TAX CONTROVERSY UPDATE
Attorney-Client Privilege, I.R.C. § 7525, and Work-Product Doctrine
Daniel A. Dumezich, Larry R. Langdon, Gary S. Colton, Jr.
In court, the party asserting the privilege
Recent decisions at the district court level has the burden of proving it applies and that the
have added to the body of law related to privilege has not been waived.
operation of the attorney-client privilege,
the Internal Revenue Code of 1986, as For attorney-client privilege to exist, the
amended (the “I.R.C.”) § 7525 tax following elements are required:
practitioner-client privilege, and the
attorney work-product doctrine. These 1) legal advice is sought;
decisions impact both the scope of
2) advice is sought from a professional legal
protection granted by each type of
advisor acting in that capacity;
privilege, as well as which actions result in
a waiver of privilege.
3) communications relate to the client’s desire
to obtain legal advice, but are not made for
These recent decisions provide valuable
the purpose of committing a crime or tort or
insight to corporate taxpayers concerned
perpetrating a fraud (the “crime fraud
about protection of confidential materials
and may impact the likelihood of success in
future tax litigation. This bulletin contains
4) communications must be made confidentially
an overview of the various privileges, and
and must be intended to remain confidential;
summarizes the relevant court decisions
relating to those privileges. 5) the client must claim privilege (usually done
through the client’s attorney); and
Attorney-Client Privilege 6) there may not be a waiver of such privilege.
Attorney-client privilege is a common law Attorney-client privilege does not apply to
privilege; it is not based on any statute or communications to which no expectation of
rule of law. The privilege belongs to the confidentiality exists. For this reason, there is no
client, not to the attorney, and survives the privilege for information that will appear on tax
client’s death. The privilege provides returns, nor for communications related to
absolute protection against disclosure preparation of tax returns (e.g., preparatory
where it applies, unless it has been waived. computations).
Tax Practitioner-Client Privilege, I.R.C. § another representative of the client (e.g., an
expert in analysis), in anticipation of litigation.
The Supreme Court first announced the work-
The tax practitioner-client privilege is a
product doctrine in Hickman v. Taylor, 329 U.S.
statutory privilege provided by § 7525 of
495, 510 (1947), and it was later codified in
the I.R.C. The privilege applies to
Federal Rule of Civil Procedure Rule 26(b)(3).
communications between a taxpayer and a
Rule 26 (b)(3) provides that:
federally authorized tax practitioner, if
those communications involve the provision
“[A] party may obtain discovery of documents
of tax advice.
and tangible things otherwise discoverable
under subdivision (b)(1) of this rule and
Section 7525 incorporates the same
prepared in anticipation of litigation or for trial
elements as attorney-client privilege;
by or for another party or by or for that other
however, there are some limitations.
party’s representative … only upon a showing
1) The privilege is effective only for that the party seeking discovery has substantial
communications made on or after need of the materials in the preparation of the
July 22, 1998. party’s case and that the party is unable
without undue hardship to obtain the
2) The tax practitioner’s privilege is substantial equivalent of the materials by other
available only in noncriminal tax means.
matters before the IRS and
noncriminal tax proceedings in No protection exists for documents that would
Federal court brought by or against have been prepared regardless of possible
the United States. It provides no litigation, but documents that serve a dual
protection in state proceedings. purpose have received work-product protection
in some courts.
3) No protection exists for written
communications between a tax There are currently two different standards
practitioner and “a director, that courts use to evaluate whether documents
shareholder, officer, or employee, were prepared “in anticipation of litigation.” The
agent, or representative of a majority of circuits have adopted the “because of
corporation in connection with the litigation” test, which requires that “In light of
promotion of the direct or indirect the nature of the document and the factual
participation of such corporation in situation in the particular case, the document can
any tax shelter (defined in § fairly be said to have been prepared or obtained
6662(d)(2)(c)(iii)).” I.R.C. § 7525(b). because of the prospect of litigation.” U.S. v.
Aldman, 134 F.3d 1194 (2nd Cir. 1998).
4) Section 7525 does not provide any
protection for tax practitioners’ work- The Fifth Circuit continues to use the more
product. restrictive “primary motivating purpose” test,
which does not require that litigation creating the
privilege be imminent, but does require that the
primary motivating purpose behind creation of
the document is to aid in possible future
The work-product doctrine is a qualified
privilege that applies to materials prepared
There is a distinction between fact work-
by an attorney acting for his client, or by
product and opinion work-product as to the
scope of protection under the work-product asserted for materials that have been prepared in
doctrine. Fact work-product is discoverable anticipation of litigation. No similar requirement
only if the requesting party establishes exists for the attorney-client privilege.
“substantial need” for the materials and an
inability “to obtain the substantial The work-product doctrine applies to any
equivalent of the materials” from an materials prepared in anticipation of litigation,
alternative source “without undue not just communications from a client to his
hardship.” Fed. R. Civ. P. 26(b)(3). attorney or legal advice based upon those
For opinion work-product, a court “shall
protect against disclosure of the mental The attorney-client privilege provides absolute
impressions, conclusions, opinions, or legal protection where all of its elements have been
theories of an attorney or other satisfied. In contrast, the work-product doctrine
representative of a party concerning the is a qualified privilege.
litigation.” Fed. R. Civ. P. 26(b)(3).
However, there is no clear standard as to
what must be shown to obtain opinion Waiver of Privilege
work-product. To date, courts have
generally refused to determine whether Because of the different rationales underlying
opinion work-product enjoys absolute the attorney-client, tax practitioner-client, and
protection, or whether it might be work-product privileges, waiver analysis differs
discoverable upon a showing of substantial depending on which privilege is claimed:
need. The one rule that is clear is that no
privilege applies to opinion work-product 1) Disclosure of work-product to an adversary
where the materials are prepared in or a third party that could serve as a
furtherance of a criminal scheme. conduit to an adversary is generally
necessary to establish waiver of the work-
The Tax Court has taken a more product protection.
affirmative stance on the scope of the
protection provided by the work-product 2) Disclosure of documents to any third party
doctrine. In Zaetnz v. Commissioner, 73 waives the attorney-client privilege. Some
T.C. 469, 478 (1978), the court stated that courts apply the same analysis regardless
“under the Tax Court rules, the work- of whether the disclosure is voluntary or
product of counsel is not discoverable.” inadvertent.
