We all know Section 7525 gives tax advisers’ clients the same protection as the client of an attorney would have for confidential communications or information obtained in the course of giving the professional advice.
But that privilege can be lost by disclosure to third parties.
And today STJ Lew (Great Name!) Carluzzo shows us how. The client is Securitas Holdings Inc., and Subsidiaries, and their outside counsel blows it for them and their tax adviser, PriceWaterhouseCoopers. The designated hitter that tells the tale is Docket No. 21206-10, filed 5/29/13.
Believe it or not, for two consecutive days I’m discoursing about Section 501(c)(15), the very existence of which I was happily unaware until last evening. See my blogpost “No Insurance? – Go Pound Sand”, 5/28/13.
As all my readers (those few, those happy few) know, Section 501(c)(15) exempts from tax insurance companies with less than $350K premium (for the years at issue).
Securitas had beneath its wings one such, Centaur, who grappled its exemption to its bosom with hoops of steel and expensive tax advice. But IRS claimed the Section 501(c)(15) aggregation rules bound Centaur to Securitas and its satellites even more firmly, torpedoing Centaur’s tax-free status.
Securitas and its experts engaged in lengthy e-correspondence over the plight of Centaur. IRS hit them with a massive document demand, but was met with the privilege claim.
STJ Lew gives with his right hand but takes with his left.
“According to petitioners, the tax advice included in the protected documents cannot be disclosed without revealing, if only by implication, the confidential communication(s) made to the tax advisors/attorneys for the purpose of receiving such advice. That being so, petitioners resist disclosure of the documents even though with few exceptions the particular document contains no specific or express disclosure of any facts provided in confidence to the tax advisors/attorneys by any one of petitioners’ officers. After an in camera review of the documents, and with one or two exceptions as noted in the transcript of the proceedings, we tend to agree with petitioners. For the following reasons, however, we need not address petitioners’ privilege claims on a document-by-document basis. We proceed as though the documents, or portions of documents, identified on petitioners’ privilege log are protected from disclosure as claimed and turn our attention to respondent’s argument that petitioners have waived any applicable privileges.” Order, p. 1.
OK, so deemed privileged, right?
Well, they were…but… Securitas’ outside counsel wrote to the Illinois Insurance Department seeking exemption from certain rules for all of Securitas’ subs, including but without in any way limiting the generality of the foregoing, as the high-priced lawyers so elegantly put it, Centaur.
Here’s what Securitas’ outside counsel wrote to the Illinois insurance people that sets off STJ Lew and blows up Securitas: “The reason for the transfer of the Centaur stock from BI-Insurance Holding to Securitas Group Re is tax related. At present, the rehabilitation estate of Centaur is exempt from federal income tax (including tax on its investment income) because it has no premium income. (See 26 U.S.C. §501(c)(15), exempting certain insurance companies with annual premium less than $350,000.) However, the U.S. corporate group of which Pinkerton’s is a member is implementing a captive insurance program, which could jeopardize Centaur’s federal tax exemption if Centaur and the new captive insurer are in the same U.S. ‘controlled group’ for tax purposes. (See 26 U.S.C. §501(c)(15)(all insurers and premiums in the same ‘controlled group’ treated in the aggregate for purposes of the $350,000 limitation.) If there were no sale of Centaur stock, and if Centaur were to lose federal tax exemption as a result, a federal income tax liability could arise on Centaur’s investment income. The rehabilitation estate of Centaur, and the common parent of Pinkerton’s U.S. corporate group, would be jointly liable to the federal government for such tax. The proposed sale is intended to prevent this from happening, preserving Centaur’s federal tax exempt status by removing Centaur from the U.S. ‘controlled group’ for federal income tax purposes.” Order, p. 2.
STJ Lew is unimpressed with Securitas’ riposte: “According to respondent [IRS], the letter operates as a waiver of the attorney-client and/or section 7525 privileges asserted by petitioners. Petitioners characterize this letter as nothing more than a routine public filing that reveals neither a confidential communication made to petitioners’ tax advisors by petitioners nor any tax advice given in return. According to petitioners, like any public filing the letter does not result in the waiver of any privilege. For the most part, we agree with petitioners with respect to the consequences of a public filing, but only in principle; we disagree with their characterization of the letter and its consequences. The letter reveals, at least in part, the Federal income tax planning and advice given to petitioners by their tax advisors in ‘implementing a captive insurance program’, which program (1) is the topic of all of the documents identified in petitioners’ privilege log; and (2) presumably gave rise to the disputed deduction. That being so, by revealing the tax advice and, if only by implication, the facts on which the advice is based, the attorney-client privilege as well as the section 7525 privilege are waived. Although the letter reveals only a part of the tax advice given to petitioners in connection with its ‘captive insurance program’ tax planning, the waiver applies to the entire topic and therefore to each document identified on petitioners’ privilege log.” Order, p. 2. (Citation and footnote omitted).
And even though IRS didn’t ask for everything, expansive STJ Lew tells Securitas to cough up, as IRS didn’t know all the documents, but STJ Lew says Securitas waived as to everything.
Moral of the story- Least said, soonest mended.
Full disclosure – A member of my immediate family works for PriceWaterhouseCoopers, but played no part in this matter.