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The U.S. Internal Revenue Service is seeking an attorney’s testimony and documents in investigating allegations of improper tax accounting at San Francisco-based Levi Strauss & Co. It’s an attorney-client privilege case with a major twist: The attorney is a terminated Levi’s lawyer who is trying to give the IRS what it seeks. Mountain View, Calif.’s Fenwick & West, on behalf of Levi, has filed a petition to quash the IRS summons in U.S. district court in San Francisco. Levi Strauss & Co. v. United States of America, No. C 03 3212 MMC (N.D. Calif.). The petition asks the court to set up a procedure for viewing documents and hearing testimony in camera to determine what information may be privileged. “We believe the documents were stolen, and an attorney-client privilege is not waived for stolen documents,” said James Fuller, a tax practice partner in Fenwick & West’s Mountain View office. Fuller said Levi is cooperating with the IRS, and that “the IRS informed us of the documents and encouraged us to intervene” to determine if they were privileged. If the court rules the documents and testimony to be privileged, the IRS must then decide whether to attempt further legal efforts to pierce the privilege. An IRS spokesman said he could not comment on specific cases but pointed to statements made by B. John Williams, chief counsel of the IRS, in a January speech to the New York State Bar Association. Williams said in the speech that there are times when “public policy considerations could outweigh the attorney-client privilege.” He added, “The existence of the crime-fraud exception highlights that the attorney-client privilege is not absolute. It has important public policy limits.” The Levi case differs from other recent attempts to break attorney-client or tax practitioner-client privileges. For example, the IRS obtained a summons in U.S. district court in Chicago on June 19 asking Dallas-based Jenkens & Gilchrist to reveal the names of some 600 clients that used questionable tax shelters. The law firm has refused the order based on attorney-client privilege. The IRS is considering its next move. In other cases, the IRS has issued summonses to various accounting firms, seeking to break the tax practitioner-client privilege, which is based on Congress’ extension of the attorney-client privilege to tax advisors. Some firms have surrendered documents. Others are fighting to protect the privilege, with mixed results. On July 23, the 7th U.S. Circuit Court of Appeals in Chicago ruled that the accounting firm BDO Seidman had to reveal its list of tax shelter clients to the IRS. Specifically comparing the tax client privilege to attorney-client privilege, the court said investors had no expectation of privilege because the IRS requires tax advisors to keep a list of names of tax shelter investors. The Levi case appears unique because it involves an in-house tax lawyer who seeks to document his claim that he was fired for questioning tax positions he suspected were fraudulent. Lawyer Robert Schmidt and another fired Levi employee, accountant Thomas Walsh, filed suit in April against Levi in California Superior Court. No. CGC-03-419398. Levi has filed a cross-complaint asking for orders barring Schmidt and Walsh from disclosing confidential or privileged information and for an order requiring the return of Levi’s documents. Schmidt’s attorney did not return calls. Linda Butler, Levi’s senior manager for communications, said Schmidt’s “allegations are false and seriously misleading.” Nevertheless, the IRS served summonses on Schmidt and Walsh on June 20 to pursue the allegations. Levi’s petition to quash the summonses asks the court to establish a process to “allow certain issues, primarily privilege issues, to be resolved concomitantly with the taking of sworn testimony from and production of documents by Schmidt and Walsh.” The petition adds, “It is nearly certain that the summonses at issue will result in the unauthorized disclosure of privileged information if the proposed procedural mechanisms are not in place.” Lawrence Cunningham, a Boston College law and business professor, said the government “seems to be heading in a more expansive direction in terms of exceptions to the attorney-client privilege.” The IRS, Securities and Exchange Commission (SEC), Justice Department and Federal Trade Commission have all sought privileged information from lawyers. Cunningham said traditionally the exception to the privilege occurs when a communication is in furtherance of an illegal act, but that generally the exception excluded the “mere intention” of committing one. “But my reading of cases,” he said, “now shows a judicial willingness to accept intent if a client goes ahead and commits the act.” He said he doesn’t strongly oppose piercing privilege when it is done to promote justice. “Privilege was not designed to be a shield to facilitate injustice,” he said. “But then there is the tension. We do need some assurance for clients to repose trust in their lawyers.” Samuel J. Winer, a partner in Foley & Lardner’s Washington office, thinks piercing privilege could actually hurt government enforcement efforts. Winer, a former staff attorney and special counsel with the SEC, used that agency as an example. “The private bar provides far more enforcement to federal laws than the SEC alone could ever achieve … because clients feel they can discuss candidly with their lawyers what is going on, and the lawyers can feel free to give candid advice,” he said. “I think the government’s efforts to discover these privileged communications could in fact chill that dialogue. And I don’t think we’re done seeing the fallout from this pressure yet.”

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