Slide 1
They cant always get what they want!
FIN 48 and Work Product Protections
New York University Summer CLEAdvanced State and Local TaxJuly
22-24, 2009
Scott L. BrandmanBaker & McKenzie LLPNew York City , New
York
William D. TownsendFowler White Boggs P.A.Tallahassee,
Florida
Leah Samit RobinsonMcDermott Will & Emery LLPNew York City,
New York
1
FIN 48: Overview
If management determines that it is NMLTN that the company will
retain the benefit of a filing position, the company must recognize
0% of the benefit and accrue 100%.
If management determines that it is MLTN that the company will
retain the benefit of a filing position, the company must recognize
the largest amount of the benefit for which there is a >50%
chance it will retain and must accrue the remainder.
FIN 48:Documentation Requirements
(really minimal)
BUT
ACCOUNTING FIRM:
Documentation Requirements
ACCOUNTING FIRM:Documentation Requirements
What is the accounting firms role?
Why do they need documentation to support their role?
Documentation Requirements
What types of information are included in the external evidence
supporting managements determinations?
NMLTN determinations
MLTN determinations
Facts and Analysis
Wouldnt my company have to give this information to the state
revenue department anyway?
Absolutely NOT!
Attorney Client Privilege
The A/C privilege allows a client to prevent compelled
disclosures of confidential communications made with a
attorneywhile seeking legal assistance
A/C Privilege
Client must intend for communication to be confidential
Client controls the privilege, preventing disclosure by the
client or attorney
Client may waive the privilege intentionally or by disclosing
communication to third parties or by persons without a need to
know
Privilege extends only to communications and not to facts.
A/C: In Corporate Context
The corporation is the client and holds the privilege.
Privilege generally can be created by:
Control group of management employees in position high enough to
decide upon action or act upon advice of attorney;
Employee for whom the matter is within scope of the employees
duties;
Employee possessing information not available to upper level
management;
Employee with authority from superiors to secure legal
advice.
Non-Legal Advice
Attorney must be acting in capacity of legal advisor.
Privilege does not extend to communications made for purpose of
providing or acquiring business or financial advice, even if made
by attorney.
In-House Counsel
Privilege may not extend to in-house counsel in role of
negotiating business issues, involving making business judgments,
or assessing business risks
While a presumption is made that communications made to outside
counsel are primarily related to legal advice, no such presumption
applies to in-house counsel because of their frequent involvement
in corporation's business decisions
Email Communications
E-mail communications present special problems
E-mail which is deleted is not necessarily permanently erased.
Deleted messages are actually stored on a central drive which can
be accessed
Reasonable expectation of privacy or confidentiality uncertain
as to communications made over e-mail or Internet
Protection against inadvertent disclosure is more difficult
because communication more comparable to postcard, readable to
anyone who can download it
Waiver
Disclosing confidential communications to a third party waives
the ability to assert the privilege as to those communications
Even disclosing the gist of a communication will waive the
privilege
FIN 48 Documents
Without doubt, if you share an opinion with your accounting firm
you have waived privilege with regard to that document
What about an executive summary?
What about just the level of the opinion (MLTN or NMLTN)?
Work Product Doctrine
Allows a client to assert protection over materials prepared or
gathered in anticipation of litigation (whether prepared by the
attorney or not) unless the protection has been waived.
In anticipation of litigation
???
In anticipation of litigation
Primary purpose test* requires a finding that documents were
prepared in anticipation
Because of test requires that the documents were prepared
because of the prospect of litigation
*** Note, not primarily and exclusively!
Waiver and Compulsion
The privilege can be waivedby disclosing documents to an adverse
(or potentially adverse) party
A court can compel disclosure if your adversary demonstrates a
substantial need or undue hardship
FIN 48 Documents
Taxpayers generally believe that any document created to support
a contingent liability is, by the very nature of a contingency,
prepared in anticipation of litigation
State revenue departments are likely to assert that FIN 48
workpapers are created for accounting purposes only; moreover,
disclosure to accounting firms waives any protection because they
are potential adversaries
What do the courts have to say about all of this?
