14-1965-cv
Schaeffler v. USA

                      UNITED STATES COURT OF APPEALS

                         FOR THE SECOND CIRCUIT

                             August Term, 2014

(Argued:     April 16, 2015                Decided: November 10, 2015)

                           Docket No. 14-1965-cv

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GEORG F.W. SCHAEFFLER, SCHAEFFLER HOLDING GMBH & CO. KG, INA-
HOLDING SCHAEFFLER GMBH & CO. KG, SCHAEFFLER HOLDING, LP,
     Petitioners-Appellants,

             v.

UNITED STATES OF AMERICA,
     Respondent-Appellee.

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B e f o r e:        WINTER, WALKER, AND DRONEY, Circuit Judges.

      Appeal from a denial of a petition to quash an IRS

summons by the United States District Court for the Southern

District of New York (Gabriel W. Gorenstein, Magistrate Judge).

We hold that the attorney-client privilege was not waived by the

sharing of documents with a consortium of banks having a common

legal interest with appellants and that the summons sought

materials protected by the work-product doctrine.       We vacate and

remand.




                                                  1
                          M. TODD WELTY (Mark P. Thomas, Laura L.
                          Gavioli, Richard D. Salgado, on the brief)
                          Dentons US LLP, Dallas, TX, for Petitioners-
                          Appellants.

                          REBECCA S. TINIO, Assistant United States
                          Attorney (Preet Bharara, United States
                          Attorney for the Southern District of New
                          York, Emily E. Daughtry, Assistant United
                          States Attorney, New York, NY, of counsel),
                          for Respondent-Appellee.

                          Amar Sarwal, Wendy Ackerman, Association of
                          Corporate Counsel, Washington, DC, for Amicus
                          Curiae Association of Corporate Counsel.

                          Kate Comerford Todd, Warren Postman, U.S.
                          Chamber Litigation Center, Inc., Washington,
                          DC, Robert A. Long, Reeves C. Westbrook,
                          Marianna Jackson, Jason Yen, Covington &
                          Burling LLP, Washington, DC, for Amicus
                          Curiae Chamber of Commerce of the United
                          States of America.

WINTER, Circuit Judge:

      Georg F.W. Schaeffler (“Mr. Schaeffler” or “Schaeffler”) and

associated entities (“Schaeffler Group”) (collectively

“appellants”) appeal from Magistrate Judge Gorenstein’s order

denying a petition to quash an IRS summons.1                We conclude that:

(i) the attorney-client privilege was not waived by appellants’

provision of documents to a consortium of banks (“Consortium”)

sharing a common legal interest in the tax treatment of a

refinancing and corporate restructuring resulting from an ill-

fated acquisition originally financed by the Consortium; and (ii)



      1
        This court has jurisdiction under I.R.C. § 7609(h)(1) which allows, inter
alia, appellate review of an order denying a petition to quash an IRS summons.

                                          2
the work-product doctrine protects documents analyzing the tax

treatment of the refinancing and restructuring prepared in

anticipation of litigation with the IRS.    We therefore vacate and

remand.

                             BACKGROUND

     The pertinent facts are not in dispute.

a) The Acquisition

     The Schaeffler Group is an automotive and industrial parts

supplier incorporated in Germany.     Mr. Schaeffler, a resident of

Dallas, Texas, is an 80% owner of the ultimate parent of the

Schaeffler Group.    This appeal arises from an attempt by the

Schaeffler Group to acquire a minority interest in a German

company, Continental AG, through a tender offer for its stock.

German law prohibits tender offers that seek less than all of a

company’s shares.    As a result, a partial offer can be

accomplished only by setting an offering price estimated to

result in the acquisition of the desired number of shares.    This

course was followed by the Schaeffler Group with regard to

Continental AG.

     To finance the offer, the Schaeffler Group executed an

eleven-billion Euro loan agreement with a consortium of banks.

On July 30, 2008, the offer was made with an acceptance period

ending on September 16, 2008.    Because of German law, the timing

of the offer was unlucky, to say the least.    On September 14,


                                  3
2008, two days before the end of the acceptance period, Lehman

Brothers Holding Inc. announced its bankruptcy, the stock market

collapsed, and the economic crisis worsened.    The market price of

Continental AG shares, already declining, fell accordingly.

Because German law prohibited the Schaeffler Group from

withdrawing its tender offer, far more shareholders than expected

or desired accepted the offer, leaving the Schaeffler Group the

owner of nearly 89.9% of outstanding Continental AG shares.

