D.C. Circuit Finds Work Product Protection Not Waived by Disclosure to Independent Auditors

By Michael Wu, CPA, MBA, San Jose, CA

Editor: Mark G. Cook, CPA, MBA

Procedure & Administration

On June 29, 2010, the Court of Appeals for the D.C. Circuit denied an IRS motion to obtain from Dow Chemical Company’s independent auditor, Deloitte & Touche USA, LLP, three documents in connection with ongoing tax litigation between Dow and the IRS (Deloitte LLP, No. 09-5171 (D.C. Cir. 6/29/10)). This affirmed in part a district court’s holding that Dow did not waive work product protection when it disclosed certain documents to Deloitte. However, the district court’s order was vacated in part for determination by the district court as to whether one document constituted attorney work product. This decision is significant because it sets back the government’s efforts to obtain work product from the taxpayers, which had gotten a boost in the Textron case.


In Textron Inc., 577 F.3d 21 (1st Cir. 2009), the First Circuit held that Textron’s tax accrual workpapers were not work product and therefore were not privileged. Textron considered three possible privileges: the attorney-client privilege, the Sec. 7525 tax practitioner privilege, and the work product privilege. Because disclosure to the company’s accountants waived the first two privileges, the case ultimately focused on the work product privilege. The test followed by the majority of the federal appellate circuits, including the First Circuit, for identifying work product is the “because of” test. Under this test, a document is considered privileged if it was created “because of” the possibility of litigation. However, in Textron, the First Circuit applied this test narrowly, essentially holding that workpapers that a company did not create for use in litigation were not created because of the possibility of litigation. The majority opinion concluded that Textron had not created the tax accrual workpapers for use in litigation and therefore they were not privileged. Textron asked the Supreme Court to review the case, but it refused.

Some commentators predicted that courts outside the First Circuit would not follow the Textron decision and would protect most tax accrual workpapers under a less strict application of the “because of” test. In Deloitte, the D.C. Circuit fulfilled these predictions, adopting a broad view regarding the application of the test that extends work product protection to dual-purpose documents that a company develops in anticipation of litigation and for a business purpose.


In Deloitte, the IRS subpoenaed documents from Deloitte concerning the tax treatment of two partnerships owned by Dow and two of its wholly owned subsidiaries. Deloitte produced a number of documents but refused to produce three documents that Dow identified as work product. The first was a draft memorandum prepared by Deloitte summarizing a meeting at which Dow’s outside counsel was present and recording the legal analysis from the outside counsel about the possibility of litigation over the partnership. Dow’s counsel (outside and in-house) created the other two documents at issue, but they were disclosed to Deloitte during an independent financial statement audit procedure.

The district court denied the government’s motion to compel without reviewing the three documents in camera (Deloitte & Touche USA LLP, 623 F. Supp. 2d 39 (D.D.C. 2009)). The district court concluded that the Deloitte memorandum was work product because its contents recorded the thoughts of Dow’s counsel regarding the prospect of litigation. The government did not dispute that the other two Dow documents were work product but maintained that the disclosure of these documents to Deloitte waived the privilege. The district court held that waiver did not occur because Deloitte was not a potential adversary and there was nothing suggesting that it was unreasonable for Dow to expect Deloitte to maintain confidentiality.

The government appealed to the D.C. Circuit and argued that El Paso Co., 682 F.2d 530 (5th Cir. 1982), and Textron demonstrated that a document created as part of an independent audit has the sole function of facilitating the audit and is not prepared in anticipation of litigation. The circuit court rejected the government’s function test and held that the court should not look solely to a document’s function from its contents in determining its status as work product. Under the “because of” test, material generated in anticipation of litigation may also be used for ordinary purposes without losing its protected status.

The government also argued that Deloitte’s memorandum was not subject to work product protection because the work product protection under Rule 26(b)(3) of the Federal Rules of Civil Procedure covers only tangible documents prepared by a party or its representatives, and Deloitte was neither. The court indicated that the critical question was not who prepared the document but whether the document contained work product. The court remanded the question to the district court to determine if the Deloitte memo was entirely work product or whether a partial or redacted version of the document could have been disclosed.

The court also addressed the government’s contention that Dow waived the work product protection by disclosing the documents to Deloitte. Work product is waived only if there has been a voluntary disclosure to an adversary or a conduit to an adversary. The court held that Deloitte was not a potential adversary because the documents prepared by Dow’s counsel were in anticipation of litigation with the IRS, not Deloitte. The court ruled that “[i]n short, Deloitte’s independent audit obligations do not make it a conduit to Dow’s adversaries” and that “Dow had a reasonable expectation of confidentiality because Deloitte, as an independent auditor, has an obligation to refrain from disclosing confidential information.”


The D.C. Circuit’s decision in Deloitte adds more support for the position that the work product privilege covers audit workpapers, including tax accrual workpapers. It also established that disclosing audit workpapers to a public accounting firm does not waive the work product privilege for those workpapers.

Textron held that in-house tax accrual workpapers were not work product. Deloitte held that similar documents were work product and that disclosing them to the company’s auditors was not a waiver for work product protection. What is next? Textron initially won its case in the First Circuit, but the court vacated the initial decision and granted the government a rehearing before the full court. Although the circuit courts do not commonly grant rehearings, given its success in Textron one would expect the government to ask the full D.C. Circuit to rehear the case. If the D.C. Circuit refuses to grant a rehearing, the government may appeal the case to the Supreme Court. However, given its refusal to hear the Textron case, the Supreme Court is not likely to agree to hear the Deloitte case either.


Mark Cook is a partner at Singer Lewak LLP in Irvine, CA.

For additional information about these items, contact Mr. Cook at (949) 261-8600, ext. 2143, or mcook@singerlewak.com.

Unless otherwise noted, contributors are members of or associated with Singer Lewak LLP.

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