Review Urged to Resolve Conflict Regarding Crime Fraud Exception

2. Should the title contemporaneously enacted by Congress be considered in construing the statute as a whole or be ignored unless and until the Court first concludes that the textual portion of the statute contains some ambiguity?

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The case arises from a civil tax examination of an accounting firm, BDO Seidman, L.L.P., with respect to the applicability of certain preparer and/or promoter penalties. Incident to that examination, the IRS summonsed a large volume of client records from 2001 and prior periods. A group of those clients intervened and took a restrained view, asserting privileges (Section 7525 Tax Practitioner Privilege, attorney-client privilege, and work product protection) as to only 267 of the thousands of their summonsed documents.

After an in camera review, the District Court held that 266 of the 267 documents were covered by one or more of the privileges. Further, the Court held that Document A-40 constituted evidence of some [unidentified] crime or fraud, and thus, was not entitled to protection. That document (which has since been produced pursuant to Court order and is reproduced at Pet. App. F, pp. 114a-117a) is an email exchange between two tax practitioners at the accounting firm. It explicitly refers to this Court's opinion in Cottage Sav. Ass'n v. Commissioner, 499 U.S. 554 (1991) with respect to obtaining desired tax benefits from distressed debt investments prior to year-end.³

In classifying A-40, the District Court initially relied upon factors from the trial opinion in Denney v. Jenkins & Gilchrist, 340 F. Supp. 2d 338 (S.D.N.Y. 2004), rev'd. in part, vacated in part, 412 F.3d 58 (2d Cir. 2005):⁴

Here, the District Court pointed to the reference in A-40 relating to closing the Cottage Savings swaps by year-end to reap desired tax benefits. Without identifying the "crime or fraud" or any of the elements that A-40 somehow evidenced, the Court directed the Intervenors to offer an explanation. In response, the Intervenors submitted declarations from the BDO personnel involved, attesting to their business reasons for sending the email, as well as materials confirming 5 the accepted practice of closing out positions by year-end to reap desired tax benefits. Counsel for the IRS then tendered a supplemental affidavit echoing the Denney factors. That declaration never identified a crime or fraud, certainly never offered evidence as to the essential elements of that [unidentified] crime or fraud, and drew no correlation between the Denney contentions and A-40. The exhibits the IRS attached to the declarations included a statement by the distressed debt trader that it was pursuing an investment that "will yield very good profits for investors." Another exhibit consisted of an email relaying the statement by the trader that certain debt includes a "kicker" with "a bonus payoff of probably around 12-1." The District Court reviewed these materials, concluded that the documents as a whole reflected an intent to reap a profit, but upheld its prior ruling.

Shortly thereafter, the Second Circuit reversed the Denney fraud holding, thereby undercutting the factors relied upon by the District Court. The Intervenors promptly filed a motion for reconsideration based on the reversal. Citing the same "totality of the circumstances" conclusion that preceded the Denney reversal, the District Court stated that it used the Denney factors only as "guidelines" and upheld its ruling that A-40 somehow evidenced a (still unidentified) crime or fraud.

The Intervenors appealed and asserted that the District Court erred in failing to require the party asserting the crime-fraud exception to make a prima facie showing that distinguished between fraud and non-fraud by identifying the alleged crime-fraud and producing prima facie evidence as to its essential elements. In its opinion, the Seventh Circuit recognized a conflict with other Circuits but, based on its precedent, held that no crime-fraud need be identified nor evidence offered as to the essential elements of the [unidentified] charge.

The second issue, the construction of the Section 7525(b) "corporate tax shelter" exception to the privilege, invokes the broader question relating to the standing of titles contemporaneously enacted by Congress as part of the statute as a whole. Section 7525(a) extends the common law attorney-client privilege to cover the tax advice given by tax practitioners to taxpayers. Section 7525(b) excludes what its title describes as "communications regarding corporate tax shelters." The District Court concluded that the exception did not apply here. The Seventh Circuit reversed, on the grounds that the title must be disregarded unless the textual portion of the statute is ambiguous.

The Client/Intervenors submit that the title contemporaneously enacted by Congress must be considered as part of the statute as a whole, that coupled with the textual tie between "promotion" and "corporation" it reflects the plain meaning of this exception, and failing that, the conflicting meanings from the District Court and the Panel confirm the ambiguity that requires consideration of the title.

