District court considers taxpayer's privilege and work product doctrine claims in IRS summons action.

• Author: Keith, Bryan D.

In a recent holding by the District Court for the District of Delaware (Veolia En-vironnement N. Am. Operations, Inc., No. 13-mc-03-LPS (D. Del. 10/25/13)), the government sought to enforce a summons for the production of certain documents against Veolia Environnement North America Operations Inc. Veolia, a subsidiary of the French conglomerate Vivendi, claimed that certain documents requested by the IRS were protected by the work product privilege, attorney-client privilege, and Sec. 7525 tax practitioner privilege.

The court found that Veolia had prepared certain documents in anticipation of litigation and that the work product privilege may apply to such documents. With respect to certain other documents, however, the court found that Veolia must produce to the IRS materials containing facts or data considered by Veo-Ha's external valuation advisers in forming opinions expressed in the advisers' reports. In addition, the court concluded that Veolia did not waive its privilege when it shared certain documents widely among individuals whom it and related entities employed.

Background

The various documents the government requested related to a dispute between the IRS and Veolia over a $4.5 billion worthless stock deduction the company claimed on its 2006 federal income tax return. Veolia purchased a corporate subsidiary in 1999 for $8.2 billion. In December 2006, the corporate subsidiary converted under applicable state law from a corporation to a limited liability company (LLC). Veolia treated the subsidiary's conversion as an event that triggered the $4.5 billion worthless stock loss with respect to the subsidiary. In evaluating the possibility of the worthless stock loss, Veolia retained legal counsel, hired two valuation firms, and obtained a private letter ruling from the IRS interpreting Sec. 165(g), which governs losses on worthless securities.

In December 2008, the IRS was evaluating whether Veolia was entitled to the claimed deduction and, in an effort to obtain additional information, issued summonses to Veolia for a variety of documents. Veolia turned over numerous documents to the IRS but refused to produce certain other documents that the company asserted were privileged. In January 2013, the IRS filed a motion to enforce its summonses and compel production of the requested documents.

Work Product Doctrine

The work product doctrine under Rule 26(b)(3) of the Federal Rules of Civil Procedure generally provides that a party may...