The Internal Revenue Service’s crackdown on abusive tax shelters has sparked controversy over a bedrock of the legal profession: the ability to protect client confidences.
The agency has demanded that two law firms turn over the names of wealthy clients who bought the questionable tax shelters, which, according to the IRS, allowed them to shave millions of dollars from their tax bills.
With the names of the tax-shelter buyers, the government would be able to audit them.
Jenkens & Gilchrist, based in Dallas, objected to the request, saying that would violate the privilege that protects the confidentiality of communications between individuals and their lawyers.
In contrast, Chicago-based Sidley Austin Brown & Wood turned over the names of about 400 former clients. The firm said it did not turn over names of clients who requested they not be identified.
Still, Sidley’s compliance troubles some lawyers who fear that individuals may become more reluctant to seek other kinds of legal advice out of fear that their identities could be disclosed to governmental entities.
“We’re very frustrated that Sidley has not aggressively tried to protect their attorney-client privilege,” said Robert McKenzie, a tax attorney at Arnstein & Lehr of Chicago, who represents two Sidley clients fighting the disclosure of their identities. “They’ve acted as if they are a neutral stakeholder.”
A Sidley spokesman said the firm continues to abide by the principles of attorney-client privilege.
“We provided no names of any former clients who objected to the IRS summons demanding information about their identities,” the spokesman said. “As a result of our efforts, our former clients have had a fair opportunity to offer their arguments to the court through their chosen counsel.”
In all, 48 former Sidley clients are trying to stop the law firm from revealing their names. The John Does, as they are called in court documents, have asked a federal judge in Chicago to allow them to intervene and defend their anonymity. U.S. District Judge Matthew Kennelly is expected to make a ruling on Thursday.
But Kennelly already has rejected some of their arguments, which does not bode well for Jenkens & Gilchrist’s position nor the intervenors, who are asserting that attorney-client privilege protects their identities–much like Jenkens is.
“What the intervenors have said is that the government knows what Sidley has said to intervenors with respect to these shelters, if they are shelters,” said Harvey Silets, a partner at Katten Muchin Zavis & Rosenman in Chicago, who represents a group of unidentified investors.
“Therefore, once you get the name of a John Doe, it’s the same as disclosing confidential communications between a lawyer and client.”
Lawyers for the IRS contend, however, that the intervenors have no expectation of privacy because tax-shelter organizers and promoters are required to keep records and produce them upon the government’s request.