     These circumstances combined to threaten the Schaeffler

Group’s solvency and ability to meet its payment obligations to

the Consortium.   As a result, appellants and the Consortium

perceived an urgent need to refinance the acquisition debt and to

restructure the Schaeffler Group.    Under United States law,

because Mr. Schaeffler is an 80% owner of the ultimate parent of

the Schaeffler Group, the tax consequences of his companies’ debt

refinancing and restructuring substantially affected his personal

tax liability to the IRS.   Given the complex and novel

refinancing and restructuring that ensued, appellants anticipated

scrutiny by the IRS.   Therefore, they retained Ernst & Young

(“EY”) and Dentons US LLP (“Dentons”) to advise on the federal

tax implications of the transactions and possible future

litigation with the IRS.

     As anticipated, the IRS began an audit of appellants that

led to the issuance of the summons at issue in this appeal.     The


                                 4
summons sought "all documents created by Ernst & Young, including

but not limited to legal opinions, analysis and appraisals, that

were provided to parties outside [appellants], that relate to

[the restructuring]."   The summons did not request documents

prepared by Dentons, appellants’ law firm, or those shared only

among their counsel and EY.   Appellants produced several thousand

documents in response to the information document request from

the IRS but sought to quash the demand for legal opinions.      For

example, appellants sought to withhold memoranda, such as an EY

memorandum (“EY Tax Memo”) that identified potential U.S. tax

consequences of the refinancing and restructuring, identified and

analyzed possible IRS challenges to the Schaeffler Group’s tax

treatment of the transactions, and discussed in detail the

relevant statutory provisions, U.S. Treasury regulations,

judicial decisions, and IRS rulings.

b) The District Court’s Ruling

     In denying the petition to quash, the district court held

that appellants had waived their attorney-client privilege by

sharing the withheld documents with the Consortium.   The court

noted that “[b]y all accounts, the Schaeffler Group, Ernst &

Young, and Dentons worked closely with the Bank Consortium not

only in effectuating the refinancing and restructuring but also

in analyzing the tax consequences of the [Continental AG]




                                 5
acquisition.”2      Sp. App’x at 6.        The court held that the “common

legal interest” or “joint defense privilege” exception to the

waiver by third-party disclosure rule did not apply.3                   In the

court’s view, the Consortium “lack[ed] . . . any common legal

stake in Schaeffler’s putative litigation with the IRS,” because

it would not be named as a co-defendant in the anticipated

litigation and “only the Consortium’s economic interests,” as

opposed to its legal interests, “were in jeopardy.”                   Sp. App’x at

20.   Therefore, appellants and the Consortium did not have a

common legal interest and were not “formulating a common legal

strategy.”      Accordingly, appellants’ attorney-client privilege

had been waived.       Sp. App’x at 15 (internal quotation marks

omitted).

      The district court also rejected appellants’ claim that the

documents in question were protected under the work-product

doctrine.     It first ruled that work-product protection had not

been waived by the sharing of information with the Consortium


      2
        When the Schaeffler Group and the Consortium agreed to share legal analyses,
they signed an agreement, styled the “Attorney Client Privilege Agreement.” Of
course, the title of that agreement was not binding on the district court and is not
binding on us. The Agreement is relevant, however, to the issues of whether the
Schaeffler Group and the Consortium maintained confidentiality with regard to third
parties and were pursuing a common legal interest.

      3
        Title 26 U.S.C. § 7525(a)(1) provides that “the same common law protections of
confidentiality which apply to a communication between a taxpayer and an attorney
shall also apply to a communication between a taxpayer and any federally authorized
tax practitioner to the extent the communication would be considered a privileged
communication if it were between a taxpayer and an attorney.” This “tax practitioner
privilege” is, therefore, essentially coterminous with the attorney-client privilege
both in scope and in waiver. See United States v. BDO Seidman, 337 F.3d 802, 810 (7th
Cir. 2003).


                                          6
because the disclosure was “in furtherance of Schaeffler and the

Bank Consortium’s common commercial desire to avoid Schaeffler’s

default and insolvency.”    Sp. App’x at 26.   It reasoned that the

common interests of appellants and the Consortium were

sufficiently strong as to not “materially increase[] the

likelihood of disclosure [of protected information] to an

adversary.”   Sp. App’x at 27 (internal quotation marks omitted)

(alteration in original).

     However, the district court held that the EY Tax Memo and,

presumably, other similar documents were not entitled to

work-product protection.    After conducting an in camera review of

the EY Tax Memo, the district court described it as containing:

(i) “detailed legal analysis of the federal tax issues

implicated,” (ii) “assert[ions] that there is no law clearly on

point,” (iii) “language such as ‘although not free from doubt,’

‘the better view is that,’ ‘it may be argued,’ and ‘it is not

inconceivable that the IRS could assert’; and (iv) “arguments and

counter-arguments that could be made by Schaeffler and the IRS

with regard to the appropriate tax treatment of [the refinancing

and restructuring].”   Sp. App’x at 28.