Years later, in Ames v. Commissioner, 112
T.C. 304, 310-311 (1999), the court barred 3) Potential waiver of the tax practitioner’s
discovery of a document, noting that it fell privilege is analyzed under the same
“squarely within the work-product category standards as those applicable to the
because it contains an attorney’s mental attorney-client privilege.
impressions and conclusions.” But the
Courts also take differing positions on the
court implied that there was a balancing
scope of subject matter impacted by a waiver.
For attorney-client privilege and § 7525, the
expansive view is that waiver applies to the
document or communication disclosed and to all
Contrasting Work-product Protection
materials or communications dealing with the
and Attorney-client Privilege same subject matter. The restrictive view allows
the waiver to be limited to the portion of the
The work-product privilege can only be communication disclosed, and does not waive
privilege as to underlying communications. factually similar or based upon the same or
This view evaluates the scope of a partial similar tax strategy.
waiver pursuant to a fairness doctrine.
IRS written policy directs the exam team to
For the work-product doctrine disclosure contact Field Counsel if there is an issue as to
of fact, work-product does not constitute a whether the taxpayer engaged in a listed
waiver of protection applicable to opinion transaction. Where the issue is whether a
work-product. Also, subject matter waiver transaction is substantially similar to a listed
does not apply to opinion work-product. transaction, Field Counsel shall consult the
particular office of the Associate Chief Counsel
that wrote the listing notice in order to get a
Requesting Tax Accrual Workpapers definitive determination. Further, “the taxpayer
should be given an opportunity to explain why it
Tax accrual workpapers are often believes the transaction is not a listed transaction
requested by the IRS in connection with or substantially similar to a listed transaction.”
listed transactions. If a taxpayer has Tax Accrual Workpapers Frequently Asked
claimed the “benefits” of a listed Questions – July 28, 2005, answer to Q1.
transaction on a return, the IRS’s policy on
requesting tax accrual workpapers controls. The IRS policy for requesting workpapers is
Announcement 2003-63. For returns filed discussed in The Internal Revenue Manual
before July 1, 2002, the request will be (“IRM”) Part 126.96.36.199 (07-12-2004) available at
limited to the tax accrual workpapers http://www.irs.gov/irm/index.html. The IRM
pertaining only to the listed transaction. distinguishes between tax reconciliation
For returns filed after July 1, 2002, the workpapers and audit/tax accrual workpapers:
request will not be limited (unless the
1) Tax reconciliation workpapers should be
transaction was properly disclosed). It is
requested as a routine matter at the
important to note that the IRS will request
beginning of an examination. Ordinarily,
the tax accrual workpapers from both the
tax reconciliation workpapers are prepared
taxpayer and the accounting firm that
and provided by the taxpayer. If these
workpapers are unavailable from the
Under Treas. Reg. § 1.6011-4(c)(6), a tax taxpayer, access will be sought from the
benefit includes adjustments (or the taxpayer's accountants.
absence of adjustments) to the basis of
2) The general standard for requests for audit
property. Treas. Reg. § 1.6011-4 also
workpapers or tax accrual workpapers is
provides that a listed transaction
the unusual circumstances standard. This
specifically includes transactions that are
standard applies to all requests for audit
“substantially similar” to a listed
workpapers, requests for tax accrual
transaction. Whether a transaction is
workpapers that do not involve a listed
“substantially similar” involves applying the
transaction as defined in Treas. Reg. §
two-part test set out in Treas. Reg. §
1.6011-4, and to any request for tax
accrual workpapers involving a listed
1) the transaction must be expected to transaction for returns filed on or before
obtain the same or similar types of February 28, 2000. For the standard for
tax consequences, and requests for tax accrual workpapers
involving a listed transaction for returns
2) the transaction must be either filed after February 28, 2000, see IRM
Requests for Tax Accrual Workpapers Regions filed a motion to quash the summons
Involving Listed Transactions are covered in part, and instructed E&Y to withhold certain
by IRM Part 188.8.131.52.2 (07-12-2004). The documents on the grounds they were privileged
Supreme Court recognized the IRS’s right and therefore not subject to the IRS summons.
to obtain tax accrual workpapers in United The documents consisted of four core documents
States v. Arthur Young & Co., 465 U.S. 805 and sixteen derivative documents. The core
(1984), but the IRS announced that it documents expressed opinions, evaluated legal
would continue its policy of restraint and theories, and analyzed possible IRS attacks on
would not request tax accrual workpapers Regions’ tax reporting of the listed transactions.
as Three of the core documents were prepared by
a standard examination technique. Alston & Bird LLP, and one was created by
Announcement 84-46, 1984-18 I.R.B. 18. partners at E&Y. The derivative documents
However, in 2002, the IRS modified its discussed, quoted, or explained the core
historical policy of restraint with respect to documents, and generally consisted of emails,
tax accrual workpapers. memoranda, and other less formal documents
created by Regions or E&Y.
