Schaeffler v. United States , 806 F.3d 34 ( 2015 )

14-1965-cv
Schaeffler v. USA
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2014
(Argued: April 16, 2015 Decided: November 10, 2015)
Docket No. 14-1965-cv
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GEORG F.W. SCHAEFFLER, SCHAEFFLER HOLDING GMBH & CO. KG, INA-
HOLDING SCHAEFFLER GMBH & CO. KG, SCHAEFFLER HOLDING, LP,
Petitioners-Appellants,
v.
UNITED STATES OF AMERICA,
Respondent-Appellee.
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B e f o r e: WINTER, WALKER, AND DRONEY, Circuit Judges.
Appeal from a denial of a petition to quash an IRS
summons by the United States District Court for the Southern
District of New York (Gabriel W. Gorenstein, Magistrate Judge).
We hold that the attorney-client privilege was not waived by the
sharing of documents with a consortium of banks having a common
legal interest with appellants and that the summons sought
materials protected by the work-product doctrine. We vacate and
remand.
1
M. TODD WELTY (Mark P. Thomas, Laura L.
Gavioli, Richard D. Salgado, on the brief)
Dentons US LLP, Dallas, TX, for Petitioners-
Appellants.
REBECCA S. TINIO, Assistant United States
Attorney (Preet Bharara, United States
Attorney for the Southern District of New
York, Emily E. Daughtry, Assistant United
States Attorney, New York, NY, of counsel),
for Respondent-Appellee.
Amar Sarwal, Wendy Ackerman, Association of
Corporate Counsel, Washington, DC, for Amicus
Curiae Association of Corporate Counsel.
Kate Comerford Todd, Warren Postman, U.S.
Chamber Litigation Center, Inc., Washington,
DC, Robert A. Long, Reeves C. Westbrook,
Marianna Jackson, Jason Yen, Covington &
Burling LLP, Washington, DC, for Amicus
Curiae Chamber of Commerce of the United
States of America.
WINTER, Circuit Judge:
Georg F.W. Schaeffler (“Mr. Schaeffler” or “Schaeffler”) and
associated entities (“Schaeffler Group”) (collectively
“appellants”) appeal from Magistrate Judge Gorenstein’s order
denying a petition to quash an IRS summons.1 We conclude that:
(i) the attorney-client privilege was not waived by appellants’
provision of documents to a consortium of banks (“Consortium”)
sharing a common legal interest in the tax treatment of a
refinancing and corporate restructuring resulting from an ill-
fated acquisition originally financed by the Consortium; and (ii)
1
This court has jurisdiction under I.R.C. § 7609(h)(1) which allows, inter
alia, appellate review of an order denying a petition to quash an IRS summons.
2
the work-product doctrine protects documents analyzing the tax
treatment of the refinancing and restructuring prepared in
anticipation of litigation with the IRS. We therefore vacate and
remand.
BACKGROUND
The pertinent facts are not in dispute.
a) The Acquisition
The Schaeffler Group is an automotive and industrial parts
supplier incorporated in Germany. Mr. Schaeffler, a resident of
Dallas, Texas, is an 80% owner of the ultimate parent of the
Schaeffler Group. This appeal arises from an attempt by the
Schaeffler Group to acquire a minority interest in a German
company, Continental AG, through a tender offer for its stock.
German law prohibits tender offers that seek less than all of a
company’s shares. As a result, a partial offer can be
accomplished only by setting an offering price estimated to
result in the acquisition of the desired number of shares. This
course was followed by the Schaeffler Group with regard to
Continental AG.
To finance the offer, the Schaeffler Group executed an
eleven-billion Euro loan agreement with a consortium of banks.
On July 30, 2008, the offer was made with an acceptance period
ending on September 16, 2008. Because of German law, the timing
of the offer was unlucky, to say the least. On September 14,
3
2008, two days before the end of the acceptance period, Lehman
Brothers Holding Inc. announced its bankruptcy, the stock market
collapsed, and the economic crisis worsened. The market price of
Continental AG shares, already declining, fell accordingly.