     The district court noted that the EY Tax Memo “does not

specifically refer to litigation . . . by discussing what actions

peculiar to the litigation process [the parties] might take or

what settlement strategies might be considered.”    Id.   The court


                                  7
concluded that appellants would have engaged in the “detailed and

complex process of resolving” the unusual tax issues even if they

did not anticipate any litigation.   Sp. App’x at 29.   It reasoned

that “Schaeffler is a rational businessperson” who “would have

sought out the type of tax advice provided by Ernst & Young about

the transaction had he not been concerned about an audit or

litigation with the IRS.”   Sp. App’x at 30-31.   Because “any

sophisticated businessperson engaging in a complex financial

transaction will naturally wish to obtain advice on the relevant

tax laws so that the transaction can be structured in such a way

as to receive the most favorable tax treatment possible,” the

court ruled that, “given our assumption that Schaeffler is a

rational businessperson who routinely makes efforts to comply

with the law, we find that, even had he not anticipated an audit

or litigation with the IRS, he still would have had to obtain the

type of legal assistance provided by Ernst & Young to carry out

the refinancing and restructuring transactions in an appropriate

manner.”   Sp. App’x at 30-31.

     The court further stated that “petitioners have presented no

facts suggesting that Ernst & Young would have acted any

differently” or given advice “different in content or form had it

known that no audit or litigation would ensue.”   Sp. App’x at 31.

In support, the district court relied upon a Treasury Department

Circular and a Treasury regulation regarding tax shelters that


                                 8
forbid tax practitioners from taking into account “the

possibility that a tax return will remain unaudited” in providing

tax advice to clients.   Sp. App’x at 31.     The court read this

regulation to require EY to provide Schaeffler with exactly the

information contained in the EY Tax Memo, in exactly the same

form, regardless of the likelihood of an IRS audit.        The court

also relied on its view that the language of the EY Tax Memo did

not “indicate that the authors are describing any particular

anticipated litigation,” notwithstanding the document’s detailed

discussion of legal strategies.       Sp. App’x at 33.   Accordingly,

the court ruled that the EY Tax Memo and related documents were

not protected from disclosure under the work-product doctrine.

                            DISCUSSION

a) Waiver of the Attorney-Client Privilege

     We review the district court's finding of waiver of the

attorney-client privilege for abuse of discretion.       In re Grand

Jury Proceedings, 219 F.3d 175, 182 (2d Cir. 2000).       An abuse of

discretion occurs when a district court:      (i) bases a decision on

an error of law or (ii) makes a factual finding that is clearly

erroneous or outside the range of permissible decisions.       Zervos

v. Verizon N.Y., Inc., 252 F.3d 163, 169 (2d Cir. 2001).

     The IRS summons seeks only those documents prepared by EY

"that were provided to parties outside the Schaeffler Group."          J.

App’x at 46.   There being no evidence indicating disclosure of


                                  9
some or all of the documents beyond the Consortium, we need

determine the effect of disclosure to the Consortium.    As noted,

the district court held that appellants waived that privilege by

sharing the contested documents with the Consortium because the

Consortium's interest was commercial rather than legal.

     The purpose of the attorney-client privilege is to enable

attorneys to give informed legal advice to clients, which would

be undermined if an attorney had to caution a client about

revealing relevant circumstances lest the attorney later be

compelled to disclose those circumstances.   The privilege, and by

extension the tax practitioner privilege, see Note 3, supra,

protects communications between a client and its attorney that

are intended to be, and in fact were, kept confidential.    A party

that shares otherwise privileged communications with an outsider

is deemed to waive the privilege by disabling itself from

claiming that the communications were intended to be

confidential.    Moreover, the purpose of the communications must

be solely for the obtaining or providing of legal advice.    United

States v. Mejia, 655 F.3d 126, 132 (2d Cir. 2011).     See In re

John Doe Corp., 675 F.2d 482, 488 (2d Cir. 1982).    Communications

that are made for purposes of evaluating the commercial wisdom of

various options as well as in getting or giving legal advice are

not protected.    See In re Grand Jury Subpoena Duces Tecum Dated

Sept. 15, 1983, 731 F.2d 1032, 1037 (2d Cir. 1984).