In general, the modified policy applies to
returns filed by taxpayers claiming benefits The court held that the documents had been
from listed transactions. Announcement prepared in anticipation of litigation, and,
2002-63, 2002-2 C.B. 72. A listed therefore, were protected by the work-product
transaction is defined in Treas. Reg. § privilege. Acknowledging a split among the
1.6011-4, and subsection (b)(2) defines circuits as to what test should be applied to
listed transactions to include substantially determine whether a document was prepared in
similar transactions. The policy governing anticipation of litigation, the court indicated that
requests for tax accrual workpapers varies the documents in this case would be protected
according to when the tax return was filed. using either the “because of litigation” or
“primary motivating purpose” tests. The court
Additional information relating to tax also concluded that the “primary motivating
accrual workpapers may be found on the purpose” test had not been adopted in any
Tax Accrual Workpapers Frequently binding decision in the Fifth or Eleventh Circuit,
Asked Questions website, available at but that “the Eleventh Circuit would align itself
http://www.irs.gov/businesses/corporations with the majority of the other courts of appeal
/article/0,,id=146242,00.html. and adopt the ‘because of litigation’ test” if
forced to choose one or the other. Regions, 2008
WL 2139008 at *5.
Summary of Relevant Cases
The rationale for protecting the documents was
Regions Financial Corp. v. United States, especially strong because (1) the documents,
2008 WL 2139008 (N.D. Ala. May 8, 2008). though they have had some utility outside of
litigation, would not have been created had
In 2006 the IRS served a summons on Regions not been primarily concerned with IRS
Ernst and Young (“E&Y”), Regions’ litigation regarding the transaction; and (2)
independent auditor for its 2002 and 2003 Regions sought only to withhold the mental
tax years. The summons was in connection impressions and legal theories of its counsel.
with a review of Regions’ tax liability for
2002 and 2003. As auditor, E&Y had been Notably, the court also held that Regions did
provided with documents related to two not waive the work-product privilege by
“listed transactions” involving Regions. disclosing the contested documents to its
independent auditor, E&Y. The court must demonstrate that the document is both
indicated that E&Y was not a potential predecisional and deliberative. To be
adversary of Regions. Furthermore, a predecisional, a communication must be
confidentiality agree- ment protected any generated before the adoption of an agency
documents that Regions gave to E&Y, policy, and to be deliberative it must reflect the
which prohibited E&Y from giving the “give-and-take of the consultative process.” Id.
documents to any other party. (citation omitted). Additionally, “[a]n agency
must identify the final decisions or decision
making processes to which a document
contributed.” Id. at 136 (citations omitted).
Mayer, Brown, Rowe & Maw LLP v. Internal
Revenue Service, 537 F. Supp. 2d 128 After an in camera review, the court found that
(D.D.C. 2008). some of the requested documents were
discloseable but that others were protected by
In January of 2004, Mayer, Brown, Rowe the deliberative process privilege. Disclosure was
& Maw submitted to the IRS three requests required of the following documents:
for records concerning certain IRS
documents under the Freedom of 1) A slide developed for internal training
Information Act (“FOIA”). The records were purposes and a cover email, because the
related to LILO (lease in, lease out) and items were not prepared to assist in the
SILO (sale in, lease out) transactions, types formulation of any agency policy; rather they
of transactions that are now frequently were used to brief IRS employees about a
litigated by the IRS. The initial dispute new policy after it was created.
involved approximately 30,000 documents,
the majority of which were resolved 2) An anonymous legal memo created after a
through prior litigation and a prior court ruling was finalized because the IRS did not
decision. A dispute remained over the final identify a relevant decisional process or
twenty-seven documents. explain how the document was predecisional.
The court also noted that, since there was no
The IRS withheld the remaining evidence that the document was shared with
twenty-seven documents on the grounds the anonymous author’s colleagues or
that they are covered under the superiors, it “could not contribute to the
deliberative process privilege decision process of agency policymaking
incorporated into FOIA exemption except in its most existential terms.” MBRM,
5 U.S.C.S. § 522(b)(5). “[The deliberative 537 F. Supp. 2d at 137.
process] privilege encompasses
documents reflecting advisory opinions, 3) Draft press releases because they did not
recommendations and deliberations have a bearing on policy formation.
comprising part of a process by which
4) IRS memos informing another Cabinet-level
governmental decisions and policies are
department head of a new revenue ruling
formulated, as well as other subjective
documents that reflect the personal because the letters “are not the type of
opinions of the writer prior to the documents that are a direct part of the
adoption of a policy.” MBRM, 537 F. deliberation process and they do not make
Supp. 2d at 134 (citations omitted). recommendations or express opinions on
legal or policy matters.” Id. at 139 (citations
To withhold a document under the
deliberative process privilege, an agency
The deliberate process privilege protected the
following documents: transactions were the same as or similar to those
identified in the Notice. The IRS issued a
1) Handwritten notations on a number of summons requesting all of Textron’s tax accrual
documents by various personnel workpapers for the tax year ending December
involved in drafting a specifically 29, 2001. The tax accrual workpapers requested
identified policy statement. Such notes consisted of counsels’ or accountants’ opinions
were found to be “related to issues that regarding (1) items that might be challenged by
the agency personnel debated and tried the IRS; (2) Textron’s likelihood of prevailing in
to address and resolve” during the litigation; and (3) estimates of tax liability and
policymaking process. Id. at 137. hazards of such litigation.
2) A portion of a summary of the status of Textron refused to produce the tax accrual
policymaking task forces highlighting workpapers, asserting that the summons was
policy recommendations under issued for an improper purpose and that the
consideration and areas that require workpapers are privileged. On April 27, 2003, the
additional analysis. IRS petitioned the United States District Court of
Rhode Island to enforce its summons.
3) A summary of the thoughts of then-
Chief Counsel B. John Williams as to The court determined that the tax accrual
whether a specific transaction should workpapers were protected by attorney-client
be scheduled for litigation, and privilege and by the § 7525 tax practitioner-client
identifying specific areas that required privilege, but held that these privileges had been
further development by field personnel waived when Textron disclosed the papers to its
and areas that should be focused on as independent auditor, Ernst and Young (“E&Y”).
the IRS contemplates settlement and Voluntary disclosure to a third party, even an
litigation of LILO transactions. independent auditor, waives attorney-client
privilege. Textron, 507 F. Supp. 2d at 151. The
tax practitioner-client privilege mirrors the
attorney-client privilege, so it too is waived by
United States v. Textron, 507 F. Supp. 2d disclosure to a third party. Id.
