D.C. Circuit Considers Work Product Issues in Deloitte

The Supreme Court’s recent denial of certiorari left intact the First Circuit’s en banc decision in United States v. Textron, Inc., 577 F.3d 21 (1st Cir. 2009), holding that Textron’s tax accrual workpapers had not been created “in anticipation of litigation” and therefore were not entitled to work product protection.  The Supreme Court’s decision, of course, does not make Textron the law of the land, but rather leaves considerable uncertainty over whether other circuits will follow the First Circuit’s lead or instead place greater weight on a company’s interest in protecting from the IRS the company’s lawyers’ assessments of the strength of its tax positions.

The next insight into these issues could come soon from the D.C. Circuit in United States v. Deloitte & Touche USA LLP, 623 F. Supp. 2d 39 (D.D.C. 2009), appeal pending, No. 09-5171 (argued Feb. 26, 2010).  The dispute in Deloitte arises in a different context from Textron, but it touches on similar issues.  In the course of tax litigation with a partnership owned by Dow Chemical, the government sought discovery from Deloitte of three documents that contained opinions of Dow lawyers concerning the merits of the tax issues.  The government agrees that two of these documents (a tax opinion prepared by Dow’s outside counsel and a legal analysis prepared by Dow’s in-house counsel) are attorney work product, but it argues that Dow waived the work product protection when it disclosed the documents to Deloitte.  The third document is an analysis prepared by Deloitte that contains opinions of Dow attorneys that had been conveyed orally to Deloitte.  The government argues that this document, prepared by accountants, is not work product.

The district court denied the government’s motion to compel in a brief opinion.  It ruled that the Deloitte memo was work product because it recorded the thoughts of Dow’s counsel concerning the prospects in litigation.  And it ruled that Dow did not waive the privilege by sharing its legal analysis with its auditors.  The government’s appeal potentially could lead the D.C. Circuit to address several recurring issues.

The threshold issue of whether the Deloitte memo is work product presents the Textron issue, and the D.C. Circuit thus could directly address whether it agrees with the First Circuit’s view on tax accrual workpapers.  The government repeats its winning argument in Textron that work product protection does not attach to tax accrual workpapers or similar documents that are prepared for the business purpose of preparing accurate financial statements.  Dow, which has intervened as the real party in interest to oppose the government’s document request aimed at Deloitte, argues that work product protection attaches because of the documents’ content — namely, lawyers’ opinions of the prospects of litigation.

Both parties, however, have advanced arguments for distinguishing Textron that could allow the D.C. Circuit to avoid directly addressing the Textron reasoning.  Dow argues that, whatever merit the Textron analysis has in the summons context where the IRS is examining a return and seeking to identify issues, it has no merit in the discovery context where the government has identified the issue and is just looking to enhance its litigation prospects by peeking through a window into the other side’s thought processes.  The government, for its part, argues that the work product claim fails at the outset because, in contrast to Textron, the information is contained in a document prepared by accountants.

These issues concerning the definition of work product apply only to the Deloitte memo.  Because the government does not dispute that the other two documents contain work product, the D.C. Circuit can also be expected to address the important issue of whether work product protection is waived by disclosing the information to a company’s auditor.  This issue was decided in favor of Textron in the original First Circuit panel decision, but that decision was vacated and became irrelevant once the en banc court determined that the tax accrual workpapers were not work product in the first place.

The appeal was argued on February 26 before a relatively conservative panel — Judges Sentelle, Brown, and Griffith.  It will be interesting to see how deeply the D.C. Circuit decides to delve into these issues and how directly it decides to address the Textron decision.

[Disclosure:  Miller & Chevalier filed amicus briefs on behalf of Financial Executives International in support of Textron’s claim of work product protection in both the First Circuit and the Supreme Court.]

United States opening brief in Deloitte

Dow Chemical response brief as Intervenor in Deloitte

United States reply brief in Deloitte

District Court opinion in Deloitte