Federal district courts in Minnesota and New Jersey recently sided with taxpayers who objected to disclosing sensitive documents to the IRS. The Minnesota decision dealt with tax accrual workpapers and the scope of the work product doctrine. Wells Fargo v. U.S., Civil No. 10-mc- 57 (D. Minn., June 4, 2013). The New Jersey case involved attorney-client communications and work product relating to allegedly improper tax shelters. Kearney Partners Fund v. U.S., Civil Action No. 11-4075, April 22, 2013).
In Wells Fargo the IRS had issued summonses to the bank and its outside auditor, KPMG, for documents relating to the bank’s tax accrual workpapers (TAW). The TAWs incorporated documents discussing the uncertain tax positions (UTPs) that Well Fargo had identified in determining its required reserve for tax benefits that risked being disallowed by the IRS. Under FASB Interpretation Number 48 (FIN 48) that determination involved a twostep process — first, analyzing whether it was more likely than not that the claimed tax benefit would be sustained (“recognition”) and, second, determining the appropriate reserve based on an evaluation of the potential settlement outcomes (“measurement”). Wells Fargo contended that the TAWs by their very nature included assessments about potential litigation and, hence, were shielded as attorney work product doctrine.
The district court took a middle position—compelling production of a narrow set of documents relating to the UTPs but denying the broader request for all TAWs. The court reasoned that the UTPs and related factual information was created in the ordinary course of business and not in anticipation of litigation. The court found that the UTPs had to be identified whenever the bank formulated transactions aimed at producing tax benefits. Moreover, Wells Fargo’s witnesses testified that the bank would not enter into any transaction unless it had a 70 percent or greater certainty that the tax benefits would be upheld. Thus, even if its attorneys were involved in these determinations, the UTPs were unlikely to meet the “in anticipation of litigation” requirement for work product. While at some point the bank’s evaluation of the UTPs shifted from ordinary business to “in anticipation of litigation,” the court held that Wells Fargo had not met its burden of proof on that issue. The court also rejected the bank’s broader claim that every time Wells Fargo considered entering into a potentially controversial transaction, it could be deemed to have anticipated tax litigation.
Unlike the UTPs, the court expressed no doubt that the other TAWs were protected as work product. The “measurement” analysis required under FIN 48 reflected the legal analysis of Wells Fargo’s attorneys in preparation of litigation. The court also held that the disclosure of the TAWs to KPMG, the bank’s auditor, did not waive the protections because the bank had by agreement bound KPMG to honor the confidentially of those documents and because KPMG and the bank were not adverse parties. The court also found that eight other documents between the bank (including draft TAWs) constituted protected attorney-client communications.
In the Kearney Partners Fund case, the district court in New Jersey upheld a Magistrate Judge’s holding that 63 documents sought by the IRS were privileged as attorneyclient communications and also protected as attorney work product. The IRS had sought the communications between the Rabner Allcorn law firm and its client, Sarma, to support the Service’s pending Florida lawsuit involving $77 million in capital losses that were alleged to have been generated from an abusive tax shelter called FOCus. Rabner Allcorn advised Sarma in connection with the investments at issue. In response to the IRS subpoena, the law firm produced thousands of documents but withheld 63 documents as privileged or protected by work product.
The Magistrate Judge conducted an in camera review and found that the attorney-client privilege applied because Rabner Allcorn was providing legal advice to Sarma about the transactions and the potential for litigation. He rejected the IRS’s claim that the privilege had been waived because Sarma had placed the advice of counsel at issue in the lawsuit because Sarma and his companies had certified they would not be relying on Rabner Allcorn’s advice in the Florida litigation. He also held that the government had not argued that the application of the privilege would deprive it of information vital to the tax shelter case and there was also no basis to rely on the crime-fraud exception to vitiate the privilege. Separately, the Magistrate Judge held that the documents were protected as work product because they were prepared in part to advise Sarma about the potential for litigation over the proposed investments, given their aggressive nature.
On appeal to the district judge, the IRS only challenged the ruling on the attorney-client privilege. That gave the district judge an easy way to resolve the case because, even if he accepted the government’s argument, the documents would still be protected under the work product rule. “Simply put, the Government has failed to even disagree with Judge Shipp’s work product ruling, let alone show that it was clearly erroneous or contrary to law.”
The holdings of Wells Fargo and Kearney Partners show that courts are willing to protect taxpayer documents under the work product doctrine, even if those documents incorporate some level of business advice, as long as the dominant purpose of the documents was to discuss potential legal exposures.