138 (D.R.I. 2007), appeal docketed, No.
07-2631 (1st Cir. Oct. 31, 2007) The court also held that Textron’s tax accrual
workpapers were protected by the work-product
Textron Financial Co. (“TFC”), a privilege, but that disclosure to E&Y did not
subsidiary of Textron Inc., entered into constitute a waiver of the privilege. In
leveraged lease transactions in 2001 and determining that the tax accrual workpapers
prepared tax accrual workpapers in were covered by the work-product privilege, the
connection with its various transactions. In court followed binding precedent in the First
April 2003, the IRS began an audit of Circuit and held that a document is prepared “in
Textron that included its 2001 tax year. anticipation of litigation” if it is prepared
The IRS issued over 101 IDRs in connection “because of” the prospect of litigation. The court
with TFC’s leveraged leases. reasoned that “the opinions of Textron’s counsel
and accountants regarding items that might be
On February 11, 2005, the IRS issued challenged by the IRS, their estimated hazards of
Notice 2005-13, which designates certain litigation percentages, and their calculation of tax
leveraged lease transactions as “listed reserve amounts would not have been prepared
transactions.” The revenue agent at all ‘but for’ the fact that Textron anticipated
examining Textron determined that a the possibility of litigation with the IRS.” Id. at
number of TFC’s leveraged lease
150. The court held that the documents requested
are not protected by the work-product privilege,
The court also explained that disclosure but are protected by the tax practitioner-client
of the tax accrual workpapers to E&Y did privilege. The court also found that the tax
not waive the work-product privilege shelter exception does not destroy Valero’s claim
because it “did not substantially increase of tax practitioner-client privilege.
the IRS’s opportunity to obtain information
contained in them.” Id. at 153. “Under the Binding precedent in the Seventh Circuit holds
AICPA Code of Professional Conduct that a document is protected under the work-
Section 301 Confidential Client Information, product doctrine “only when ‘the document can
E&Y had a professional obligation ‘not [to] fairly be said to have been prepared or obtained
disclos[e] any confidential client because of the prospect of litigation.’” Valero,
information without the specific consent of 2007 WL 4179464 at *5 (quoting Logan v.
the client.’” Id. Further, “E&Y expressly Commercial Union Ins. Co., 96 F.3d 971, 976-77
agreed not to provide the information to (7th Cir. 1996) (emphasis in original)). After an in
any other party, and confirms that it has camera review of the documents, the court
adhered to its promise.” Id. concluded “[t]he fact that Valero hired Arthur
Andersen with an eye toward the complex nature
of the transaction, and the possibility that the
IRS might investigate, does not support a
Valero Energy Corp. v. United States, No. contention that Arthur Andersen prepared its
06-C-6730, 2007 U.S. Dist. LEXIS 81526; materials because Valero or Andersen anticipated
2007 WL 4179464 (N.D. Ill. Aug. 23, 2007) actual litigation.” Id. at *6. Instead, the court
(not reported in F. Supp. 2d). categorized the documents as having been
prepared during the ordinary course of business.
On December 31, 2001, Valero Energy
Corp. (“Valero”) merged with a Canadian The court found that the documents sought
company. Arthur Andersen LLP provided were protected by the tax practitioner-client
Valero with tax advice for the merger. The privilege because Valero had “a reasonable belief
IRS issued an administrative summons that a confidential relationship existed.” Id. at *7.
directed to Arthur Andersen in November The court specified that the tax practitioner-client
2006, requesting books, papers, and other privilege is not contingent upon the existence of
records relating to the 2002 and 2003 a written agreement, and that it was clear that
federal tax liability of Valero and its employees of both Valero and Arthur Andersen
subsidiaries. The summons focuses on understood the communications between them
Valero’s deductions and claimed losses that to be confidential.
involve Canadian subsidiaries acquired in
the 2001 merger. In ruling that the tax shelter exception does
not destroy Valero’s claim of privilege, the court
Valero filed a petition to quash the noted that “Valero does not have to negate the
summons. The IRS then served a second applicability of the tax shelter exception; rather,
summons in January 2007 clarifying the the government has the burden of showing that
scope of the first summons, and it applies.” Id. at *9. This would have required
withdrawing its first summons. Valero also the government to show that the transaction was
petitioned the court to quash the second one in which tax avoidance was “a significant
summons, arguing that some of the purpose,” not merely one where tax avoidance
documents requested were protected by was “one of the purposes.” Id. Furthermore, the
the work-product privilege and the tax court noted that “[t]he tax shelter exception does
not apply to all advice about transactions or the timing of the taxpayer’s request for the
plans that might be considered tax shelters; outside accountants’ review was dubious since it
rather, it applies to communications ‘made occurred around the same time the taxpayer’s
in connection with the promotion of’ tax return was due. Finally, the documents were
participation in a tax shelter.” Id. at 10. not created in anticipation of litigation, but rather
The court found no evidence that were records created in the ordinary course of
communications between Valero and Arthur business. This conclusion was supported by the
Andersen promoted participation in a tax following findings of fact:
1) The taxpayer’s regular outside accounting
firm supplied the opinions.
United States v. Roxworthy, 457 F.3d 590 2) When the advice was requested, no litigation
(6th Cir. 2006). had been commenced, nor has been
commenced—other than the IRS seeking
In 1999, the taxpayer corporation these opinions.
engaged an outside auditor to evaluate the
tax implications of a $112 million loss 3) Other than broad generalizations, the
resulting from a sale of stock. The auditor taxpayer failed to offer any proof that the
provided two documents evaluating the opinions were created because of the
transaction’s tax consequences. Later, the prospect of actual litigation.
