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.