus, information initially given to an independent accountant and later transferred to an attorney will usually not be privileged, while that taken to an attorney who subsequently gives it to an accountant for "interpretation" may be privileged.

The type documents within the scope of the privilege has not been clearly decided. The courts have generally held that financial transactions conducted by an attorney with or on behalf of his client," 177 tax returns prepared for the client by the attorney1s or accounting services performed by the attorney when he is also an accountant1 are not privileged.180 Clearly, information that is to be included in the taxpayer's tax return is not intended to be confidential and therefore is not within the privilege.181 However, the question of whether papers and summaries prepared by the client to aid the attorney in preparation of the client's tax return are privileged is in dispute.

In United States v. Merrell182 the court held income and expense summaries given to the attorney were of a non-confidential nature and therefore

175. Id. at 921. Decisions relating to communications to agents of the attorney had previously applied only to persons with menial duties such as secretaries, stenographers, or interpreters. In Kovel the attorney had directed the client to relate the story to an accountant, employed by the law firm and who specialized in tax law, so that the accountant could interpret the problem for the attorney, thereby enabling him to better represent the client. The court found no difference between these facts and an attorney using an interpreter to relate the story of a client speaking a foreign language. Id. at 922.

176. 322 F.2d 460 (9th Cir. 1963). The documents were found to have been prepared in the course of an attorney-client relationship for the purpose of advising and defending the client, and the accountant's role was to facilitate an accurate complete consultation between the client and the attorney. See United States v. Jacobs, 322 F. Supp. 1299 (C.D. Cal. 1971); Bauer v. Orser, 258 F. Supp. 338 (D.N.D. 1966).

177. Lowy v. Commissioner, 262 F.2d 809 (2d Cir. 1959); McFee v. United States, 206 F.2d 872 (9th Cir. 1953); Banks v. United States, 204 F.2d 666 (8th Cir.), cert. denied, 346 U.S. 857 (1953); Pollock v. United States, 202 F.2d 281 (5th Cir.), cert. denied, 345 U.S. 993 (1953).

178. United States v. Tellier, 255 F.2d 441 (2d Cir.), cert. denied, 358 U.S. 821 (1958): Olender v. United States, 210 F.2d 795 (9th Cir. 1954), cert. denied, 352 U.S. 982 (1957); United States v. Schlegel, 313 F. Supp. 177 (D. Neb. 1970); United States v. Merrell, 303 F. Supp. 490 (N.D.N.Y. 1969); Gretsky v. Miller, 160 F. Supp. 914 (D. Mass. 1958).

179. Olender v. United States, 210 F.2d 795 (9th Cir. 1954), cert. denied, 352 U.S. 982 (1957); In re Fisher, 51 F.2d 424 (S.D.N.Y. 1931); United States v. Chin Lim Mow, 12 F.R.D. 433 (N.D. Cal. 1952).

180. A taxpayer who has an attorney perform his accounting services for him or handle his business affairs is apparently not in an advantageous position. In Colton v. United States the court allowed the agents great latitude in discovering what matters were privileged or unprivileged. 306 F.2d 633 (2d Cir. 1962), cert. denied, 371 U.S. 951 (1963).

181. United States v. Schlegel, 313 F. Supp. 177 (D. Neb. 1970); United States v. Merrell, 303 F. Supp. 490 (N.D.N.Y. 1969).

182. 303 F. Supp. 490 (N.D.N.Y. 1969).

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not within the privilege.183 In United States v. Schlegel, 184 the District Court of Nebraska held that only information that is subsequently conveyed to the Government is non-confidential in nature. Furthermore, the fact that the attorney makes the final decision as to what items are included in the taxpayer's return should not decrease the scope of the privilege.18 The Schlegel decision was grounded upon the desirability of having the taxpayer freely disclose information to his attorney.186 The Merrell opinion, however, treats the transactions as if the information were taken to an accountant. The fact that non-lawyers (that is, accountants) deal with many questions arising under the Internal Revenue Code should not shrink the attorney-client privilege in the tax area.187

State statutes creating an accountant-client privilege are not applicable in federal tax fraud investigations. 188 Although it has been contended that the

183. Id. at 493. "The workpapers of Merrell, by definition, consisted of information that was intended to be transcribed onto the tax returns, and cannot be of a confidential nature."

184. 313 F. Supp. 177 (D. Neb. 1970).

185. Id. at 179. But see Falsone v. United States, 205 F.2d 734 (5th Cir.), cert. denied, 346 U.S. 864 (1953). The Schlegel court felt the client intended only so much of the information as the attorney concludes should be sent to the Government to be of a nonconfidential nature. The fact that the attorney decides what is finally included in the return should not alter the taxpayer's intent. Thus, those items that are not included in the return should be considered confidential.