Because German law prohibited the Schaeffler Group from
withdrawing its tender offer, far more shareholders than expected
or desired accepted the offer, leaving the Schaeffler Group the
owner of nearly 89.9% of outstanding Continental AG shares.
These circumstances combined to threaten the Schaeffler
Group’s solvency and ability to meet its payment obligations to
the Consortium. As a result, appellants and the Consortium
perceived an urgent need to refinance the acquisition debt and to
restructure the Schaeffler Group. Under United States law,
because Mr. Schaeffler is an 80% owner of the ultimate parent of
the Schaeffler Group, the tax consequences of his companies’ debt
refinancing and restructuring substantially affected his personal
tax liability to the IRS. Given the complex and novel
refinancing and restructuring that ensued, appellants anticipated
scrutiny by the IRS. Therefore, they retained Ernst & Young
(“EY”) and Dentons US LLP (“Dentons”) to advise on the federal
tax implications of the transactions and possible future
litigation with the IRS.
As anticipated, the IRS began an audit of appellants that
led to the issuance of the summons at issue in this appeal. The
4
summons sought "all documents created by Ernst & Young, including
but not limited to legal opinions, analysis and appraisals, that
were provided to parties outside [appellants], that relate to
[the restructuring]." The summons did not request documents
prepared by Dentons, appellants’ law firm, or those shared only
among their counsel and EY. Appellants produced several thousand
documents in response to the information document request from
the IRS but sought to quash the demand for legal opinions. For
example, appellants sought to withhold memoranda, such as an EY
memorandum (“EY Tax Memo”) that identified potential U.S. tax
consequences of the refinancing and restructuring, identified and
analyzed possible IRS challenges to the Schaeffler Group’s tax
treatment of the transactions, and discussed in detail the
relevant statutory provisions, U.S. Treasury regulations,
judicial decisions, and IRS rulings.
b) The District Court’s Ruling
In denying the petition to quash, the district court held
that appellants had waived their attorney-client privilege by
sharing the withheld documents with the Consortium. The court
noted that “[b]y all accounts, the Schaeffler Group, Ernst &
Young, and Dentons worked closely with the Bank Consortium not
only in effectuating the refinancing and restructuring but also
in analyzing the tax consequences of the [Continental AG]
5
acquisition.”2 Sp. App’x at 6. The court held that the “common
legal interest” or “joint defense privilege” exception to the
waiver by third-party disclosure rule did not apply.3 In the
court’s view, the Consortium “lack[ed] . . . any common legal
stake in Schaeffler’s putative litigation with the IRS,” because
it would not be named as a co-defendant in the anticipated
litigation and “only the Consortium’s economic interests,” as
opposed to its legal interests, “were in jeopardy.” Sp. App’x at
20. Therefore, appellants and the Consortium did not have a
common legal interest and were not “formulating a common legal
strategy.” Accordingly, appellants’ attorney-client privilege
had been waived. Sp. App’x at 15 (internal quotation marks
omitted).
The district court also rejected appellants’ claim that the
documents in question were protected under the work-product
doctrine. It first ruled that work-product protection had not
been waived by the sharing of information with the Consortium
2
When the Schaeffler Group and the Consortium agreed to share legal analyses,
they signed an agreement, styled the “Attorney Client Privilege Agreement.” Of
course, the title of that agreement was not binding on the district court and is not
binding on us. The Agreement is relevant, however, to the issues of whether the
Schaeffler Group and the Consortium maintained confidentiality with regard to third
parties and were pursuing a common legal interest.
3
Title 26 U.S.C. § 7525(a)(1) provides that “the same common law protections of
confidentiality which apply to a communication between a taxpayer and an attorney
shall also apply to a communication between a taxpayer and any federally authorized
tax practitioner to the extent the communication would be considered a privileged
communication if it were between a taxpayer and an attorney.” This “tax practitioner
privilege” is, therefore, essentially coterminous with the attorney-client privilege
both in scope and in waiver. See United States v. BDO Seidman, 337 F.3d 802, 810 (7th
Cir. 2003).
