United States v. BDO Seidman

In the
United States Court of Appeals
For the Seventh Circuit
____________

Nos. 05-3260 & 05-3518
UNITED STATES OF AMERICA,
Petitioner-Appellant,
Cross-Appellee,
v.

BDO SEIDMAN, LLP, regarding IRS
examination of BDO Seidman, LLP,
Respondent-Appellee,
and,

ROBERT S. CUILLO, et al.,
Intervenors-Appellees,
Cross-Appellants.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 02 C 4822—James F. Holderman, Chief Judge.
____________
ARGUED SEPTEMBER 11, 2006—DECIDED JULY 2, 2007
____________

Before RIPPLE, KANNE and WILLIAMS, Circuit Judges.
RIPPLE, Circuit Judge. This is the third appeal arising
out of an effort by the Internal Revenue Service (“IRS”) to
enforce administrative summonses against BDO Seidman,
2 Nos. 05-3260 & 05-3518

LLP (“BDO”), an accounting firm that allegedly failed to
disclose potentially abusive tax shelters that it promoted.
See United States v. BDO Seidman, 337 F.3d 802 (7th Cir.
2003) (BDO II); United States v. BDO Seidman, Nos. 02-3914
& 02-3915, 2002 WL 32080709 (7th Cir. Dec. 18, 2002) (BDO
I). The IRS now appeals the district court’s ruling that
sustained BDO’s claim of attorney-client privilege with
respect to a memorandum written by one of BDO’s em-
ployees. The IRS also appeals a separate ruling that sus-
tained the tax practitioner and/or attorney-client privilege
asserted by a number of BDO’s clients (“Intervenors”)
with respect to 266 documents. The Intervenors cross-
appeal the district court’s ruling that one document,
Document A-40, fell within the crime-fraud exception to
the attorney-client and/or tax practitioner privilege. For
the reasons set for forth in this opinion, we affirm in part
and vacate and remand in part.

I
BACKGROUND
A. The Enforcement Action
In September 2000, the IRS received information suggest-
ing that BDO was promoting potentially abusive tax
shelters without complying with the Internal Revenue
Code’s (“IRC”) listing requirements for such tax shelters.
See 26 U.S.C. §§ 6111(a), 6112(a) (2000); BDO II, 337 F.3d
at 806. Potentially abusive tax shelters included those trans-
actions defined as “tax shelters” under § 6111(c) and ar-
rangements identified by regulation as potentially abusive
Nos. 05-3260 & 05-3518 3

under § 6112(b).1 Organizers of any potentially abusive
tax shelter were required to maintain a list of persons to
whom an interest in the shelter was sold. See 26 U.S.C.
§ 6112(a) (2000). Additionally, organizers and sellers of
§ 6111(c) tax shelters were required to register the tax
shelter with the IRS. See id. § 6111(a). Failure to follow
these registration and list-keeping requirements was sanc-
tionable by penalties. See id. §§ 6707, 6708.2
The IRS commenced a compliance investigation into
BDO’s alleged violations. The IRS issued twenty sum-
monses commanding production of documents, testimony
relating to the transactions and information on the identity
of the clients who had invested in the transactions. BDO II,

1
Sections 6111 and 6112 of the IRC were amended by the
American Jobs Creation Act of 2004, Pub. L. No. 108-357, § 815,
118 Stat. 1418, 1581-83 (2004). The Act eliminated the distinc-
tion between § 6111(c) tax shelters and other arrangements
identified by the Secretary under § 6112(b)(2) by replacing the
terms “tax shelter” and “potentially abusive tax shelter” with
“reportable transaction.” Reportable transactions are “any
transaction[s] with respect to which information is required to
be included with a return or statement because . . . such transac-
tion is of a type which the Secretary determines as having a
potential for tax avoidance or evasion.” 26 U.S.C. § 6707A. All
reportable transactions must be reported to the IRS, see id.
§ 6111(a) (2000 & Supp. IV 2004), and must satisfy the IRC’s list-
keeping requirements, see id. § 6112(a).
2
Sections 6707 and 6708 also were amended by the American
Jobs Creation Act, see Pub. L. No. 108-357, §§ 816-817, 118 Stat.
1418, 1583-84 (2004), but they continue to provide penalties
for failure to comply with the registration and list-keeping
requirements of §§ 6111 and 6112. See 26 U.S.C. §§ 6707 & 6708
(2000 & Supp. IV 2004).
4 Nos. 05-3260 & 05-3518

337 F.3d at 805-06. When BDO resisted these summonses,
the IRS petitioned the United States District Court for the
Northern District of Illinois for enforcement. Id. at 806.
BDO contended that the summonses could not be en-
forced because the investigation had no legitimate purpose.
It also contended that the summonses were overbroad,
issued in bad faith and sought information already in the
IRS’ possession. Lastly, BDO submitted that the informa-
tion sought was irrelevant to the investigation. Id. at 806.
BDO further asserted that a number of the documents
were protected by the attorney-client privilege, the tax
practitioner privilege under 26 U.S.C. § 7525(a) or work
product protection. BDO II, 337 F.3d at 806. The district
court ruled that the IRS had issued the summonses in good
faith and that enforcement would not constitute an abuse
of process. It ordered BDO to produce all responsive
documents except for those previously listed on privilege
logs and submitted to the court by BDO for in camera
inspection. Id. at 806-07.
BDO then notified its clients that it intended to produce
documents that would reveal their identities to the IRS.
In response, a number of clients sought to intervene as of
right in order to assert the tax practitioner privilege under
26 U.S.C. § 7525(a).3 The district court denied the motions
to intervene, holding that the tax practitioner privilege
would not prevent disclosure of the clients’ names. See
BDO II, 337 F.3d at 807. The clients appealed this denial
to this court.
On December 18, 2002, we entered an order remanding
the case to the district court to permit it to undertake an

3
See John and Jane Does Emergency Motion to Intervene, R.38;
Richard and Mary Roes Emergency Motion to Intervene, R.42.
Nos. 05-3260 & 05-3518 5

in camera inspection of the documents for which the
would-be anonymous intervenors asserted a privilege. See
BDO I, 2002 WL 32080709, at *1. We ordered the district
court to make more extensive findings with respect to the
claim of tax practitioner privilege for each document,
taking into account the totality of the circumstances. Id.
After conducting this in camera review, the district court
determined that the tax practitioner privilege did not
prevent disclosure of the clients’ identities. R.73 at 7-31.
The clients again appealed, and we affirmed the district
court’s ruling on the question of privilege and its denial
of the motions to intervene. BDO II, 337 F.3d at 813.
After our decision affirming the district court’s denial
of the anonymous clients’ motion to intervene, the Inter-
venors sought intervention as of right in order to assert a
claim of privilege under the attorney-client privilege, tax
practitioner privilege or work product doctrine with
respect to 267 documents. The IRS filed a document titled
“United States’ Concurrence in Intervenors’ Motions to
Intervene and Challenge to Claims of Privilege” in which
it argued that the district court should grant the motion,
or, in the alternative, deny the claim of privilege. The IRS
and the Intervenors also filed a joint motion in which the
IRS consented to the intervention and the parties set
forth a proposed briefing schedule. On July 15, 2004, the
district court granted the Intervenors’ motion.

B. Intervenors’ Claims
The Intervenors asserted attorney-client privilege, tax
practitioner privilege or work product protection with
respect to 267 documents. The IRS submitted that the
documents either were not covered by the tax practitioner
6 Nos. 05-3260 & 05-3518

privilege under the tax shelter exception found in 26 U.S.C.
§ 7525(b), as it existed at the time of the communications,
or that the documents fell within the crime-fraud exception
to both the attorney-client and tax practitioner privileges.
According to the IRS, BDO, in conjunction with other
firms, had engaged in the practice of selling prepackaged
tax shelters, the sole purpose of which was the unlawful
attempt to evade tax liability. The district court determined
that the IRS had failed to make a prima facie showing of
crime or fraud that would justify a blanket determination
that all of the documents fell within the crime-fraud
exception. R.178 at 16. The court noted that, just because
the IRS characterized the transactions “as abusive and
unlawful cookie cutter tax shelters,” such a characterization
did not make them so. Id. at 17. The court added that the
question of whether BDO and the Intervenors had violated
the IRC was the ultimate issue in the IRS’ investigation and
that a finding of fraud based solely on the IRS’ allegations
“would place the proverbial ‘Cart before the Horse.’ ” Id. In
a footnote, the district court added that, based on these
same considerations, it could not hold that the Intervenors
or BDO were engaged in tax shelters which would fall
within the tax shelter exception to the tax practitioner
privilege. Id. at n.6.
Although the district court was unwilling to apply the
crime-fraud exception in blanket fashion, it proceeded to
review each document in camera to determine whether
individual documents fell within the crime-fraud excep-
tion. Id. at 18. In conducting the review, the district court
looked to the totality of the circumstances to determine
whether there was sufficient evidence of crime or fraud to
bring a document within this exception. Id. at 23. To guide
this evaluation, the district court identified eight non-
Nos. 05-3260 & 05-3518 7

exclusive, non-determinative “potential indicators of
fraud” which it drew from arguments made by the IRS,
from two other cases involving allegedly fraudulent
practices by BDO and from an unrelated IRS enforcement
action against another accounting firm. R.178 at 23.4 Based

