Osman, Basaam v. United States

In the
United States Court of Appeals
For the Seventh Circuit
Nos. 99-3131 & 99-3317
IN THE MATTER OF GRAND JURY PROCEEDINGS,
Involving William Thullen and Kenneth Dvorak,
Witnesses Before the Special January, 1999-2
Grand Jury
APPEAL OF: BASAAM OSMAN
and
CROSS-APPEAL OF: UNITED STATES OF AMERICA
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 96 GJ 791--Marvin E. Aspen, Chief Judge.
Argued February 17, 2000--Decided July 18, 2000
Before HARLINGTON WOOD, JR., COFFEY and RIPPLE, Circuit
Judges.
RIPPLE, Circuit Judge. A grand jury
investigating alleged tax fraud by Dr. Basaam
Osman subpoenaed numerous documents from
accountants hired by his attorneys. Dr. Osman
sought to block production of the documents. He
claimed that the accountants were agents of law
firms representing him in the grand jury
investigation and, thus, that the documents were
subject to the attorney-client privilege. The
district court, after reviewing the disputed
materials in camera, required the production of
some of the documents. The court allowed others
to be withheld on the ground that the attorney-
client privilege was a shield to their
production. Dr. Osman appeals the district
court’s order determining that the attorney-
client privilege does not protect certain
documents in the possession of his accountants.
The United States cross-appeals, claiming that in
that same order, the district court erroneously
applied the privilege to other documents. For the
reasons set forth in the following opinion, we
vacate the judgment of the district court and
remand this case to permit the district court to
make further findings as to whether the documents
in question are subject to the attorney-client
privilege.
I
BACKGROUND
Dr. Basaam Osman is currently under
investigation for tax fraud by a grand jury in
the Northern District of Illinois. The grand jury
is investigating fraud allegedly perpetrated by
Dr. Osman in connection with both his personal
and medical business tax filings between 1985 and
1997. We begin by setting forth, in summary
fashion, the history of this investigation.
In 1994, the Criminal Investigations Division of
the Internal Revenue Service ("IRS") initiated a
criminal investigation of Dr. Osman, focusing on
the years 1985 to 1993. Dr. Osman retained the
law firm of von Mandel & von Mandel to represent
him. The von Mandel law firm then hired an
accounting firm, Terrell, Weiss & Sugar Ltd., to
assist it in defending Dr. Osman. The initial
criminal investigation evolved into a civil
audit. In May 1995, Dr. Osman, with the
assistance of the von Mandel and Terrell firms,
provided the IRS with tax returns for the years
1985 to 1993. Von Mandel’s professional
representation of Dr. Osman ended later that same
year.
In 1996, however, a grand jury investigation of
Dr. Osman began. The initial scope of this
investigation was to consider allegations that
Dr. Osman failed to file individual and corporate
tax returns after the IRS had concluded its
earlier audit. For this investigation, Dr. Osman
retained the law firm of Cotsirilos, Stephenson,
Tighe & Streicker. The Cotsirilos law firm then
hired another accounting firm, Czurylo, Thullen &
Rodgers, to assist in the representation of Dr.
Osman.
In November 1998, a grand jury subpoena sought
the production of all correspondence to or from
the two accounting firms that had been written in
the course of their work on Dr. Osman’s matters.
The two accounting firms produced over 2000
documents, but each withheld certain documents
based on Dr. Osman’s claim of attorney-client
privilege. The Terrell accounting firm withheld
51 pages of material; the Czurylo accounting firm
retained 78 pages.
In March 1999, Kenneth Dvorak and William
Thullen testified before the grand jury. Dvorak,
an accountant with the Terrell firm, testified
that he had prepared Dr. Osman’s tax returns for
the years 1985 to 1993 and explained that his
accounting firm was hired by the von Mandel law
firm for the sole purpose of preparing tax
returns. Thullen, an accountant with the Czurylo
firm, testified that he was hired by an attorney
with the Cotsirilos firm for the sole purpose of
preparing tax returns.
