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Section Review

Understanding Discovery: The Supreme Judicial Court Clarifies the Attorney Client Privilege & Work Product Doctrine as Related to Tax Memoranda

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.











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).

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