4
The first case to which the district court looked in deriving its
potential indicators of fraud was Denney v. Jenkens & Gilchrist,
340 F. Supp. 2d 338 (S.D.N.Y. 2004). That case involved a civil
RICO class action in which the plaintiffs alleged that Jenkens &
Gilchrist had developed and BDO and others had marketed a
tax shelter known as the Currency Options Bring Reward
Alternatives (“COBRA”). BDO sought to enforce an arbitration
clause in its consulting agreements. Based on what it deemed
to be admissions by the parties, the court in Denney concluded
that BDO and its clients had engaged in mutual fraud in
connection with the consulting agreements to conceal the true
purpose of the agreements: providing the clients with tax
shelters advice. Id. at 346. Because the contracts were the
product of mutual fraud between BDO and its clients, the
arbitration clause was unenforceable. Id. at 347. The court based
its conclusion that the contracts were mutually fraudulent on
the vague language in the consulting agreements and its find-
ings that BDO did not provide any of the consulting services
described in the agreements. Id. at 346-47.
The next case the district court looked to in developing its
potential indicators of fraud was Miron v. BDO Seidman, LLP,
342 F. Supp. 2d 324 (E.D. Pa. 2004). Like Denney, Miron involved
the enforceability of an arbitration clause in one of BDO’s
consulting agreements and related to the COBRA transaction.
See id. at 327. The district court in Miron noted the factors that
led the court in Denney to find that the consulting agreements
had been the product of mutual fraud, but concluded that the
consulting agreements at issue were factually distinguishable.
(continued...)
8 Nos. 05-3260 & 05-3518

on these cases and other factors that the IRS had submitted
were indicative of fraud, the district court arrived at the
following eight factors to guide its in camera review of
each of the 267 documents:
(1) the marketing of pre-packaged transactions by
BDO; (2) the communication by the Intervenors to
BDO with the purpose of engaging in a pre-arranged

4
(...continued)
See id. at 329-30. In particular, the court found that BDO had
provided the services described in its consulting agreements.
Id. The court in Miron noted also that, unlike the consulting
agreements in Denney, in which the only identified goal was
expanding business operations, the consulting agreements at
issue were intended to limit also the clients’ financial exposure
on those expansions. Id. at 329. Based on these differences, the
court concluded that the consulting agreements were not
similarly suggestive of fraud. Id.
The third case to which the district court looked in arriving
at its potential indicators of fraud was United States v. KPMG
LLP, 316 F. Supp. 2d 30 (D.D.C. 2004). Unlike Denney and Miron,
KPMG did not involve BDO. KPMG involved an action brought
by the IRS to enforce summonses it issued to the accounting firm
of KPMG as part of its investigation into KPMG’s alleged
promotion of, and participation in, tax shelters. Id. at 31-32. The
court in KPMG held that boilerplate opinion letters provided
to KPMG clients by the law firm of Brown & Wood were not
protected by the attorney-client privilege because they had
been provided as a part of “KPMG’s marketing machine” rather
than as reasoned legal advice. Id. at 40. The district court in the
present action found the findings of the court in KPMG consis-
tent with the IRS’ allegation that BDO had engaged in the
promotion of prepackaged tax shelters rather than individual-
ized tax advice. See R.178 at 23.
Nos. 05-3260 & 05-3518 9

transaction developed by BDO or [a] third party with
the sole purpose of reducing taxable income; (3) BDO
and/or the Intervenors attempting to conceal the true
nature of the transaction; (4) knowledge by BDO, or a
situation where BDO should have known, that the
Intervenors lacked a legitimate business purpose for
entering into the transaction; (5) vaguely worded
consulting agreements; (6) failure by BDO to provide
services under the consulting agreement yet receipt
of payment; (7) mention of the COBRA transaction;
and (8) use of boiler-plate documents.
R.178 at 23. The court further noted that the presence of
these factors alone would not be sufficient to establish a
prima facie case of fraud. See id. at 23-24. Rather, the
potential indicators of fraud were intended to serve
merely as guideposts. See id. at 24. The ultimate question of
whether a prima facie showing of crime or fraud had
been made with respect to a particular document was to
be determined under the totality of circumstances.
Based on this review, the district court held that, with
the exception of Document A-40, the IRS had failed to make
a prima facie showing of a crime or fraud. Id. at 24. Thus,
the district court upheld the Intervenors’ claim of privilege
with respect to 266 of the 267 documents, although it did
not specify which privilege (attorney-client or tax practi-
tioner) applied to each document. See id. at 13-14, 29.
After finding prima facie evidence that Document A-40
fell within the crime-fraud exception, the district court
permitted the Intervenors to provide an explanation that
would negate the evidence of crime or fraud. Id. at 24. The
Intervenors provided their explanation to the court and
the IRS responded. On May 17, 2005, after finding the
Intervenors’ explanation insufficient to rebut the prima
10 Nos. 05-3260 & 05-3518

facie evidence of crime or fraud, the district court ruled
that Document A-40 fell within the crime-fraud excep-
tion to the tax practitioner or attorney-client privilege.
R.190 at 10.
After the district court issued its final ruling with respect
to Document A-40, the Court of Appeals for the Second
Circuit reversed the decision of the United States District
Court for the Southern District of New York in Denney v.
Jenkens & Gilchrist, 340 F. Supp. 2d 338 (S.D.N.Y. 2004). See
Denney v. BDO Seidman, L.L.P., 412 F.3d 58, 66 (2d Cir.
2005). The Intervenors moved for reconsideration under
Rule 60(b) of the Federal Rules of Civil Procedure, argu-
ing that, because the district court had relied on Denney
when establishing the factors that would guide its in
camera review of each document, the court should reexam-
ine its earlier ruling. R.210 at 2-3. The district court denied
the motion, holding that the Second Circuit’s decision did
not affect the controlling law in this case. Id. at 3. The
court added that its finding of prima facie evidence of
crime or fraud was based on the totality of the circum-
stances, an inquiry guided, but not controlled, by the
eight factors it previously had identified. Id. at 6.

C. BDO’s Privilege Claims
While its clients were seeking to intervene to protect their
claims of privilege, BDO asserted its own claims of
attorney-client privilege and work product protection
with respect to 110 documents. The IRS responded that
the documents were neither protected attorney-client
communications nor work product, and, even if they were,
the documents fell within the crime-fraud exception. R.127
at 2. After conducting an in camera inspection of each
Nos. 05-3260 & 05-3518 11

document, the district court determined that 103 of the
documents were within the attorney-client privilege and
that one other document, though not covered by the
attorney-client privilege, fell within the work product
doctrine. Id. at 3-9. However, the court concluded that
six documents, as submitted to the court in redacted
form, were not within the attorney-client privilege and
ordered their disclosure as so redacted. Id. at 7. Based on
the same in camera review, the district court found no
evidence that the communications in 104 documents
protected by the attorney-client privilege or work prod-
uct doctrine were made to further a crime or fraud. Id.
at 10.
One of the 104 documents that the district court had
found to fall within the attorney-client privilege was a
memorandum written by Michael Kerekes (“Kerekes
Memorandum”). Kerekes was a lawyer and partner at
BDO. In August 2000, he wrote a memorandum to BDO’s
outside counsel, David Dreier, a tax attorney with the law
firm of White & Case LLP, requesting legal advice on
pending IRS regulations. In January 2001, Donna Guerin,
an attorney at the law firm of Jenkens & Gilchrist, received
a copy of the memorandum under circumstances that
remain the subject of dispute.5 At the time attorney Guerin

5
Guerin received the memorandum by fax. She asserts that the
memorandum was sent to her by Robert Greisman, a partner
with BDO. Greisman contends that he does not remember fax-
ing the memorandum to Guerin and that on the day it was
faxed to her he was at a meeting at a hotel in Los Angeles. There
is no record of a fax having been sent from the hotel to Jenkens
& Gilchrist on that day and the document itself does not display
(continued...)
12 Nos. 05-3260 & 05-3518

received the Kerekes Memorandum, Jenkens & Gilchrist
did not represent BDO, but these two entities, one an
accounting firm and the other a law firm, serviced jointly
clients on the same or related matters. According to
attorney Guerin, she received the letter from BDO as input
into an opinion letter regarding tax shelters that Jenkens &
Gilchrist was preparing for both BDO and their common
clients. Although BDO and Jenkens & Gilchrist subse-
quently were co-defendants in civil litigation, see, e.g.,
Denney v. Jenkens & Gilchrist, 340 F. Supp. 2d 338, there
was no litigation pending against BDO or Jenkens &
Gilchrist at the time attorney Guerin received the Kerekes
Memorandum.
After the district court’s ruling on BDO’s claim of
privilege for the 110 documents, the IRS received the
Kerekes Memorandum from Jenkens & Gilchrist in re-
sponse to a subpoena. Upon viewing the memorandum, the
IRS requested the court reconsider its privilege ruling with
respect to the Kerekes Memorandum. The IRS asserted that