IRS audited the taxpayer’s 1997-1999 tax
years, and as part of its examination issued 4) The taxpayer failed to contravene the
an IDR. In response to the IDR, the inference that these documents were simply
taxpayer created, and produced to the IRS, created by the outside auditor as part of its
usual functions in the preparation of
a privilege log in which the taxpayer
taxpayer’s tax return.
asserted its belief that certain documents
were protected from disclosure by the
5) The documents did not bear a legend or
stamp containing the work-product
The IRS then issued an administrative designation.
summons seeking these documents and
The taxpayer filed objections to the
served it on the taxpayer’s vice president of
magistrate’s report with the district court and
tax, Patrick Roxworthy. When the IRS
was allowed to expand the record to include
sought to enforce its summons in court, a
additional affidavits and the depositions of its
show cause hearing was held in which the
general counsel and Roxworthy. United States v.
taxpayer was asked to establish that the
Roxworthy, No. 04-MC-18-C (W.D. Ky. 2005).
documents the IRS sought to be produced
However, the magistrate’s report was adopted by
were in fact protected by the work-product
the District Court on April 4, 2005.
The Court of Appeals for the Sixth Circuit
The magistrate determined that the
reversed and remanded the case and joined the
documents were not protected by the
majority of circuits by adopting the “because of”
work-product doctrine for a number of
test. This test questions whether the documents
reasons. First, the corporation sought tax
in issue were created “because of” the prospect
advice only after the transaction had been
of litigation. The test has two prongs, both of
completed, which was inconsistent with the
which require a fact-based analysis:
taxpayer’s stated need to assess the
litigation risks of the transaction. Second,
1) was the document created because the the court found “a document can be created for
taxpayer subjectively believed that both use in the ordinary course of business and
litigation was a real possibility; and in anticipation of litigation without losing its
work-product sic [protection].” Id. at 599.
2) was the taxpayer’s subjective
anticipation of litigation objectively
American Steamship Owners Mutual Protection
The court found the taxpayer subjectively and Indemnity and Association, Inc. v. Alcoa
believed litigation was a real possibility Steamship Co., Inc., No. 04 Civ 4309, 2006 WL
based on the language of the documents, 278131 (S.D.N.Y. 2006) (not reported in F. Supp.
which included phrases like “It is likely that 2d).
a court would agree with…” and “this issue
. . . may not be contested.” Roxworthy, 457 Defendants sought the disclosure of two
F.3d at 594. In addition, the expanded opinion letters prepared by counsel for Plaintiff.
record showed the taxpayer did not file its Plaintiff withheld the requested documents on
tax returns on March 15, as was assumed the basis that they were protected by the work-
in the magistrate’s report, and the product doctrine. Defendants argued that Plaintiff
taxpayer’s tax returns were prepared by in- failed to establish that the documents qualified
house tax professionals, not the outside for work-product protection. They further argued
accounting firm that analyzed the tax that, even if the documents did qualify for work-
consequences of the sale. Furthermore, the product protection, Plaintiff waived any immunity
issues assessed in the documents on which when it provided the letters to its actuary in
protection had been claimed were unsettled connection with a report the actuary prepared for
and had been the subject of other submission to the New York Insurance
litigation. Also, the loss was only a tax loss Department.
and would not be reflected on the
taxpayer’s books. Finally, the documents The court held that the Defendants’ assertion
were created after the transaction had that the letters are not work-product was simply
been entered into, so it could be inferred incorrect. Plaintiff is required to provide an
that the documents were created in opinion each year of a qualified independent
anticipation of litigation. loss-reserve specialist as to the adequacy of its
loss and loss adjustment expense reserves. The
The court also found the taxpayer’s letters at issue were used by the Plaintiff to
anticipation of litigation was objectively justify a reduction in the Plaintiff’s reserves based
reasonable because the amount of tax on termination of a discretionary practice that is
dollars at issue was substantial. The IRS the subject of litigation.
had previously questioned similar
transactions, and the documents The letters fit squarely within one of the
themselves appeared to discuss the facts hypothetical situations in United States v.
that would lead to litigation and to Adlman, 134 F.3d 1194, 1195 (2d Cir. 1998),
anticipate the series of events that could regarding materials being created because of
result from litigation. Id. at 600. business reasons and because of the prospect of
While the documents at issue were not
stamped as “work-product,” the case A business entity prepares financial
seems to indicate that this is a factor in statements to assist its executives,
determining whether certain documents are stockholders, prospective investors,
protected under the doctrine. In addition, business partners, and others in
evaluating future courses of action. auditing firm waived such protection.
Financial statements include
reserves for projected litigation. The court reviewed the unredacted minutes in
The company’s independent auditor camera to determine if the redacted portion was
requests a memorandum prepared within the scope of work-product protection.
by the company’s attorneys District Courts sitting in the Ninth Circuit apply
estimating the likelihood of success the “because of” test to determine whether any
in litigation and an accompanying materials created are protected from disclosure
analysis of the company’s legal by the work-product doctrine. The “because of”
strategies and options to assist it in test basically turns on whether the documents
estimating what should be reserved were created “because of” the anticipation of
for litigation losses. litigation.
Id. at 1200. The court held that one of the redacted
paragraphs was entitled to protection and that
Equally, if not more important, the court the paragraph immediately subsequent to the
found that Plaintiff’s disclosure of the protected paragraph was not entitled to work-
documents to its outside actuary did not product protection. The court explained that the
waive work-product protection. In doing so, reason for this finding was that the first
the court declined to follow Medinol, Ltd. v. paragraph specifically referred to its counsel
Boston Scientific Corp., 214 F.R.D. 113, providing legal advice to the board and this
115-17 (S.D.N.Y. 2002) which held work- language was absent in the second paragraph.
product protection was waived when
documents are disclosed to an independent The court also held that JDS Uniphase’s
auditor because the auditor serves a “public disclosure of the protected materials to its
watchdog” function adverse to its business auditing firm did not constitute a waiver of work-
client. Instead, the court found Medinol to product protection. However, the court, without
be in direct conflict with the Adlman elaborating, limited this holding to the facts of
hypothetical reproduced above. this particular case.
