USA v. Veolia Environment North America Operations Inc.

Filing 31

MEMORANDUM OPINION re 1 MOTION to Enforce IRS Summons. Signed by Judge Leonard P. Stark on 10/31/2014. (rpg)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE
UNITED STATES OF AMERICA,
Petitioner,
Civ. No. 13-mc-03-LPS

v.
VEOLIA ENVIRONNEMENT NORTH
AMERICA OPERATIONS, INC.,
Respondent.

Kathryn Keneally, Nathan L. Strup, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, DC.
Attorneys for Petitioner.

Philip A. Rovner, Jonathan A. Choa, POTTER ANDERSON & COOPER LLP, Wilmington,
DE.
Breon S. Peace, Yaron Z. Reich, Jonathan Gifford, CLEARY GOTTLIEB STEEN &
HAMILTON LLP, New York, NY.
Attorneys for Respondent.

MEMORANDUM OPINION

October 31, 2014
Wilmington, Delaware

STARK, U.S. District Judge:
Pending before the Court is Petitioner United States of America's Motion to Enforce
Internal Revenue Service ("IRS") Summonses against Veolia Environnement North America
Operations, Inc. ("Taxpayer"). (D.I. 1) Taxpayer has refused to produce materials sought by the
IRS based on Taxpayer's assertion of work-product protection, attorney-client privilege, and tax
practitioner privilege.

BACKGROUND 1
I.

The IRS Audit
This dispute arises out of an IRS audit of Taxpayer's 2006 U.S. federal income tax return,

in which Taxpayer claimed a $4.5 billion worthless stock deduction. (D.I. 5 at 2; D.I. 11 at 1)
Taxpayer is a U.S. holding company owned by Veolia Environnement S.A. ("VE"), which is
itself a subsidiary of Vivendi S.A., a multi-billion dollar French conglomerate. (D.I. 11 Ex. 1
~~

7-8)
In April 1999, Taxpayer purchased Water Application & Solutions Corporation2

("WASCO") for $8.2 billion. (D.I. 8 ~ 6) By 2006, Taxpayer had come to the conclusion that
W ASCO's stock was worthless. It then retained legal advisors and tax experts to identify a
means by which it could claim WASCO' s stock as a deduction under Section 165(g) of the
Internal Revenue Code, 26 U.S.C. § 165(g). (D.I. 7 ~~ 7-11) Specifically, Taxpayer intended to
reduce ordinary income by taking a deduction for worthless securities in affiliated corporations.

1

Additional background material can be found in the Court's Memorandum and Order
dated October 25, 2013. (D.I. 23)
WASCO was known as U.S. Filter Corporation until 2004. (D.I. 11-1~4)

2

1

See 26 U.S.C. § 165(g)(3); see also D.I. 11 at 3-4.
In 2006, Taxpayer determined that converting WASCO to a Delaware Limited Liability
Corporation ("LLC") could be a viable "trigger" for claiming the deduction on its tax return.
(D .I. 8 ~ 10) Before finalizing the decision to convert WASCO to an LLC and claim the
deduction, Taxpayer and VE retained counsel at Cleary Gottlieb Steen & Hamilton LLP ("Cleary
Gottlieb") for legal advice, and additionally hired two valuation firms, Aon Accuracy ("Aon")
and XRoads Solutions Group LLP ("XRoads"), to evaluate and produce written reports on
WASCO's insolvency. (D.I. 7 ~~ 7-8; D.I. 8 ~~ 18, 20-21) On December 18, 2006, the Boards
of Directors of WASCO and Taxpayer met and authorized the companies to pursue the claim.
(D.I. 7 ~ 12) Several days later, on December 22, 2006, WASCO was converted to an LLC.
(D.1. 7 ~ 15)
In February 2007, Taxpayer- already under audit by the IRS for its 2004 and 2005
returns - applied for and subsequently enrolled in the IRS's newly established Pre-Filing
Agreement ("PF A") program, which was created "to resolve, before returns are filed, issues that
are likely to be disputed in post-filing audits." (D.I. 8 ~ 28; D.I. 11 at 4-5; see also D.l. 5 at 4) 3
In April 2007, VE and Taxpayer hired a third valuation firm, Duff & Phelps LLC ("Duff &