5
(...continued)
the phone number of the origin of the fax. Further, the memo-
randum was not received in a single transmission. The last
three pages of the memorandum were sent at around 3:20 p.m.,
with the balance of the memorandum, that is, the first portion of
the memorandum, being sent in a separate transmission at
around 4:00 p.m. In addition to the memorandum being sent out
of order in two transmissions, the fax heading indicates that
those portions of the memorandum sent at around 3:20 p.m.
began at the second page of the transmission. The fax heading
of the transmission sent around 4:00 p.m. indicates that the
portion of the memorandum sent at that time began at the
eighth page of the transmission. The balance of both transmis-
sions does not appear in the record.
Nos. 05-3260 & 05-3518 13

the document fell within the crime-fraud exception to the
attorney-client privilege or, alternatively, that the privilege
had been waived. Based on its prior in camera review of
the document, the district court rejected the IRS’ claim that
the Kerekes Memorandum fell within the crime-fraud
exception. R.180 at 3-4. The court noted that, even though
the contents of the Kerekes Memorandum were new to the
IRS, they were not new to the court, and it had considered
the arguments presented by the IRS in its prior in camera
review of the Kerekes Memorandum. The district court
further held that disclosure of the Kerekes Memorandum
to attorney Guerin did not waive BDO’s claim of privilege
because the memorandum related to a common legal
interest shared by BDO and Jenkens & Gilchrist and
therefore fell within the common interest doctrine. Id. at 6.
The district court added that it would reach the same
conclusion even if the common interest doctrine did not
apply because it had found ample precedent to sustain the
privilege as an unintentional disclosure. Id.

II
DISCUSSION
The IRS timely appealed the district court’s ruling
with respect to the Kerekes Memorandum. The IRS con-
tends that BDO waived any claim of privilege with respect
to the memorandum when it disclosed the document to
attorney Guerin. The IRS submits that the common interest
doctrine does not apply because the communication
was not made in anticipation of litigation. It further
contends that the disclosure was voluntary, and, therefore,
BDO cannot claim that the privilege is preserved because
any disclosure was inadvertent. Alternatively, the IRS
14 Nos. 05-3260 & 05-3518

contends that the district court erred by not reconsider-
ing its ruling that there was no evidence of crime or
fraud in connection with the Kerekes Memorandum after
it found such evidence with respect to Document A-40.
The IRS also appeals the district court’s ruling that the
tax shelter exception to the tax practitioner privilege, 26
U.S.C. § 7525(b) (2000), does not apply to the 267 docu-
ments for which the Intervenors claimed the privilege. The
IRS contends that the burden was on the Intervenors to
prove that the tax shelter exception did not apply, a bur-
den the IRS claims the Intervenors did not meet.
The Intervenors cross-appeal the district court’s finding
of prima facie evidence of crime or fraud with respect to
Document A-40. The Intervenors submit that the district
court’s finding was in error because the IRS failed to make
a prima facie showing of each element of a particular
crime or common law fraud.

A. The Kerekes Memorandum
We first shall address whether the district court erred in
sustaining BDO’s claim of attorney-client privilege under
the common interest doctrine and in rejecting the IRS’
position that the Kerekes Memorandum fell within the
crime-fraud exception to the attorney-client privilege.
We review all necessary findings of fact and all applica-
tions of law to fact in connection with the district court’s
ruling on a privilege claim for clear error. See United States
v. Frederick, 182 F.3d 496, 499 (7th Cir. 1999) (application of
law to fact); United States v. Evans, 113 F.3d 1457, 1461 (7th
Cir. 1997) (findings of fact). We shall reverse only if, on
review of the entire evidence, we are “left with the definite
Nos. 05-3260 & 05-3518 15

and firm conviction that a mistake has been committed.”
Malachinski v. Comm’r, 268 F.3d 497, 505 (7th Cir. 2001)
(quoting Coleman v. Comm’r, 16 F.3d 821, 824 (7th Cir.
1994)) (internal quotation marks omitted). On the other
hand, the scope of a privilege is a question of law that
we review de novo. See BDO II, 337 F.3d at 809. We review
a district court’s decision regarding the crime-fraud
exception for an abuse of discretion. United States v. Al-
Shahin, 474 F.3d 941, 946 (7th Cir. 2007).
In federal courts, except when state law supplies the
applicable rule of law, the attorney-client privilege is
“governed by the principles of the common law as [it] may
be interpreted by the courts of the United States in the
light of reason and experience.” Fed. R. Evid. 501. Al-
though it ultimately was not adopted by Congress, the
rule of attorney-client privilege promulgated by the
Supreme Court in 1972 as part of the Proposed Federal
Rules of Evidence has been recognized “as a source of
general guidance regarding federal common law princi-
ples.” In re Grand Jury Investigation, 399 F.3d 527, 532 (2d
Cir. 2005); see also 3 Jack B. Weinstein & Margaret A.
Berger, Weinstein’s Federal Evidence § 503.02 (Joseph M.
McLaughlin, ed., 2d ed. 2006). Proposed Rule 503 provided:
A client has a privilege to refuse to disclose and to
prevent any other person from disclosing confiden-
tial communications made for the purpose of facilitat-
ing the rendition of professional legal services to the
client, (1) between himself or his representative and
his lawyer or his lawyer’s representative, or (2) be-
tween his lawyer and the lawyer’s representative, or
(3) by him or his lawyer to a lawyer representing
another in a matter of common interest, or (4) between
representatives of the client or between the client and
16 Nos. 05-3260 & 05-3518

a representative of the client, or (5) between lawyers
representing the client.
See Proposed Fed. R. Evid. 503(b), 56 F.R.D. 183, 236 (1972).
Put simply, in order for the attorney-client privilege to
attach, the communication in question must be made: (1) in
confidence; (2) in connection with the provision of legal
services; (3) to an attorney; and (4) in the context of an
attorney-client relationship.
The purpose of the privilege is to “encourage full disclo-
sure and to facilitate open communication between attor-
neys and their clients.” BDO II, 337 F.3d at 810. Open
communication assists lawyers in rendering legal advice,
not only to represent their clients in ongoing litigation,
but also to prevent litigation by advising clients to con-
form their conduct to the law and by addressing legal
concerns that may inhibit clients from engaging in other-
wise lawful and socially beneficial activities. See Frederick,
182 F.3d at 500. The cost of these benefits is the withholding
of relevant information from the courts. BDO II, 337 F.3d
at 811.
Recognizing the inherent tension between the beneficial
goals of the attorney-client privilege and the courts’ right
to every person’s evidence, the courts have articulated
the following principles to inform our analysis of the
scope of the common interest doctrine:
(1) “[C]ourts construe the privilege to apply only
where necessary to achieve its purpose.” Id.
(2) Only those communications which “reflect the
lawyer’s thinking [or] are made for the purpose
of eliciting the lawyer’s professional advice or
other legal assistance” fall within the privilege.
Frederick, 182 F.3d at 500.
Nos. 05-3260 & 05-3518 17

(3) Because one of the objectives of the privilege is
assisting clients in conforming their conduct to the
law, litigation need not be pending for the com-
munication to be made in connection to the provi-
sion of legal services. See United States v. Schwim-
mer, 892 F.2d 237, 243-44 (2d Cir. 1989).
(4) Because “the privilege is in derogation of the
search for truth,” any exceptions to the require-
ments of the attorney-client privilege “must be
strictly confined.” In re Grand Jury Proceedings
(Thullen), 220 F.3d 568, 571 (7th Cir. 2000).
Although occasionally termed a privilege itself, the
common interest doctrine is really an exception to the rule
that no privilege attaches to communications between a
client and an attorney in the presence of a third person. See
Robinson v. Texas Auto. Dealers Ass’n, 214 F.R.D. 432, 443
(E.D. Tex. 2003). In effect, the common interest doctrine
extends the attorney-client privilege to otherwise non-
confidential communications in limited circumstances.
For that reason, the common interest doctrine only will
apply where the parties undertake a joint effort with
respect to a common legal interest, and the doctrine is
limited strictly to those communications made to further
an ongoing enterprise. See Evans, 113 F.3d at 1467. Other
than these limits, however, the common defense doctrine
does not contract the attorney-client privilege. Thus,
communications need not be made in anticipation of
litigation to fall within the common interest doctrine.6

6
The weight of authority favors our conclusion that litigation
need not be actual or imminent for communications to be with-
in the common interest doctrine. At least five of our sister
(continued...)
18 Nos. 05-3260 & 05-3518