6
because the disclosure was “in furtherance of Schaeffler and the
Bank Consortium’s common commercial desire to avoid Schaeffler’s
default and insolvency.” Sp. App’x at 26. It reasoned that the
common interests of appellants and the Consortium were
sufficiently strong as to not “materially increase[] the
likelihood of disclosure [of protected information] to an
adversary.” Sp. App’x at 27 (internal quotation marks omitted)
(alteration in original).
However, the district court held that the EY Tax Memo and,
presumably, other similar documents were not entitled to
work-product protection. After conducting an in camera review of
the EY Tax Memo, the district court described it as containing:
(i) “detailed legal analysis of the federal tax issues
implicated,” (ii) “assert[ions] that there is no law clearly on
point,” (iii) “language such as ‘although not free from doubt,’
‘the better view is that,’ ‘it may be argued,’ and ‘it is not
inconceivable that the IRS could assert’; and (iv) “arguments and
counter-arguments that could be made by Schaeffler and the IRS
with regard to the appropriate tax treatment of [the refinancing
and restructuring].” Sp. App’x at 28.
The district court noted that the EY Tax Memo “does not
specifically refer to litigation . . . by discussing what actions
peculiar to the litigation process [the parties] might take or
what settlement strategies might be considered.” Id. The court
7
concluded that appellants would have engaged in the “detailed and
complex process of resolving” the unusual tax issues even if they
did not anticipate any litigation. Sp. App’x at 29. It reasoned
that “Schaeffler is a rational businessperson” who “would have
sought out the type of tax advice provided by Ernst & Young about
the transaction had he not been concerned about an audit or
litigation with the IRS.” Sp. App’x at 30-31. Because “any
sophisticated businessperson engaging in a complex financial
transaction will naturally wish to obtain advice on the relevant
tax laws so that the transaction can be structured in such a way
as to receive the most favorable tax treatment possible,” the
court ruled that, “given our assumption that Schaeffler is a
rational businessperson who routinely makes efforts to comply
with the law, we find that, even had he not anticipated an audit
or litigation with the IRS, he still would have had to obtain the
type of legal assistance provided by Ernst & Young to carry out
the refinancing and restructuring transactions in an appropriate
manner.” Sp. App’x at 30-31.
The court further stated that “petitioners have presented no
facts suggesting that Ernst & Young would have acted any
differently” or given advice “different in content or form had it
known that no audit or litigation would ensue.” Sp. App’x at 31.
In support, the district court relied upon a Treasury Department
Circular and a Treasury regulation regarding tax shelters that
8
forbid tax practitioners from taking into account “the
possibility that a tax return will remain unaudited” in providing
tax advice to clients. Sp. App’x at 31. The court read this
regulation to require EY to provide Schaeffler with exactly the
information contained in the EY Tax Memo, in exactly the same
form, regardless of the likelihood of an IRS audit. The court
also relied on its view that the language of the EY Tax Memo did
not “indicate that the authors are describing any particular
anticipated litigation,” notwithstanding the document’s detailed
discussion of legal strategies. Sp. App’x at 33. Accordingly,
the court ruled that the EY Tax Memo and related documents were
not protected from disclosure under the work-product doctrine.
DISCUSSION
a) Waiver of the Attorney-Client Privilege
We review the district court's finding of waiver of the
attorney-client privilege for abuse of discretion. In re Grand
Jury Proceedings, 219 F.3d 175, 182 (2d Cir. 2000). An abuse of
discretion occurs when a district court: (i) bases a decision on
an error of law or (ii) makes a factual finding that is clearly
erroneous or outside the range of permissible decisions. Zervos
v. Verizon N.Y., Inc., 252 F.3d 163, 169 (2d Cir. 2001).
The IRS summons seeks only those documents prepared by EY
"that were provided to parties outside the Schaeffler Group." J.
App’x at 46. There being no evidence indicating disclosure of
9
some or all of the documents beyond the Consortium, we need
determine the effect of disclosure to the Consortium. As noted,
the district court held that appellants waived that privilege by
sharing the contested documents with the Consortium because the
Consortium's interest was commercial rather than legal.