The Government then filed a motion to compel
production of the withheld documents. In a
proceeding involving the accounting firms and the
Government, but not Dr. Osman, the district court
ordered the accountants to produce the documents.
Dr. Osman filed an emergency motion to intervene,
and tendered the documents themselves for in
camera review by the district court. In August,
the district court entered an order requiring the
production of specific pages of the withheld
documents: 37 Terrell pages in their entirety, 2
Terrell pages in redacted form, 50 Czurylo pages
in their entirety, and 2 Czurylo pages in
redacted form. The district court allowed Dr.
Osman to retain the remaining pages of the
documents. In its order, the district court
explained that it relied on a document-by-
document in camera examination of the contested
materials to decide whether the attorney-client
privilege applied to particular pages. It did not
provide an explanation of why each particular
page was or was not privileged.
Dr. Osman, confronted with this district court
order, produced all of the documents ordered
disclosed except for 8 pages of the Terrell
documents. He now appeals, asking that he be
allowed to retain those 8 pages. The Government
cross-appeals, arguing that it is entitled to
view the 12 Terrell pages and 26 Czurylo pages
that the district court allowed Dr. Osman to
continue to withhold and that it should be
allowed to view the redacted pages in their
entirety.
II
DISCUSSION
Dr. Osman claims that the documents in the
possession of the accounting firms are protected
by the attorney-client privilege. There is no
accountant-client privilege. See United States v.
Arthur Young & Co., 465 U.S. 805, 817-19 (1984);
Couch v. United States, 409 U.S. 332, 335 (1973);
United States v. Frederick, 182 F.3d 496, 500
(7th Cir. 1999), cert. denied, 120 S. Ct. 1157
(2000). However, material transmitted to
accountants may fall under the attorney-client
privilege if the accountant is acting as an agent
of an attorney for the purpose of assisting with
the provision of legal advice. "’[W]hat is vital
to the privilege is that the communication be
made in confidence for the purpose of obtaining
legal advice from the lawyer. If what is sought
is not legal advice but only accounting service .
. . or if the advice sought is the accountant’s
rather than the lawyer’s, no privilege exists.’"
United States v. Brown, 478 F.2d 1038, 1040 (7th
Cir. 1973) (quoting United States v. Kovel, 296
F.2d 918, 922 (2d Cir. 1961))./1
Although the violation of the attorney-client
privilege is a serious matter, our case law has
recognized consistently that the privilege is in
derogation of the search for the truth and,
therefore, must be strictly confined. See United
States v. White, 970 F.2d 328, 334 (7th Cir.
1992) (citing cases). In applying this principle,
we have held that material transmitted to an
attorney or the attorney’s agent for the purpose
of using that information on a tax return is not
privileged. The preparation of tax returns is an
accounting service, not the provision of legal
advice. See Frederick, 182 F.3d at 500-01; United
States v. Lawless, 709 F.2d 485, 487 (7th Cir.
1983). On the other hand, information transmitted
to an attorney or to the attorney’s agent is
privileged if it was not intended for subsequent
appearance on a tax return and was given to the
attorney for the sole purpose of seeking legal
advice. See Frederick, 182 F.3d at 500-01.
Documents used in both preparing tax returns and
litigation are not privileged. See id. at 501.
Dr. Osman, as the party seeking to establish the
privilege, bears the burden of demonstrating that
all of the requirements for invoking the
attorney-client privilege have been met. See
United States v. Evans, 113 F.3d 1457, 1461 (7th
Cir. 1997); Lawless, 709 F.2d at 487. The inquiry
into whether documents are subject to a privilege
is a highly fact-specific one. "Only when the
district court has been exposed to the contested
documents and the specific facts which support a
finding of privilege under the attorney-client
relationship for each document can it make a
principled determination as to whether the
attorney-client privilege in fact applies."
Holifield v. United States, 909 F.2d 201, 204
(7th Cir. 1990). An assertion of privilege
therefore must be made on a document-by-document
basis. See White, 970 F.2d at 334; Lawless, 709
F.2d at 487.
