Regions Financial Corp. Persuades District Court That Tax Opinions Provided To Outside Auditors Are Protected Work Product

Replaying the victory of Textron1 in 2007,

Regions Financial Corporation ("RFC") prevailed last

week (May 8) in its opposition to an IRS summons seeking

certain tax accrual workpapers from RFC's outside auditor.

While the IRS has been successful litigating the merits of what

it considers to be abusive shelters, it has largely met with

failure in attempting to override evidentiary protections such

as the work product doctrine. (Click here to view the decision.)

Background

In connection with the tax audit of RFC for the 2001 through

2003 tax years, in April 2006 the IRS issued a summons to

RFC's outside auditor, Ernst & Young

("E&Y"), requesting all tax accrual workpapers

that E&Y had created or assembled in connection with its

audit of RFC. During the course of the audit, the IRS had

determined that RFC had participated in two listed transactions

during the audited tax years, and, pursuant to its tax accrual

workpaper policy, the IRS sought all the tax accrual workpapers

relating to the 2002 and 2003 tax years, although for the 2001

tax year the IRS sought only the workpapers relating to the

listed transactions.

RFC moved to quash the summons on grounds of work product.

Work product protects from disclosure documents and tangible

things that are created in anticipation of litigation.

See Fed. R. Civ. Pr. 26(b)(3). Eventually the dispute

narrowed to four tax opinions from RFC's tax advisors that

were in E&Y's files. RFC instructed E&Y to decline

to produce four tax opinions: three authored by its outside tax

counsel, Alston & Bird; and one authored by tax

professionals at E&Y who were separate from the audit team.

RFC claimed that these opinions were protected by work product.

RFC also claimed that certain portions of several other

documents that referenced the tax opinions were also protected

under work product. The tax opinions discussed a transaction in

which an existing REIT subsidiary of RFC issued new preferred

stock that was subsequently acquired by the European

Reconstruction and Development Bank (the "ERDB

Transaction").2

The district court ruled that the documents at issue were

protected work product and, like the judge in Textron,

suggested that the preparation of analyses with respect to

contingent tax liabilities is fundamentally an action carried

out in anticipation of litigation.3 The court

did not resolve the uncertainty as to the standard for

application of work product in the 11th Circuit (to which the

case would be appealed). Instead the court said that under

either the more restrictive "primary purpose" test or

the less restrictive "because of litigation" test the

documents met the requirements for work product protection.

Supporting Affidavits Were Critical to Work Product

Claim

There was no dispute between the parties that the opinions

at issue contained RFC's advisors' analyses regarding

the merits of the consent dividend treatment of the ERBD

Transaction. Thus, the content of the documents was

consistent with RFC's claim of work product protection.

Indeed, the IRS did not attempt to argue that its need for the

information and facts contained in the opinions should overcome

RFC's claim of work product (as it was entitled to do under

Fed. R. Civ. Pr. 26(b)(3)). This showed that the IRS was not

interested in obtaining facts regarding the transaction it

wanted to see the taxpayer's legal analysis. RFC conceded

that the IRS was entitled to the facts. Based on its in

camera review in which the court found that the documents

contained "the mental impressions and opinions of

RFC's lawyers" the court noted that: "the

contested documents contain precisely the kind of legal

analysis that the work product doctrine exists to

protect." Slip Op. at 13. The court cited United

States v. Roxworthy, 457 F.3d 590, 598 (6th Cir. 2006),

for the statement that this factor weighs in favor of

recognizing the documents as protected.

Because of the parties' positions, the arguments before

the court focused on whether the work product doctrine applied,

not on whether the IRS had made a showing sufficient to

override those protections because of need to obtain the facts.

Work product depends on the purpose for the creation of the

document sought to be protected from disclosure was it created

in anticipation of litigation? This is rarely an open question

for...