Precursors I
U.S. v. Arthur Young & Co.: IRS was granted authority in
obtaining tax accrual work papers under its summons authority in
unusual circumstances in order to promote full disclosure to public
accountants
U.S. v. Roxworthy: court adopted because of test which has
objective and subjective elements; the work product doctrine was
able to protect tax accrual work papers.
Long-Term Capital Holdings v. U.S.: the taxpayer waived the
attorney-client privilege when it disclosed the "gist or substance"
of the tax opinion by disclosing that it had obtained a MLTN level
of opinion (YIKES!)
Precusors II
U.S. v. AldmanDespite being create primarily to assist in a
business decision, a report that contained predictions about the
likely outcomes of an anticipated suit) was protected from
disclosure because it was prepared in anticipation of
litigationEvergreen Trading v. U.S.A/C does not attach to documents
just because they are shown to attorneys; work product does not
protect document prepared when not under the supervision of an
attorney
U.S. v. Textron
Textron refused to furnish to the IRS work papers consisting of
a spreadsheet that listed unclear tax positions, percentage
estimates of the chance of prevailing, and tax reserve amounts
A/C applied, but was waived
Practitioner privilege applied, but was waived
U.S. v. Textron
Work product doctrine:in anticipation of litigationbecause of
testrequires only that the documents were prepared because of the
prospect of litigationTextron had appealed issues in 7 of its last
8 audits
U.S. v. Textron
WaiverDisclosures that are inconsistent with keeping the
information from an adversary may result in a waiver of the
privilege
Disclosure to auditors
AICPA code of Professional Conduct
Personal guarantee by auditor
COOPERATION DOES NOT AMOUNT TO CONSPIRACY.
Textron: The Appeal
Textron: The Appeal
January 21, 2009, 1st Circuit Court of Appeals affirmed and
remanded the decision of the trial court. Answered several
questions.Whether administrative tax disputes should be treated as
litigation for purposes of work product. Whether a mental
commitment on the part of the taxpayer to litigate the issue short
of a complete IRS concession was necessary. Whether disclosure of
the workpapers to auditors waived the work product protection.
Textron: The Appeal
Implications for state tax auditsUnder the rules announced in
Textron, Tax papers in state audits and litigation should be
entitled to at least the same protection from disclosure for tax
accrual workpapers, and in some states even greater protections are
available under state law. To the extent state tax accrual
workpapers are prepared, at least in part, in anticipation of
litigation, taxpayers should vigorously assert the work-product
privilege to protect them from disclosure.
Textron: The Appeal - FIN 48 Implication
Under the First Circuits reasoning, the combination of FIN 48
requirements of recognition and measurement for such uncertain
positions should provide a similar guarantee of the reasonableness
of anticipation of a tax dispute regarding suchCorporations
required to keep internal tax accrual workpapers should review
their current practices in light of the First Circuits
decision.
Regions Financial v. U.S.
Third party summons for Regions tax accrual workpapers related
to listed transactions; all but 9 documents were provided. Some
were core documents; others were derivative documents that
discussed or quoted the core documents.
Regions Financial v. U.S.
Because of or primary purpose?
Ultimately, the court determined that it did not need to
determine which test applied because the documents were subject to
protection under both tests
Were it not for anticipated litigation, Regions would not have
to worry about contingent liabilities and would have no need to
elicit opinions regarding the likely results of litigation.
Regions Financial v. U.S.
WaiverDisclosure to accountants did not waive the doctrine:
There is simply no conceivable scenario in which E & Y would
file a lawsuit against Regions because of something E & Y
learned from Regions disclosures.
MA. Comm. of Revenue v. Comcast Corp.
Massachusetts Commissioner of Revenue v. Comcast Corp., No.
SJC-10209 (Mass. Mar. 3, 2009)Court ruled in a state excise tax
:work product doctrine protected from disclosure communications
between an in-house corporate counsel and outside tax accountants
consulted by him regarding the structuring of a sale of stock
transaction.sought the accountants assistance to help interpret
Massachusetts law to assess the risks of and exposure to litigation
for any various forms of a stock sale.