186. If the client felt all information given to the attorney would be non-confidential, the taxpayer would tend to withhold information he deems detrimental. Thus, the client would be withholding information from the one man professionally qualified to evaluate it. This clearly violates the spirit of the attorney-client privilege. The court noted, however, the decision did not imply that the client's books and records, as opposed to his summaries of them, are covered by the privilege. United States v. Schlegel, 313 F. Supp. 177 (D. Neb. 1970).

187. In Schlegel the Government also contended the information was not privileged due to rule 503 of the Proposed Rules of Evidence for the United States District Courts and Magistrates, which states: “(d) Exceptions. There is no privilege under this rule. . . . (1) . . . . If the services of the lawyer were sought or obtained to enable or aid anyone to commit or plan to commit what the client knew or reasonably should have known to be a crime or fraud . . . ." Id. at 180.

The delivery of two sets of information to the attorney, the second showing less earned income than the first, was held not sufficient to establish that Schlegel knew or reasonably should have known that inclusion in an income tax return of the lower set of income figures would be or would further a fraud or crime. The court rejected the advisory committee's note, which states: "[N]o preliminary finding that sufficient evidence aside from the communication has been introduced to warrant a finding that the services were sought to enable the commission of a wrong is required." Id. at 179.

The court instead held evidence other than the communication itself must be shown to establish the conditions of the exception. Id. at 180.

188. Commissioner v. Lustman, 322 F.2d 253 (3d Cir. 1963); Falsone v. United States, 203 F.2d 734 (5th Cir.), cert. denied, 346 U.S. 864 (1953); United States v. Bowman, 236 F. Supp. 548 (M.D. Pa. 1964), aff'd, 358 F.2d 421 (1966); Petition of Bordan Co., 75 F. Supp. 857 (N.D. Ill. 1948). The decisions are in disagreement as to why the privilege does not apply. See Cohen, Accountants' Workpapers in Federal Tax Investigations, 21 TAX L. REV 138 (1965).

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[Vol. XXV Treasury Department's granting enrolled agents the right to practice before the Internal Revenue Service creates an accountant-client privilege, the courts have refused to judicially create an accountant-client privilege equivalent to the attorney-client privilege.189

CONCLUSION

The investigative power of the Internal Revenue Service is by nature inquisitorial and enables the Service to invade the privacy of every person in the United States. Due to the overriding necessity of collecting revenue, courts have generally been reluctant to curb the Service's investigative powers even when it is aimed at criminal prosecution. Furthermore, statutory limitations have generally proved to be of limited usefulness. The recent, self-imposed requirement to give the Miranda warnings at the outset of a criminal investigation is encouraging. Whether the courts will enforce the procedures remains to be seen, but the recent decisions of Heffner and Leahey indicate an increasing judicial awareness of the protections that must be afforded the taxpayer. Not only should a warning be given at the outset of a criminal investigation, but every taxpayer should, at the outset of an Internal Revenue Service examination be apprised of the potentialities of the investigation. This would not seriously hinder the Service in its investigations and it would give each unsuspecting victim a chance to make an intelligent decision whether to waive his constitutional rights. The Service vigorously prosecutes those cases that will receive the most notoriety, as fear of prosecution is the main deterrent to filing false returns. Thus, every taxpayer should enter this adversary situation armed with the knowledge of the possible outcome.

The courts need to abondon the "legitimate purpose" versus "improper purpose" test and focus on the bona fides of the individual investigation. If a special agent is present it cannot honestly be disputed that he is seeking incriminating evidence. As is so often stated, the courts should not permit such an abuse of their process. The time of referral to the Intelligence Division rather than the time of recommendation for prosecution should be the terminus for issuing a section 7602 summons, yet even this time should not be conclusive. Referral should be the guideline and the actual purpose the determinant.

Basing the privilege against self-incrimination on the sole issue of ownership versus possession degrades the nature of the privilege. An individual is forced to seek professional accounting and legal assistance because of the complexity of the tax law, having no intention for his records to be made public. When the complexity of the law compels a person to divulge in confidence to another what may eventually be incriminating evidence, and this confidential communication is not privileged, the person is compelled to incriminate himself. This is not to say that an extensive accountant-client

189. E.g., Falsone v. United States, 205 F.2d 734 (5th Cir.), cert. denied, 546 U.S. 864 (1953).

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privilege should exist. Routine accounting services are not intended as confidential and do not involve the seeking of legal advice. Yet those matters that are intended to be confidential and do not involve the rendering of professional services should be protected.

Thus, while the recent extension of the Miranda warnings to tax investigations is commendable, the courts have generally condoned the Service's inquisitorial investigations and continued to deny the taxpayer constitutional protections generally available in criminal investigations.

80-321 O-77-41

MIKE ROLLYSON

Part 4-Economic Impact of Heroin Traffic

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