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Bryan Slone, Deloitte - Omaha(402) 444-1839 Greg Scaglione, Koley Jessen - Omaha(402) 343-3721 September 21, 2010 Privilege/Work Product Doctrine
1 Copyright © 2008 Deloitte Development LLC. All rights reserved. Agenda IRS Summons Authority Privilege Attorney/Client Tax Practitioner/Client Work Product Recent Developments Best Practices
IRS Summons Authority
3 Copyright © 2008 Deloitte Development LLC. All rights reserved. IRS Summons Authority IRC § 7602 authorizes the IRS to issue summons for the production of: “any books, papers, records, or other data which may be relevant or material” in “ascertaining the correctness of any return,…, determining the liability of any person for any internal revenue tax…, or collecting any such liability….”
4 Copyright © 2008 Deloitte Development LLC. All rights reserved. IRS Summons Authority – Powell Standard If taxpayer does not comply with an IRS summons, the IRS must seek to have the summons enforced by a court To be enforced, an IRS summons must satisfy the standard set forth by the Supreme Court in Powell v. US, 379 US 48: –Elements: Legitimate purpose Information relevant to purpose Documents not already in IRS possession Compliance with summons procedures –Prima facie case normally made with agent’s affidavit
6 Copyright © 2008 Deloitte Development LLC. All rights reserved. Attorney/Client Privilege Purpose: –Provides privacy necessary for adversary system of litigation –Encourages full disclosure by client to the attorney Elements: –Confidential communication –Between a lawyer and her client –For the purpose of securing legal advice –The privilege is claimed –The privilege is not waived
7 Copyright © 2008 Deloitte Development LLC. All rights reserved. Attorney/Client Privilege (Cont.) Protected Communications Include: –Dialogue between taxpayer and attorney –Attorney’s notes of tax advice discussed with taxpayer –Memos, letters, presentations –Underlying documentation relevant to tax advice Excluded Communications Include: –Tax returns –Ruling requests –Transfer pricing studies –Information intended for release to 3 rd parties –“Dual-purpose” document (US v. Frederick)
8 Copyright © 2008 Deloitte Development LLC. All rights reserved. Scope of Attorney/Client Privilege (Cont.) Auditing – In US v. Frederick, the 7 th Circuit Court of Appeals stated: –“An audit is both a stage in the determination of tax liability, often leading to the submission of revised tax returns, and a possible antechamber to litigation” If “merely verifying the accuracy of a return” it is “accountant’s work” and thus not covered by the privilege. If the attorney participates in the audit to “deal with issues of statutory interpretation or case law” that may have been raised in connection with examination, then “the lawyer is doing lawyer’s work” and the privilege may attach.
9 Copyright © 2008 Deloitte Development LLC. All rights reserved. Accountant/Client Privilege Accountant/Client Privilege: –IRC §7525 –To protect certain tax-related communications –Extends common law Attorney/Client privilege –Applicable to communications made on or after July 22, 1998 This privilege does not apply to: –Criminal tax matters before the IRS or in Federal court –Written communications directly or indirectly promoting tax shelters
10 Copyright © 2008 Deloitte Development LLC. All rights reserved. Scope of Accountant/Client Privilege Limits on Attorney/Client privilege also apply to the Accountant/Client privilege. §7525 and Work Product Doctrine are meant to protect different matters
11 Copyright © 2008 Deloitte Development LLC. All rights reserved. Work Product Doctrine Federal Rule of Civil Procedure 26(b)(3) which provides: (3) Trial Preparation Materials.... a party may obtain discovery of documents and tangible things otherwise discoverable under subdivision (b)(1) of this rule and prepared in anticipation of litigation or for trial by or for another party or by or for that other party's representative... only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party's case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means. In ordering discovery of such materials when the required showing has been made, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation.
12 Copyright © 2008 Deloitte Development LLC. All rights reserved. Work Product Doctrine – “In anticipation of litigation” requirement Courts have applied two different tests in determining whether a document was prepared "in anticipation of litigation." –Under the "primary purpose" test, documents are held to be prepared in anticipation of litigation "as long as the primary motivating purpose behind the creation of a document was to aid in possible future litigation." US v. El Paso Co., 682 F.2d at 542 (5th Cir. 1982). –Under the "because of" test, the relevant inquiry is whether the document was prepared or obtained "because of" the prospect of litigation. United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998). "It should be emphasized that the 'because of' formulation that we adopt here withholds protection from documents that are prepared in the ordinary course of business or that would have been created in essentially similar form irrespective of the litigation,"
14 Copyright © 2008 Deloitte Development LLC. All rights reserved. U.S. vs. Textron Inc. and Subs. IRS determined that the taxpayer claimed tax benefits from multiple transactions in the 2001 tax year that were the same as or substantially similar to the “Sale-in, Lease-out” (SILO) listed transaction Taxpayers’ return was filed after July 1, 2002 SILO transaction designated a “listed” transaction in 2005, subsequent to taxpayers tax return filing
15 Copyright © 2008 Deloitte Development LLC. All rights reserved. U.S. vs. Textron Inc. and Subs.(Cont.) IRS issued summons seeking all tax accrual workpapers for 2001 tax year Taxpayer did not respond to IRS summons – IRS filed summons enforcement action District Court held the tax accrual workpapers were protected by the work product doctrine Textron did not waive the work product privilege when it shared tax accrual workpapers with its independent auditors
16 Copyright © 2008 Deloitte Development LLC. All rights reserved. Work Product Doctrine – “In anticipation of litigation” requirement IRS argued that Textron's tax accrual workpapers were prepared in the ordinary course of its business. –to satisfy the requirements of securities law, and –to help its independent auditor give a clean opinion about its financial statements.