Phelps"), to produce an independent valuation ofWASCO's stock. (D.1. 8 ~ 30; D.I. 5 at 5)
Taxpayer provided the IRS with XRoads' final versions of the reports on WASCO's stock, which
both XRoads and Duff & Phelps prepared, as an effort to bolster Taxpayer's claim that
WASCO' s stock was worthless. (D .I. 8 ~ 31; D .I. 5 at 5)
On December 5, 2008, the IRS issued summonses for a variety of documents in

3

Quoting Rev. Proc. 2005-12, 2005-1 C.B. 311, 2004 WL 2956045, § 2 (Dec. 22, 2004).
2

Taxpayer's possession. (D.I. 1 at ii 8) While Taxpayer produced "hundreds of thousands of
pages in response to hundreds ofrequests from the IRS" (D.I. 4 at ii 10), it initially withheld 361
documents and portions of 45 documents. (D.I. 5 at 1; see also D.l. 8 ii 43) (stating that
Taxpayer produced 641,415 bates-stamped pages to IRS between January 2009 and April 2013)
Taxpayer refused to produce these materials based on its assertion of several privileges:
(1) work-product protection under Federal Rule of Civil Procedure 26(b)(3); (2) attorney-client
privilege; and (3) tax practitioner privilege under 26 U.S.C. § 7525(a)(l). (D.I. 5; D.I. 12)

II.

Procedural History
On January 4, 2013, the government filed this action to enforce the summonses and

compel the production of the documents withheld by Taxpayer. (D.I. 1) 4 On April 30, 2013,
following briefing, the Court held a hearing regarding the government's motion. (See Transcript
of Apr. 30, 2013 hrg. (D.I. 21)) ("Tr.") 5 Among the matters discussed were whether the Court
should review a portion of the withheld documents in camera and, if so, which ones. (See Tr. at
14) After the parties further met and conferred, the government agreed to withdraw its request
for 178 documents and requested that the Court conduct a review of a sample of 55 documents

The Court's jurisdiction over this matter is not contested. (See D.l. 4 ii 1)

4

5

The order proposed by the government and entered by the Court in scheduling the April
2013 hearing included a finding that "the file in this matter reflects a prima facie showing" of the
factors the government must show in order to obtain enforcement of the summonses. (D.I. 2 ii 3)
The Supreme Court set out the relevant four-part test in United States v. Powell, 379 U.S. 48, 5758 (1964): the government must show that (1) the investigation will be conducted pursuant to a
legitimate purpose; (2) the inquiry may be relevant to the purpose; (3) the information sought is
not already within the government's possession; and (4) the administrative steps required by the
Code have been followed. Taxpayer does not meaningfully dispute that the government has
made out a prima facie case, so the burden to justify withholding the summonsed documents has
shifted to Taxpayer. (See D.l. 11 at 6)
3

representative of the remaining 228 contested documents. (D.I. 16 at 2) The Court then ordered
Taxpayer to submit the requested 55 documents for in camera review (D.I. 18), and on May 24,
2013 Taxpayer did so.
Following inspection of the 55 documents, this Court issued a Memorandum Order on
October 25, 2013. (See D.I. 23) The Court made several findings, including a finding that
Taxpayer had met its burden to show that it anticipated litigation as early as March 2006 (id. at
9), and that Taxpayer improperly withheld documents containing communications made to its
testifying experts, XRoads and Duff & Phelps (id. at 13). The Court ordered the production of
documents disclosed to testifying experts unless otherwise protected under Rule 26(b ), and
further ordered the parties to meet and confer to identify which documents still remained in
dispute. (Id. at 14, 16-17)
By November 14, 2013, both parties indicated to the Court that 92 documents remained
in dispute. (D.I. 25, 26) These disputed documents generally fall into two categories:
(1) materials claimed as work-product from 2006 onwards, and (2) materials protected under the

attorney-client and tax practitioner privileges. On November 22, 2013, the Court ordered
Taxpayer to submit the remaining documents in dispute for in camera inspection and- given the
variety of documents claimed protected under the attorney client and tax practitioner privileges 6 allowed Taxpayer to accompany each document with a brief description of the privilege
purportedly protecting each document in question. (D .I. 2 7) On December 6, 2013, Taxpayer

6

Unlike the materials claimed protected as work-product (which applies almost
exclusively to materials related to the WASCO transaction created from 2006 onwards), the
documents claimed as privileged under the attorney-client and tax practitioner privileges pertain
to a wide variety of subjects dating from 2001 onwards. (See, e.g., Priv. Log No. 215 (containing
draft amendment created by outside counsel in January 2001))
4

submitted the documents. On December 13, the parties notified the Court that no other
documents remained in dispute. (D.I. 29, 30)

LEGAL STANDARDS
I.