The purpose of the attorney-client privilege is to enable
attorneys to give informed legal advice to clients, which would
be undermined if an attorney had to caution a client about
revealing relevant circumstances lest the attorney later be
compelled to disclose those circumstances. The privilege, and by
extension the tax practitioner privilege, see Note 3, supra,
protects communications between a client and its attorney that
are intended to be, and in fact were, kept confidential. A party
that shares otherwise privileged communications with an outsider
is deemed to waive the privilege by disabling itself from
claiming that the communications were intended to be
confidential. Moreover, the purpose of the communications must
be solely for the obtaining or providing of legal advice. United
States v. Mejia, 655 F.3d 126, 132 (2d Cir. 2011). See In re
John Doe Corp., 675 F.2d 482, 488 (2d Cir. 1982). Communications
that are made for purposes of evaluating the commercial wisdom of
various options as well as in getting or giving legal advice are
not protected. See In re Grand Jury Subpoena Duces Tecum Dated
Sept. 15, 1983, 731 F.2d 1032, 1037 (2d Cir. 1984).
10
While the privilege is generally waived by voluntary
disclosure of the communication to another party, the privilege
is not waived by disclosure of communications to a party that is
engaged in a “common legal enterprise” with the holder of the
privilege. Under United States v. Schwimmer, 892 F.2d 237 (2d
Cir. 1989), such disclosures remain privileged “where a joint
defense effort or strategy has been decided upon and undertaken
by the parties and their respective counsel . . . in the course
of an ongoing common enterprise . . . [and] multiple clients
share a common interest about a legal matter.” Id. at 243
(internal citations and quotation marks omitted). "The need to
protect the free flow of information from client to attorney
logically exists whenever multiple clients share a common
interest about a legal matter." Id. at 243 (citing Daniel J.
Capra, The Attorney-Client Privilege In Common Representations,
20 Trial Law. Q., Summer 1989, at 21).
Parties may share a “common legal interest” even if they are
not parties in ongoing litigation. Id. The common-interest-rule
serves to "protect the confidentiality of communications passing
from one party to the attorney for another party where a joint
defense effort or strategy has been decided upon and undertaken
by the parties and their respective counsel." Id. at 243. "[I]t
is therefore unnecessary that there be actual litigation in
progress for the common interest rule of the attorney-client
11
privilege to apply[.]" Id. at 244 (citations omitted). However,
"[o]nly those communications made in the course of an ongoing
common enterprise and intended to further the enterprise are
protected." Id. at 243. The dispositive issue is, therefore,
whether the Consortium's common interest with appellants was of a
sufficient legal character to prevent a waiver by the sharing of
those communications. We hold that it was.
The original relationship between the Schaeffler Group and
the Consortium arose before the economic crisis and the resultant
oversubscription to the Schaeffler Group’s tender offer that
necessitated the refinancing and restructuring. However, once
the tender offer was made, the relationship was altered. Because
the tender offer could not be withdrawn under German law, the
Consortium and the Schaeffler Group were, respectively, locked
into the loan and to the offering price. As a result of the
oversubscription, the Schaeffler Group faced a threat of
insolvency that would in turn cause a default on the Consortium’s
eleven-billion Euros loan. The Group and the Consortium could
avoid this mutual financial disaster by cooperating in securing a
particular tax treatment of a refinancing and restructuring.
Securing that treatment would likely involve a legal encounter
with the IRS. Both appellants and the Consortium, therefore, had
a strong common interest in the outcome of that legal encounter.
12
On this record, the nature and viability of the refinancing
and restructuring had a commercial component and tax law
component. Of course, the final transaction had to fit the need
of the Schaeffler Group to conduct its business efficiently.
Otherwise, the nature and viability of the transaction was driven
by U.S. tax law, and both appellants and the Consortium had a
common interest in seeing that law applied in a particular way.
