Regions Financial Corp. v. U.S., 2008 U.S. Dist. LEXIS 41940 – In Regions, the court considered whether a legal analysis produced for Regions Financial (“Regions”) was protected as work product and, if so, whether Regions waived the privilege by transmitting that analysis to a third party.

In 2000, Regions entered into a transaction with the European Bank for Reconstruction and Development. Before doing so, Regions asked its outside counsel to analyze potential IRS attacks on its tax reporting for the transaction. It then transmitted counsel’s analysis to Regions’ accountants and asked them to evaluate the transaction. The accountants agreed to keep the analysis confidential. Years later, when the IRS initiated an investigation into Regions’ tax liability, Regions asserted the work product privilege with respect to outside counsel’s analysis, in addition to the accountants’ tax accrual workpapers discussing that analysis.

The work product privilege is codified in Federal Rule of Civil Procedure 26(b)(3), which provides that litigants ordinarily cannot discover documents “prepared in anticipation of litigation.” Different jurisdictions apply different tests to determine what constitutes “prepared in anticipation of litigation” in the context of IRS summonses. The Fifth Circuit asks whether “the primary motivating purpose behind the creation of the document was to aid in possible future litigation.” In contrast, the Second Circuit asks whether the document was prepared “because of the prospect of litigation,” providing broader work product protection.

Here, the court did not need to choose a test because it decided that Regions satisfied the stricter test. The IRS argued that Regions sought outside counsel’s analysis in order to create a sufficient tax reserve that accurately reflected its contingent liabilities, thereby allowing Regions to obtain an unqualified audit from its accountants. The court noted that, but for the prospect of litigation with the IRS, Regions would not have needed to create a tax reserve. Therefore, the withheld documents were produced primarily in anticipation of litigation with the IRS.

The court also determined that Regions did not waive work product protection by transmitting outside counsel’s analysis to the accountants. Work product waiver occurs when the documents are transmitted to (1) an adversary, or (2) a third party that could serve as a conduit to an adversary. Here, the court held that “there is simply no conceivable scenario in which [the accountants] would file a lawsuit against Regions because of something [the accountants] learned from Regions’ disclosures.” It also held that the accountants could not serve as a conduit to an adversary because it entered into a confidentiality agreement with Regions.