The U.S. Court of Appeals for the Second Circuit held that the attorney-client privilege and work-product doctrine protected legal memoranda prepared by an accounting firm that were disclosed to third parties. The Schaeffler Group sought to refinance its acquisition debt held by a consortium of banks and restructure its operations during the earliest stages of the economic downturn that subsequently threatened its solvency. Expecting the transactions to draw Internal Revenue Service (IRS) scrutiny, the Schaeffler Group and its eponymous owner (Taxpayers) sought advice from Ernst & Young (EY) on the federal tax consequences of the transactions. In connection with its eventual audit of the Taxpayers, the IRS sought all documents prepared by EY and disclosed to third parties. The Taxpayers withheld certain EY memoranda describing, among other things, the potential tax consequences of the transactions that they had shared with the banks and the banks’ counsel.

Rejecting the IRS’s waiver argument, the Second Circuit concluded that the attorney-client privilege (and necessarily the federal tax-practitioner privilege) applied to the EY memoranda because the bank consortium shared a “common legal interest” with the Taxpayers. The “common legal interest” rule, also known as the joint defense privilege exception, protects the confidentiality of communications from one party to the attorney for another party where the parties and their counsel have agreed on and undertaken a joint defense effort or strategy with respect to a legal matter. Although the refinancing and restructuring had both commercial and legal components, the court concluded that the rule applied because the transactions were tax-law driven, and both parties shared a common interest in ensuring exactly how the tax law applied. 

The court also held that the work-product doctrine applied to the EY memoranda. The work-product doctrine protects documents prepared in anticipation of litigation from disclosure, but it does not extend to documents prepared in the ordinary course of business when the form of the documents would not change even if litigation were expected. The court concluded that the EY memoranda directly addressed the legal issues arising from the refinancing and restructuring transactions and were prepared with an eye toward an anticipated IRS audit and litigation, both of which were highly probable. Schaeffler v. United States, No. 14-1965-cv (2d Cir. Nov. 10, 2015).