Under United States v. Kovel, 296 F.2d 918, 921–22, 9 AFTR 2d 366 (2nd Cir. 1961) the attorney-client privilege applies to an individual's communications with an accountant if the communications are “made in confidence for the purpose of obtaining legal advice from the lawyer”.  The party asserting that a communication is protected by the attorney-client privilege has the burden to establish that it applies. U.S. v. Horvath, 53 AFTR 2d 84-1138, (8th Cir 1984).

In Adams, the district court concluded that communications between a taxpayer and his accountant was protected by the attorney-client privilege. However, the court concluded that any such privilege could be waived by filing an amended tax return, and that even if they were protected, the crime-fraud exception vitiated the privilege.

Under the crime-fraud exception, the attorney-client privilege does not extend to communications made for the purpose of getting advice for the commission of a fraud or a crime. Though the attorney-client privilege protects an individual's consultation with a lawyer with respect to past wrongdoings, the privilege is lost if the communication is made to further a continuing or contemplated criminal fraud or scheme. Similarly, a client who has used his attorney's assistance to perpetrate a crime or fraud cannot assert the work product privilege as to any documents generated in furtherance of his misconduct. See, In re Green Grand Jury Proceedings, 492 F.3d 976 (8th Cir. 2007); Zolin v. U.S.63 AFTR 2d 89-1483 (S. Ct. 1989)

Before the crime-fraud exception may be applied, the government must make a threshold showing that legal advice was obtained to further an illegal or fraudulent scheme. It's required to demonstrate "a factual basis adequate to support a good faith belief by a reasonable person… that in camera review of the materials may reveal evidence to establish the claim that the crime-fraud exception applies." In re Green Grand Jury Proceedings,  492 F.3d 976, 979 (8th Cir. 2007); Zolin v. U.S.63 AFTR 2d 89-1483, (S Ct 1989).

Notwithstanding, to make the ultimate showing that the crime-fraud exception applies, and that the purportedly privileged documents should be disclosed, a higher level of proof is required. In re Gen. Motors Corp., 153 F.3d 714 (8th Cir. 1998) The Supreme Court in Zolin expressly declined to specify the quantum of proof required to establish the crime-fraud exception, but noted that the standard is higher than the threshold showing required for in camera review.

The taxpayer, Edward Adams, invoked the attorney-client privilege over numerous communications between himself and accountants at Murry LLC, who were retained by his tax counsel under a so-called "Kovel arrangement."

The government raised three challenges to the assertion of privilege with regard to the communication with the accountants:

  • that the protections provided under Kovel were not applicable to these individual communications;
  • that any such protection was waived by the taxpayer's subsequent filing of amended tax returns; and
  • that the crime-fraud exception invalidated any claim of privilege.

In addition to the communications with his accountants, the government sought, and Mr. Adams asserted privilege with regard to, communications that he had with his law and business partner and their paralegal, and with lawyers that represented several companies (including the Apollo corporation, noted below).

The district court conducted an in camera review of the various Murry LLC communications.

The district court rejected the government's argument that the protections of Kovel did not apply to the Murry LLC communications. The court found that the declaration and supplemental declaration by Mr. Adams' attorney sufficiently demonstrated that the attorney-client privilege extended to the documents at issue. In these declarations, the attorney thoroughly explained how communications with Murry LLC and the information Mr. Adams provided to the accountants assisted in his provision of legal advice to his client regarding tax-related matters. The court found that this was sufficient to invoke the attorney-client privilege. The court also stated that its in camera review of the communications did not contradict the attorney's explanation.

The Amended Tax returns

 The district court also concluded that Mr. Adams' subsequent filing of amended tax returns for 2008, 2009, and 2010 did not result in a waiver of the privilege as to the Murry LLC communications submitted for in camera review. The district noted that in Cote, the Eighth Circuit stated that

"[n]otwithstanding our recognition that the attorney-client privilege attached to the information contained in the accountant's work papers under the circumstances existing here, we find that by filing the amended returns the taxpayers communicated, at least in part, the substance of that information to the government, and they must now disclose the detail underlying the reported data."

Notably, the Cote court distinguished between "workpapers [that] contain detail of unpublished expressions which are not part of the data revealed on the tax returns," and other workpapers to which the rule of waiver would apply. Mr. Adam's attorney explained in his supplemental declaration that, in responding to a subpoena from the government, he provided copies of files that contain data and information that was included on the amended returns for 2008-2010. However, the attorney did not disclose information communicated by Mr. Adams in connection with requests for legal advice. The district court found that the explanation of Mr. Adam's attorney distinguished this case from Cote, where the accountant "testified that the information on his workpapers was later transcribed onto the amended returns which were filed by the taxpayers with the government," thereby waiving the privilege.

The district court said that it could not conclude on the record before it (including it's in camera review) that Mr. Adams was claiming privilege over the underlying details for the data that was ultimately transmitted to IRS when he filed the amended returns. Instead, the record suggested that the information conveyed to the accountants at Murry LLC comprised the type of unpublished expressions that were not later revealed on the amended tax returns.

As to the government's contention with regard to the crime-fraud exception, the district court found that while the government met the initial threshold requirement, it failed to make the ultimate showing that the crime-fraud exception applied.


While amended tax returns have the potential to unravel the Koval privilege, if communications are maintained properly the waiver of the attorney-client can be maintained.