A. THE CRIME-FRAUD CONFLICT CONFUSES WHAT SHOULD BE A SIMPLE CONSISTENT RULE AT THE FINGERTIPS OF EVERY LAWYER, LAW STUDENT, AND NOW ACCOUNTANT.

Every litigant in every hotly contested case or controversy is tempted to accuse his adversary of fraud or even a crime in the form of misrepresenting the disputed facts. The law of the D.C., Third, Fifth, Ninth, and Eleventh Circuits responsibly restrains such reckless slanders by insisting upon a genuine prima facie test that distinguishes between crime-fraud and the universe of other conduct -- that is, accurate reliance on substantive Supreme Court authority (Document A-40), honest differences of opinion, mistake, or negligence. Reckless allegations by the federal government destroy lives without regard to the outcome. This Court witnessed the 26,000 innocent people who lost their jobs and retirement as a result of the reckless accusations in United States v. Arthur Andersen & Co., 544 U.S. 696 (2005). Document A-40 captures that problem even more clearly. Imagine a relatively short email exchange between two tax practitioners which explicitly refers to a substantive Supreme Court opinion (Cottage Savings) to confirm desired tax benefits as somehow being twisted into prima facie evidence of a crime or fraud instead of an overt effort to follow the law. Yet, that is precisely what the District Court held and the Seventh Circuit affirmed under what is here the spokeless umbrella of "totality of the circumstances."

Consistent with the Roman maxim that the law never presumes fraud, prima facie proof of crime-fraud should require (i) identification of the specific crime-fraud alleged and (ii) evidence as to the essential elements. Obviously, the absence of one of those essential elements distinguishes between what is and is not a crime or fraud. Only that approach comports with the precedent of this Court embedded in every Circuit's uniform set of jury instructions: decency demands that a crime-fraud allegation be distinguished from the universe of other conduct.⁵

More to the point here, this Court has long recognized that tax avoidance is a proper purpose. As Justice O'Connor stated on behalf of the Court in United States v. Carlton, 512 U.S. 26, 35-36 (1994):

No one does. It is not just a matter facing every federal tax practitioner with clients who have retired to Florida, New Mexico, or southern California. Suppose a tax lawyer sitting in her office in Washington emails her partner in Dallas about a tax planning transaction based on substantive Supreme Court authority. So far, so good. Same simple rule applied, protecting her reputation and integrity by barring reckless crime-fraud allegations absent an identified crime or fraud and some evidence of the essential elements. But suppose the Dallas partner wants advice about some securities aspect and forwards the email to their partner in Chicago. With no identified crime or fraud and no evidence as to its essential elements, the reckless IRS allegation that this case invites in the Seventh Circuit destroys the lifelong reputation of the Washington tax lawyer.

The law recognizes that the mere allegation of crime or fraud can scar a decent man or woman for life. For that reason, the law requires heightened pleading and proof standards for civil fraud and criminal accusations. At a minimum, such accusations require that the crime or fraud be pled with specificity as to each essential element. Absent those elements, the conduct constitutes something other than a crime or fraud. The reality that the law imposes the burden of proof upon the accuser and sets the bar at the heightened level of "clear and convincing evidence" for civil fraud and "proof beyond a reasonable doubt" for crimes, conveys the sensitivity of a civilized society to the most corrosive form of slander.

The Seventh Circuit's standard could infect virtually every civil and criminal proceeding involving privileged communications. It begs the question of what crime or fraud is charged. Essentially, it leaves the District Court with the burden, if not the caprice, of applying an ipse dixit standard with no need to identify anything more than suspicions about unidentified wrongs. As such, courts will invariably vitiate valid privileges and malign people in situations involving nothing more than a factual dispute, competing evidence, or just negligence, as 12 distinguished from a true crime or fraud which should never be presumed. The litigant protecting the privilege there, as here, must aim in the dark at a constantly moving target.