The documents in question were all directed to the tax issues, a
legal problem albeit with commercial consequences, namely the
possible insolvency of the Schaeffler Group and its default on
the Consortium loan. Appellants’ interest was in securing a
refinancing. The Consortium’s interest was in funding a
refinancing that would protect its earlier investment and would
itself be repaid, goals dependent on the resolution of legal tax
issues. The fact that eleven-billion Euros of sunken investment
and any additional sums advanced in the refinancing were at stake
does not render those legal issues “commercial,” and sharing
communications relating to those legal issues is not a waiver of
the privilege.
For example, when the possibility of default loomed, the
Consortium's counsel became familiar with the Schaeffler Group's
organizational structure and advised it during negotiations to
restructure the Group and refinance its acquisition. The
Consortium needed "access to confidential tax information and
13
analyses" to "assess its credit exposure for potential tax
liabilities of Mr. Schaeffler." J. App’x at 77. Together,
appellants and the Consortium agreed that Appellants should
request an IRS private letter ruling. With regard to issues not
resolved by the letter ruling, they agreed to share "certain core
tax advice prepared by the U.S. tax advisors." J. App’x at 77.
This information was exchanged pursuant to the confidentiality
agreement.
That this agreement, see Note 2, supra, involved the pursuit
of a common legal strategy was reflected in the undertaking of
mutual obligations involving appellants and the Consortium. The
Consortium agreed, subject to limitations not pertinent here, to
permit Mr. Schaeffler to pay up to 885 million Euros in personal
tax liabilities before repaying the Schaeffler Group's debt. It
further agreed to extend him an additional line of credit to pay
tax liabilities up to 250 million Euros. In return, Mr.
Schaeffler’s right to act unilaterally was restricted. He was
required to give notice to the Consortium of any material audit
or investigation. The Consortium also retained a right of
refusal limiting Mr. Schaeffler’s freedom of action with regard
to the IRS, e.g. paying taxes, suing for a refund, or settling.
The communications regarding tax opinions were, therefore, “made
in the course of an ongoing common enterprise” and “intended to
further the enterprise." Schwimmer, 892 F.2d at 243.
14
The government’s reliance on language in a number of cases
from other circuits is misplaced. It is true that cases
involving criminal prosecutions usually describe the definition
of a common defense strategy according to the contours of a
particular charging instrument. In the context of civil
proceedings, however, these cases emphasized the need of the
parties to identify a common legal interest or strategy in
obtaining a particular legal goal whether or not litigation is
ongoing. Such a mode of analysis is far more helpful to
appellants than to the government. See, e.g., In re Pac.
Pictures Corp., 679 F.3d 1121, 1129 (9th Cir. 2012) (holding that
"victim" did not have common legal interest with the government
due to a "shared desire to see the same outcome in a legal
matter" –- i.e., a conviction; "[i]nstead, the parties must make
the communication in pursuit of a joint strategy in accordance
with some form of agreement –- whether written or unwritten");
United States v. BDO Seidman, LLP, 492 F.3d 806, 817 (7th Cir.
2007) (noting that "[c]ommunications do not cease to be for the
purpose of receiving legal services just because the recipient
intended to use the fruits of the legal services to guide
[commercial transactions]" and that a memorandum constituting "a
consultation between . . . in-house counsel and . . . outside
counsel with respect to the legality of the proposed financial
course of action" could fall under the common legal interest
15
doctrine); Cavallaro v. United States, 284 F.3d 236, 250 (1st
Cir. 2002) (reaffirming that "when a client, a lawyer, and an
accountant are present, the accountant's presence will destroy
the privilege if the accountant is not necessary, or at least
highly useful, for the effective consultation between the client
and the lawyer") (quotation marks omitted).
No caselaw in this or another circuit compels us to hold
that the Consortium's interest in appellants’ obtaining favorable
tax treatment for the refinancing and restructuring transaction
is not a sufficient common legal interest. In our view, the fact
that the Consortium stood to lose a lot of money (along with
appellants) if appellants’ tax arguments failed is not support
for the position that no common legal interest existed. To the
contrary, it was the interest in avoiding the losses that
established a common legal interest. A financial interest of a
party, no matter how large, does not preclude a court from
finding a legal interest shared with another party where the
legal aspects materially affect the financial interests.