The district court correctly recognized the
important role that in camera inspection of
disputed documents often plays in a determination
of the existence of the privilege. See United
States v. Zolin, 491 U.S. 554, 568-69 (1989)
(citing, inter alia, Lawless). Indeed, it
sometimes may be apparent from the face of a
document that it is not privileged because the
document contains information that necessarily
would have been submitted for the preparation of
a tax return. See Lawless, 709 F.2d at 488.
However, when the circumstances suggest that a
document might be privileged, it is important
that the district court consider the totality of
those circumstances in making its determination
as to whether the privilege must be recognized.
For instance, a document that appears privileged
may have lost that privilege through disclosure
or transmittal to a third party. See In re
Pebsworth, 705 F.2d 261, 262 (7th Cir. 1983); see
also United States v. Hamilton, 19 F.3d 350, 353
(7th Cir. 1994); Powers v. Chicago Transit Auth.,
890 F.2d 1355, 1359 (7th Cir. 1989). Similarly,
the purpose of a document may not be apparent on
its face, and it may be necessary to rely on the
testimony of those involved in the production and
handling of a document to determine the purpose
for which it was produced. See Motley v. Marathon
Oil Co., 71 F.3d 1547, 1550-51 (10th Cir. 1995);
United States v. Rockwell Int’l, 897 F.2d 1255,
1264-65 (3d Cir. 1990). In short, in camera
review, although important, often cannot
determine definitively whether a document was
transmitted in such a way as to destroy any
privilege or was created for an unprivileged
purpose.
In assessing the district court’s order in this
case, we necessarily are bound by the record
before us. Accepting, as we must, that
limitation, we cannot determine how the district
court evaluated the testimony of the accountants.
The accountants testified that they were hired
solely to prepare tax returns, but their
assertion is disputed by Dr. Osman. The district
court’s order does not discuss the accountants’
testimony or Dr. Osman’s response to it. Nor do
we have specific findings concerning whether any
of the documents at issue were generated for the
purpose of preparing tax returns or transmitted
to a tax preparer for the purpose of preparing a
return. Finally, the record before us does not
address the possibility that a document created
for a privileged purpose might have been handled
in a manner that destroyed that privilege.
We therefore must remand this matter to the
district court to permit that court to enter more
extensive findings on whether, in light of the
purpose, use, or transmission of these documents,
any privilege exists./2 In making these
findings, the district court should consider the
"totality of the circumstances" surrounding each
document. See Diversified Indus., Inc. v.
Meredith, 572 F.2d 596, 610 n.3 (8th Cir. 1978)
(en banc) ("The totality of the circumstances
indicates that the communications were
privileged."). In the course of deciding whether
particular documents are privileged, the district
court should enter specific findings regarding
the purpose and history of each document in order
to allow for meaningful appellate review./3
Conclusion
For the foregoing reasons, the judgment of the
district court is vacated, and the case is
remanded for further proceedings consistent with
this opinion.
VACATED AND REMANDED
/1 Accord Linde Thomson Langworthy Kohn & Van Dyke,
P.C. v. Resolution Trust Corp., 5 F.3d 1508,
1514-15 (D.C. Cir. 1993); United States v.
Bornstein, 977 F.2d 112, 117 (4th Cir. 1992);
United States v. Davis, 636 F.2d 1028, 1043 (5th
Cir. Unit A 1981); United States v. Cote, 456
F.2d 142, 144 (8th Cir. 1972).
/2 Other courts of appeals have taken the same
course in similar circumstances. See Bornstein,
977 F.2d at 116-17 (remanding for a determination
of whether papers were produced to assist
individual in his capacity as a lawyer or in his
capacity as an accountant/tax preparer); Rockwell
Int’l, 897 F.2d at 1264-65 (requiring the
district court, on remand, to determine whether
material was legal advice).
/3 The district court may determine, in its
discretion, to consider additional testimony on
this subject.