This case essentially paints the parties involved -- BDO and the Clients -- with a brush that retroactively presumes they must be wrongdoers. At most, the IRS and, at points, the District Court, seemed to equate the IRS' self-serving "abusive tax shelter" label⁶ with some kind of unspecified crime or fraud. The problem exceeds the reality that this label and the application of the Supreme Court authority remain a hotly contested dispute and that such debatable matters are not the stuff of crimes or frauds. See, e.g., United States v. Critzer, 498 F.2d 1160, 1163 (4th Cir. 1974) ("pioneering interpretations of the tax law should not be sought or rendered in criminal prosecution"); United States v. Dahlstrom, 713 F.2d 1423, 1428 (9th Cir. 1983). The problem, however, is far greater.

The IRS asserted the exact same label before this Court in Cottage Savings with no suggestion of even negligence, and this Court confirmed that the taxpayer accurately recognized the distressed debt loss. In United Parcel Serv. of Am. v. Commissioner, 254 F.3d 1014 (11th Cir. 2001), the IRS again leveled the same pejorative with the contention that the company lacked any non-tax purpose and the contention that the company was negligent -- not fraudulent and certainly not criminal. The IRS persuaded the trial court that the company was both wrong and negligent. A three-judge panel found, however, that the so-called "abusive tax shelter" position taken by the company was technically sound and ACCURATE. The exact same sequence arose in Compaq Computer Corp. v. Commissioner, 277 F.3d 778 (5th Cir. 2001), and IES Indus., Inc. v. Commissioner, 253 F.3d 350 (8th Cir. 2001). The trial courts in both of those cases sustained the IRS' "abusive tax shelter" contention that the taxpayers were both wrong and negligent (with no suggestion of fraud or criminal conduct), and two separate three-judge appellate panels determined that the companies' positions not only fell short of negligence -- they were CORRECT.⁷ How in God's green earth can there be a crime or fraud when the as yet untested position may well be accurate?

In Clark, the Supreme Court addressed whether a crime-fraud exception applied to the common law privilege protecting juror deliberations. The prosecution specifically alleged that a juror both obstructed justice and committed perjury. Id. at 9. In concluding that the crime-fraud exception applies to juror deliberations, the Court looked to the exception to attorney-client communications. This Court rejected earlier cases that seemed to waive the attorney-client privilege based solely on "a mere charge of illegality, not supported by any evidence . . .", instead holding:

Without recognizing the presence of the identified crime and ample evidence of its essential elements in Clark, the Seventh Circuit took the general phrases in the 1933 Clark opinion to a dangerous extreme:

The best stated rule -- and the rule embraced by more Circuits than any other -- (i) cures the danger raised by standards that fail to distinguish between fraud and non-fraud, and (ii) comports with the traditional understanding of a prima facie case throughout the law. The standard followed by the D.C., Third, Fifth, Ninth, and Eleventh Circuits requires evidence of the elements of the (identified) violation.

In the Court of Appeals case most commonly cited by other circuits, the D.C. Circuit defined prima facie evidence of the crime-fraud exception as requiring that the party seeking to circumvent the privilege must:

Similarly, the Third Circuit follows the same path, after attempting to reconcile the competing views into this one straightforward test:

The Fifth Circuit also responsibly restrains reckless allegations by requiring the universally understood prima facie standard:

So too, the Ninth Circuit defines "prima facie evidence" consistent with the traditional understanding of that phrase ("The government must submit 'evidence that if believed by a jury, would establish the elements of an ongoing violation'"). United States v. Chen, 99 F.3d 1495, 1503 (9th Cir. 1996), quoting United States v. Laurins, 857 F.2d 529, 541 (9th Cir. 1988). In both Chen and Laurins, the Court specifically identified the crime or fraud and pointed to independent evidence of their elements. In Laurins, for example, the government specifically identified the crime as obstruction of justice through the target's withholding documents that the Court ordered produced and the government produced those very (allegedly non-existent) documents from a seizure at the defendant's home. Id. at 534-35.

The Eleventh Circuit test for invoking the crimefraud exception mirrors that of the D.C., Third, Fifth, and Ninth Circuits in that, a party invoking the crime-fraud exception to the attorney-client privilege must show:

On a slightly different branch, the Fourth and Eighth Circuits both require a prima facie showing of crime-fraud but do not explicitly address the need for evidence as to the essential elements. Compare In re Grand Jury Proceedings, Thursday Special Grand Jury Sept. Term, 1991, 33 F.3d 342, 352 (4th Cir. 1994), and In re Berkley and Co., Inc., 629 F.2d 548, 553 (8th Cir. 1980).