For example, the Consortium's legal interest is underlined
by the extent to which the Consortium essentially insured
appellants, by extending credit and subordinating its debt, and
retained control over Mr. Schaeffler's legal decisions to settle,
pay, or sue. In that regard, several courts have held that an
insurer shares a common legal interest with the insured in the
16
outcome of litigation, even when their potential defenses are not
perfectly aligned. See Lectrolarm Custom Sys., Inc. v. Pelco
Sales, Inc., 212 F.R.D. 567, 571-73 (E.D. Cal. 2002); Travelers
Cas. & Sur. Co. v. Excess Ins. Co., 197 F.R.D. 601, 607 (S.D.
Ohio 2000) (holding that members of a reinsurance group facing
similar environmental pollution claims by United States insurance
and reinsurance companies “shared [legal] interests sufficiently
common or joint to create a need for full and frank communication
between and among counsel and their clients”); cf. Minn. Sch.
Bds. Ass’n Ins. Trust v. Emp’rs Ins. Co. of Wausau, 183 F.R.D.
627, 631-32 (N.D. Ill. 1999) (holding, in the context of work
product protection, that a reinsured’s communication with its
reinsurers did not waive the protection because the reinsured
“always intended and expected that their communications would
remain confidential and protected from common adversaries”).
We, therefore, conclude that appellants did not waive their
attorney-client privilege.
c) Application of Work-Product Doctrine
Because the district court concluded that the work-product
immunity, if applicable, was not waived, and the government has
not sufficiently challenged that ruling on appeal, we address
only the district court’s view that the EY Tax Memo and related
documents were not entitled to work-product protection.
17
Attorney work product is of course protected from discovery.
See Hickman v. Taylor, 329 U.S. 495, 510-11 (1947); see also Fed.
R. Civ. P. 26(b)(3). The doctrine “is intended to preserve a
zone of privacy in which a lawyer can prepare and develop legal
theories and strategy with an eye toward litigation, free from
unnecessary intrusion by his adversaries.” United States v.
Adlman, 134 F.3d 1194, 1196 (2d Cir. 1998) (internal quotation
marks omitted). Documents prepared in anticipation of litigation
are work product, even when they are also intended to assist in
business dealings. Id. at 1204. We review the district court’s
ruling on a work-product claim for abuse of discretion. See,
e.g., Horn & Hardart Co. v. Pillsbury Co., 888 F.2d 8, 12 (2d
Cir. 1989).
The district court acknowledged that the EY Tax Memo was
prepared at a time when appellants believed litigation was highly
probably and contained analyses of the strengths, weaknesses, and
likely outcomes of potential legal arguments. Nevertheless, the
court found that appellants would have sought and received advice
"created in essentially similar form" even if they had not
anticipated litigation. J. App’x at 1755. On this ground, the
court denied work-product protection.
Adlman is the governing precedent. It posited polar
examples on a spectrum to help in determining whether documents
should be deemed prepared “in anticipation of litigation” and
18
therefore subject to work-product protection. At one end of the
spectrum, a document will be protected if, “in light of the
nature of the document and the factual situation in the
particular case, the document can fairly be said to have been
prepared or obtained because of the prospect of litigation.”
Adlman, 134 F.3d at 1202 (citations omitted). At the other end,
protection will be withheld from “documents that are prepared in
the ordinary course of business or that would have been created
in essentially similar form irrespective of the litigation.” Id.
The district court’s application of the “ordinary course of
business” or “essentially similar form” example to the documents
at issue in this appeal appears to us to virtually swallow the
work-product protection Adlman extended to documents “prepared or
obtained because of the prospect of litigation.”