Work-Product Doctrine
Federal Rule of Civil Procedure 26(b )( 1) broadly provides: "[p ]arties may obtain

discovery regarding any non-privileged matter that is relevant to any party's claim or defense."
The work-product exception to this disclosure requirement is set forth in Rule 26(b)(3)(A), which
states: "Ordinarily, a party may not discover documents ... that are prepared in anticipation of
litigation or for trial by or for another party or its representative." This work-product doctrine
functions to "promote[] the adversary system" by guarding the confidentiality of documents
prepared in anticipation oflitigation, allowing a party to prepare for litigation without fear that its
work-product will be used against it. See Westinghouse Elec. Corp. v. Republic of Philippines,
951 F.2d 1414, 1428 (3d Cir. 1991); see Hickman v. Taylor, 329 U.S. 495, 510-11 (1947).
The "burden of demonstrating that a document is protected as work-product rests with the
party asserting the doctrine." Conoco Inc. v. U.S. Dept. ofJustice, 687 F.2d 724, 730 (3d Cir.
1982). Hence, "[ o]nly by looking to the state of the mind of the party preparing the document, or
... the party ordering the preparation of the document[,]" Martin v. Bally 's Park Place Casino &

Hotel, 983 F.2d 1252, 1260 (3d Cir. 1993), can a court determine if a document comes within the
scope of Rule 26(b)(3) protection. "[D]isclosure to a third party does not necessarily waive the
protection of the work-product doctrine;" thus, in order to determine whether there has been a
waiver of the work-product doctrine, courts must "distinguish between disclosures to adversaries
and disclosures to non-adversaries." Westinghouse Elec. Corp., 951 F.2d at 1428. "Under this

5

standard, the voluntary disclosure of attorney work-product to an adversary or a conduit to an
adversary waives work-product protection for that material." United States v. Deloitte LLP, 610
F.3d 129, 140 (D.C. Cir. 2010); see also In re Chevron Corp., 633 F.3d 153, 165 (3d Cir. 2011)
("[I]t is only in cases in which the material is disclosed in a manner inconsistent with keeping it
from an adversary that the work-product doctrine is waived.").

II.

Attorney-Expert Communications
Federal Rule of Civil Procedure 26(a)(2)(B)(ii) mandates the disclosure of all "facts or

data considered by" an expert witness who is retained or employed to provide expert testimony,
when the facts or data were considered by the expert "in forming" "opinions the witness will
express." See also Fed. R. Civ. P. 26(a)(2)(B)(i). In 2010, Rule 26 was amended to "address
concerns about expert discovery," including by adding Rule 26(b )(4)(B) protecting drafts of
export reports required under Rule 26(a)(2)(C). See adv. comm. notes (2010). Also added was
Rule 26(b)(4)(C), which "protect[s] communications between the party's attorney and any
[expert] witness required to provide a report under Rule 26( a)(2)(B)," with three exceptions into
which discovery is permitted: "communications [that] (i) relate to compensation for the expert's
study or testimony; (ii) identify facts or data that the party's attorney provided and that the expert
considered in forming the opinions to be expressed; or (iii) identify assumptions that the party's
attorney provided and that the expert relied on in forming the opinions to be expressed." The
advisory committee notes accompanying the 2010 amendments state: "The addition of Rule
26(b)(4)(C) is designed to protect counsel's work-product and ensure that lawyers may interact
with retained experts without fear of exposing these communications."

6

III.

Attorney-Client and Tax Practitioner Privileges
The attorney-client privilege protects client and attorney communications related to

securing legal advice. See Rhone-Poulenc Rorer Inc. v. Home Indem. Co., 32 F.3d 851, 856 (3d
Cir. 1994). The privilege applies to communications from an attorney to a client as well as from
a client to its attorney. See Upjohn v. United States, 449 U.S. 383, 390 (1981). The attorneyclient privilege must be "strictly confined within the narrowest possible limits consistent with the
logic of its principle" because the "privilege obstructs the search for the truth and ... its benefits
are, at best 'indirect and speculative."' In re Grand Jury Investigation, 599 F.2d 1224, 1235 (3d
Cir. 1979) (internal citation omitted).
The burden of demonstrating the applicability of the attorney-client privilege thus rests on
the party asserting the privilege. See Matter of Bevill, Bresler & Schulman Asset Mgmt. Corp.,
805 F.2d 120, 126 (3d Cir. 1986) ("A party asserting a privilege bears the burden of proving the
applicability of the privilege"). Specifically, the party asserting privilege must show each of the
following:

