District Court Considers Taxpayer’s Privilege and Work Product Doctrine Claims in IRS Summons Action

By Bryan D. Keith, J.D., CPA, Washington, D.C.

Editor: Greg A. Fairbanks, J.D., LL.M.

Practice & Procedures

In a recent holding by the District Court for the District of Delaware ( Veolia Environnement N. Am. Operations, Inc. , No. 13-mc-03-LPS (D. Del. 10/25/13)), the government sought to enforce a summons for the production of certain documents against Veolia Environnement North America Operations Inc. Veolia, a subsidiary of the French conglomerate Vivendi, claimed that certain documents requested by the IRS were protected by the work product privilege, attorney-client privilege, and Sec. 7525 tax practitioner privilege.

The court found that Veolia had prepared certain documents in anticipation of litigation and that the work product privilege may apply to such documents. With respect to certain other documents, however, the court found that Veolia must produce to the IRS materials containing facts or data considered by Veolia’s external valuation advisers in forming opinions expressed in the advisers’ reports. In addition, the court concluded that Veolia did not waive its privilege when it shared certain documents widely among individuals whom it and related entities employed.


The various documents the government requested related to a dispute between the IRS and Veolia over a $4.5 billion worthless stock deduction the company claimed on its 2006 federal income tax return. Veolia purchased a corporate subsidiary in 1999 for $8.2 billion. In December 2006, the corporate subsidiary converted under applicable state law from a corporation to a limited liability company (LLC). Veolia treated the subsidiary’s conversion as an event that triggered the $4.5 billion worthless stock loss with respect to the subsidiary. In evaluating the possibility of the worthless stock loss, Veolia retained legal counsel, hired two valuation firms, and obtained a private letter ruling from the IRS interpreting Sec. 165(g), which governs losses on worthless securities.

In December 2008, the IRS was evaluating whether Veolia was entitled to the claimed deduction and, in an effort to obtain additional information, issued summonses to Veolia for a variety of documents. Veolia turned over numerous documents to the IRS but refused to produce certain other documents that the company asserted were privileged. In January 2013, the IRS filed a motion to enforce its summonses and compel production of the requested documents.

Work Product Doctrine

The work product doctrine under Rule 26(b)(3) of the Federal Rules of Civil Procedure generally provides that a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial (see also Hickman v. Taylor, 329 U.S. 495 (1947)). The U.S. Supreme Court has ruled that the work product doctrine can apply to information requested in an IRS summons (see Upjohn Co., 449 U.S. 383 (1981)). The work product doctrine is generally considered to be an extension of the attorney-client privilege, as it covers not just direct communications between a taxpayer and its attorney but applies to materials prepared for the taxpayer or for its attorneys by a consultant, agent, or other adviser (Fed. R. Civ. Pro. 26(b)(3)(A)). The work product doctrine, however, is subject to certain exceptions. For example, it does not apply to materials assembled by a party in the ordinary course of business (see Goosman v. A. Duie Pyle, Inc., 320 F.2d 45 (4th Cir. 1963)).

In the instant case, the government argued that Veolia did not prepare the disputed materials in anticipation of litigation, as required under the work product doctrine, but in the ordinary course of business, because Veolia’s ordinary activities involved acquiring, managing, and divesting operating companies. The government reasoned that these ongoing ordinary business activities encompassed Veolia’s goal of restructuring subsidiaries to derive tax benefits. Therefore, under the government’s view, Veolia’s conversion of its subsidiary was merely a result of its ongoing business decisions, and the corresponding documents should not be covered by the work product doctrine.

The court disagreed with the government and concluded that Veolia did in fact anticipate litigation as early as March 2006. The court noted the following as support for its conclusion:

  • A dispute between Veolia and the IRS seemed likely because Veolia had been audited by the IRS in prior tax years;
  • A dispute seemed likely also because of the magnitude of the deduction at issue;
  • Veolia retained outside legal counsel to advise it regarding the worthless-stock deduction;
  • Veolia sought valuation reports;
  • Veolia obtained a private letter ruling from the IRS;
  • Veolia applied to participate in the IRS Pre-Filing Agreement (PFA) program; and
  • Veolia’s withheld documents actually referred to the possibility of future litigation.

Thus, the court concluded that even though Veolia’s restructuring of its corporate subsidiary may have also been undertaken in the ordinary course of its business, such an overlap did not deprive Veolia from using the work product doctrine to shield certain documents from IRS discovery.

Materials Relied Upon by Experts

As discussed above, the work product doctrine in Rule 26(b)(3)(A) protects from discovery certain materials prepared in anticipation of litigation. The rule is narrowed somewhat, however, by Rule 26(b)(4)(C), which limits protection only to direct communications between an expert and a party’s attorney and excludes “facts or data” not provided by the party’s attorney from the scope of protected materials. Thus, the court concluded that Veolia must produce materials containing facts or data that were not provided by Veolia or its attorneys and that were considered by Veolia’s valuation experts in forming such experts’ opinions as expressed in their reports.

Attorney-Client and Tax Practitioner Privileges

The court did not rule on whether the attorney-client privilege or the Sec. 7525 tax practitioner privilege applied to specific documents requested from Veolia. In general, the attorney-client privilege is a common law privilege that protects communications between an attorney and the attorney’s client. The Sec. 7525 tax practitioner privilege protects communications concerning tax advice between a tax practitioner and the practitioner’s client. Sec. 7525(a)(1) generally provides that the tax practitioner privilege applies to the extent that the attorney-client privilege would apply if the communications were between a client and attorney.

The government argued that Veolia failed to demonstrate that certain of the requested materials related to obtaining legal advice and should therefore be entirely excluded from any privilege claim. The court did not rule on the issue in light of its other rulings and instead directed the government and Veolia to evaluate the documents at issue and submit future proposals to the court.

Waiver of Privilege

In addition, the government argued that, even if certain documents were subject to some sort of privilege, Veolia waived its privilege with respect to those materials. The government contended that Veolia waived its privilege when it shared materials widely among individuals working for Veolia and when it shared materials among individuals who were employed by related entities. The court rejected the government’s contention, however, and ruled that Veolia had not waived its privilege. The court noted that Veolia had common interests with its parent and other affiliated entities and that it was necessary to share the materials at issue with the various employees for purposes of obtaining and acting on legal and tax advice.


The court’s conclusions provide insight into how other courts may define materials prepared “in anticipation of litigation” and apply the work product doctrine, attorney-client privilege, and tax practitioner privilege to disputes between taxpayers and the IRS. Importantly, documents and materials prepared several years prior to a dispute with the IRS may be privileged documents prepared in anticipation of litigation, notwithstanding the lack of an immediate controversy with the IRS and the passage of several years.

Furthermore, the court’s holdings suggest that taxpayers in the right circumstances may share privileged documents with the employees of affiliated entities when those entities have a common interest in the litigation. In summary, taxpayers should carefully consider ongoing tax planning and how to maintain the ability to claim privilege for materials related to such planning, even if an anticipated dispute with the IRS is not expected to arise for several years.


Greg Fairbanks is a tax senior manager with Grant Thornton LLP in Washington, D.C.

For additional information about these items, contact Mr. Fairbanks at 202-521-1503 or greg.fairbanks@us.gt.com.

Unless otherwise noted, contributors are members of or associated with Grant Thornton LLP.

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