A third line of opinions comes from the First, Second, and Sixth Circuits, along with a variation on the Ninth Circuit precedent. They state different standards for the weight of the evidence required to establish a prima facie case of crime-fraud. Any discussion of the weight of the required crime-fraud evidence necessarily assumes that, whatever the required weight may be, it establishes the essential elements of the violation. In every instance, the courts specifically identify the crime or fraud and only apply the exception where ample independent evidence exists as to the essential elements. Hence, the weight cases bolster the D.C., Third, Fifth, Ninth, and Eleventh Circuits' precedent requiring "evidence, if believed by a trier of fact, would establish the elements of an ongoing or imminent [identified] crime or fraud." In re Sealed Case, 107 F.3d at 50. The Ninth Circuit draws a distinction between the weight required in civil cases like this and criminal cases. In its recent opinion on the subject, In re Napster, Inc. Copyright Litigation, 479 F.3d 1078, 1094-95 (9th Cir. 2007), the Ninth Circuit held:

The varying First, Second, and Sixth Circuit opinions further underscore the need for clarification by this Court in that -- at least in criminal cases -- they prescribe the required weight as reasonable belief, reasonable cause, or probable cause. See In re Grand Jury Proceedings, 417 F.3d 18, 23 (1st Cir. 2005) ("reasonable basis . . . something less than a mathematical (more likely than not) probability that the client intended to use the attorney in furtherance of a crime or fraud . . . In all events, the reasonable cause standard is intended to be reasonably demanding . . ."); In re Grand Jury Subpoena Duces Tecum Dated Sept. 15, 1983, 731 F.2d 1032, 1039 (2d Cir. 1984) (Identifies crime as 18 U.S.C. § 1503 violation and equates "reasonable basis," "reasonable cause," and "probable cause"); In re Richard Roe, Inc., 68 F.3d 38, 40 (2d Cir. 1995) ("probable cause"); United States v. Collis, 128 F.3d 313, 321 (6th Cir. 1997) ("a prudent person would have a reasonable basis to suspect the perpetration of a crime or fraud"); In re Antitrust Grand Jury, 805 F.2d 155, 164 (6th Cir. 1986).

The Sixth Circuit precedent, like the Seventh Circuit opinions, reflects internal conflicts and thereby underscores the confusion in this critical area. For example, the Sixth Circuit in Collis endorses "a reasonable basis to suspect," while its In re Antitrust Grand Jury opinion holds that "[t]he evidence produced by the government must raise more than a strong suspicion that a crime was committed to establish a prima facie violation". In re Antitrust Grand Jury, at 165.

The Seventh Circuit follows what this case proves to be the spokeless umbrella of "totality of the circumstances" so long as the party opposed to the privilege "gives colour to the [unidentified] charge" by showing "some foundation in fact." BDO, 492 F.3d at 818. That umbrella conveys no meaning, much less distinguishes between crime-fraud on the one hand and even honest differences of opinion on the other. Consider the unconstitutional vagueness of a "prima facie crime-fraud" test that (i) requires no identified crime or fraud AND (ii) requires no evidence of the essential elements -- the same essential elements that, in every other context, the law demands heightened specificity in pleading and heightened standards of proof before scarring someone for life.

To be sure, the earlier Seventh Circuit cases cited by the Panel here state a permissive standard but do so in the context of clearly identifying both a crime or fraud and ample independent evidence of their essential elements. For example, the Seventh Circuit seems to rely most heavily upon its opinion in United States v. Al-Shahin, 474 F.3d 941, 946-7 (7th Cir. 2007) where the Court stated the standard as:

The Seventh Circuit in this case also cited its earlier opinion, In the Matter of Feldberg, 862 F.2d 622, 625-26 (7th Cir. 1989), which undeniably states the permissive standard of "[t]he question is not whether the evidence supports a verdict but whether it calls for an inquiry." Again however, the Seventh Circuit took pains in Feldberg to specifically identify the crime as obstruction of justice and to point to ample independent evidence of the essential elements -- evidence that the defendant's lawyer originally produced 51 contracts as a complete production in response to a grand jury subpoena and later produced seven "post-dated" contracts. See also, In re Special September 1978 Grand Jury, 640 F.2d 49, 54 (7th Cir. 1980) (Court cited specific state statute violated by false election reports filed by defendant's law firm, noted that the government both submitted the false reports and pointed out their falsity as independent evidence of the crime). Thus, the courts in each of those cases felt it necessary to identify the kind of specificity sought by the Intervenors, regardless of the enunciation of the standard. Nonetheless, the imprecise standard remains the rule in that Circuit.

