D.C. Circuit Declines to Follow Textron

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July 6, 2010

The D.C. Circuit has now decided the Deloitte case that was previously discussed on this blog.  (See D.C. Circuit Considers Work Product Issues in Deloitte for that discussion and links to the briefs in the case.)  The decision addresses two basic issues, and on both scores it gives comfort to taxpayers who do not want to furnish the IRS with their counsel’s candid assessment of litigation prospects on potential tax disputes.

With respect to the mental impressions of taxpayer’s counsel embodied in documents that are acknowledged to be work product, the court held that a taxpayer does not waive the privilege by sharing the analysis with its auditors.   The court explained that a company’s auditor is not its adversary, and that the company has a reasonable expectation that the auditor will preserve the confidentiality of that information.  Deloitte now becomes the leading appellate decision on the waiver issue, reaching the same outcome as the since-vacated decision of the First Circuit panel in Textron.

With respect to the issue that the Supreme Court recently declined to review, the court held that the “Deloitte memo” did contain work product in the form of orally transmitted opinions of Dow’s counsel, even though the memo was prepared by accountants.  The court distinguished the two decisions from other circuits that have taken a much dimmer view of work product protection for tax accrual workpapers or similar documents.  The court distinguished the Fifth Circuit’s old decision in United States v. El Paso Co., 682 F.2d 530 (1982), because that circuit uses a more restrictive standard for the work product inquiry into whether the document was prepared “in anticipation of litigation” — the “primary purpose” test — rather than the “because of” test applied by most circuits.  With respect to the Textron decision, which comes from a circuit that has nominally adopted the “because of” test,  the court noted that Judge Torruella’s dissent from the en banc decision in Textron had questioned whether the majority had truly adhered to the First Circuit’s stated standard.  And the court suggested that there could be some difference in the content of the documents that warranted the different results.  (This Miller and Chevalier Tax Alert contains a fuller discussion of the D.C. Circuit’s opinion as well as some observations on how it might affect the IRS’s initiative in Announcement 2010-9 to require disclosure of uncertain tax positions.)

Despite the court’s efforts to avoid a direct rebuff to the First Circuit, the reasoning of Deloitte is difficult to square with the Textron decision.  And there is now a clear conflict with the Fifth Circuit’s El Paso decision, both with respect to the result in the case of tax accrual workpapers and with respect to the more general issue of the proper standard for assessing whether a document is work product.  Therefore, if presented with a petition for certiorari in Deloitte, the Supreme Court may be more inclined to step into the fray than it was in Textron.

Before considering Supreme Court review, the government is almost certain to seek rehearing en banc from the full D.C. Circuit.  That approach proved successful in Textron after the First Circuit panel had initially ruled in favor of the taxpayer.  In the likely event that the D.C. Circuit does not rehear the case, the government will have to decide whether to seek certiorari after telling the Supreme Court a few months ago in Textron that this issue did not warrant Supreme Court review.  That decision may depend in part on tactical considerations, such as whether the government believes that the Deloitte case presents a favorable factual setting in which to determine the correct test for work product, as well as the relative importance that the Solicitor General attaches to the workpapers issue.

The D.C. Circuit’s opinion is linked below.  A petition for rehearing is due Aug. 13.

Deloitte court of appeals opinion