Summer Reading Roundup – Recent Developments Concerning the Scope of the Work Product Doctrine

After finally slogging my way through the closing chapters of Cormack McCarthy’s Blood Meridian ― one of his many brilliant, but despairingly bleak, novels about the western frontier ― I decided I should conclude my summer reading with something more upbeat, like recent court decisions in tax–related litigation.  (In fact, I did read the case while sitting in a deck chair, periodically gazing out over the water on one of the many, perfect late summer days in Maine.)

All kidding aside, the recent decision by the Federal Court of Appeals for the D.C. Circuit in United States v. Deloitte LLP (D.C. Cir. June 29, 2010) reinforces some important principles in the often complex, three–way relationship between businesses, their tax counsel, and their outside accountants, with regard to the confidentiality of tax records prepared by, or in the hands of, a business’s independent auditors.

By way of background, it is, of course, common for accountants, in the context of an annual audit of a corporation, to request information regarding the assessment by a company’s attorneys of one or more legal issues that are potentially material to the audit.   It is important for companies to approach such audit issues carefully, in consultation with tax counsel, because in most jurisdictions there is no “accountant-client” privilege similar to the attorney-client privilege.  For that reason, disclosure of attorney-client communications to a company’s outside auditors is generally held to constitute a waiver of the attorney-client privilege that would otherwise shield such communications from disclosure to third-parties, including federal and state tax officials.

The Deloitte decision addresses the question of whether, separate from the attorney-client privilege, the “work product” doctrine protects documents that reflect the legal advice of a company’s tax counsel disclosed to independent auditors during the course of an internal audit from disclosure by independent auditors to the government. In connection with tax litigation involving Dow Chemical, the IRS sought to compel Dow’s auditor, Deloitte, to produce three documents it withheld from discovery in response to a subpoena.  The first document was prepared by Deloitte during a regular, internal audit of Dow, and summarized a meeting between Deloitte, Dow and Dow’s outside attorneys regarding the prospect of litigation over a particular tax matter.  The other two documents were prepared by Dow’s counsel (in one case, in-house, in the other, outside counsel) and also concerned possible tax litigation.  The IRS contended that the first document could not be work product, regardless of its content, because it was prepared by Deloitte.  The IRS conceded that the other two documents were work product, but argued that Dow waived its work product protection by disclosing the documents to Deloitte.

The Court rejected the IRS’s arguments.  As to the first document, the Court determined that work product protection extends to thoughts and opinions of a company’s attorneys developed because of the prospect of litigation, regardless of whether such work product is contained in a document prepared by the company’s accountants in connection with an audit.  As to the Dow legal memoranda, the Court held that providing documents to the company’s independent auditors does not constitute a waiver of the work product protection over such documents because a company’s auditors are not inherently adverse to the company and because it was reasonable of Dow to expect that Deloitte would maintain the documents confidentiality against Dow’s adversaries (in this case, the government).

It is important for all businesses, including online sellers and other direct marketers, to understand both the principles that the Deloitte decision stands for, and those that it does not.  On the one hand, it is meaningful for a federal court of appeal to uphold protections for the confidentiality of work product contained in documents provided to a company’s independent auditors.  Particularly for a publicly–traded company, which may be required to provide such information to its auditors in order to secure an unbiased review of its financial condition, having a basis for maintaining the confidentiality of certain information related to actual or anticipated litigation, despite disclosure, is clearly important.

However, companies should not misunderstand the holding of Deloitte and assume it provides them carte blanche to disclose information to their accountants without fear of discovery.   The work product doctrine goes only so far: it does not protect any information, including legal advice of counsel, unless such information or documents were prepared because of litigation.  Tax planning strategies unrelated to anticipated litigation will not be shielded under Deloitte if disclosed to an auditor.  Thus, companies should continue to take care to consult with counsel in responding to requests made by their accountants that seek the disclosure of legal advice, prior to making any such disclosures.