Company Found In Contempt Of Court For Refusing Subpoena Regarding Dual-Purpose Communication

Sometimes, attorneys find themselves wearing multiple hats, acting as both a lawyer and as a business advisor for their clients. These roles can become especially blurred in a tax law context, where the advice of an attorney can simultaneously include legal and non-legal advice.

Company Withholds Documents Despite Subpoena

In a recent 9th Circuit Court decision, In Re Grand Jury, a law firm refused to comply with a subpoena to release certain documents in a criminal investigation case, claiming that the records were confidential. The case was unusual in that they were acting as both a company and a law firm. Additionally, the target of the criminal investigation was not only the owner of the company, but also a client of the law firm.

The appellants produced some documents in response to the subpoena, but refused to provide others, citing attorney-client privilege and work-product doctrine. Most people are familiar with attorney-client privilege, which indicates that certain communications between client and attorney are confidential. Work-product doctrine means that an opposing party cannot discover or compel disclosure of materials that have been prepared by or for a Gilbert tax attorney for legal representation – especially when they are prepared in preparation for litigation.

“Primary Purpose” vs. “Because Of” Communications

In order to determine whether information is eligible for subpoena during an investigation, they may be subjected to a test and determination of what information is being communicated. For example, communication from a client about their W-2 forms are not privileged, but queries from a client on what to claim on their tax return may be privileged and confidential. The situation can become less clear when an attorney’s communications are dual-purpose. If a client asked about a specific tax deduction, a response might include non-legal considerations of tax compliance as well as legal determinations on what to do if the IRS were to challenge the deduction.

When these dual-purpose communications are under review, the court may consider whether the “primary purpose” of the communication was to give or receive legal advice, in contrast to business or tax advice. Unfortunately, the implication is that dual-purpose communication has just one primary purpose. The “because of” test is broader and determines whether a dual-purpose communication took place because there was a need to give or receive legal advice. However, use of the “primary purpose” and “because of” tests have not been explicitly adopted by the 9th Circuit court, and the opinions of district courts on this issue are split.

Circuit Court Upholds Contempt of Court

In the In Re Grand Jury case, the grand jury issued subpoenas that were ignored by the tax firm. The court ruled that these dual-purpose communications were not covered under attorney-client privilege because their primary purpose was to receive tax advice, not legal advice. The appellants disagreed with the ruling, arguing that the district court made an error in using “primary purpose” testing and should have relied on “because of” reasoning. They refused to release the documents and therefore were found to be in contempt of court. When appealed, the district court upheld the ruling and concluded that the primary-purpose test governs cases in which attorney-client privilege is assessed for dual-purpose communication.

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