United States: Second Circuit Determines That Tax Memo Shared Between Taxpayers And Banks Is Protected Under The Common Interest Doctrine And Subject To Work-Product Protection

Last Updated: November 23 2015
Article by Shearman & Sterling LLP

On November 10, 2015, the US Court of Appeals for the Second Circuit unanimously held in a published opinion that (i) the attorney-client privilege was not waived by appellants-taxpayers who shared a group of documents, including a 58-page tax memorandum, with a consortium of banks having a common legal interest with the taxpayers in the tax treatment of a corporate refinancing and restructuring transaction; and (ii) the work-product doctrine protected documents analyzing the tax treatment of the transaction prepared in anticipation of litigation with the IRS. Schaeffler, et al., v. United States, No. 14-1965-cv, 2015 US App. LEXIS 19617 (2d Cir. Nov. 10, 2015). This ruling, which vacated and remanded Magistrate Judge Gabriel Gorenstein's denial of taxpayers' petition to quash an IRS summons, is one of the most favorable privilege decisions in years as it clarifies and broadens common interest doctrine protection for communications among accountants, lawyers and bankers who have, or whose clients' have, a common commercial and legal interest in the tax consequences of a transaction and for parties who are engaged in a "common legal enterprise" with the holder of the privilege. It also reaffirms Supreme Court and Second Circuit precedent concerning work-product protection for documents created in anticipation of litigation.

A. Background

In Schaeffler, the taxpayers petitioned to quash an IRS summons for a tax memorandum and related documents prepared by taxpayers' accounting firm in connection with a complex refinancing and corporate restructuring transaction in 2008 by the Schaeffler Group, an automotive and industrial parts supplier incorporated in Germany, in an attempt to acquire a minority interest in a target German company through a tender offer for its stock. To finance the tender offer, the Schaeffler Group executed an eleven-billion Euro loan agreement with a consortium of banks. With the announcement of Lehman Brothers' bankruptcy only two days before the end of the tender offer acceptance period, the stock price of the target company declined drastically, resulting in a significantly higher than expected number of shareholders who accepted the offer. Moreover, the Schaeffler Group was prohibited under German law from withdrawing its tender offer. These events threatened the Schaeffler Group's solvency and its ability to meet its payment obligations with its lenders under the loan agreement. Accordingly, the Schaeffler Group and the bank consortium sought to refinance the acquisition debt and restructure the Schafeffler Group, which resulted in various potential tax consequences for the Schaeffler Group, including for the majority owner of the parent of the Schaeffler Group in his personal capacity (collectively, the "taxpayers").

The taxpayers believed an IRS audit and potential litigation as to at least some of the US tax consequences of the proposed refinancing and restructuring was likely, and therefore engaged outside tax and legal advisors to assist with the US tax implications of the transactions and possible future litigation with the IRS. As part of its engagement, Ernst & Young LLP ("E&Y") prepared a memorandum for the taxpayers that identified potential US tax consequences of the proposed transactions, identified and analyzed potential IRS challenges to the Schaeffler Group's treatment of the transactions, and analyzed the relevant statutory provisions, US Treasury regulations, judicial decisions and IRS rulings (the "Tax Memo"). The Schaeffler Group also retained Dentons US LLP to advise it on the federal tax implications of the transactions and potential litigation with the IRS. The bank consortium and its outside counsel worked closely with the Schaeffler Group's outside tax advisors at E&Y in effectuating the transactions and analyzing the US tax consequences of the transactions. In this regard, the Schaeffler Group and the bank consortium signed an agreement whereby they agreed to share privileged, protected and confidential documents, including their analyses, in an effort to protect and not to waive those privileges, protections or the confidentiality of the information. After the execution of that agreement, the Schaeffler Group shared the Tax Memo and other documents with the bank consortium.

The IRS, in conjunction with an audit of the taxpayers' tax returns for 2009 and 2010, issued a number of document demands requesting all tax opinions and analyses that discussed the US tax consequences of the Schaeffler Group's restructuring, and, eventually, it issued an administrative summons to E&Y requiring it to provide all legal opinions that it provided to parties outside the Schaeffler Group. Although it produced several thousand documents, the taxpayers petitioned to quash the IRS 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 E&Y by the federal tax practitioner privilege. With respect to their privilege claim, the taxpayers argued that no privilege waiver of the Tax Memo and related documents occurred when they were provided to the bank consortium because the Schaeffler Group and the consortium had a common legal interest.