In re JDS Uniphase Corporation Securities Moore v. Commissioner, T.C. Memo 2004-259.
Litigation, No. C-02-1486, 2006 WL
2850049 (N.D.Cal. filed Oct. 6, 2006). The IRS determined deficiencies in the Moores’
1999 and 2000 Federal income taxes. One issue
In 2005, the lead Plaintiff made a request for decision was in connection with Ms. Moore’s
for the production of documents seeking, membership interest in the Surgery Center of
among other things, the production of Georgia, LLC (“LLC”). To support their claim that
minutes from a meeting of JDS Uniphase’s Ms. Moore’s interest in LLC did not exceed
Board of Directors. Defendant produced a two percent, the Moores offered two documents
redacted copy of the minutes, taking the under seal. United Surgical Partners Int’l, Inc.
position that the redacted portions were (“International”), LLC’s parent entity and an
entitled to work-product protection. The affected person under T.C. Rule 103, made a
lead Plaintiff filed a motion to compel motion to prevent disclosure of these documents
discovery in which it argued that the at trial. International’s claim was based on the
minutes were not protected by the work- attorney-client privilege.
product doctrine and, even if they were,
Defendant’s disclosure of the minutes to its The court first discussed the attorney-client
privilege generally. It stated that connection with its investigation of possible
communications not made in confidence liability for failing to disclose potentially abusive
and not for the purpose of obtaining legal tax shelters. After explaining that § 7525 applies
advice are not protected by the attorney- to tax advice to the same extent that the
client privilege. However, when a client attorney-client privilege applies to legal advice,
expects communications to his attorney for the court held that no identity privilege existed
the purpose of obtaining legal advice to for the clients.
remain confidential, the attorney-client
privilege applies, even if the The court concluded that the disclosure of the
communication contains non-confidential taxpayers’ identities would not reveal their
information. motives for becoming clients and participating in
transactions described in summonses. As a
The court next analyzed who held the result, no confidential communications would be
attorney-client privilege in the Moore case. disclosed if their identities were revealed.
The communications at issue had occurred Additionally, the court explained that §§ 6111
between LLC’s attorney and LLC. To and 6112, which set forth the registration and
decide this issue, the court turned to state listing requirements for organizers and sellers of
law. Under Georgia law, LLC was potentially abusive tax shelters, prevented
considered a separate Person from investors from having an expectation of
International, and the manager has the confidentiality regarding their participation in the
authority to assert or waive the attorney- transactions.
client privilege on behalf of LLC.
The case was returned to District Court and,
Finally, the court analyzed the issue of following the Seventh Circuit’s opinion, the court
whether the privilege had been waived. considered BDO Seidman’s assertions of privilege
The court noted that waiver can be as to 110 documents. The court concluded that
expressed or implied. In this case, it was all but six of those documents were protected by
clear the confidentiality of these documents the attorney-client privilege or the work-product
had been breached since the IRS had doctrine. No. 02 C 4822, 2004 WL 1470034
attached them as part of its court filings, (N.D. Ill. June 29, 2004).
which had apparently been provided by the
Moores or by International during one of its 1) The court rejected the government’s
previous audits. The court thus held that argument that outside law firms were co-
the attorney-client privilege had been promoting tax shelters, rather than providing
waived either by LLC’s own disclosure or legal advice to BDO Seidman, concluding that
otherwise. Part of this holding was due to the government had failed to present
LLC’s own failure to take the necessary adequate proof to support its co-promotion
precautions to preserve the confidentiality argument.
of the privileged material.
2) The court rejected the government’s
argument that BDO Seidman waived the
attorney-client privilege with respect to
United States v. BDO Seidman, 337 F.3d certain memoranda by disclosing the
802 (7th Cir. 2003). contents of those documents to a co-
promoter, concluding that the letter to the
Clients of BDO Seidman, an accounting co-promoter did not disclose the substance
firm, asserted a claim of identity privilege in of the memoranda.
response to an IRS summons directing BDO
Seidman to produce documents sought in 3) The court concluded that six of the
documents were protected from privilege was available. The court focused on the
disclosure by the work-product doctrine Seventh Circuit’s discussion of §§ 6111 and 6112,
because they were prepared in and expressed reservations about the
anticipation of litigation. government’s use of §§§ 6111, 6112, and 7602
to pursue “subsidiary targets,” i.e., Andersen’s
4) The court rejected the government’s former clients, because of conflicting interests
argument that the crime-fraud between Andersen and its clients.
exception to the attorney-client
privilege eliminated the availability of The court did not make a ruling regarding the
that privilege: “This court cannot infer, availability of any privilege for responsive files in
based on a review of the documents Andersen’s possession.
and bearing in mind the government’s
contentions, that BDO sought legal
advice from outside or in-house counsel
to perpetuate a crime or fraud, Doe v. KPMG LLP, No. 3:03-CV-2036-H, 2004 WL
particularly in light of the uncertain and 797719 (N.D. Tex. April 12, 2004).
complex nature of the Internal
Revenue Code and the regulations Anonymous plaintiffs filed this action seeking
thereunder.” injunctive and declaratory relief to prevent KPMG
from disclosing their identities to the IRS in
connection with an administrative summons
served on KPMG. No summons enforcement
United States v. Arthur Andersen, LLP, 273 action had been instituted by the United States.