The Denney factors never distinguished between crime-fraud and accurate reliance on Supreme Court authority, honest differences of opinion, mistake, negligence, or recklessness, but the District Court listed no other factors here. Perhaps recognizing that these factors fail to distinguish between fraud and the universe of non-fraud, the District Court correctly concluded that these global factors did not push the overall BDO tax planning efforts across the line into the realm of crime-fraud. Pet. App. D, p. 83a. Thus, the Intervenors faced no identified crime-fraud, no evidence as to the unidentified essential elements, and eight factors that failed to distinguish between fraud and permitted purposes.

Without identifying the specific crime-fraud, or the prima facie elements, the District Court requested a rebuttal from the Client/Intervenors. The documents reviewed in camera confirmed an interest in reaping profits, as the Court confirmed. The Client/Intervenors, therefore, inferred that the Court's concern related to the year-end tax avoidance considerations. On that score, the trial court's solely-tax-motivated finding in Cottage Savings, the case noted on the face of A-40, confirms that even the sole purpose of tax avoidance (as opposed to the dual profit and tax purpose here) does not negate the deducibility of losses recognized from distressed debt.¹⁰Cottage Savings, 90 T.C. at 384. Given the in camera evidence of their profit motive and the Cottage Savings confirmation as to the permissible tax purposes, the Client/Intervenors responded to the District Court's request with evidence of the accepted tax planning practice of triggering tax losses at the end of the year. The IRS then tendered its fifth supplemental affidavit: it attached at least two documents that further confirmed that certain distressed debt investments in particular "will yield very good profits for investors"¹¹ and another bundle offered "a bonus payoff of probably 12-1." Nonetheless, the Court concluded that the explanation by the Intervenors was insufficient for reasons the Client/Intervenors still cannot clearly identify -- beyond the eight Denney factors under the "totality of the circumstances" umbrella.

Shortly thereafter, the Second Circuit broke the spokes of that umbrella by reversing Denney. To be sure, the Second Circuit reversed on the stated grounds that no admission as to mutual fraud existed, but that finding of no fraud necessarily meant that the eight factors failed to establish fraud. Otherwise, the District Court's opinion would have been affirmed on that point. The Client/Intervenors promptly asked the District Court in this case to reconsider its prior ruling in light of the Denney reversal. From the Intervenors' perspective, the response was enigmatic. The District Court denied the Motion for Reconsideration on the assertion that it used the Denney factors only as "guidelines" and considered the "totality of the circumstances." No one can say what factors the District Court considered in support of the still unidentified crime or fraud -- other than the tainted Denney factors.

All of this shadowboxing highlights the breadth and depth of the danger raised in all cases by the "totality of the circumstances" abdication of standards. Only caprice dictates the incredibly corrosive crime-fraud scar where:

B. THE CONFLICT BETWEEN THOSE CASES THAT READ A STATUTE AS A WHOLE AND THOSE THAT IGNORE THE TITLE CONTEMPORANEOUSLY ENACTED BY CONGRESS CREATES CONFUSION OVER THIS COURT'S "HOLISTIC ENDEAVOR."

The second issue, the construction of Section 7525(b), also concentrates on a conflict that goes well beyond this statute and this case. Sooner or later, courts must construe every statute. Those statutes now carry Congressionally enacted titles. Today, a confusion exists as to whether titles contemporaneously enacted by Congress constitute part of the law.

Every day, people must read and understand these statutes -- with the titles that define their subject matter and scope. Far too often, the beacon of "plain meaning" simply restates the question and only cosmetically alters the lines of attack. The Seventh Circuit conflict demonstrates the dangers of casting aside the canon of reading a statute as a whole in favor of disregarding the title -- not to mention a nation that cannot say which words enacted by Congress constitute law.

