United States v. Arthur Young & Co.
465 U.S. 805, 79 L. Ed. 2d 826, 1984 U.S. LEXIS 43 (1984)
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Rule of Law:
An independent auditor's tax accrual workpapers are not protected by a work-product privilege and must be disclosed in response to a valid Internal Revenue Service (IRS) summons issued under § 7602 of the Internal Revenue Code.
Facts:
- Arthur Young & Co. served as the independent auditor for Amerada Hess Corp., tasked with reviewing Amerada's financial statements as required by federal securities laws.
- In the course of its audit, Arthur Young prepared tax accrual workpapers, which evaluated Amerada's reserves for contingent tax liabilities.
- These workpapers identified questionable tax positions taken by Amerada and reflected Arthur Young's opinions on the validity of those positions.
- In 1975, the IRS began a routine audit of Amerada's tax returns for the years 1972-1974.
- The audit uncovered questionable payments from a 'special disbursement account,' prompting the IRS to initiate a criminal investigation as well.
- The IRS issued an administrative summons to Arthur Young, demanding access to all its files related to Amerada, including the tax accrual workpapers.
- Amerada instructed Arthur Young not to comply with the IRS summons.
Procedural Posture:
- The IRS commenced an enforcement action against Arthur Young in the U.S. District Court for the Southern District of New York.
- Amerada Hess Corp. intervened in the proceeding.
- The District Court (trial court) found the workpapers relevant, rejected any accountant-client privilege, and ordered the summons enforced.
- Amerada and Arthur Young appealed to the U.S. Court of Appeals for the Second Circuit.
- A divided Court of Appeals (intermediate appellate court) affirmed the workpapers' relevance but reversed the enforcement, creating a new work-product immunity for tax accrual workpapers.
- The United States (IRS) petitioned the U.S. Supreme Court for a writ of certiorari, which was granted.
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Issue:
Does a judicially created work-product immunity shield an independent auditor's tax accrual workpapers from disclosure in response to an Internal Revenue Service summons under § 7602?
Opinions:
Majority - Chief Justice Burger
No. There is no work-product immunity for an independent auditor's tax accrual workpapers. The broad summons authority granted to the IRS by Congress under § 7602 reflects a policy choice in favor of disclosure, and courts should not create new privileges to curtail this power without unambiguous direction from Congress. Unlike the attorney work-product doctrine, which protects the work of a client's confidential advocate, an independent auditor's role is that of a 'public watchdog' whose primary duty of independence and fidelity is to the public, not the client. This public responsibility transcends any employment relationship and is inconsistent with the creation of a privilege that would shield its work from a legitimate government inquiry.
Analysis:
This decision solidifies the expansive investigatory power of the IRS under § 7602 and firmly rejects the creation of a federal common law accountant-client privilege or work-product immunity. The Court's distinction between the role of an attorney (a private advocate) and an independent auditor (a 'public watchdog') is a crucial piece of legal doctrine that has lasting implications for corporate governance and tax compliance. By leaving the creation of any new privilege to Congress, the Court reinforced principles of judicial restraint and confirmed that an auditor's analysis of a company's tax vulnerabilities is not shielded from government scrutiny.
