Waiver of Privilege:Sharing Information with Deal Team in Tax Planning

In Schaeffler v. U.S., the taxpayer filed a motion to quash the U.S.'s request to discover information that was shared between lawyers, financiers and accountants under the attorney work product doctrine.

In short, the taxpayer owned a limited partnership that was funded by a consortium of banks to purchase a target company.  Shortly, after the target company was acquired, the share price dropped significantly, and the taxpayer, the banks and the partnership were required to restructure.  As part of the restructuring, the parties entered into an Attorney Client Privilege Agreement ("ACPA") and retained EY and Dentons US, LLP to assist with the restructuring.  The U.S. sought via summons all documents shared under the ACPA.

First, the Court ruled that, although the banks had an large interest in the partnership's tax treatment, there was no common interest, so the common interest rule did not apply.  In order for the common interest rule to apply, there must be: (1) a common legal, rather than commercial, interest, and (2) the disclosures were made in the course of that common legal goal.  The Court held that the banks' interest was primarily commercial in that they were interested in how much they would have to finance to pay the tax burden.  As such, their interest was commercial, not legal, and there was no attorney-client privilege.

The Court also rejected the work product argument as applied to EY in that the restructuring plan formed by EY was not in anticipation of litigation.  The Court used the standard of whether EY would have created the document containing the opinion in a similar form even if litigation or an audit had not been anticipated.  The Court found that EY would have had a legal duty to create similar memorandum under a similar form.  The Court reasoned that Circular 230 and Treas. Reg. 1.6694-2(b) require tax practitioners in providing tax advice to base their opinions on all legal issues and risks regardless of anticipated litigation or audit. As such, EY was legally bound to provide a similar analysis even if an audit was not anticipated.

In this Office's opinion, the Court's opinion makes any tax advice from a non-lawyer to a client non-privileged because the tax practitioner must consider legal arguments and risks in formulating an opinion under Circular 230 and the regulations.  Clients would be well advised to use law firms in place of accountancy firms in analyzing the risks of business transactions.

See Schaeffler v. U.S., 1:13-cv-4864 (SDNY May 28, 2014)