FIN 48 and Work Product Protection Presentation

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

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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.


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.


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).


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.


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)