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Vox Tax: Global Protections for Tax Advice

Shortly before the end of 2014, Dentons published a new edition of Vox Tax. This edition of Vox Tax analyzes global protections available for tax advice and provides a high-level overview of legal privileges and protections that may preclude the production of sensitive tax advice in administrative tax examinations and judicial proceedings.

In the report, lawyers from Dentons’ Global Tax Team examine privileges and protections in 17 countries across North America, Europe, and Asia. The report addresses the applicable protections, the type of information subject to protection, and what may effectuate a waiver of those protections.

Additionally, the report analyzes the practices and trends of each local taxing authority with respect to information gathering and sharing. This report also includes a summary table comparing these 17 countries on several key intricacies of their respective tax laws.

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Anticipate Litigation, Check. Anticipate Communications Between a Testifying Expert and Parties Other than the Taxpayer or the Taxpayer’s Attorney, Ch…Wait, What? To Involve Counsel, Or Not To Involve Counsel Is the Question.

Taxpayers continually find themselves facing decisions that will end up being scrutinized during future IRS examinations, and courts have repeatedly found that such concern, coupled with other factual indicia, can satisfy the “anticipation of litigation” requirement for work product protection under Federal Rule of Civil Procedure (“FRCP”) 26(b)(3).  (For a seminal case on this topic, please see United States v. Adlman, 134 F.3d 1194 (2d. Cir. 1998)).  The U.S. District Court for the District of Delaware recently grappled with this issue in a Government action to enforce several IRS summonses related to an examination of a $4.5 billion worthless stock deduction claimed by Vivendi S.A.’s U.S. subsidiary, Veolia Environment North American Operations, Inc. (the “Taxpayer”), during the 2006 tax year. See United States v. Veolia Environment N. Am. Operations, Inc., D. Del., No. 1:13-mc-03 (Oct. 25, 2013).  The taxpayer previously provided 600,000+ pages of bates-stamped documents to the Government in response to more than 25 summonses and hundreds of Information Document Requests during the examination of the Taxpayer’s 2004-2006 tax years.  Approximately 300 withheld documents remained at issue.

In Veolia, the Court found the Taxpayer adequately established their anticipation of litigation during the transaction’s 2006 planning stages.  The Court was specifically persuaded by the Taxpayer’s 2006 retention of outside counsel to advise on litigation possibilities, a Private Letter Ruling request on certain aspects of the transaction, the Taxpayer’s participation in a pre-audit program for the IRS to review the transaction, the Taxpayer’s audit history, and the amount of the claimed deduction.  Interestingly, the Court even opined that if the government’s contention that the Taxpayer had a history of engaging in similar transactions in the ordinary course of business was true, work product protection could still apply given the facts of the case.  This was all consistent with aspects of the established case law on the anticipation of litigation issue.

Unfortunately for the Taxpayer, the Government’s claims and the court’s analysis did not stop there.  During 2006, the Taxpayer retained a French valuation firm to provide a risk exposure analysis on the transaction and identify and supervise U.S. valuation experts that could prepare valuation reports to substantiate the claimed deduction.  One firm was retained in 2006 and produced a pre-transaction valuation report that supported the claimed position and another firm was retained in 2007 to provide a second valuation report to buttress the argument.  These reports were prepared independently and both were ultimately provided to the Government to support the claimed position.

The Government argued that the Taxpayer’s provision of the two valuation reports made their preparers testifying experts under FRCP 26(b)(4) and any communications that relayed factual data to the testifying experts were not protected according to FRCP 26(b)(4)(C)(ii). The first point was not heavily disputed, and the Taxpayer appears to have provided significant amounts of information to the Government during the examination.  Regarding the second issue, the Court focused on the privilege log and held that some of the documents presented therein appear to be factual communications to testifying experts that are not protected under the work product doctrine.  Importantly, the Court also stated that FRCP 26(b)(4)(C) and its protections did not extend to parties other than the Taxpayer or the Taxpayer’s attorneys.  That final point may have been moot in Veolia, given the court’s indication that the referenced communications constituted facts and data; however, it raises an important aspect of the rule to be mindful of.

The number of litigated summons cases involving privilege and work product claims continues to increase.  And the pace of new cases may continue to grow given the IRS’s new IDR policy, which promises to increase significantly the numbers of summonses that are issued.  For taxpayers and tax advisors, this is an area of concern that should be closely monitored.