F. Supp. 2d 955 (N.D. Ill. July 2, 2003);
2003 WL 21956404 (Aug. 15, 2003). The court held that the plaintiffs’ identities
were not privileged under § 7525. The court
Former clients of Arthur Andersen explained that the disclosure of the plaintiffs’
challenged the enforceability of summonses identities would reveal their participation in the
directing Andersen to reveal the identities tax shelters, but it would not disclose any
of investors and to produce documents confidential communications regarding those tax
sought by the government in connection shelters.
with its investigation of Andersen’s
potential liability for failing to register and The court also concluded that the plaintiffs
disclose potentially abusive tax shelters. lacked a reasonable expectation that their
The clients asserted a claim of identity identities or their participation in the tax shelter
privilege to prevent the disclosure of their would be confidential. First, the plaintiffs had
identities, and a claim of attorney-client informed KPMG of their participation in the tax
and/or § 7525 privilege to prevent the shelter so that KPMG could complete their tax
production of responsive files in Arthur returns. Second, interpreting BDO Seidman, the
Andersen’s possession. court concluded that §§ 6111 and 6112 eliminate
any reasonable expectation of privacy as to
The court held that no identity privilege participation in a tax shelter. Finally, the court
was available for Andersen’s former clients. reasoned that even if the plaintiffs did not believe
In its initial order, which preceded the that KPMG would be required to disclose their
Seventh Circuit’s opinion in BDO Seidman, identities under § 6112, the plaintiffs would have
the court held that identity privilege was had to disclose their participation in the tax
available, but in its second order, the court shelter if they were audited, because the losses
held that in light of Seventh Circuit’s resulting from their participation in the tax
opinion in BDO Seidman, no identity shelter appeared on their tax returns, stating
“[k]nowing that any information included information with Wachovia Bank.
on a tax return could be questioned during
an audit, Plaintiffs could not have
reasonably believed their participating in
the tax shelter was confidential.” United States v. KPMG LLP, Misc. No. 02-0295
(D.D.C. May 4, 2004).
KPMG challenged the enforceability of
Doe v. Wachovia Corp., 268 F. Supp. 2d summonses requesting information and materials
627 (W.D.N.C. 2003). related to the IRS’s “examination of KPMG’s
promotion of and participation in transactions
Two groups of intervenors sought to that the IRS contends are tax shelters.” KPMG
prevent Wachovia from complying with argued that many of the documents in its
administrative summonses seeking possession are protected by one or more
documents and investor lists pertaining to privileges, including the attorney-client privilege,
potentially abusive tax shelters. The court § 7525, and the work-product doctrine.
concluded that neither § 7525 nor attorney-
client privilege applied. In an order dated December 20, 2002, the
court equated § 7525 with the attorney-client
Section 7525 did not apply because the privilege. The court explained that the tax
proceeding did not involve the United practitioner’s privilege applies when practitioners
States as a party, nor was it a tax are performing lawyers’ work, but not when they
proceeding before the IRS. Also, the are performing functions related to the
transactions at issue involved the preparation of tax returns. US v. KPMG, 237 F.
participation of a corporation; thus, the Supp. 2d 35 (D.D.C. 2002).
exceptions set forth in § 7525(b) for
communications between a representative The court then concluded that many
of a corporation in connection with the documents for which the tax practitioner’s
promotion of the direct or indirect privilege was claimed were not privileged
participation of such corporation in any tax because they were prepared in conjunction with
shelter applied. Finally, any advice provided the preparation of a tax return. To reach this
by accountants was in the context of the conclusion, the court adopted a broad view that
preparation of tax returns, and there is no any documents relating to the federal income tax
privilege for materials that will appear on a consequences of a transaction were prepared in
tax return, nor for communications related conjunction with a tax return. Additionally, the
to the preparation of tax returns. court concluded that the attorney-client privilege
applies to documents to which § 7525 did not
The attorney-client privilege did not apply apply. This conclusion appears to be inconsistent
because no attorney-client relationship with the court’s explanation of § 7525.
existed between the intervening plaintiffs
and the law firm. The law firm had not A magistrate judge issued a Report and
provided any legal advice tailored to Recommendation (“R&R”) after conducting an in
individuals; instead, the legal advice was camera examination of all documents listed on
generic, applicable to any investor in the KPMG’s privilege logs. 2003 WL 22336072 (Oct.
marketed transaction. Furthermore, any 8, 2003). The R&R concluded that § 7525 applies
privilege that might have applied was to tax advice regarding a specific client’s
waived by virtue of the promotion of the circumstances but does not apply to
transactions and the relevant legal advice communications related to the preparation of tax
to multiple investors and the sharing of the returns or containing general tax advice
unrelated to a specific client. The R&R also 5) The court explained that any documents that
concluded that in many instances both § support items reported on a federal tax
7525 and the attorney-client privilege return were not privileged, nor did any
applied. privilege apply to documents related to
activities that KPMG engaged in as part of its
In reviewing the magistrate judge’s R&R, development and sale of tax shelter
the court revisited the privilege issues and products.
clarified its December 2002 order in a
memorandum opinion dated May 4, 2004.
US v. KPMG, 316 F. Supp. 2d 30 (D.D.C.
2004). The privilege clarifications included Long Term Capital Holdings v. United States, No.
the following: 3:01 CV 1290 (JBA), 2002 WL 31934139 (D.
Conn. Oct. 30, 2002); 2003 WL 1548770 (Feb.