While some statutes from decades past contained titles added by an outside publisher, every modern federal statute contains titles enacted by Congress as part of the whole, titles designed to convey direction, meaning, and context to the reader. Those voting on the statute, those subjected to or benefited by that statute, and those who later read that statute glean at least equal meaning from the overall description Congress chose to enact. In every instance of the written word, titles convey the subject matter and scope of what follows.

In the typical statutory construction case where both sides (and here, two courts in the same case) contend that the text carries a plain (but opposite) meaning, the Seventh Circuit acknowledges that the title conveys the meaning urged by the Client/Intervenors of what should be the narrowly construed Section 7525(b) "corporate tax shelter" exception to the (remedial and therefore broadly read) Tax Practitioner Privilege. Congress not only contemporaneously enacted that title as part of the original statute as a whole, it later affirmatively amended that title (and the text) to apply to individual tax shelters -- and explicitly mandated prospective application of that amendment. Nonetheless, the Seventh Circuit explicitly disregards that title based on the Panel's conclusion that the text conveys a plain meaning that covers both individual tax shelters and corporate tax shelters.

Time obscures whether the title disregarded by Trainmen was injected into the 1887 Interstate Commerce Act by a publisher or enactment. What is clear is that the 1887 heading was not contemporaneously enacted as part of the subject 1940 amendment. Moreover, the Court resolved the question by resort to the (1940) legislative history, and the holding comports with reading the statute (including the amendments) as a whole, all of which favors recognition of the Section 7525(b) title.

Moreover, the Seventh Circuit proceeds on a doubly flawed premise. One, its reading of Section 7525 disregards the inconsistent "plain meaning" derived by the District Court and ignores the textual requirement that the communication with the corporation be made "in connection with the promotion of the direct or indirect participation of such corporation in any tax shelter. . . ." In short, the title simply corroborates the textual requirement that the corporation is the subject of the tax shelter promotion -- either directly or, like the then-pending cases, by sheltering corporate tax indirectly through partnerships. Two, the reality that the District Court and the Panel reached inconsistent "plain meanings" confirms that the statute is susceptible to two or more readings -- the essence of an ambiguity.

By contrast, the Ninth and Tenth Circuits maintain that even titles contemporaneously enacted by Congress as part of the statute are NOT part of the law itself and cannot be considered absent textual ambiguity. Singh v. Gonzales, 499 F.3d 969, 975 (9th Cir. 2007); Griffin v. Steeltek, Inc., 160 F.3d 591, 594 (10th Cir. 1998). In Singh, the Ninth Circuit relied in part on the title in resolving "doubt about the meaning of [the] statute,'" but stated that "statutory titles are not part of the legislation." Singh, 499 F.3d at 977 (citation omitted). In Griffin, the Tenth Circuit reversed a summary judgment on the grounds that the title of the overall act (as opposed to the title of a specific exception), "Americans with Disabilities," was not part of the statute and did not limit claims to disabled persons.

On its face, Section 7525(b) excludes corporate tax shelter communications from the federally authorized tax practitioner privilege:

Nonetheless, the Panel ignored the title and the textual tie between "promotion" and "corporation," in holding that the corporate tax shelter exception unambiguously applied to individual tax shelters so long as the arrangement directly or indirectly involves participation by any type of corporation (even S corporations that pay no corporate tax). BDO, 492 F.3d at 823. That reading subsumes the universe of commerce, for every transaction involves the participation of a corporation in one capacity or another -- be it the bank, the overnight delivery company, the real estate company, the brokerage firm, the printer, the law firm, the accounting firm, ad infinitum. All agree that the exception applies to arrangements that shelter corporate tax but the Panel also includes individual shelters that happen to involve a corporation in some way and excludes those that do not. Neither Congress nor anyone else ever pointed to a rational basis for including some individual shelters and excluding others. The Seventh Circuit notes that "[a]though 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." Id. at 823, citing Yeskey, 524 U.S. at 212.

That reasoning necessarily concedes that the title contemporaneously enacted by Congress leads to the true Congressional intent.

The next year, Congress eliminated the limitation prospectively. Section 813 of the American Jobs Creation Act of 2004 (JOBS) Act (Pub. L. No. 108-357), changed both the Section 7525(b) title and text. Compare the title applicable here ("SECTION NOT TO APPLY TO COMMUNICATIONS REGARDING CORPORATE TAX SHELTERS") to the prospectively amended title and text:

For these reasons, the Client/Intervenors ask the Court to grant their Petition and resolve these critical questions.