Applying the common interest doctrine to the full range of
communications otherwise protected by the attorney-client
privilege encourages parties with a shared legal interest
to seek legal “assistance in order to meet legal require-
ments and to plan their conduct” accordingly. See In re
Regents of the Univ. of California, 101 F.3d 1386, 1390-91 (Fed.
Cir. 1996). This planning serves the public interest by
advancing compliance with the law, “facilitating the
administration of justice” and averting litigation. Id. at
1391. Reason and experience demonstrate that joint ven-
turers, no less than individuals, benefit from planning
their activities based on sound legal advice predicated
upon open communication.
Having determined that BDO is not barred from assert-
ing attorney-client privilege under the common interest

6
(...continued)
circuits have recognized that the threat of litigation is not a
prerequisite to the common interest doctrine. See In re Grand Jury
Subpoena (Custodian of Records, Newparent, Inc.), 274 F.3d 563, 572
(1st Cir. 2001); In re Regents of the Univ. of California, 101 F.3d
1386, 1390-91 (Fed. Cir. 1996); United States v. Aramony, 88 F.3d
1369, 1392 (4th Cir. 1996); United States v. Schwimmer, 892 F.2d
237, 244 (2d Cir. 1989); United States v. Zolin, 809 F.2d 1411, 1417
(9th Cir. 1987), aff’d in part and vacated in part on other grounds,
United States v. Zolin, 491 U.S. 554 (1989). We have found only
one circuit that requires a “palpable threat of litigation at the
time of the communication.” United States v. Newell, 315 F.3d
510, 525 (5th Cir. 2002) (quoting In re Santa Fe Int’l Corp., 272
F.3d 705, 711 (5th Cir. 2001)). This position runs contrary to the
“established [rule] that the attorney-client privilege is not
limited to actions taken and advice obtained in the shadow
of litigation.” In re Regents of the Univ. of California, 101 F.3d at
1390.
Nos. 05-3260 & 05-3518 19

doctrine simply because it was not shared under the
threat of litigation, we next shall determine whether the
district court’s ruling on BDO’s claim of privilege was
clearly erroneous. The district court recognized that the
scope of the common interest doctrine is limited to a
common legal interest to which the parties formed a
common strategy. See R.180 at 6. The district court con-
cluded that BDO and Jenkens & Gilchrist, acting as joint
venturers, shared a common legal interest “in ensuring
compliance with the new regulation issued by the IRS,” id.,
and in making sure that they could defend their product
against potential IRS enforcement actions.
There was, moreover, sufficient evidence to support the
district court’s determination in this regard. The Kerekes
Memorandum originally was addressed to BDO’s outside
counsel, White & Case, and it sought advice on a legal
question. At the time attorney Guerin received the Kerekes
Memorandum, BDO and Jenkens & Gilchrist jointly
serviced a number of common clients with respect to
certain tax products. According to Guerin, Robert
Greisman, a partner at BDO, sent her the memorandum
as part of BDO’s effort to coordinate with Jenkens &
Gilchrist a common legal position that BDO and Jenkens &
Gilchrist would communicate later to these common
clients.7
Nonetheless, the IRS asserts that, because the purpose of
the communication was to coordinate the content of the
message to their common clients, the communication
between BDO and Jenkens & Gilchrist was not made for

7
There is no contention that the final communication from the
joint venturers to their clients was privileged.
20 Nos. 05-3260 & 05-3518

the purpose of securing advice with respect to a common
legal interest and, therefore, was not within the scope of the
common interest doctrine. However, even if the ultimate
reason for sharing the Kerekes Memorandum was to
advance the joint interests of BDO and Jenkens & Gilchrist
in their representations to their common clients, it does not
follow that the communication itself was not made to
secure legal advice with respect to a common legal interest.
Communications do not cease to be for the purpose of
receiving legal services just because the recipient intended
to use the fruits of the legal services to guide its relations
with customers. In essence, through the memorandum, two
joint venturers, BDO and Jenkens & Gilchrist, undertook a
consultation between their respective in-house counsel and
BDO’s outside counsel with respect to the legality of the
proposed financial course of action they would recommend
to their common clients. This effort, as the district court
recognized, was clearly within the scope of the common
interest doctrine.
The district court’s findings do not leave us “with the
definite and firm conviction that a mistake has been
committed.” Malachinski, 268 F.3d at 505 (quoting Coleman,
16 F.3d at 824) (internal quotation marks omitted). The
district court’s finding that the communication of the
Kerekes Memorandum to attorney Guerin was within the
common interest doctrine was not clearly erroneous.
Further, because the privileged status of communications
falling within the common interest doctrine cannot be
waived without the consent of all of the parties, Jenkens &
Gilchrist’s subsequent voluntary disclosure of the Kerekes
Memorandum in response to the IRS’ subpoena did not
waive BDO’s claim of privilege. See John Morrell & Co. v.
Local Union 304A of the United Food & Commercial Workers,
Nos. 05-3260 & 05-3518 21

AFL-CIO, 913 F.2d 544, 556 (8th Cir. 1990); In re Grand Jury
Subpoenas (89-3 & 89-4, John Doe 89-129), 902 F.2d 244, 248
(4th Cir. 1990); see also Advisory Committee’s Note, Pro-
posed Fed. R. Evid. 503(b), 56 F.R.D. 183, 239 (1972).89

8
The district court held in the alternative that, even if the
Kerekes Memorandum did not fall within the common interest
doctrine, disclosure of the memorandum by BDO to attorney
Guerin was inadvertent. The court concluded that, because
the disclosure was inadvertent, BDO had not waived its claim
of privilege for the memorandum. The IRS also challenges
this alternative holding. Because the district court’s applica-
tion of the common interest doctrine was not clear error, we
need not address this alternative ruling.
9
The IRS contends that, after the court found that Document A-
40 fell within the crime-fraud exception, the district court
should have revisited its conclusion that the crime-fraud
exception to the attorney-client privilege did not vitiate the
privilege with respect to the Kerekes Memorandum.
The IRS did challenge specifically the district court’s earlier
determination that the crime-fraud exception did not apply
to the Kerekes Memorandum. See R.152 (sealed). This chal-
lenge pre-dated, however, the district court’s determination
with respect to Document A-40. Indeed, on the same day that
the district court announced its initial conclusion that the IRS
had made a prima facie showing that the communications in
Document A-40 were made in furtherance of crime or fraud,
the district court rejected the IRS’ identical challenge to the
Kerekes Memorandum. At no time after the district court
stated that it had found prima facie evidence of crime or fraud
with respect to Document A-40 did the IRS request the dis-
trict court to re-evaluate its earlier ruling with respect to the
Kerekes Memorandum. The IRS was not without opportunity
to raise the issue. As discussed in greater detail in Part II.B,
(continued...)
22 Nos. 05-3260 & 05-3518

B. Document A-40
We now address whether the district court erred when it
held that the Intervenors could not assert a privilege with
respect to Document A-40 because the document fell within
the crime-fraud exception to the attorney-client and tax
practitioner privileges. We review a district court’s decision
regarding the crime-fraud exception for an abuse of
discretion. Al-Shahin, 474 F.3d at 946.

9
(...continued)
after concluding that there was prima facie evidence that
Document A-40 fell within the crime-fraud exception, both the
Intervenors and the IRS were permitted to submit additional
arguments about the applicability of the crime-fraud exception
to Document A-40. The IRS availed itself of this opportunity
and filed additional memoranda with the court opposing the
Intervenors’ answer to the court’s preliminary findings of crime
or fraud with respect to Document A-40. Nowhere in these
papers did the IRS request the district court revisit its earlier
rulings on the Kerekes Memorandum.
Based on this record, we must conclude that the IRS has
waived this issue. We have recognized that the waiver rule
exists to provide the district court with the first opportunity
to rule on a party’s theories. Bailey v. Int’l Bhd. of Boilermakers,
Iron Ship Builders, Blacksmiths, Forgers & Helpers, Local 374, 175
F.3d 526, 530 (7th Cir. 1999). This requirement assures that
we shall not usurp the role of the district court by engaging
in initial fact finding. Id. It also assures an adequate record
for review, id., a particularly important function in cases such
as this one, where the fact-specific nature of the inquiry lies
within the trial court’s particular expertise, see Frederick, 182
F.3d at 499. Because the issue the IRS presents on appeal was
never before the district court, we are left with no basis to
evaluate the district court’s ruling on a particularly fact-bound
issue. The issue is waived.
Nos. 05-3260 & 05-3518 23

