August 1998 Issue


he Second Circuit Court of Appeals, reversing a lower court opinion, recently held that a CPA firm's tax memoranda, which had been requested by a corporate client's tax vice president, can be protected by the work product doctrine.

A concept distinct from the attorney-client privilege, the work product doctrine is codified in the Federal Rules of Civil Procedure (FRCP) rule 26(b)(3). The attorney-client privilege is a much older legal concept than the work product doctrine and is designed to protect confidential communications between the attorney and the client.

The work product doctrine, on the other hand, does not involve attorney-client communications. It is intended to "preserve a zone of privacy in which a lawyer can prepare and develop legal theories and strategy 'with an eye toward litigation' free from unnecessary intrusion from his [or her] adversaries."

In other words, the work product doctrine was created to permit attorneys to prepare for litigation without being harassed by the opposition.

The case revolved around a transaction contemplated by Sequa, an aerospace manufacturing company. Sequa's tax vice president, an attorney, wanted to merge two of its subsidiaries and requested an opinion on the proposed restructuring from Arthur Andersen. The CPA firm's 58-page memorandum recommended against the merger but suggested a number of different approaches if the company chose to proceed. Sequa did proceed with the merger and as a result filed for a $35 million tax refund.

The IRS audited the transaction and requested taxpayer documents concerning the corporate restructuring. The taxpayer acknowledged the existence of the memorandum but refused to turn it over to the IRS, claiming it was protected by the attorney-client privilege and the work product doctrine. The IRS served a summons to obtain the memorandum and began a U.S. District Court action to enforce the summons.

The district court held the memorandum was protected by neither the attorney-client privilege nor the work product doctrine. On appeal, the Second Circuit agreed with the holding regarding the attorney-client privilege but remanded for further consideration regarding the work product doctrine. On reconsideration, the district court again ruled against the application of the work product doctrine and decided to enforce the IRS summons. The matter was then appealed to the Second Circuit a second time.

FRCP rule 26 says that documents prepared "in anticipation of litigation" may only be discovered by an opposing party if failure to allow discovery would create an undue hardship on that party. But in any event, the rule requires that a court "shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation." The question for the court in applying the doctrine to the Sequa transaction is whether the Arthur Andersen memorandum prepared at the request of the tax vice president in advance of a corporate restructuring transaction was prepared "in anticipation of litigation."

The various Circuit Courts of Appeals have applied two different tests to determine the extent of the protection offered by the work product doctrine "primarily to assist in litigation" and "because of the prospect of litigation." The Second Circuit ruled that the Arthur Andersen memorandum was protected under the work product doctrine provided it met the "because of" test. In its earlier review of the case, the appellate court had not had the opportunity to decide which of the two tests would be used in its jurisdiction.

As a result of this case, the Second Circuit joined the Third, Fourth, Seventh, Eighth and D.C. Circuits in using the following test: "Documents should be deemed prepared 'in anticipation of litigation,' and thus within the scope of the rule, if 'in light of the nature of the document and the factual situation in the particular case, the document can fairly be said to have been prepared or obtained because of the prospect of litigation." [Emphasis in original.]

The matter was remanded to the District Court to decide the case yet a third time. *

Source: U.S. v. Adlman, __ F.3d. __, No. 96-6095 (2nd. Cir. 2/13/98).

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