² Unless indicated otherwise, all Section references are to Title 26 of the United States Code -- that is, the Internal Revenue Code of 1986 (as amended through December 31, 2001).

³Cottage Savings was a case in which a taxpayer exchanged one bundle of distressed mortgages for another. This Court held that the exchange properly resulted in the recognition of the desired tax losses.

⁴ The trial court also cited two other cases as a source for these factors, Miron v. BDO Seidman, L.L.P., 342 F.Supp.2d 324 (E.D. Pa. 2004), and United States v. KPMG, L.L.P., 316 F.Supp.2d 30 (D.D.C. 2004). However, Miron concluded that the crime-fraud exception did not apply to the generalized scope of the BDO consulting agreement and the KPMG Court never discussed the exception.

⁵See, e.g., Ernst & Ernst v. Hochfelder, 425 U.S. 185, 214 (1976) (recognizing the difference between negligent conduct and fraudulent conduct); United States v. United States Gypsum Co., 438 U.S. 422, 445 (1978) (same); United States v. Pechenik, 236 F.2d 844, 846 (3d Cir. 1956) (fraud "does not include negligence, carelessness, misunderstanding or unintentional understatement of income").

⁶ That pejorative is itself abused for at least two reasons. One, the phrase "tax shelter" statutorily includes any arrangement with a significant tax avoidance purpose (Section 6662(d)(2)(C)). That point covers virtually every business, investment, homeowner, divorce, and estate planning decision. See, e.g., D'Arcy-MacManius & Masius, Inc. v. Commissioner, 63 T.C. 451 (1975) ("consideration of tax aspects . . . is only prudent business planning"); Brumley-Donaldson Co. v. Commissioner, 443 F.2d 501, 510 (9th Cir. 1971) (Trask, J., dissenting) ("In the complexity of today's business and tax jungle a corporate president who does not obtain tax advice . . . ought to be fired"). Two, the IRS applies the "abusive" pejorative retroactively to these 2001 distressed debt investments (the subject of A-40) on an ex post facto basis via a position the IRS first published six years later in 2007. IRS LMSB-04-0407-031 (April 18, 2007).

⁷ The whiplash between one judge finding a given transaction wrong and negligent while a three-judge panel finds that same tax treatment technically sound is not lost on the commentators. See Courts Can't Agree On When Negligence Penalty Applies, 84 J. Tax'n 191 (March 1996); Courts Still Can't Agree on When Negligence Penalty Applies, 90 J. Tax'n 377 (June 1999).

⁸Zolin dealt with the District Court's discretion in refusing to review certain audio tapes in camera which this Court confirmed involves a lower standard than proof of the crime-fraud exception.

⁹In Re Grand Jury Subpoena involved specific allegations of perjury and obstruction of justice.

¹⁰ Distressed debt is peculiar in that, when contributed to a partnership, it carries the ability to generate unused built-in tax losses and substantial profits from the incremental increase in the value of the debt/receivables.

¹¹ The District Court later cited this email which both notes this interest in profitability and the BDO tax practitioners' focus upon compliance with a particular tax rule that potentially impacted the tax aspect of these tax-advantaged investments upon which the tax practitioners were focused.

¹² Commentators and the Section 7525 privilege itself confirm the plain meaning of the "corporate tax shelter" exception. As noted by Louis F. Lobenhofer in The New Tax Practitioner Privilege: Limited Privilege and Significant Disruption TAX NOTES TODAY, 1999 TNT 113-93 (Jun. 11, 1999), the corporate tax shelter exception comes into play only with respect to "written communications with corporate representatives, so, oral discussions and proposals to individuals and unincorporated organizations" are still privileged. See also, Calvin Johnson, Corporate Tax Shelters, 1997 and 1998, TAX NOTES TODAY, 98 TNT 187-84 (Sept. 28, 1998). (". . . the section starts off with what might seem an important privilege, but then takes back the privilege when the client is a corporation"); Robert T. Smith, After the Alamo: Taxpayer Claims of Privilege and the IRS War on Shelters, TAX NOTES TODAY, 2003 TNT 9-47 (Jan. 13, 2003) ("[N]o protection applies under section 7525 for communications related to tax shelters by corporations").