Privilege Claims Under Fire

Despite some legal setbacks, the IRS has signaled it will continue to press for a strict reading of the work product privilege that protects taxpayer documents from discovery. With Action on Decision 2007-004, the IRS said it will not acquiesce in the Sixth Circuit’s holding in U.S. v. Roxworthy that favored Yum! Brands’ withholding of tax opinions prepared for the fast-food company by KPMG. The IRS said it would continue to challenge what it considers to be unjustified assertions of work product privilege in all circuits, including the Sixth. Likewise, IRS Chief Counsel Donald Korb has criticized as flawed a decision last summer by the U.S. District Court in Rhode Island in favor of Textron Inc.’s assertion of the privilege with respect to tax accrual workpapers (see “ Tax Matters,” JofA , Nov. 07, page 80).

In U.S. v. Roxworthy, 98 AFTR2d 2006-5964 (2006), the Sixth Circuit joined four other circuits in adopting the “because of” test as the standard for determining whether documents were prepared “in anticipation of litigation,” a critical element of the work product privilege. Courts applying the test have examined (1) whether a document was created because of a party’s subjective anticipation of litigation, as contrasted with an ordinary business purpose, and (2) whether that subjective anticipation of litigation was objectively reasonable. Therefore, circumstances surrounding a document’s creation are pivotal in determining whether it may be withheld.

Courts also have said a document can be created both for use in the ordinary course of business and in anticipation of litigation without losing its work product privilege. For example, attorneys’ work resulting from participation in audits “to deal with issues of statutory interpretation or case law” ( U.S. v. Frederick , 83 AFTR2d 99-1870) may invoke the attorney-client privilege where the lawyer’s analysis would not have been performed had the possibility of litigation with the IRS not been anticipated—as opposed to an accounting function that “would have been created in essentially similar form irrespective of the litigation” ( U.S. v. Adlman , 81 AFTR2d 98-820).

The purpose of the work product privilege is to prevent a potential adversary, such as the IRS, from gaining an unfair advantage by obtaining documents prepared by the opposing party or its counsel in anticipation of litigation that may reveal the party’s strategy or its own assessment of the strengths and weaknesses of its case.

Prepared by Laura Jean Kreissl , Ph.D., assistant professor of accounting, and Darlene Pulliam , CPA, Ph.D., professor of accounting, both of the College of Business, West Texas A&M University, Canyon, Texas.