The crime-fraud exception places communications made
in furtherance of a crime or fraud outside the attorney-
client privilege. United States v. Zolin, 491 U.S. 554, 563
(1989). The exception is based on the recognition that the
privilege necessarily will “protect the confidences of
wrongdoers.” Id. at 562. This cost is accepted as necessary
to achieve the privilege’s purpose of promoting the
“broader public interests in the observance of law and
the administration of justice.” Id. (quoting Upjohn Co. v.
United States, 449 U.S. 383, 389 (1981)) (internal quotation
marks omitted). However, when the advice sought relates
“not to prior wrongdoing, but to future wrongdoing,” the
privilege goes beyond what is necessary to achieve its
beneficial purposes. Id. at 562-63 (quoting 8 John Henry
Wigmore, Evidence In Trials At Common Law § 2298 (John
T. McNaughton rev. 1961)) (internal quotation marks
omitted) (emphasis in original).
To invoke the crime-fraud exception, the party seeking
to abrogate the attorney-client privilege must present
prima facie evidence that “gives colour to the charge” by
showing “some foundation in fact.” Al-Shahin, 474 F.3d at
946 (quoting Clark v. United States, 289 U.S. 1, 15 (1933))
(internal quotation marks omitted). The party seeking to
abrogate the privilege meets its burden by bringing forth
sufficient evidence to justify the district court in requiring
the proponent of the privilege to come forward with an
explanation for the evidence offered against it. See United
States v. Davis, 1 F.3d 606, 609 (7th Cir. 1993). The privilege
will remain “if the district court finds [the] explanation
satisfactory.” Id.
BDO and the Intervenors would require the party seeking
to abrogate the attorney-client privilege to make out a
prima facie case of each element of a particular crime or
24 Nos. 05-3260 & 05-3518

common law fraud to invoke the crime-fraud exception.
Such a burden is inconsistent with our requirement that the
party seeking to abrogate the privilege need only “give
colour to the charge” by showing “some foundation in
fact.” Al-Shahin, 474 F.3d at 946 (quoting Clark, 289 U.S. at
15) (internal quotation marks omitted). The approach
advocated by BDO and the Intervenors reflects the view
of some circuits, which require enough evidence of crime
or fraud to support a verdict in order to invoke the crime-
fraud exception. See In re Feldberg, 862 F.2d 622, 625 (7th
Cir. 1988). We expressly have rejected that approach. See id.
We therefore must determine whether the district court
abused its discretion in determining that the IRS had come
forward with sufficient evidence to give color to its charge
that Document A-40 was a communication in furtherance
of a crime or fraud. The district court engaged in a
document-by-document, in camera inspection of all 267
documents for which the Intervenors claimed a privilege to
determine whether they fell within the crime-fraud excep-
tion. R.178 at 18. In determining whether there was prima
facie evidence of criminal or fraudulent activity, the
court looked at the totality of the circumstances, including
the eight “potential indicators of fraud” discussed above.10

10
As noted above, the eight potential indicators of fraud
identified by the district court were:
(1) the marketing of pre-packaged transactions by BDO; (2)
the communication by the Intervenors to BDO with the
purpose of engaging in a pre-arranged transaction devel-
oped by BDO or [a] third party with the sole purpose of
reducing taxable income; (3) BDO and/or the Intervenors
attempting to conceal the true nature of the transaction; (4)
(continued...)
Nos. 05-3260 & 05-3518 25

See id. at 23. Based on the totality of circumstances, the
district court found no prima facie evidence of crime or
fraud with respect to 266 of the documents, a ruling that
the IRS does not challenge.
Applying the same totality of the circumstance approach,
the district court found prima facie evidence of crime or
fraud with respect to Document A-40 and instructed the
Intervenors to come forward with an explanation that
would rebut the evidence. Id. at 24. The Intervenors
responded and the IRS provided further evidence to rebut
the Intervenors’ response. After considering all of the
evidence, the district court concluded that the Intervenors
had failed to rebut the prima facie showing of crime or
fraud. R.190 at 10.
The Intervenors now challenge the district court’s ruling.
First, the Intervenors point to the decision of the United
States Court of Appeals for the Second Circuit in Denney
v. BDO Seidman, L.L.P., 412 F.3d 58 (2005), which reversed
Denney v. Jenkens & Gilchrist, one of the cases from
which the district court derived its potential indicators of

10
(...continued)
knowledge by BDO, or a situation where BDO should have
known, that the Intervenors lacked a legitimate business
purpose for entering into the transaction; (5) vaguely
worded consulting agreements; (6) failure by BDO to
provide services under the consulting agreement yet re-
ceipt of payment; (7) mention of the COBRA transaction;
and (8) use of boiler-plate documents.
R.178 at 23.
26 Nos. 05-3260 & 05-3518

fraud.11 See Denney v. BDO Seidman, 412 F.3d at 66. The
Second Circuit’s decision in Denney v. BDO Seidman does
not draw into question the district court’s totality of the
circumstances analysis in this case.
In Denney v. BDO Seidman, the Second Circuit held that
the District Court for the Southern District of New York
had erred when it concluded, without factual support in
the record, that the parties had agreed that their agree-
ments were mutually fraudulent. Denney v. BDO Seidman,
412 F.3d at 66. The Second Circuit’s decision did not
address whether facts such as mention of the COBRA
transaction, vaguely worded consulting agreements or
failure to provide services under the consulting agree-
ments, i.e., the factors that the district court in the pres-
ent case derived from Denney v. Jenkens & Gilchrist, would
be indicative of fraud. Moreover, the district court in the
present case did not place dispositive weight on any one
of the “potential indicators of fraud,” nor did the court
limit its analysis to the eight potential indicators. R.190
at 5.
The remainder of the Intervenors’ challenge asserts that
the IRS could not defeat the Intervenors’ claim of privilege
under the crime-fraud exception because the IRS had failed
to allege a particular offense or the elements of common
law fraud, and, in any event, the Intervenors had come
forward with rebuttal evidence showing a legitimate
purpose underlying the transactions in question. As we
already have noted, our case law does not require a party

11
The potential indicators of fraud the district court drew from
Denney v. Jenkens & Gilchrist were mention of the COBRA
transaction, vaguely worded consulting agreements and
failure to provide services under the consulting agreements.
Nos. 05-3260 & 05-3518 27

seeking to invoke the crime-fraud exception to allege a
particular offense or to make a prima facie showing with
respect to each element of common law fraud. The IRS only
was required to present sufficient evidence to “give colour
to the charge” that the communication was made in
furtherance of a crime or fraud by showing “some founda-
tion in fact.” Al-Shahin, 474 F.3d at 946 (quoting Clark,
289 U.S. at 15) (internal quotation marks omitted).
After concluding that there had been a prima facie
showing that Document A-40 was a communication made
in furtherance of a crime or fraud, the district court gave
the Intervenors the opportunity to explain the communica-
tion. The Intervenors offered an explanation, but the
district court did not find it satisfactory. Nor was the
district court required to find the explanation satisfactory.
Thus, the district court did not abuse its discretion when
it concluded that the IRS had made a prima facie show-
ing of crime or fraud which the Intervenors failed to
explain satisfactorily.

C. Tax Practitioner Privilege
We now shall address whether the district court correctly
applied the tax practitioner privilege found in § 7525 to the
facts of this case. Prior to 2004, § 7525 provided:
§ 7525. Confidentiality privileges relating to taxpayer
communications
(a) Uniform application to taxpayer communications
with federally authorized practitioners.—
(1) General rule.—With respect to tax advice, the
same common law protections of confidentiality
which apply to a communication between a tax-
28 Nos. 05-3260 & 05-3518

payer and an attorney shall also apply to a commu-
nication between a taxpayer and any federally
authorized tax practitioner to the extent the com-
munication would be considered a privileged
communication if it were between a taxpayer and
an attorney.
(2) Limitations. Paragraph (1) may only be asserted
in—
(A) any noncriminal tax matter before the
Internal Revenue Service; and
(B) any noncriminal tax proceeding in Federal
court brought by or against the United States.
(3) Definitions. For purposes of this subsection—
(A) Federally authorized tax practitioner. The
term “federally authorized tax practitioner”
means any individual who is authorized under
Federal law to practice before the Internal
Revenue Service if such practice is subject to
Federal regulation under section 330 of title 31,
United States Code.
(B) Tax advice. The term “tax advice” means
advice given by an individual with respect to a
matter which is within the scope of the individ-
ual’s authority to practice described in sub-
paragraph (A).
(b) Section not to apply to communications regarding
corporate tax shelters. The privilege under subsection
(a) shall not apply to any written communication
between a federally authorized tax practitioner and a
director, shareholder, officer, or employee, agent, or
representative of a corporation in connection with the
Nos. 05-3260 & 05-3518 29

promotion of the direct or indirect participation of
such corporation in any tax shelter (as defined in
section 6662(d)(2)(C)(iii)).
26 U.S.C. § 7525 (2000). To determine whether the district
court correctly applied § 7525, we first must address: (1)
the elements of the privilege and, specifically, whether
the “exception” to the privilege for communications related
to tax shelters is an element of the privilege or whether it is
a true exception; and (2) the scope of the tax shelter excep-
tion.