Comcast Corp. (cont.)
Applying the because of test, the court held that the
accountants memoranda would not have been prepared irrespective of
the prospect of litigation.
As such, the documents were protected from disclosure, under the
work product doctrine.
LATE BREAKING NEWS
Countryside Limited Partnership
Countryside Limited Partnership v. Commissioner of Internal
Revenue, 132 T.C. No. 17, June 8, 2009IRS moved to compel
production of documents from the taxpayer including written minutes
of communications between the taxpayer's attorneys and longstanding
tax accountant regarding business planning matters including taxes
and a two-page handwritten note taken by one of the partners at a
meeting with the accountant regarding tax planning.The attorney
client privilege "shall not apply to any written communication
which is ... in connection with the promotion of the direct or
indirect participation of the person in any tax shelter (as defined
in section 6662(d)(2)(C)(ii))." 7525(b).
Countryside Limited Partnership
Put the burden on the IRS to establish that the exception
applied. Thus, the IRS had to prove that there was a (i) written
communication between the practitioner and the taxpayer which (ii)
was made in connection with the promotion of a tax shelter.notes of
an oral conversation were not "written communications." no
promotional activity where the tax advisor is giving tax advice in
the course of a routine relationship between the advisor and the
client.
Countryside Limited Partnership
Put the burden on the IRS to establish that the exception
applied. Thus, the IRS had to prove that there was a (i) written
communication between the practitioner and the taxpayer which (ii)
was made in connection with the promotion of a tax shelter.notes of
an oral conversation were not "written communications." no
promotional activity where the tax advisor is giving tax advice in
the course of a routine relationship between the advisor and the
client.
Valero Energy Corp. v. United States
Valero Energy Corp. v. United States,Case No. No. 08-3473, 7th
Circuit, June 8, 2009Took a very different view regarding the
shelter exception in section 7525. Adopted a broad definition of
"promotion." The Government's burden in showing that the exception
applied was not heavy: "[t]he burden to overcome the privilege is
relatively light it need only show there is some foundation in fact
that a particular document falls within the tax shelter
exception.
Valero Energy Corp. (cont.)
The documents involved various communications and related
materials between the taxpayer and its historic accountant, Arthur
Andersen, regarding, inter alia, the tax consequences of a planned
major acquisition by Valerothe Seventh Circuit concluded that,
because Arthur Andersen encouraged Valero to undertake the
tax-beneficial structures and transactions associated with the
planned acquisition, Andersen was promoting those transactions
within the meaning of the statute,
United States v. Deloitte & Touche,
United States v. Deloitte & Touche, Case No. 08-411, U.S.
District Court for the District of Columbia, June 8, 2009 The
Government sought three documents Deloitte had received from its
client, Dow Chemical, in the course of a financial audit. Dow
asserted that the documents were protected by the work-product
doctrine. The IRS did not vigorously challenge whether the
documents were work-product in the first instance but argued that
their disclosure to Deloitte constituted a waiver of the
work-product protection.
U.S. v. Deloitte Touche (cont.)
Dow's disclosure to Deloitte USA was not inconsistent with the
maintenance of secrecy because Deloitte USA, as Dow's independent
auditor, was not a potential adversary, and no evidence suggests
that it was unreasonable for Dow to expect Deloitte USA to maintain
confidentiality.The district judge also addressed an interesting
recurring issue regarding whether Deloitte had to produce documents
which were in the possession of its Swiss affiliate. As a general
matter, a party which is subject to a summons must produce
documents that are in its "possession, custody or control."
U.S. v. Deloitte Touche (cont.)
Here the district judge had to answer the interesting question
whether Deloitte USA had control over documents in the possession
of its Swiss affiliate, Deloitte Switzerland. The judge held that
no such control existed. No disclosure was required.
TAKEAWAYS
Document Protection Plan
BEFORE documents are created
IN the documents
AFTER the documents have been provided to you (the client)