(1)

the asserted holder of the privilege is or sought to
become a client;

(2)

the person to whom the communication was made
(a) is a member of the bar of a court, or his
subordinate and (b) in connection with this
communication is acting as a lawyer;

(3)

the communication relates to a fact of which the
attorney was informed (a) by his client (b) without
the presence of strangers (c) for the purpose of
securing primarily either (i) an opinion on law or
(ii) legal services or (iii) assistance in some legal
proceeding, and not (d) for the purpose of
committing a crime or tort; and
7

(4)

the privilege has been (a) claimed and (b) not
waived by the client.

In re Grand Jury Investigation, 599 F.2d at 1233 (internal quotation marks omitted).
The tax practitioner privilege, codified at 26 U.S.C. § 7525(a)(l), protects
communications between a taxpayer and a "federally authorized tax practitioner" for the purpose
of obtaining tax advice, "to the extent the communication would be considered a privileged
communication if it were between a taxpayer and an attorney." See generally Chao v. Koresko,
2005 WL 2521886, at *3 (3d Cir. Oct. 12, 2005) (recognizing tax practitioner privilege). Section
7525(a)(l) codifies the tax practitioner privilege as reflecting "the same common law protections
of confidentiality which apply to a communication between a taxpayer and an attorney" and,
thus, "the scope of the tax practitioner-client privilege depends on the scope of the common law
protections of confidential attorney-client communications." United States v. BDO Seidman, 337
F.3d 802, 810 (7th Cir. 2003).

DISCUSSION
I.

Documents Claimed to be Work-Product
Taxpayer asserts work product protection with respect to roughly half of the 92

documents Taxpayer is withholding. Taxpayer contends that these documents were created in
anticipation of litigation and are, therefore, protected under Rule 26(b)(3). The Court has
reviewed each of these documents in camera. Broadly speaking, these materials fall into two
categories: (A) draft reports of testifying experts; and (B) communications with testifying
experts.

8

A.

Draft Valuation Reports from XRoads and Duff & Phelps

Taxpayer claims that Privilege Log Nos. 275, 277, 280, 283-92, 315-17, and 342 are
expert reports prepared by XRoads and Duff & Phelps7 and, therefore, are protected work
product. (See D.l. 17 at 3 n.8) The parties dispute whether some of these documents - namely,
those labeled as "draft valuation letters" and "draft valuation presentations" - qualify as draft
"reports" within the meaning of Rule 26(b)(4). (See D.l. 25 at 3; D.I. 26 at 2) Additionally, the
government seeks production of any portions of these documents to the extent that they "may
contain non-privileged materials." (D.I. 25 at 3)
1.

Draft reports: Privilege Log Nos. 275, 277, 315-17

Rule 26(b )(4)(B) extends work-product protection to "drafts of any report or disclosure
required under Rule 26(a)(2), regardless of the form in which the draft is recorded." Several of
the Privilege Log documents are just that. Privilege Log Nos. 275 and 277, authored by XRoads,
and Nos. 315-17, authored by Duff & Phelps, are draft reports on the fair market value of
WASCO, and come within the ambit of Rule 26(b)(4)'s protection. These documents were
shared among employees of the testifying expert firms, Taxpayer, VE, outside counsel, and (for
the Duff & Phelps reports) with outside tax advisors PricewaterhouseCoopers LLP ("PWC") As
noted in the previous Memorandum Order, the Court is persuaded that "Taxpayer ... had
common interests with its parent and other affiliated entities" and there was no waiver of
protection by virtue of these documents being shared among members of the VE corporate
family. (D.I. 23 at 16) In particular with regard to Nos. 315-17, the Duff & Phelps reports, the

7

It is undisputed that XRoads and Duff & Phelps are testifying experts who must provide
a written report as required by Rule 26(a)(2)(B). (D.I. 11 at 7; D.I. 12 at 2)
9

Court finds no waiver of privilege because PWC is not an adversary nor a conduit to an
adversary. On the contrary, PWC was regularly consulted as a non-testifying expert. (See D.I. 7

iJ 10; D.I. 5 at 3)
Accordingly, the Court finds that the Taxpayer has met its burden with regard to Privilege
Log Nos. 275, 277, and 315-17. The Taxpayer will not be ordered to produce these documents to
the government.
2.

