2nd Circ. Ruling Holds Lessons On Protecting Legal Advice
By Eric Kroh
Nov. 20, 2015
Linda Galler, a professor at the Maurice A. Deane School of Law at Hofstra University and senior tax counsel at Curtis Mallet-Prevost Colt & Mosle LLP, said although it may seem like overkill, one takeway from the decision is it’s not a bad idea to explicitly state when a piece of legal advice is prepared with the expectation of a court dispute.
“It’s probably a reasonably good practice that if you are giving written advice in the context of anticipative litigation, the advice ought to say that on the face of it,” Galler said.
Galler said the Second Circuit opinion got the work-product doctrine question absolutely right. The facts were clear that E&Y was hired specifically because Schaeffler expected pushback from the IRS, and that’s exactly the circumstances under which the work-product doctrine should apply, she said.
It’s surprising that the lower court came to the opposite conclusion, Galler said. The district court magistrate judge said the E&Y tax memos were not entitled to work-product protection because Schaeffler would have sought the advice, and the accounting firm would have given the same advice, with or without the threat of litigation because of the complexity of the transactions involved and the large sums at stake.
The Second Circuit said the lower court’s analysis ignored reality.
“The district court’s holding appears to imply that tax analyses and opinions created to assist in large, complex transactions with uncertain tax consequences can never have work-product protection from IRS subpoenas,” the appellate court said.
Galler said tax practitioners understand that the more complex the transaction, the greater the likelihood there will be an audit or investigation, and the greater the likelihood the taxpayer is going to seek tax advice. One possible upshot of the case is it might allow for the argument to be made that the more complex a transaction is, the greater the likelihood that work-product protection would apply, at least under the Second Circuit’s analysis, Galler said.
Galler also pointed to the lower court’s misinterpretation of the Circular 230 rules governing the standards of practice before the IRS.
The district court reasoned that under Circular 230, when preparing tax advice a practitioner must not take into account the possibility that a tax return will be audited. Therefore, E&Y had a responsibility to consider in full the relevant legal issues regardless of whether it anticipated an audit and ensuing litigation with the IRS, so the advice is not protected by the work-product doctrine, the court said.
That reasoning is backwards, Galler said.
“All Circular 230 says is you have to give advice based on the law, not the possibility or lack of possibility that the IRS is going to catch the client,” Galler said. “You can’t turn it around and say if you’re giving advice because the taxpayer anticipates the issue is going to be litigated, somehow you’ve violated Circular 230.”
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