1. Elements of the Tax Practitioner Privilege
As with all assertions of privilege, the proponent of the
tax practitioner privilege must establish each element of the
privilege. See BDO II, 337 F.3d at 811. On the other hand,
with respect to exceptions to the privilege, the burden rests
on the party seeking to overcome an otherwise valid claim
of privilege to prove preliminary facts that would sup-
port a finding that the claimed privilege falls within an
exception. See Charles Alan Wright & Kenneth W. Graham,
Jr., 24 Federal Practice & Procedure § 5507, at 571 (1986).
The IRS submits that § 7525(b)’s (“subsection (b)”) tax
shelter “exception” to the tax practitioner privilege is not
an exception to the privilege, but an element of the privi-
lege itself. Thus, under the IRS’ theory, the party asserting
the privilege must establish that the communication was
not made, in the words of the statute, “in connection with
the promotion of the direct or indirect participation . . . in
any tax shelter.” 26 U.S.C. § 7525(b) (2000). The Intervenors,
on the other hand, contend that the tax shelter “exception”
is a true exception to the tax practitioner privilege, and,
consequently, the opponent of the privilege bears the
30 Nos. 05-3260 & 05-3518

burden of establishing that the communication falls within
the exception.
Prior to the American Jobs Creation Act of 2004, Pub. L.
No. 108-357, 118 Stat. 1418 (2004),12 subsection (b) read:
The privilege under subsection (a) shall not apply
to any written communication between a federally
authorized tax practitioner and a director, shareholder,
officer, or employee, agent, or representative of a
corporation in connection with the promotion of the
direct or indirect participation of such corporation in
any tax shelter (as defined in section 6662(d)(2)(C)(iii)).

12
The American Jobs Creation Act of 2004, Pub. L. No. 108-357,
118 Stat. 1418 (2004), amended subsection (b) to read:
The privilege under subsection (a) shall not apply to any
written communication which is—
(1) between a federally authorized tax practitioner and
(A) any person,
(B) any director, officer, employee, agent, or repre-
sentative of the person, or
(C) any other person holding a capital or profits
interest in the person, and
(2) in connection with the promotion of the direct or
indirect participation of the person in any tax shelter (as
defined in section 6662(d)(2)(C)(ii)).
26 U.S.C. § 7525(b) (2000 & Supp. IV 2004). These changes
applied only to communications made after October 24, 2004. See
American Jobs Creation Act of 2004, Pub. L. No. 108-357,
§ 813(b), 118 Stat. 1418, 1581 (2004). The Act did not amend
the elements of the tax practitioner privilege set forth in
§ 7525(a).
Nos. 05-3260 & 05-3518 31

26 U.S.C. § 7525(b) (2000). The plain wording of this
subsection evinces a clear intent to treat the rule embodied
in subsection (b) as an exception to the tax practitioner
privilege. The first sentence of subsection (b) refers to “the
privilege under subsection (a).” Id. The fact that the
privilege does not apply to the class of communications
described in subsection (b) presupposes the existence of
an otherwise applicable privilege.
This conclusion is supported further by the structure of
§ 7525 as a whole. Section 7525(a) (“subsection (a)”) sets out
a general rule, id. § 7525(a)(1), specific limitations on the
situations in which that rule may be asserted, id.
§ 7525(a)(2), and defines key terms that further limit the
scope of the rule, id. § 7525(a)(3). By placing some specific
limitations on the general rule together with the general
rule in subsection (a) while placing other limitations on
the general rule in subsection (b), the structure of the
statute suggests that not all limitations to the privilege are
of the same character. The most natural reading of the
section as a whole is to consider those limitations to the
scope of the general rule found in subsection (a) to consti-
tute elements of the privilege and those limitations found
in subsection (b) as exceptions to the application of that
privilege.
The rationale underlying the tax shelter exception further
supports this conclusion. Subsection (b) originally was
added in conference committee. The report of the confer-
ence committee explained that “[t]he Conferees [did] not
understand the promotion of tax shelters to be part of the
routine relationship between a tax practitioner and a
client.” H.R. Rep. No. 105-599 at 269 (1998) (Conf. Rep.).
This rationale is analogous to the rationale underlying the
crime-fraud exception, i.e., advice given to further future
32 Nos. 05-3260 & 05-3518

crime or fraud goes beyond what is necessary to achieve
the beneficial aims of the privilege. See Zolin, 491 U.S. at
562. Thus, in both situations, the rationale underlying
the limitation on the claimed privilege goes to the neces-
sity of the communications to achieve the beneficial aims of
the privilege.
Thus, based on the text, structure and purpose of subsec-
tion (b), it is clear that the tax shelter “exception” is a true
exception to the tax practitioner privilege. As with any
other exception to a claimed privilege, the burden rests on
the opponent of the privilege to prove preliminary facts
that would support a finding that the claimed privilege
falls within an exception. Cf. Wright & Graham, 24 Federal
Practice & Procedure § 5507, at 571. As with the crime-
fraud exception, the opponent meets this burden by
bringing forth enough evidence to show “some foundation
in fact” that the exception applies. Cf. Al-Shahin, 474 F.3d
at 946 (quoting Clark, 289 U.S. at 15) (internal quotation
marks omitted).

2. Scope of the Tax Shelter Exception
The Intervenors contend that the tax shelter exception
found in subsection (b) applies only to tax shelters that
shelter corporate taxes. The Intervenors rely on the sub-
section’s heading and the legislative history of subsection
(b) to support this contention. The IRS, on the other hand,
submits that the tax shelter exception, as it existed in 2002,
was not so limited. To support its position, the IRS relies
on the text of the statute and the legislative history of
subsection (b). The question thus becomes whether the tax
shelter to which the communication relates must shelter
corporate, as opposed to individual, taxes.
Nos. 05-3260 & 05-3518 33

We begin with the text of the statute. “Only if the plain
language of the statute is inconclusive or clearly contra-
venes expressed congressional intent do we look beyond
the words themselves.” Oneida Tribe of Indians v. Wisconsin,
951 F.2d 757, 761 (7th Cir. 1991). To discern the scope of the
tax shelter exception, we must look to the elements of the
exception. To fall within subsection (b), a communication
must be: (1) written; (2) “between a federally authorized
tax practitioner and a director, shareholder, officer, or
employee, agent, or representative of a corporation”; and
(3) made “in connection with the promotion of the direct or
indirect participation of such corporation in any tax
shelter” as defined by 26 U.S.C. § 6662(d)(2)(C)(ii).13 26
U.S.C. § 7525(b) (2000). The plain text appears to apply to
any tax shelter falling within the definition of a tax shelter
found at 26 U.S.C. § 6662(d)(2)(C)(ii), and at least one
district court has found that the tax shelter exception
applies to individuals when the tax shelter required the
participation of a corporation. See Doe v. Wachovia Corp.,
268 F. Supp. 2d 627 (W.D.N.C. 2003).
The Intervenors contend that subsection (b)’s heading,
which, prior to the 2004 amendments, read “[s]ection not to
apply to communications regarding corporate tax shelters,”
see 26 U.S.C. § 7525(b) (2000), demonstrated a clear congres-
sional intent to limit subsection (b) to tax shelters for
corporate income taxes. As a general rule, “[t]he title of a
statute . . . cannot limit the plain meaning of the text.”

13
Prior to 2004, subsection (b) referred to the definition of “tax
shelter” found at 26 U.S.C. § 6662(d)(2)(C)(iii). As a result of
amendments to § 6662, that definition is found now at 26 U.S.C.
§ 6662(d)(2)(C)(ii). For ease of analysis, we shall refer to the
current code section.
34 Nos. 05-3260 & 05-3518

Pennsylvania Dep’t of Corr. v. Yeskey, 524 U.S. 206, 212 (1998)
(quoting Bhd. of R.R. Trainmen v. Baltimore & Ohio R.R. Co.,
331 U.S. 519, 528-29 (1943)) (internal quotation marks
omitted) (omissions in original). A statute’s heading is “of
use only when [it] shed[s] light on some ambiguous word
or phrase.” Yeskey, 524 U.S. at 212 (quoting Bhd. of R.R.
Trainmen, 331 U.S. at 529) (internal quotation marks
omitted) (alterations in original). As noted above, subsec-
tion (b) is not ambiguous. If anything, the heading adds
ambiguity to subsection (b). Absent this heading, the
subsection would not seem limited to corporate tax shelters
at all.
Although the section heading suggests that Congress had
corporate tax shelters in mind, “the fact that a statute can
be applied in situations not expressly anticipated by
Congress” demonstrates breadth, not ambiguity. Yeskey,
524 U.S. at 212 (quoting Sedima, S.P.L.R. v. Imrex Co., 473
U.S. 479, 499 (1985)) (internal quotation marks omitted).
The plain language of subsection (b) is certainly broad
because it applies to “any written communication . . . in
connection with the promotion of the direct or indirect
participation of such corporation in any tax shelter,”
26 U.S.C. § 7525(b) (2000) (emphasis added), but such
breadth does not make the text ambiguous.
Further evidence of the intended breadth of the statute
is found in its reference to the relatively broad “tax shelter”
definition found in 26 U.S.C. § 6662(d)(2)(C)(ii) as op-
posed to the narrower definitions found in the pre-2004
version of 26 U.S.C. § 6111.14 The definition of “tax shelter”

14
See supra note 1. It is worth noting that the American Jobs
Creation Act of 2004 left the definition of “tax shelter” found in
§ 6662(d)(2)(C)(ii) unchanged.
Nos. 05-3260 & 05-3518 35

found at 26 U.S.C. § 6662(d)(2)(C)(ii) defines a “tax shelter”
as any partnership, entity, plan or arrangement, a signifi-
cant purpose of which is the avoidance or evasion of
Federal income tax. 26 U.S.C. § 6662(d)(2)(C)(ii).15
Because subsection (b) is not ambiguous, we need not
look to legislative history to determine its meaning. How-
ever, even if we were to consider legislative history, we
would not find it useful because that history creates more
ambiguity than it eliminates. Even the legislative history
that the Intervenors cite in support of its argument that
subsection (b) is limited to corporate taxes raises more
questions than it answers. The Conference Report upon
which the Intervenors rely states that the tax shelters to
which subsection (b) applies “include, but are not limited to,
those required to be registered as confidential corporate
tax shelter arrangements under section 6111(d).” H.R. Rep.