1) The court concluded that the identities 14, 2003).
of the KPMG clients were not
privileged, relying upon the analysis set The taxpayer corporation had Shearman &
forth in the Seventh Circuit’s opinion in Sterling LLP (“S&S”) and King & Spalding LLP
BDO Seidman, and in the district (“K&S”) prepare opinion letters relating to losses,
courts’ orders in Doe v. Wachovia Corp. which the taxpayer claimed on its 1997 tax
and Doe v. KPMG LLP. return. The taxpayer’s tax returns were later the
subject of an audit by the IRS, and during the
2) The court observed that “KPMG has audit the taxpayer shared several legal opinions
taken steps since the IRS investigation provided by S&S but withheld the legal opinions
began that have been designed to hide issued by K&S. The K&S opinions were withheld
its tax shelter activities. In doing so, on the grounds that they were protected by the
KPMG has cast doubt over its privilege attorney-client privilege and the work-product
3) The court expressed the view that the In its initial ruling, the court held that the
Brown & Wood opinion letters as to attorney-client privilege did not apply to the K&S
which KPMG asserted claims of opinion letter, but that the work-product doctrine
privilege were “boiler-plate templates” applied to that opinion letter. The court
without any independent legal analysis concluded that the two opinion letters dealt with
focusing upon a particular client, noting the same subject matter, so the voluntary
that they “appear to be nothing more disclosure of the S&S opinion letter resulted in a
than an orchestrated extension of subject matter waiver as to the opinion letter
KPMG’s marketing machine.” KPMG prepared by K&S. Additionally, although the K&S
was given ten days to provide a more opinion remained confidential, the taxpayer
detailed privilege log for the opinion informed its accountants of the conclusion
letters. reached therein (that a desired deduction “more
likely than not” was permissible). The court held
4) The court concluded that documents that by disclosing the conclusion of the K&S
discussing legal or tax advice that opinion letter to its accountants, the taxpayer
neither included nor were based upon waived the attorney-client privilege.
confidential information communicated
to a lawyer or tax practitioner by a After the taxpayer filed a motion for
client or prospective client were not reconsideration and the government filed a
privileged. motion for clarification, the court issued a second
order that modified its initial order. The court
concluded that the two opinion letters counsel to establish an affirmative defense that
addressed different subject matters and would avoid the imposition of penalties without
therefore required independent analysis for waiving attorney-client privilege as to the
the purpose of the attorney-client privilege. substantive tax issues.
1) The S&S opinion letter was not The debtors argued that bifurcation was
protected by the attorney-client necessary to avoid the prejudice of premature
privilege because it was a required waiver of the attorney-client privilege, but the
component of the taxpayer’s books and court refused to bifurcate the proceeding into a
records and was never intended to be substantive tax phase and a penalty phase. The
kept confidential. As a result, the court concluded that the debtors had waived the
disclosure of the S&S opinion letter did attorney-client privilege by presenting a
not constitute a subject matter waiver reasonable-cause affirmative defense in their
affecting the availability of any response to one of the government’s
privileges for the K&S opinion letter. interrogatories. That response stated that the
debtors had reasonable cause for the tax
2) The disclosure of the “gist” of the K&S treatment of the challenged transaction based
opinion letter waived the attorney- upon, among other things, their consultations
client privilege as to that limited portion with outside legal counsel. The court also held
of the letter, but did not constitute a that the debtors’ waiver of their right to assert
waiver as to the underlying reasoning. the attorney-client privilege extended to any
communications pertaining to the subject matter
The court’s second order reiterated its of the challenged transaction.
holding that the K&S opinion letter was
prepared in anticipation of litigation and
was therefore protected by the attorney
work-product doctrine. Moreover, the Diversified Group, Inc. v. Daugerdas, 139 F.
protection provided by the work-product Supp. 2d 445 (S.D.N.Y. 2001); 217 F.R.D. 152
doctrine for the K&S opinion letter (July 30, 2003); 2003 WL 22077466 (Sept. 5,
remained intact despite the limited waiver 2003).
of the attorney-client privilege that would
have applied to that letter. Following the settlement of a lawsuit brought
by a marketer of tax strategies against its
attorney for breach of fiduciary duty, breach of
contract, and unjust enrichment, legal publisher
In re G-I Holdings Inc., 218 F.R.D. 428 American Lawyer Media, Inc. (“ALM”) filed a
(D.N.J. 2003). motion to intervene. ALM sought to gain access
to documents that had been filed under seal by
The Commissioner asserted that two the original parties to the litigation.
corporations had tax deficiencies based
upon the determination that a partnership The court granted ALM’s motion to intervene
transaction constituted a taxable sale rather and concluded, as a preliminary matter, that the
than a nontaxable contribution to capital attorney-client privilege can apply to the
under § 721(a). The corporations moved to provision of legal advice by a lawyer that relates
bifurcate discovery and the trial into two to a tax shelter. The court then referred the case
stages, one involving substantive tax issues to a Special Master to issue a recommended
and the second addressing potential ruling regarding which, if any, of the sealed
penalties. Their goal was to arrange things documents were protected by the attorney-client
so that they could rely on the advice of privilege.
The court ultimately adopted the Special confidential communications pertaining to the
Master’s recommendation, concluding that provision of legal advice, and those
the attorney-client privilege did not apply to communications do not appear in the final
the majority of the sealed documents: version of the documents.
1) Certain communications that pre-dated 4) The parties waived the right to assert the
the engagement letter were not attorney-client privilege as to their deposition
privileged because those documents by failing to invoke the privilege when they
revealed a desire to obtain business were deposed.
advice rather than legal advice.
5) Certain legal memoranda were not protected
2) Invoices were not privileged because by the attorney-client privilege because they
they did not contain any confidential were not prepared in response to specific
attorney-client communications. requests for legal advice from potential
clients but instead “were intended as
3) Marketing materials provided to the educational materials to solicit new clients for
attorney were not privileged, because the purpose of selling them tax strategies.”
they were not provided for the purpose
of obtaining legal advice. The court 6) No redaction of the identities of third parties
recognized, however, that drafts of was necessary because the documents did
documents that are ultimately intended not reveal whether any of the third parties
to be released to the general public can ultimately purchased the tax shelters.
be privileged if those drafts reflect
Daniel A. Dumezich Larry R. Langdon Gary S. Colton, Jr.
Mayer Brown LLP Mayer Brown LLP Mayer Brown LLP
71 S. Wacker Dr. Two Palo Alto Square, Ste. 300 71 S. Wacker Dr.
Chicago, IL 60606 Palo Alto, CA 94306 Chicago, IL 60606
(312) 701-7822 (650) 331-2075 (312) 701-7928
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