Draft valuation letters and presentations:
Privilege Log Nos. 280, 283-92, 342

The Court also agrees with Taxpayer that Privilege Log Nos. 280, 283-292, and 342 are
draft reports protected from disclosure as work product. (D.I. 17 at 3 n.8) Privilege Log No. 280
is described in the log as a "Draft Xroads valuation letter for Veolia Environment .... "
Privilege Log Nos. 283-292 and 342 are characterized as "Draft Valuation Presentations .... "
Rule 26(b)(4)(B) protects "drafts of any report or disclosure required under Rule 26(a)(2),
regardless of the form in which the draft is recorded." Here, the documents' contents reveal them
to be draft reports, demonstrating counsel's collaborative interactions with expert consultants notwithstanding the form these documents take. See Republic of Ecuador v. For Issuance of a

Subpoena Under 28 US. C. Sec. 1782(a), 735 F.3d 1179, 1187 (10th Cir. 2013).
Privilege Log Nos. 283-292 and 342 are labeled "draft valuation presentations" and, like
Log No. 280, contain preliminary conclusions. The XRoads presentation includes summaries
regarding WASCO's solvency and an outline. Privilege Log No. 342, the Duff & Phelps draft
presentation, also contains summaries and conclusions regarding solvency, which reflect

10

counsel's collaborative interactions with expert consultants. 8
Privilege Log No. 283 consists of a cover letter with a document attached to it; the
remainder of the document, other than the cover letter, is identical to Privilege Log Nos. 284-92
(except that the attachment to No. 283 has handwritten notes on it). The cover letter is not
referenced in the privilege log and Taxpayer will be required to produce it. Taxpayer properly
withheld the remainder of No. 283.

B.

Communications with the Testifying Experts

Taxpayer has withheld or redacted a number of materials containing communications
with testifying experts XRoads and Duff & Phelps on the basis that these documents reflect or
contain opinion work-product protected under Rule 26(b)(3) and do not otherwise fall under any
of the exceptions listed in Rule 26(b)(4)(C)(i)-(iii). (See D.I. 12 at 3) These documents are:
Privilege Log Nos. 82, 147, 351, 353, 355-56; materials produced in redacted form, i.e., Privilege
Log Nos. R295-96, R311-12, R267, R297-303; and Redaction Log Nos. R18-19, R26. 9 These
documents generally fall into two categories: (1) communications between counsel and the
testifying experts; and (2) communications between non-attorney employees and the testifying
experts.

8

All of these documents were prepared after the time in which the Court previously found
that Taxpayer anticipated litigation in March of 2006.
9

The documents subsequently produced in redacted form are a combination of redacted
documents produced to the IRS prior to commencement of this enforcement action (Redaction
Log documents) and documents originally withheld which were produced in redacted form
pursuant to the Court's prior Orders (D.I. 23; D.I. 27; see also D.I. 30). For the sake of clarity,
documents produced in redacted form are signified by an "R" preceding the privilege or
redaction log number.
11

1.

Attorney-expert communications:
Privilege Log Nos. 82, 351, R295-96

These documents contain communications between Taxpayer's counsel and the two
testifying experts. Privilege Log No. 351 contains an email chain between Taxpayer, Taxpayer's
Counsel, PWC, and Duff & Phelps. Log Nos. R295 and R296 contain redacted comments from
Taxpayer's employees and outside counsel attached to an email sent to Xroads.
These documents are protected, as each contains attorney mental impressions and theories
regarding the creation of the valuation report, and each comes within the scope of Rule
26(b)(4)(C)'s protection for an attorney's mental impressions when contained in a
communication with a testifying expert.
Taxpayer has not met its burden, however, to show that Privilege Log No. 82 is
protected. 10 This document consists of an email from Taxpayer's counsel at Cleary Gottlieb to
XRoads which, by its own language, puts forth "facts" for XRoads' consideration in preparing its
valuation letters. Accordingly, this document must be produced. See Fed. R. Civ. P.
26(b )(4)(C)(i)-(iii).
2.

Non-attorney communications with testifying experts:
Privilege Log Nos. 147, R267, R297-303, R31112, 332, 353, 355-56; Redaction Log Nos. RlS-19,
R26

These documents contain communications made to testifying experts by either
Taxpayer's non-attorney employees or its retained non-testifying experts. Taxpayer argues, and

10

ln addition to work-product protection, Taxpayer asserts attorney-client and tax
practitioner privilege for this document. This document - an email between XRoads and the
Taxpayer's counsel - is not a communication to or from a client and falls outside the scope of
these privileges. See In re Grand Jury Investigation, 599 F.2d at 1233.
12

the Court has found, that many of the materials created by Taxpayer and its non-testifying experts
were prepared in anticipation of litigation as early as March 2006. (D.I. 23 at 9) However, the
government contends that even if many of these documents are privileged, Taxpayer has waived
the privilege. (D.I. 11at12-13)
After inspection, the Court concludes that Taxpayer waived work-product protection with
respect to these disputed documents. Taxpayer predicates its argument on the theory that Rule
26(b )(3)(B) broadly protects from disclosure communications with testifying experts unless they
come within one of the exceptions delineated in Rule 26(b )(4 )( C) relating to compensation, facts
or data, or assumptions relied upon by the expert. (See, e.g., D.I. 28 at 1-2 ("[P]ortions of these
... documents ... are protected as opinion work-product under the work-product doctrine
because they ... did not convey facts to XRoads, but consisted only of further discussion of the
relevance of certain facts."))
This misapprehends the scope of Rule 26(b )(4 )( C) 's protection, which extends only to
communications between a party's attorney and a testifying expert. Rule 26(b)(4)(C) does not
erase the general rule that work-product protection is waived when material is disclosed to a
testifying expert. See In re Chevron, 633 F.3d at 165. Several recent appellate court decisions
have held that the post-2010 version of Rule 26(b)(4) is narrow in scope. See Republic of

Ecuador v. Mackay, 742 F.3d at 871 (9th Cir. 2014) (holding that Rule 26(b)(4) does not provide
presumptive protection for all testifying expert materials as trial preparation materials); Republic

of Ecuador v. Hinchee, 741F.3d1185, 1195 (11th Cir. 2013) (work-product protection only
extends to core work-product of attorney). Other courts addressing the issue of whether the
work-product doctrine extends to communications between a non-attorney or agent and the

13

testifying expert have concluded that it does not. See Fialkowski v. Perry, 2012 WL 2527020, at
*4 (E.D. Pa. June 29, 2012) (emphasizing Rule 26(b)(4)(C) is designed to protect just counsel's
communications with expert); In re Application of Republic of Ecuador, 280 F .R.D. 506, 514-16
(N.D. Cal. 2012) (stating Rule 26(b)(4)(C) does not protect communications between
non-attorney employees of corporation and its expert witness, nor those between testifying and
non-testifying experts).
The Courts finds these cases instructive. By enlisting XRoads and Duff & Phelps as
expert witnesses in its litigation with the IRS, Taxpayer has placed them "in a position to serve as
a conduit to transmit" either these documents "or at least [their] conclusions" to the IRS; the
reason Taxpayer is submitting documents to these experts is the hope that the experts will agree
with their content, incorporate them into an expert report, and thereby provide Taxpayer an
opportunity to persuade the IRS to agree with Taxpayer's position. See In re Chevron, 633 F.3d
at 165. Consequently, the documents submitted to the testifying experts here lose their workproduct protection, unless the protection is otherwise preserved by Rule 26(b)(4)(C).
Accordingly, Taxpayer must disclose Privilege Log Nos. 147, R267, R297-303, R311-12,
353, 355-56, and Redaction Log Nos. R18-19, R26, which comprise either communications
between non-attorney employees of Taxpayer and the testifying experts (see, e.g., Priv. Log No.
147) or communications between testifying experts and the consulting experts (see, e.g., Priv.
Log. Nos. R297-303; Red. Log No. R26).
II.

Attorney-Client and Tax Practitioner Privileges
The government argues that Taxpayer has not established that either the attorney-client

privilege or tax practitioner privilege applies to many of the documents, or, alternatively, that

14

such a privilege was waived. (D.I. 11 at 12-13) Taxpayer has the burden to show that the
attorney-client or tax practitioner privilege applies, and the Court must apply these privileges
narrowly. See In re Grand Jury Investigation, 599 F.2d at 1235.
Again, the Court divides these materials into two general categories: (A) communications
with attorneys or tax practitioners; and (B) internal documents Taxpayer claims reflect legal or
tax advice.

A.