Adlman held that work-product protection would be withheld
only from documents that were prepared in the ordinary course of
business in a form that would not vary regardless of whether
litigation was expected. In the present case, such records would
include the supporting records and papers that appellants’
external tax return preparers collected and created in the
ordinary course of annually completing appellants’ federal tax
returns.4
4
The government's reference to United States v. Frederick, 182 F.3d 496, 501-02
(7th Cir. 1999), as support for its position, is unpersuasive in the context of this
appeal. Frederick denied protection to "dual purpose" documents prepared by the
appellant's lawyer, who was also his tax preparer, on the ground that "people in or
19
The tax advice in the EY Tax Memo was quite different. It
was specifically aimed at addressing the urgent circumstances
arising from the need for a refinancing and restructuring and was
necessarily geared to an anticipated audit and subsequent
litigation, which was on this record highly likely. See Adlman,
134 F.3d at 1195 (predicted litigation was virtually inevitable
because of size of transaction and losses).
We also disagree with the district court’s characterization
of the form of the advice EY would be ethically and legally
required to give appellants even in the absence of anticipated
litigation. Neither professional standards, tax laws, nor IRS
regulations required that appellants’ tax advisors provide the
kind of highly detailed, litigation-focused analysis and advice
included in the EY Tax Memo. Cf. id. at 1195 (noting
extraordinary detail in 58-page memorandum). The standards
relied upon by the district court all target concerns over the
"audit lottery," in which aggressive tax advisers might recommend
risky tax positions solely because the particular clients were
statistically unlikely ever to be audited. See ABA Formal Op.
85-352 (1985) (establishing a governing standard requiring
contemplating litigation [should not] be able to invoke, in effect, an accountant's
privilege, provided that they used their lawyer to fill out their tax returns." Id.
at 501. However, the court further noted that legal advocacy during an audit would be
different from preparations of annual tax returns, and "[i]f, however, the taxpayer is
accompanied to [an] audit by a lawyer who is there to deal with issues of statutory
interpretation or case law that the revenue agent may have raised in connection with
his examination of the taxpayer's return, the lawyer is doing lawyer's work and the
attorney-client privilege may attach." Id. at 502.
20
lawyers to advise clients whether a position is likely to
withstand litigation). That policy concern is simply not
implicated here where appellants would not have sought the same
level of detail if merely preparing an annual routine tax return
with no particular prospect of litigation.
Finally, we address the district court’s construct of a
hypothetical scenario in which appellants faced exactly the same
business and tax issues but did not anticipate litigation. This
scenario appears to us to ignore reality. The size of a
transaction and the complexity and ambiguity of the appropriate
tax treatment are important variables that govern the probability
of the IRS’s heightened scrutiny and, therefore, the likelihood
of litigation. To hypothesize the same size of the transaction
and the same complexity and ambiguity of the tax issues but also
a lack of any anticipation of litigation posits a factual
situation at odds with reality. It posits an expectation of
harmony with the IRS similar to that associated with the
preparation of a W-2 form in writing memoranda needed for large
transactions with no clear application of the tax laws.
Finally, we note that the district court's holding appears
to imply that tax analyses and opinions created to assist in
large, complex transactions with uncertain tax consequences can
never have work-product protection from IRS subpoenas. This is
contrary to Adlman, which explicitly embraces the dual-purpose
21
doctrine that a document is eligible for work-product protection
"if 'in light of the nature of the document and the factual
situation in the particular case, the document can fairly be said
to have been prepared or obtained because of the prospect of
litigation[,]' Charles Alan Wright, Arthur R. Miller, and Richard
L. Marcus, 8 Federal Practice & Procedure § 2024, at 343 (1994)."
Adlman, 134 F.3d at 1202.
In our view, the EY Tax Memo contains "legal analysis that
falls squarely within [Hickman v. Taylor, 329 U.S. 495 (1947)]'s
area of primary concern-analysis that candidly discusses the
attorney's litigation strategies [and] appraisal of likelihood of
success." Id. at 1200. They are, therefore, protected under the
work-product doctrine.
CONCLUSION
For the foregoing reasons, we vacate the judgment of the
district court and remand for such further proceedings as may be
necessary to determine, in a manner consistent with this opinion,
whether any remaining documents are protected by the attorney-
client privilege or work-product doctrine.
22