The Supreme Judicial Court recently
took on its own initiative a case from the Appeals Court
considering whether certain tax memoranda prepared by accounting
firms were protected under the attorney client privilege or the
work product doctrine. The Massachusetts Department of Revenue
sought these documents in discovery during the course of an appeal
of certain tax assessments. In
Commissioner of Revenue v. Comcast Corporation, 453 Mass.
293 (2009), the taxpayer Comcast Corporation, in connection with an
appeal of the amount of excise tax due in connection with a
liquidation of shares of stock that yielded significant capital
gains, objected to the Commissioner of Revenue's request to produce
certain documents on the grounds that the tax memoranda, and drafts
of the tax memoranda, were privileged or protected. The Supreme
Judicial Court affirmed the Superior Court's decision that the
documents were protected by the work-product doctrine.
Retention of Accounting
Firms
Taxpayer had retained an
accounting firm for tax advice with regard to the transaction in
question. It would be common business practice for any company to
seek tax advice for a transaction of this size and scale. Comcast's
in-house tax counsel was the individual that retained Arthur
Anderson for tax advice. It was in his capacity as State and Local
Tax Counsel that the individual at Comcast retained Arthur
Anderson. He turned to the accounting firm to prepare a memorandum
discussing the impact of certain planning opportunities and to
interpret Massachusetts law. Even though he was state and local tax
counsel for Comcast, he was not adequately familiar with
Massachusetts law. Communications with Arthur Anderson were
considered by all to be confidential and privileged and were
treated as such.
During the course of the audit,
the Commissioner sought certain information regarding the
transaction at hand and deemed the information that the taxpayer
produced "insufficient." The taxpayer continued to withhold the tax
memoranda as those documents were considered protected. The Supreme
Judicial Court considered the applicability of the Attorney Client
Privilege and the Work Product Doctrine separately.
The Attorney Client
Privilege
The underlying purpose behind
the Attorney-Client Privilege is to allow clients to make full and
open disclosures to their legal counsel so that fully informed
legal advice can be rendered.1 The purpose of this is to
promote "broader public interests in the observance of law and
administration of justice."2 Despite the high value
placed on the privilege, Massachusetts courts have construed the
privilege narrowly, in order to "protect the competing societal
interest of the full disclosure of relevant evidence," particularly
where information is being withheld from a government entity, as is
true in tax proceedings.3
The requirements of the
attorney-client privilege are that: 1) legal advice of any kind is
sought, (2) from a professional legal advisor in his capacity as
such, (3) the communications relating to that purpose are made in
confidence, (4) by the client, and (5) at his instance permanently
protected from disclosure by himself or by the legal advisor. The
protection may be waived by the client.4 The party
asserting the privilege, the taxpayer, bears the burden of proving
that the privilege applies.
The Commissioner argued that the
taxpayer in this case had not met its burden for three reasons.
First, the information at issue was not confidential, but was
public knowledge. The Court disagreed and found that every
necessary step was taken to keep the contents of the memoranda
private.
Second, the Commissioner
challenged the assertion that the memoranda fell within the
"derivative attorney-client privilege" because the information was
disclosed to a third party, namely an accountant. The Court stated
that the privilege can shield communications with a third party to
the extent that the third party facilitates communication between
attorney and client and thereby assists the attorney in the
rendering of legal advice.5 The Court cited a case in
which in house counsel requested an accountant to evaluate the tax
consequences of a proposed restructuring.6 In that case,
the taxpayer argued that the accountant prepared the analysis in
order to assist in rendering legal advice, but the Court determined
that the derivative privilege outlined in Kovel did not protect the
advice because the accountant was not needed to facilitate
communication between counsel and client.
The Supreme Judicial Court
applied the same analysis to Comcast, and determined that the
memoranda prepared by Arthur Anderson were not protected by the
attorney-client privilege.
In so holding, the Supreme
Judicial Court recognized the difficulty in drawing a distinction
between "legal advice" and "tax or accounting advice" given to a
client. Regardless, the court held that as the advice was disclosed
to a third party, it need not resolve the distinction between the
two. The Court noted that while Comcast was free to seek advice on
Massachusetts law from a practicing Massachusetts attorney, advice
was instead sought from an accountant, and was therefore not
protected by the privilege.
The Work Product
Doctrine
The Work Product Doctrine is
used "to enhance the vitality of an adversary system of litigation
by insulating counsel's work from intrusions, inferences, or
borrowings by other parties."7 In Massachusetts, the
Work Product Doctrine protects documents prepared in anticipation
of litigation even when prepared by non-lawyer
representatives.8
The Court held that the Anderson
memoranda in question were protected by the Work Product Doctrine
not only because they contained the "mental impressions,
conclusions, opinions and legal theories" of its authors but also
because they were prepared "because of" the reasonable prospect of
litigation. The memoranda in question were prepared in order that
Comcast could make an informed business decision about the possible
or likely outcome of litigation that would rise from the
transaction.
Disclosure of Tax Advice
Memoranda
While preparation of memoranda
seeking tax advice from non-lawyers is commonplace, taxpayers
should be cognizant of the intricacies of the protections provided
by both the attorney-client privilege and the Work Product Doctrine
and take appropriate actions to ensure that advice is protected
where applicable. In this case, the Supreme Judicial Court has
provided guidance as to the steps necessary to protect
communications between taxpayers, their counsel, and their tax
advisors.
Notes
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8. Mass. R. Civ. P. 26(b)(3).
See generally, Suffolk Constr. Co. v. Div.
of Capital Asset Mgmt. 449 Mass. 444, 449 (2007).Upjohn Co. v.
U. S., 449 U.S. 383, 389 (1982).Comcast, 453 Mass. at
304.See Suffolk Constr. Co., at 448. See U. S. v.
Kovel, 296 F.2d 918 (1961). U.S. v. Adlman, 68 F.3d 1495, 1500
(2d Cir. 1995).See Ward v. Peabody, 380 Mass. 805, 817
(1980).