Communications with Attorneys or Tax Practitioners

Many of the documents before the Court directly involve attorneys or tax practitioners.
For the attorney-client privilege to attach to a document, the Court must be satisfied that it is:
"(1) a communication (2) made between privileged persons (3) in confidence (4) for the purpose
of obtaining or providing legal assistance for the client." In re Chevron, 650 F.3d 276, 289 (3d
Cir. 2011) (internal quotation omitted). Similarly, "the same common law protections of
confidentiality which apply to a communication between a taxpayer and an attorney ... apply to
a communication between a taxpayer and any federally authorized tax practitioner to the extent
the communication would be considered a privileged communication if it were between a
taxpayer and an attorney." 26 § U.S.C. 7525(a)(l); see also Seidman, 337 F.3d at 810; see

generally Chao, 2005 WL 2521886 (3d Cir. Oct. 12, 2005) (recognizing tax practitioner
privilege).

1.

Legal Memoranda: Privilege Log Nos. 122, 148, 149, 158, 206, 208

These withheld materials consist oflegal memoranda from outside counsel or in-house
counsel addressing various issues from at least 1999 onwards. The Court concludes that these
documents were properly withheld on the basis of the attorney-client privilege. Each is a

15

communication transmitted among privileged persons, the client from outside counsel (Priv. Log
Nos. 148-49, 158, 206, 208) or among in-house counsel (Priv. Log No. 122). Furthermore, as
memoranda analyzing legal implications of certain corporate transactions, these documents were
made for the purpose of dispensing legal advice and were kept in confidence. See Sampson v.

Sch. Dist. o,fLancaster, 262 F.R.D. 469, 477 (E.D. Pa. 2008) (finding legal memorandum
protected under attorney client privilege). Stripping these documents of their privileged status
would run contrary to the principle of "foster[ing] disclosure and communication between the
attorney and the client." Upjohn Co., 449 U.S. at 389.
The Court finds that the privilege attaching to these documents has not been waived. The
presence of a third party does not waive the attorney-client privilege if that presence is "essential
to and in furtherance of the communication." In re Grand Jury Investigations, 918 F.2d 374, 384
(3d Cir. 1990). To the extent that these documents were shared within the corporate family, such
as those sent to or from VE, such involvement was essential to and in furtherance of the
communications with the attorneys involved.
Accordingly, these documents were properly withheld.

2.

Draft materials of attorneys/tax practitioners:
Privilege Log Nos. 220, 246, 250, 254, 256, R215-219

These documents all consist of draft materials prepared by or with Taxpayer's outside
counsel. Privilege Log Nos. 220, 254, and 256 are drafts of agreements or contracts prepared by
outside counsel and sent to Taxpayer, and are protected under the attorney-client privilege. See

Andritz Sprout-Bauer, Inc. v. Beazer E., Inc., 174 F.R.D. 609, 633 (M.D. Pa. 1997) ("Preliminary
drafts of contracts are generally protected by attorney-client privilege, since [they] may reflect
not only client confidences, but also legal advice and opinions of attorneys, all of which is
16

protected by the attorney/client privilege.") (internal quotation omitted; alteration in original).
Privilege Log Nos. 246 and 250 similarly reflect attorney advice to Taxpayer in handling the
WASCO transaction and, like the draft contracts, their production would necessarily disclose
confidential advice dispensed by outside counsel. The Court concludes that these materials may
be withheld under the attorney-client privilege.
Although Privilege Log Nos. R2 l 5-l 9 also contain drafts of agreements prepared by
outside counsel, an inspection of these documents reveals that the attorney-client privilege has
been waived. The privilege log notes that these draft agreements, originally created in August
2000, were attached to an email from Elissa Moskowitz seven years later. Taxpayer has not
shown why the involvement of Ms. Moskowitz, an employee of PWC, was essential or in
furtherance of the communication. The gap in time suggests otherwise. These documents must
be disclosed in their entirety.
3.

Communications with attorneys or tax practitioners:
Privilege Log Nos. 150, 154, 177, 201, 205, 252, 253;
Redaction Log Nos. R32-R37

Before the Court are also numerous communications with attorneys and/or tax
practitioners covering a wide variety of topics and issues relating to proposed transactions,
including the WASCO transaction. Specifically, Privilege Log Nos. 150, 154, 177, and 205 are
communications made with tax practitioners, and Privilege Log Nos. 252, 253, and Redaction
Log Nos. R32-37 11 are communications with Taxpayer's outside counsel. After an inspection of
these documents, the Court concludes that Taxpayer has met its burden and established the

