Second Circuit adopts broad test for accountant's work-product protection.

• Author: Josephs, Stuart R.
• Position: U.S. 2d Circuit Court of Appeals

A divided Second Circuit held in Adlman, 2/13/98, that the work-product doctrine protects a document prepared to assess the desirability of a business transaction which, if undertaken, would give rise to litigation.

Adlman was an attorney with Sequa Corp., which in 1989 was considering the tax consequences of a reorganization. He consulted with an accountant and requested a memorandum outlining the tax consequences. The accountant gave Adlman a draft and then a final memorandum. The accountant's firm later issued two opinion letters on the reorganization. Sequa proceeded with the transaction and claimed a $290 million capital loss on its 1989 return.

During an audit, the IRS made informal document requests for information related to the reorganization. Sequa asserted that the memoranda were protected from disclosure by the attorney-client privilege and the work-product doctrine. In the suit to enforce this summons, the Service argued that the accounting firm had acted as Sequa's tax and business adviser, not as an accountant assisting Adlman.

The district court ruled in the IRS's favor, finding that the memoranda were not protected under either privilege. The Second Circuit agreed that the attorney-client privilege did not apply but reversed and remanded on the work-product doctrine, ordering the trial court to find whether the memoranda were prepared "in anticipation of litigation." The lower court again ruled in the Service's favor.

On appeal, the Second Circuit stated that "in anticipation of litigation" refers to documents prepared "because of existing or expected litigation." Under that test, a document "created because of the prospect of litigation ... does not lose protection ... merely because it is created in order to assist with a business decision." The majority opinion rejected the narrower interpretation that the doctrine protects only documents prepared "primarily or exclusively to assist in litigation."

In a related matter, on Nov. 5, 1997, the House of Representatives passed H.R. 2676, the Internal Revenue Service Restructuring and Reform Act of 1997. The Senate's version, S. 1096, is pending before its Finance Committee.

Section 341 of H.R. 2676 reads as follows:

Section 7602 (relating to examination of books and witnesses) is amended by adding at the end the following new subsection:

"(d) PRIVILEGE OF CONFIDENTIALITY EXTENDED TO TAXPAYER'S DEALINGS WITH NONATTORNEYS AUTHORIZED TO PRACTICE BEFORE INTERNAL REVENUE...