United States: Court Determines Tax Memo Not Protected By Attorney-Client Privilege And Work Product Doctrine

Last Updated: July 23 2014
Article by Judy Fisher

The Southern District of New York, in Schaeffler v. United States1, recently denied a petition to quash an IRS summons for a tax memorandum prepared by the petitioner's accounting firm in connection with a complex refinancing and corporate restructuring on the part of the Schaeffler Group, determining that (i) the tax memorandum was not protected by the work product doctrine, and (ii) attorney-client and tax practitioner privilege was waived when the tax memorandum was shared with a consortium of banks that funded the original transaction being refinanced and restructured.

The Schaeffler Group believed an IRS audit and possible dispute as to at least some of the US tax consequences of the proposed transactions was likely, and therefore engaged outside tax and legal advisors to assist with the US tax implications of the transactions. As part of its engagement, Ernst & Young LLP prepared a memorandum that identified potential US tax consequences of the proposed transactions, as well as possible IRS challenges to the Schaeffler Group's treatment of the transactions (the "E&Y memo").

Because the US tax consequences of the proposed refinancing and restructuring transactions could materially affect the Schaeffler Group's ability to repay the bank consortium's debt, the consortium and its law firm worked closely with the Schaeffler Group's outside tax advisors in effectuating the transactions and analyzing the US tax consequences of them. In this regard, the Schaeffler Group and the bank consortium signed an agreement whereby they agreed to share privileged, protected and confidential documents and their analyses without waiving those privileges, protections or the confidentiality of the information. After the execution of this agreement, the Schaeffler Group shared with the bank consortium, among other things, the E&Y memo.

The IRS, in conjunction with an audit of the Schaeffler Group's tax returns for 2009 and 2010, issued a number of IDRs requesting all tax opinions and analyses that discussed the US tax consequences of the Schaeffler Group's restructuring, and, eventually, an administrative summons to Ernst & Young requiring it to provide all legal opinions that it provided to parties outside the Schaeffler Group. The Schaeffler Group petitioned to quash this summons on the grounds that it sought legal opinions and other confidential advice protected by both the work product doctrine and the attorney-client privilege, as extended to Ernst & Young by the tax practitioner privilege.

With respect to attorney-client privilege, the petitioners argued that no waiver of the privileged tax memorandum occurred when the documents were provided to the bank consortium because the Schaeffler Group and the consortium had a common legal interest. The court disagreed, holding that the shared interest between the two parties was economic, not legal. The consortium may have shared the desire that the transactions receive favorable tax treatment from the IRS so that the Schaeffler Group could service its debt to the bank consortium, but there was no common legal stake in the Schaeffler Group's putative litigation with the IRS. The court noted that this result would be different if the bank consortium could have been named as a co-defendant in the anticipated dispute with the IRS. Accordingly, the court held that the common interest rule did not apply and, therefore, petitioners waived any attorney-client or tax practitioner privilege that attached to the E&Y memo when they shared it with the bank consortium. The fact that the parties had previously signed an agreement that sought to preserve privilege did not affect the court's analysis on this point.

The petitioners also argued that the E&Y memo was protected from disclosure to the IRS under the work product doctrine. The court rejected an argument by the Government that the Schaeffler Group had waived work product protection by sharing the E&Y memo with the bank consortium. The court held that, because the parties had a shared commercial incentive in keeping the details of the refinancing negotiations from the Schaeffler Group's potential adversaries, including the IRS, and because the bank consortium was contractually required to keep the disclosed information confidential, the disclosure of the E&Y memo to the consortium did not materially increase the likelihood of disclosure to an adversary. Accordingly, to the extent the E&Y memo was entitled to work product projection, the court held that the disclosure did not waive the protection.

On the merits of the work product protection claim the court followed the requirement set out in United States v. Adlman, 134 F. 3d 1194 (2d Cir. 1998), that documentation protected by the work product doctrine would have been created in essentially similar form had litigation not been anticipated. The court determined that, as a sophisticated businessperson engaging in a complex financial transaction, the petitioner would likely have sought out the same sort of tax advice Ernst & Young provided to ensure that advantageous tax strategies were employed to their fullest potential, even in the absence of anticipated litigation. The court noted that petitioners had presented no facts suggesting that Ernst & Young would have acted any differently had it known no audit or litigation would ensue. Furthermore, the court focused on the requirement of Treasury Department Circular 230 that tax practitioners cannot allow the possibility that a tax return will remain unaudited to affect the advice they give, concluding that when Ernst & Young provided legal advice on the tax treatment of the transactions, it had a responsibility to consider in full the relevant legal issues regardless of whether they anticipated an audit and ensuing litigation with the IRS. The court held that the E&Y memo would have been produced in the same form irrespective of any concern about litigation, and therefore, that it was not protected from disclosure under the work product doctrine.

Footnotes

1 No. 1:13-cv-04864 (S.D.N.Y. May 28, 2014)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions