Just when the Department of Justice must have thought that it could do no wrong in pursuing the workpapers of taxpayers and their auditors, it ran smack into the formidable blockade that is the Court of Appeals for the District of Columbia Circuit. In United States v. Deloitte LLP et al., No. 09-5171 (D.C. Cir. Jun. 29, 2010), the D.C. Circuit seems to have fired a shot across the bow of both the Department of Justice and the IRS’s brand-new Schedule UTP. (You can find the opinion here.)
Writing for an undivided panel, Chief Judge Sentelle opined that Federal Rule of Civil Procedure 26(b)(3) only partially codifies the work product doctrine announced in Hickman v. Taylor, 329 U.S. 495 (1947). While the text of Rule 26(b)(3) addresses “documents and tangible things,” the doctrine prescribed by the Supreme Court was much broader, extending to “‘intangible’ things” like theories, mental impressions, and opinions. In other words, according to the D.C. Circuit’s interpretation, “work product” consists not of mere documents themselves, but rather of the mental impressions and opinions on which those documents are based. Thus, whether a document is subject to the protection of the work product doctrine will depend upon whether it contains “work product”; and whether the substance contained in the document is “work product” will depend on whether that substance, not the document, was prepared in anticipation of litigation.
Although the Department of Justice will no doubt take exception, the court’s logic seems consistent with how the work product doctrine operates in practice. Once “work product” has been created, that work product can be repeatedly transmitted from one person to another so long as no waiver has occurred. It seems incongruous that an attorney could memorialize her opinions and theories in a memorandum and then have the substance of that writing lose its protection as work product simply because it was repeated, via oral or written communication, to another person within the zone of protection contemplated by Rule 26(b)(3). Rather, as the court’s opinion suggests, the inquiry should focus on the circumstances in which the “opinion,” “theory,” or “mental impression” was developed. If such intangible ideas were developed in anticipation of litigation, they should be protected by the work product doctrine, notwithstanding their subsequent transmission or memorialization in another form.
Moreover, the D.C. Circuit’s reasoning, were it accepted by other courts, has the potential to blow an enormous hole in the government’s efforts to obtain information from taxpayers and their advisors regarding so-called “uncertain tax positions” on the newly devised Schedule UTP. (For the draft schedule and instructions, see here and here.) As the court noted, “intangible” work product, such as mental impressions, are protected so that a party cannot be forced to “repeat or write out” the mental impressions in discovery. If a party cannot be forced to divulge such information in discovery, the question that naturally follows is whether that party can be forced to disclose such information on its tax returns.
The merits of a given tax position, and a taxpayer’s assessments of putatively “uncertain tax positions,” clearly represent legal “theories,” “opinions,” and “mental impressions.” After all, the correct determination of the tax consequences of some activity or transaction is a legal conclusion. Moreover, the theories and opinions that are being requested by the IRS clearly relate to issues for which the taxpayer anticipates the likelihood of a dispute, and potential litigation, with the government. (The instructions to Schedule UTP require taxpayers to disclose positions for which no accounting reserve is required but for which litigation is nevertheless expected. As my colleague, Phil Karter, has previously noted, this requirement could be interpreted as requiring the disclosure of information otherwise protected by the work product doctrine.)
Now, it might still be argued that even if a taxpayer’s estimate of its uncertain tax positions represents legal thoughts, opinions, or mental impressions, that information should not be protected because those impressions were not prepared in anticipation of litigation. (See, e.g., Steve R. Johnson, The Work Product Doctrine and Tax Accrual Workpapers, Tax Notes 155 (Jul. 13, 2009) (suggesting that tax accrual workpapers never deserve protection as work product).) A full treatment of the issue is beyond the scope of this essay; however, it bears further exploration because, if the D.C. Circuit is correct and its reasoning is adopted by other courts, the Department of Justice may soon be scrambling for alternative arguments for why workpapers should not be subject to the work product doctrine.
Of further note, the court also rejected the government’s arguments that the taxpayer’s disclosure of its own memoranda to its auditor waived protection for those memoranda, which were conceded to contain work product. Briefly, the court rejected the government’s arguments that the auditor was either (i) a potential adversary of the taxpayer or (ii) a conduit to other adversaries.
As to the first argument, the court framed the question as whether the auditor could be an adversary of the taxpayer’s “in the sort of litigation” that the otherwise protected documents address. Because the taxpayer anticipated a dispute with the IRS, not with its auditor, the auditor could not be considered a potential adversary with respect to the documents. As to the second argument, the court concluded that the auditor’s obligation to maintain the confidentiality of information provided by the taxpayer provided a sufficient basis for the taxpayer to expect the disclosed materials would remain confidential. Consequently, no waiver had occurred when the information was disclosed to the auditor.
Going forward, a request for an en banc rehearing is likely – if not certain. Further, the appeal of yet another work product case to the Supreme Court seems to be in the offing.