The taxpayers also maintained that the Tax Memo and related documents were subject to work- product protection because they were prepared in anticipation of litigation. The District Court, however, disagreed, holding that attorney-client and tax practitioner privileges were waived when the Tax Memo was shared with the bank consortium. In particular, the District Court held that there was no "common legal interest" because the bank consortium's interest was commercial rather than legal. Op at *6. The District Court also rejected the taxpayers' claim that the Tax Memo and related documents were protected under the work-product doctrine because, according to the District Court, the documents did not specifically refer to litigation and the detailed analyses and advice provided to the taxpayers would have been provided even if they had not anticipated an audit or litigation with the IRS. Id. at *8-*9.

B. Non-Waiver of Attorney-Client Privilege

On appeal, The Second Court noted that while the attorney-client 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. Op at *12. According to the Court, the dispositive issue was "whether the Consortium's common interest with [the taxpayers] was of a sufficient legal character to prevent a waiver by the sharing of those communications." Id at *13. The Court held that it was.

At the outset, the Court made clear that parties may share a common legal interest even if there is no ongoing litigation at the time of the shared communications between the parties. Thus, the relevant issue for the Court was whether the communications were made in the course of an ongoing common enterprise and intended to further the enterprise. Analyzing the facts at issue, the Court determined that because of the threat of insolvency and default, the taxpayers and the bank consortium "had a strong common interest" in obtaining particular tax treatment of the refinancing and restructuring. Op. at *8-*9.

The Court determined that "[taxpayers] and the [bank 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." Id. at *14. Moreover, the Court found that the bank consortium "needed 'access to confidential tax information and analyses' to 'assess its credit exposure for potential tax liabilities'" of the Schaeffler Group's majority shareholder. Id at *15. Accordingly, both parties "had a strong common interest in the outcome of that legal encounter." Id. at *14. The Court also observed that no caselaw in the Second or other circuits compelled it to hold that the bank consortium's interest in the taxpayers' obtaining favorable tax treatment for the refinancing and restructuring transactions was not a sufficient common legal interest. Op at *18. Thus, "[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." Id. In support of its reasoning, the Court noted that the bank consortium's legal interest was evidenced by how it "essentially insured" the taxpayers, including by extending credit and subordinating its debt, and retaining control over decisions by the Schaeffler Group's majority shareholder concerning the IRS, including whether to pay taxes, to sue for a refund or to settle. The Court then pointed to the fact that in an analogous context several courts outside of the Second Circuit have held that an insurer and an insured may maintain a common legal interest in the outcome of a litigation even if their defenses are not aligned. Id. at *18-*19.

C. Application of Work-Product Doctrine

The Second Circuit separately addressed the issue of whether the work-product doctrine applied to the Tax Memo and related documents, noting at the outset that the work-product immunity, if applicable, was not waived by sharing those documents with E&Y. Op at *17. The Court concluded that the District Court had erred and that the Tax Memo and related documents were protected by the work-product doctrine because they contained "legal analysis that falls squarely within [Hickman v. Taylor, 329 US 495 (1947)]'s area of primary concern-analysis that candidly discusses the attorney's litigation strategies [and] appraisal of likelihood of success." Id. at *25 (brackets in original).

Citing United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998), the Court determined that work-product doctrine protected the documents because they were specifically aimed at addressing tax issues that may arise in an anticipated audit and subsequent litigation, including the strengths, weaknesses and likely outcomes of potential legal arguments. Op at *20. In analyzing Adlman, the Court drew a distinction between documents prepared or obtained "because of" the prospect of litigation, on the one hand, and documents created "irrespective of the litigation," on the other hand. Id. at *20-21 (internal citations omitted). Addressing the facts at hand, the Court found that the Tax Memo "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 "highly likely." Id. at *21

The Court further disagreed with the District Court's reasoning that E&Y would have been compelled by professional standards, tax laws and regulations to provide the same tax advice to the taxpayers even in the absence of anticipated litigation. Op. at *22-*23. Noting the level of detail contained in the Tax Memo, the Court rejected the notion that the taxpayers would have sought the same level of detail as part of an "annual routine tax return with no particular prospect of litigation." Id. at *23.

D. Looking Forward

The Schaeffler decision is significant because it clarifies the scope of the common interest privilege for communications involving accountants, lawyers and bankers in situations where they and their clients have a common commercial and legal interest in the tax consequences of a transaction. It also is a strong reaffirmation of the Hickman and Adlman work-product decisions and supports a liberal interpretation of what constitutes "anticipation of litigation" in the work-product context. Although the Second Court's analysis pertained to the specific facts in the case, the decision supports application of the work-product doctrine where the size, complexity and ambiguity of the tax treatment of the transaction heightens the likelihood of IRS scrutiny of the transaction.

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.

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
Font Size:
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.


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.


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