District Court Accords Work Product Protection To Taxpayer Documents Prepared During A Transaction’s Planning Stages

The U.S. District Court for the District of Delaware recently interpreted the work product privilege in a manner favorable to taxpayers, ruling that documents can be prepared "in anticipation of litigation" even if created during the planning stages of a transaction.

On October 25, 2013, the U.S. District Court for the District of Delaware issued an order in United States v. Veolia Environnement North America Operations, Inc., Civ. No. 13-mc-03-LPS (D. Del. 2013), interpreting the applicability of various claimed privileges, including the work product privilege, to a group of documents withheld in response to summonses issued by the Internal Revenue Service in connection with an audit of a $4.5 billion worthless stock deduction. The district court did not make a specific holding with respect to any of the particular documents, but it did make various findings designed to assist the parties in resolving the discovery dispute. While the district court sided with the government in rejecting the taxpayer's privilege claim over certain documents provided to its experts, the district court agreed with the taxpayer on the primary dispute over the applicability of the work product privilege to other documents prepared during the planning stages of the transaction that triggered the claimed deduction.

Background

Work Product Doctrine

Federal Rule of Civil Procedure 26(b)(1) lays out the general scope of discovery: "[p]arties may obtain discovery regarding any nonprivileged matter that is relevant to any party's claim or defense." One exception to that disclosure requirement is the work product privilege (also known as the work product doctrine). Designed "to preserve a zone of privacy in which a lawyer can prepare and develop legal theories and strategy with an eye toward litigation, free from unnecessary intrusion by his adversaries," United States v. Adlman, 134 F.3d 1194, 1196 (2d Cir. 1998), the doctrine was first recognized by the Supreme Court in Hickman v. Taylor, 329 U.S. 495 (1947). The Supreme Court observed that, to properly prepare a client's case, a lawyer must be able to "assemble information, sift what he considers to be the relevant from the irrelevant facts, prepare his legal theories and plan his strategy without undue and needless interference."

The work product doctrine as articulated in Hickman was partially codified in the Federal Rules. In its current form, Rule 26(b)(3) ordinarily protects from discovery "documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative." Thus, unless the opposing party can show a substantial need for the materials and cannot obtain their substantial equivalent without undue hardship, materials—whenever created—that are "prepared in anticipation of litigation or for trial" are protected by the work product privilege.

Assuming the party issuing a summons makes out a prima facie case to obtain enforcement of it, see United States v. Powell, 379 U.S. 48, 57-58 (1964), the party asserting work product protection carries the burden of demonstrating that it was justified in asserting the privilege, see, e.g., Conoco, Inc. v. U.S. Dept. of Justice, 687 F.2d 724, 730 (3d Cir. 1982), which includes showing that the materials at issue were prepared in anticipation of litigation. To meet that burden, courts have required the proponent asserting the privilege to satisfy both a subjective and objective test. See, e.g., United States v. Roxworthy, 457 F.3d 590, 593 (6th Cir. 2006). Not only must a party "have had a subjective belief that litigation was a real possibility," but also "that belief must have...