11

Taxpayer also asserts protection as work-product for Redaction Log Nos. R32-37, an
issue the Court need not decide.
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claimed privilege. The documents for which Taxpayer claims the tax practitioner privilege either
dispense tax planning advice in relation to different transactions (Priv. Log Nos. 154 and 205) or
are necessary in order to obtain such tax planning advice and directly seek such advice (Priv. Log
Nos. 150, 177).
Similarly, Privilege Log No. 252 directly solicits advice from outside counsel, while Log
Nos. 253 and Redaction Log Nos. R32-37 provide legal advice and discuss this information with
the client. Finally, Privilege Log No. 201, an email from outside counsel concerning an
upcoming meeting, contains information necessary for Taxpayer to obtain legal advice relating to
tax and business transactions in the form of agenda topics for a future meeting. These documents
were properly withheld as privileged.
B.

Internal Documents

Taxpayer withholds many documents not involving any attorney or tax practitioner,
arguing that the privileges nonetheless cover "internal communications in which the client
reports or discusses counsel's advice." (D.I. 5 at 8) Even where an attorney is not the author or a
recipient, a document may nonetheless be protected if it "reflect[ s] confidential communications
between client and counsel ... for the purpose of either (1) providing legal services or
(2) providing information to counsel to secure legal services." SmithKline Beecham Corp. v.
Apotex Corp., 232 F.R.D. 467, 477 (E.D. Pa. 2005) (citing Cuna, Inc. v. Pall Corp., 121 F.R.D.

198, 202 (E.D.N.Y. 1988)); see also Schwarz Pharma., Inc. v. Teva Pharm. USA, Inc., 2007 WL
2892744, at *3 (D.N.J. Sept. 27, 2007) (stating that intra-corporate documents may be privileged
where there is "some nexus between the privileged communication and a specific attorney.").

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1.

Protected documents: Privilege Log Nos. 161, 195, 209, 245, 247

Taxpayer has met its burden with respect to Privilege Log Nos. 161, 195, 245, and 247.

In camera inspection reveals that these documents are related to other privileged documents,
such as Privilege Log Nos. 245 and 24 7, 12 or explicitly reference advice sought from outside
counsel, as in Privilege Log Nos. 161 and 195. These documents were properly withheld on the
basis of privilege. Although Privilege Log No. 209 is not protected by the attorney-client or tax
practitioner privilege, the content of this document makes clear that it was properly withheld as
work-product.
2.

Unprotected documents: Privilege Log Nos. 151, 152, 164-65,
171, 173-76, 178, 181-82, 196 pg. 5, 197-98, 224-25, 244;
Redaction Log No. R41

The party withholding a document on the basis of privilege is tasked with "describ[ing]
the nature of the documents ... in a manner that ... will enable other parties to assess the
applicability of the privilege or protection." Fed. R. Civ. P. 26(b)(5). "Where descriptions in the
privilege log fail to meet this standard, then disclosure is an appropriate sanction." SmithKline,
232 F.R.D. at 475 (internal quotation omitted). The Court concludes that the privilege log
descriptions do not support the Taxpayer's assertions of privilege with respect to the documents
listed discussed in this section.
Many of the descriptions, for example, do not indicate an author and/or recipient, and the
privilege log further provides no clue as to why they were created. (See, e.g., Priv. Log Nos. 164,
173, 196 pg. 5; see also SmithKline, 232 F.R.D. at 476 ("We ... scrutinize closely any privilege

12

Privilege Log No. 247 is a large file containing numerous materials. To the extent that
these materials are not strictly intra-corporate communications, they are nonetheless protected as
direct and confidential communications with attorneys.
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claim where [the party asserting the privilege] is unable to identify the author or has provided
only a general group-wide description for the recipients.")) Some documents, which appear to be
legal memoranda or tax memoranda (see, e.g., Priv. Log Nos. 197-98; Red. Log No. R41), are
addressed so broadly - generally to the entire corporation - as to render the Court unable to
determine whether the asserted privilege was waived, and thus must be produced. See

SmithKline Beecham Corp. v. Apotex Corp., 2000 WL 1310669, at *7 (N.D. Ill. Sept. 13, 2000)
("It was not unreasonable for the magistrate judge to have difficulty determining, from a general

description like 'management,' whether a document had been too broadly distributed to seriously
allow a claim of confidentiality.").
CONCLUSION
In accordance with the reasoning set forth above, the Taxpayer must disclose the

documents identified as improperly withheld. An appropriate order follows.

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