IRS announces its nonacquiescence to Roxworthy decision.

• Author: Beavers, James

The IRS issued an action on decision (AOD) announcing its nonacquiescence to the Sixth Circuit's decision in Roxworthy, 457 F3d 590 (6th Cir. 2006). In that case, the Sixth Circuit held that certain memos a corporation received from an outside accounting firm were privileged under the work-product privilege. In the AOD, the Service stated that it intends to continue to vigorously pursue the enforcement of its summons and to challenge taxpayers' privilege claims where appropriate.

Background and District Court Litigation

As part of an audit, the IRS issued an informal document request to Yum! Brands, Inc. (Yum). Yum claimed that seven of the items requested were protected by the work-product privilege. An administrative summons seeking the production of these documents was served on Patrick J. Roxworthy (Roxworthy) in his capacity as vice president of tax at Yum. Roxworthy refused to produce two of these documents, which were memos prepared by a Big Four accounting firm analyzing the tax consequences of certain transactions entered into by Yum pertaining to the creation of a captive insurance company and the subsequent sale of the captive's stock at a substantial loss; they included arguments that the IRS might assert against Yum's treatment of the transaction and possible counterarguments.

The IRS filed a petition in district court to enforce the summons as it related to the two opinion letters, arguing that the documents were not created in anticipation of litigation, so the work-product privilege did not apply. The case was referred to a magistrate judge. In his defense, Roxworthy filed affidavits from an in-house Yum attorney and a partner from the accounting firm asserting that the documents were produced in anticipation of litigation and therefore were privileged under the work-product privilege.

The magistrate judge applied the because of test to determine whether the memos were created in anticipation of litigation. In addition to proving that the documents in question were created for litigation purposes, under the because of test, the party claiming privilege must show that it subjectively believed that litigation was possible, and the belief must be objectively reasonable. The magistrate judge found that the affidavits did not include any information to back up the assertions that the memos were created in anticipation of litigation and that the other evidence surrounding the memos' creation suggested that the documents were not...