15
Prior to the 2004 amendments to the section, 26 U.S.C. § 6111
contained two definitions of “tax shelter” applicable only to
§ 6111. One of these definitions defined a “tax shelter” as cer-
tain investments for which the representations made in con-
nection with the sale of the investment would lead “any person”
to believe that the investment would produce a “tax shelter
ratio” over a threshold amount. 26 U.S.C. § 6111(c)(1) (2000). The
other definition of “tax shelter” previously found in § 6111
defined “tax shelter” as any partnership, entity, plan or arrange-
ment, a significant purpose of which is the avoidance or evasion
of Federal income tax for a direct or indirect participant which
is a corporation, that is offered under conditions of confiden-
tiality, and for which the promoters receive commissions
exceeding $100,000. Id. § 6111(d)(1). In contrast, 26 U.S.C.
§ 6662(d)(2)(C)(ii) makes no reference to dollar or “tax shelter
ratio” thresholds, nor does it require the tax shelter to benefit
a corporation.
36 Nos. 05-3260 & 05-3518

No. 105-599 at 269 (1998) (Conf. Rep.) (emphasis added).
All this statement tells us is that the tax shelters referenced
in subsection (b) reach a broader class of arrangements
than the confidential corporate tax shelters then defined
in § 6111(d). It says nothing of how much broader the
exception is intended to sweep.
The rest of the legislative history is equally unenlighten-
ing. Subsection (b) was added to the bill in conference
committee and had not been part of the prior debate on the
legislation. After subsection (b) was added, one of the key
architects of the bill expressed concern that the privilege
itself would lead to confusion and litigation. See 144 Cong.
Rec. S7626 (daily ed. July 8, 1998) (statement of Sen.
Moynihan). Confusion regarding the scope of the tax
shelter exception was not limited to members of Congress;
tax practitioners themselves expressed confusion as to the
breadth of the tax shelter exception. See Sheryl Stratton,
Accountant-Client Privilege: Unclear from the Start, 80 Tax
Notes 7 (July 6, 1998).
Next, the Intervenors contend that the tax shelter excep-
tion applies only to communications “when the corpora-
tion is the taxpayer.” Intervenor’s Br. at 20 (italics in origi-
nal). According to the Intervenors, communication between
a federally authorized tax practitioner and an S corpora-
tion’s officers or agents in connection with the S corpora-
tion’s participation in a tax shelter therefore would not
fall within the tax shelter exception. The Intervenors assert
that S corporations are not taxpayers and that “corpora-
tion” in this context means a C corporation.16 Id. at 20-21.

16
A number of the Intervenors participated in BDO’s programs
through S corporations.
Nos. 05-3260 & 05-3518 37

We cannot accept this argument. S corporations are both
taxpayers and corporations under the IRC.17 Although
S corporations are not subject to taxes imposed by subtitle
A, chapter 1 of the IRC, see id. § 1363(a), this exception
merely means that they do not pay directly income taxes.
Section 1363 does not exempt S corporations from other
taxes imposed by the IRC, such as employment taxes
(subtitle C) and excise taxes (subtitles D and E). Notably,
the IRC defines “taxpayers” as “any person subject to any
internal revenue tax.” Id. § 7701(a)(14) (emphasis added).18
This definition applies throughout the IRC, except when
“otherwise distinctly expressed or manifestly incompati-
ble” with the intent of the statute. Id. § 7701(a). Section 7525
does not express distinctly any intent to define “taxpayer”
only to include income tax payers, nor would it be “mani-
festly incompatible” with § 7525 to extend the tax practitio-
ner privilege to advice given in connection with taxes other
than income taxes.
Additionally, S corporations must calculate their taxable
income, id. § 1363(b), and file a return, id. § 6037(a). Fur-
ther, the S corporation’s taxable income is calculated in the
same manner as an individual’s, with certain exceptions
which are not relevant here. Id. § 1363(b). Indeed, apart

17
If S corporations were not taxpayers, then the tax shelter
exception is irrelevant, as the tax practitioner privilege applies
only to “communication[s] between a taxpayer and any federally
authorized tax practitioner.” 26 U.S.C. § 7525(a)(1). If the
S corporation is not a taxpayer, the S corporation has no
privilege to assert with respect to communications between the
S corporation’s director, shareholder, officer, employee, agent
or representative and a federally authorized tax practitioner.
18
A corporation is a person for purposes of the IRC. See 26
U.S.C. § 7701(a)(1).
38 Nos. 05-3260 & 05-3518

from non-separately computed income or losses, which are
not relevant here, the S corporation calculates the income
or losses passed through to its shareholders by calculating
the S corporation’s gross income and subtracting “the
deductions allowed to the corporation.” Id. § 1366(a)(2)
(emphasis added).
The Intervenors provide no support for their argument
that the term “corporation,” as used in § 7525(b) only
means “C corporation.” The IRC itself defines an S corpora-
tion as a “small business corporation for which an election
under section 1362(a) is in effect,” id. § 1361(a)(1); it defines
a C corporation as “a corporation which is not an S corpo-
ration,” id. § 1361(a)(2). This usage alone suggests that,
when a particular section of the IRC is intended to apply
only to C corporations, Congress will use that term, rather
than the generic “corporation.” Additionally, the IRC and
implementing Treasury Regulations define “corporation”
for federal tax purposes as “a business entity organized
under a Federal or State statute . . . if the statute describes
or refers to the entity as incorporated or as a corporation.”
26 C.F.R. § 301.7701-2(b)(1).
The regulations relied upon by the Intervenors in sup-
port of their argument that “corporation,” as used in
subsection (b), means “C corporation” are inapposite.
These regulations implement § 6111, which, as we have
noted above, applies to a much narrower definition of “tax
shelter” than the one applied in subsection (b). Congress
chose to define “tax shelter” for purposes of subsection (b)
using a broader definition than that found in § 6111.
However narrowly the cited regulations may confine the
application of § 6111, they are of little relevance in defin-
ing the breadth of the definition found in 26 U.S.C.
Nos. 05-3260 & 05-3518 39

§ 6662(d)(2)(C)(ii).19

19
The regulation to which the Intervenors refer, 26 C.F.R.
§ 301.6111-2, was promulgated prior to the 2004 amendments
to § 6111 (the Intervenors actually cite the temporary regula-
tions, but those regulations have since become permanent; the
definition of confidential corporate income tax shelter in the
permanent regulations is the same as that in the temporary reg-
ulations). Section 6111 was and remains an anti-fraud statute,
aimed at providing the IRS with records of financial products
marketed for the purpose of reducing Federal income tax
liability. The pre-2004 version of § 6111 identified two types
of transactions for special scrutiny as “tax shelters.” See 26 U.S.C.
§ 6111(c) & (d) (2000). The first sort of transaction defined tax
shelters generally as investments offered for sale that, based
on the representations in connection with the offering, would
lead a reasonable person to infer that the investment would
generate deductions and credits exceeding statutorily defined
ratio of deductions and credits to the adjusted basis of the
initial investment. See id. § 6111(c). Further, the investment had
to be a registered security or “substantial.” Id. The second defini-
tion of “tax shelter” deemed confidential transactions, a sig-
nificant purpose of which was the avoidance or evasion of
corporate income taxes and for which the tax shelter’s promoter
may receive at least $100,000 in fees, to be tax shelters. Id.
§ 6111(d). As is evident from the first definition of “tax shelter”
found in the pre-2004 version of § 6111, the section as a whole
is not limited in its consideration to corporate tax shelters.
The regulations the Intervenors cite implement the pre-2004
version of § 6111 only with respect to the second definition of
tax shelter, which was only one of the types of transactions
identified by § 6111 as requiring special scrutiny. The current
regulations continue to identify confidential corporate income
tax shelters for purposes of implementing § 6111, even though
(continued...)
40 Nos. 05-3260 & 05-3518

Finally, we address the Intervenors’ contention that
application of the tax shelter exception to tax shelters that
do not involve corporate income taxes would “consume[]
the general rule” by destroying the privilege any time a
corporation participates in a tax shelter. Intervenors’ Br. at
20. The Intervenors submit that, if the tax shelter exception