17 Copyright © 2008 Deloitte Development LLC. All rights reserved. Work Product Doctrine – “In anticipation of litigation” requirement Textron Court acknowledged this reality, but then rejected it. –It is clear that the opinions of Textron's counsel and accountants regarding items that might be challenged by the IRS, their estimated hazards of litigation percentages and their calculation of tax reserve amounts would not have been prepared at all "but for" the fact that Textron anticipated the possibility of litigation with the IRS. –If Textron had not anticipated a dispute with the IRS, there would have been no reason for it to establish any reserve or to prepare the workpapers used to calculate the reserve. –Thus, while it may be accurate to say that the workpapers helped Textron determine what amount should be reserved to cover any potential tax liabilities and that the workpapers were useful in obtaining a "clean" opinion from E&Y regarding the adequacy of the reserve amount, there would have been no need to create a reserve in the first place, if Textron had not anticipated a dispute with the IRS that was likely to result in litigation or some other adversarial proceeding.
18 Copyright © 2008 Deloitte Development LLC. All rights reserved. US v. Textron Inc. 2009 U.S. App. LEXIS 18103 (1 st Cir. 8/14/09) TP claimed work product protection, and district court agreed w/ TP. On appeal, affirmed, then vacated Held: On rehearing en banc, 3-2 decision for IRS Work product doctrine protects only documents prepared for or in anticipation of litigation, irrespective of whether documents are prepared by lawyers or reflect legal thinking
19 Copyright © 2008 Deloitte Development LLC. All rights reserved. Held: Evidence did not show that tax accrual workpapers were prepared for use in potential litigation or would have been useful in the event of litigation; rather, evidence showed that workpapers were prepared to support financial statements Practice Pointer: Understanding the scope and breadth of confidentiality privileges is vital in representing clients; the last word has yet to be written about tax accrual workpapers; other types of documents may be protected and thus off limits to the IRS US v. Textron Inc.
20 Copyright © 2008 Deloitte Development LLC. All rights reserved. Textron Update On 5/24/10, the Supreme Court denied Textron’s petition for writ of cert. with respect to the First Circuit opinion. Practice Pointer. State of the law with respect to application of work product doctrine to tax accrual workpapers and other dual purpose documents will remain unsettled. IRS may become more aggressive in production requests.
21 Copyright © 2008 Deloitte Development LLC. All rights reserved. Facts: DC Circuit Court of Appeals reviewed the District Court’s decision as to whether certain documents were privileged. 3 Documents: –Document #1 - Draft memo by Deloitte summarizing the meeting between Deloitte, Dow, and outside counsel about the possibility of litigation and how to account for it. –Document #2 - Memo and flowchart prepared by Dow accountant and in-house attorney. –Document #3 - Tax opinion prepared by Dow’s outside counsel. Issue: Are these documents protected by a privilege? US v. Deloitte LLP, No. 09-5171 (6/29/10)
22 Copyright © 2008 Deloitte Development LLC. All rights reserved. Analysis/Holding: Document # 1 - IRS had two arguments: The Deloitte Memorandum cannot be work product because it was created by Deloitte not Dow or its representative. It was prepared for audit and not in ‘anticipation of litigation’ Court held: Rule 26(b)(3) is only a partial codification because it only addresses tangible things. Under Hickman, the question is not who created the document or how they are related to the party asserting work-product protection, but whether the document contains work product-- Deloitte’s preparation of the document does not exclude the possibility that it contains Dow's work product. Look at whether it was prepared in “anticipation of litigation” Applied ‘because of’ test Held that District Court had insufficient information to conclude that the document was work product and remanded for review. US v. Deloitte LLP, No. 09-5171 (6/29/10) (cont.)
23 Copyright © 2008 Deloitte Development LLC. All rights reserved. Analysis/Holding: Documents # 2 & 3 IRS conceded that the documents were work product, however, claimed that the disclosure of these documents to Deloitte waived the privilege. Issue: Whether disclosure to an independent auditor constitutes a waiver? Held: The independent auditor is not an adversary. Deloitte could not be Dow’s adversary in the sort of litigation the documents address. Practice Pointers: It's vital to understand the application of privileges. It's important to understand what the limitations are regarding what needs to be disclosed to the IRS. A document that was disclosed to the auditors can still be protected by work product privilege. US v. Deloitte LLP, No. 09-5171 (6/29/10) (cont.)
25 Copyright © 2008 Deloitte Development LLC. All rights reserved. Best Practices Segregation of tax positions Labeling and filing "privileged" documents appropriately E-mails and extraneous materials Redesigning FAS 109/FIN 48 documentation Audit planning discussions with external auditors Accountability for final documentation and retention
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