19
(...continued)
§ 6111 no longer uses the term “tax shelter.”
Section 6662, on the other hand, is concerned with distinct
issues. Section 6662 deals with penalties for underpayment of a
taxpayer’s tax liability. When an understatement of income is
“substantial,” § 6662 imposes a penalty of twenty percent of the
amount of taxes underpaid. 26 U.S.C. § 6662(a)-(b). However,
§ 6662 provides that taxpayers may reduce the amount of an
understatement, and hence the penalty imposed, by that por-
tion of the understatement resulting from a position taken by
the taxpayer for which there was substantial authority or, if
the position is disclosed adequately on the tax return, for
which there was a reasonable basis for such treatment. Id.
§ 6662(d)(2)(B). As an exception to this general rule, however,
§ 6662 provides that that portion of an understatement attribut-
able to a tax shelter, i.e., a transaction into which the taxpayer
enters, the substantial purpose of which is to avoid or evade
income taxes, cannot be used to reduce the amount of the
taxpayer’s understatement, and hence the penalty imposed. Id.
§ 6662(d)(2)(B)(i). Thus, § 6662 reflects a congressional policy
decision that understatements above a particular threshold, i.e.,
substantial understatements, merit penalties. It also has made
the policy choice that certain positions taken on tax returns, i.e.,
those supported by substantial authority or, when properly
disclosed, a rational basis, should not result in the taxpayer
incurring penalties unless the position taken is the result of a
transaction into which the taxpayer entered for the purpose
of evading or avoiding taxes.
Nos. 05-3260 & 05-3518 41

extends to individual income taxes, any time a corporation,
such as a banking corporation or investment corporation,
is involved in the tax shelter, the general rule of tax practi-
tioner privilege will be negated.
A close look at the tax shelter exception makes clear
that the Intervenors’ submission overstates significantly
the scope of that exception. First, the exception applied
only to written communications. Second, the written
communication must have been between a federally
authorized tax practitioner and a director, shareholder,
officer, or employee, agent, or representative of a corpora-
tion. Third, the written communication must have been “in
connection with the promotion of the direct or indirect
participation of such corporation in any tax shelter,” as
defined in § 6662(d)(2)(C)(ii). 26 U.S.C. § 7525(b) (2000).
Because the exception is limited to written communica-
tions, oral communications between a tax practitioner
and the corporate agent remain within the general rule of
privilege. Further, because the tax shelter exception applies
only when the written communication relates to the
corporation’s direct or indirect participation in a particular
type of tax shelter, i.e., one meeting the definition found
in § 6662(d)(2)(C)(ii), the tax shelter exception will not
affect any otherwise privileged communication that does
not relate to a transaction falling within that definition.
Most importantly, the tax shelter exception applies only
to communications between the tax practitioner and the
corporate agent. As noted earlier, the tax practitioner
privilege is limited to communications that would be
42 Nos. 05-3260 & 05-3518

privileged if they had been made to an attorney.20 The
attorney-client privilege protects only those statements
made by the client to the attorney in confidence. See Evans,
113 F.3d at 1462. A communication is not made in confi-
dence when the client intends that the communication
shall be disclosed to unprivileged third parties. See 2
Christopher B. Mueller & Laird C. Kirkpatrick, Federal
Evidence § 186, at 324 (2d ed. 1994); see also Proposed
Fed. R. Evid. § 503(a)(4), 56 F.R.D. 183, 236 (1972) (“A com-
munication is ‘confidential’ if not intended to be disclosed
to third persons other than those to whom disclosure is

20
We have held previously that this limitation means that non-
lawyer tax practitioners cannot claim the privilege when “doing
other than lawyers’ work.” United States v. BDO Seidman, 337
F.3d 802, 810 (7th Cir. 2003) (quoting United States v. Frederick,
182 F.3d 496, 502 (7th Cir. 1999)) (internal quotation marks
omitted). This statement cannot be taken to mean that the tax
practitioner privilege authorizes non-attorneys to engage in the
practice of law when representing others before the IRS. By
limiting the availability of the privilege to those individuals
authorized to practice before the IRS subject to federal regula-
tions and limiting the scope of the privilege to advice given
within the individual’s authority as a federally authorized tax
practitioner, see 26 U.S.C. § 7525(a)(1), (3), § 7525 clearly is
not intended to alter the scope of a federally authorized tax
practitioner’s authority to practice. Further, the regulations
governing tax practitioners in activities before the IRS expressly
state that nothing in the regulations shall “be construed as
authorizing persons not members of the bar to practice law.” 31
C.F.R. § 10.32. Taken in context, our prior observations on
the scope of the privilege recognize nothing more than com-
munications, though technically within the scope of practice
before the IRS, that would fall outside of the attorney-client
privilege are also outside of the tax practitioner privilege.
Nos. 05-3260 & 05-3518 43

in furtherance of the rendition of professional legal ser-
vices to the client or those reasonably necessary for the
transmission of the communication.”). However, an
exception to this general rule permits disclosure of confi-
dential communications by the attorney to an expert
retained for the purpose of rendering legal services. 2
Mueller & Kirkpatrick, Federal Evidence § 186, at 324.
The tax practitioner privilege protects those communica-
tions which would be privileged if made to an attorney.
See 26 U.S.C. § 7525(a). This protection is embodied both
in the general rule regarding confidential communica-
tions and in the exception for disclosures to experts
retained to assist the tax practitioner. With respect to
individual income taxpayers, the tax shelter exception has
the effect of taking communications intended to be passed
along in written form to corporate agents in connection
with the corporation’s participation in a tax shelter out of
the exception for communications to third party experts
retained to assist the tax practitioner. Such communica-
tions are subject to the general rule that communications
to third parties are not privileged. For all other confiden-
tial communications between the individual income tax
payer and its tax practitioner, both the general rule and
the exception for communications to a retained expert
apply.
Thus, we cannot accept the Intervenors’ prediction that
application of the tax shelter exception to individual
income tax payers, as it relates to communications made
before October 21, 2004, would swallow the general rule
of tax practitioner privilege any time a corporation was
involved in the shelter.
44 Nos. 05-3260 & 05-3518

3. The District Court’s Decision
We turn now to the district court’s ruling that the tax
shelter exception did not apply to the Intervenors’ docu-
ments. It is unclear what legal standard the district court
applied in assessing the applicability of the tax shelter
exception to the communications at issue. The district
court disposed of the matter in a footnote, in which it
stated that, for the same reasons it found that the IRS’
characterization of the Intervernors’ conduct as falling
within the crime-fraud exception, it did not find that the
Intervenors engaged in tax shelters. See R.178 at 17 n.6.
However, the tax shelter exception requires no show-
ing of crime or fraud. Further, the record is unclear regard-
ing what evidence, if any, was produced by the IRS to
support its contention that the documents fell within
the tax shelter exception. The IRS did contend that a
significant purpose of the financial products purchased
by the Intervenors was to avoid or evade federal income
tax and the record reflects that some of the Intervenors had
purchased the financial product through a corporation.
R.135 at 11. However, the district court’s decision does not
indicate how these allegations fell short of establishing
the applicability of the tax shelter exception.
Additionally, the district court did not note which claims
of privilege were sustained based on the attorney-client
privilege and which were sustained based on the tax
practitioner privilege. See R.178 at 13-14, 29. Because we
cannot evaluate the legal standard employed by the dis-
trict court, remand is necessary. In re Grand Jury Proceed-
ings (Thullen), 220 F.3d at 572. Thus, we must vacate the
district court’s ruling with respect to the applicability of
the tax shelter exception and remand for further consider-
ation.
Nos. 05-3260 & 05-3518 45

On remand, for each of the 266 documents that the
district court concluded to fall within a valid claim of
privilege, the court should first determine whether the
document falls within the attorney-client privilege, the tax
practitioner privilege or both privileges. For those docu-
ments that would fall within the attorney-client privilege or
both the attorney-client and tax practitioner privilege,
no further analysis is required, as the tax shelter excep-
tion applies only to the tax practitioner privilege. See 26
U.S.C. § 7525(b) (2000). For those documents falling
solely within the tax practitioner privilege, the burden
rests upon the IRS to come forward with sufficient evi-
dence to demonstrate some foundation in fact that a
particular document falls within the tax shelter excep-
tion. To meet this burden, the IRS must bring forward
evidence that: (1) the communication relates to a tax
shelter, as defined by § 6662(d)(2)(C)(ii); (2) the communi-
cation was made by a director, shareholder, officer, or
employee, agent, or representative of the corporation; and
(3) the communication was made in connection with the
promotion of the direct or indirect participation of the
corporation in such tax shelter.

Conclusion
For the forgoing reasons, the decision of the district court
is affirmed in part and vacated and remanded in part.
AFFIRMED in part,
VACATED and REMANDED in part
46 Nos. 05-3260 & 05-3518

A true Copy:
Teste:

________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit

USCA-02-C-0072—7-2-07