                                 10
     While the privilege is generally waived by voluntary

disclosure of the communication to another party, the privilege

is not waived by disclosure of communications to a party that is

engaged in a “common legal enterprise” with the holder of the

privilege.   Under United States v. Schwimmer, 892 F.2d 237 (2d

Cir. 1989), such disclosures remain privileged “where a joint

defense effort or strategy has been decided upon and undertaken

by the parties and their respective counsel . . . in the course

of an ongoing common enterprise . . . [and] multiple clients

share a common interest about a legal matter.”     Id. at 243

(internal citations and quotation marks omitted).     "The need to

protect the free flow of information from client to attorney

logically exists whenever multiple clients share a common

interest about a legal matter."    Id. at 243 (citing Daniel J.

Capra, The Attorney-Client Privilege In Common Representations,

20 Trial Law. Q., Summer 1989, at 21).

     Parties may share a “common legal interest” even if they are

not parties in ongoing litigation.     Id.   The common-interest-rule

serves to "protect the confidentiality of communications passing

from one party to the attorney for another party where a joint

defense effort or strategy has been decided upon and undertaken

by the parties and their respective counsel."     Id. at 243.   "[I]t

is therefore unnecessary that there be actual litigation in

progress for the common interest rule of the attorney-client


                                  11
privilege to apply[.]"   Id. at 244 (citations omitted).    However,

"[o]nly those communications made in the course of an ongoing

common enterprise and intended to further the enterprise are

protected."   Id. at 243.    The dispositive issue is, therefore,

whether the Consortium's common interest with appellants was of a

sufficient legal character to prevent a waiver by the sharing of

those communications.    We hold that it was.

     The original relationship between the Schaeffler Group and

the Consortium arose before the economic crisis and the resultant

oversubscription to the Schaeffler Group’s tender offer that

necessitated the refinancing and restructuring.    However, once

the tender offer was made, the relationship was altered.    Because

the tender offer could not be withdrawn under German law, the

Consortium and the Schaeffler Group were, respectively, locked

into the loan and to the offering price.    As a result of the

oversubscription, the Schaeffler Group faced a threat of

insolvency that would in turn cause a default on the Consortium’s

eleven-billion Euros loan.    The Group and the Consortium could

avoid this mutual financial disaster by cooperating in securing a

particular tax treatment of a refinancing and restructuring.

Securing that treatment would likely involve a legal encounter

with the IRS.   Both appellants and the Consortium, therefore, had

a strong common interest in the outcome of that legal encounter.




                                  12
     On this record, the nature and viability of the refinancing

and restructuring had a commercial component and tax law

component.   Of course, the final transaction had to fit the need

of the Schaeffler Group to conduct its business efficiently.

Otherwise, the nature and viability of the transaction was driven

by U.S. tax law, and both appellants and the Consortium had a

common interest in seeing that law applied in a particular way.

The documents in question were all directed to the tax issues, a

legal problem albeit with commercial consequences, namely the

possible insolvency of the Schaeffler Group and its default on

the Consortium loan.   Appellants’ interest was in securing a

refinancing.   The Consortium’s interest was in funding a

refinancing that would protect its earlier investment and would

itself be repaid, goals dependent on the resolution of legal tax

issues.   The fact that eleven-billion Euros of sunken investment

and any additional sums advanced in the refinancing were at stake

does not render those legal issues “commercial,” and sharing

communications relating to those legal issues is not a waiver of

the privilege.

     For example, when the possibility of default loomed, the

Consortium's counsel became familiar with the Schaeffler Group's

organizational structure and advised it during negotiations to

restructure the Group and refinance its acquisition.   The

Consortium needed "access to confidential tax information and


                                13
analyses" to "assess its credit exposure for potential tax

liabilities of Mr. Schaeffler."    J. App’x at 77.   Together,

appellants and the Consortium agreed that Appellants should

request an IRS private letter ruling.   With regard to issues not

resolved by the letter ruling, they agreed to share "certain core

tax advice prepared by the U.S. tax advisors."   J. App’x at 77.

This information was exchanged pursuant to the confidentiality

agreement.

     That this agreement, see Note 2, supra, involved the pursuit

of a common legal strategy was reflected in the undertaking of

mutual obligations involving appellants and the Consortium.      The

Consortium agreed, subject to limitations not pertinent here, to

permit Mr. Schaeffler to pay up to 885 million Euros in personal

tax liabilities before repaying the Schaeffler Group's debt.       It

further agreed to extend him an additional line of credit to pay

tax liabilities up to 250 million Euros.    In return, Mr.

Schaeffler’s right to act unilaterally was restricted.    He was

required to give notice to the Consortium of any material audit

or investigation.   The Consortium also retained a right of

refusal limiting Mr. Schaeffler’s freedom of action with regard

to the IRS, e.g. paying taxes, suing for a refund, or settling.

The communications regarding tax opinions were, therefore, “made

in the course of an ongoing common enterprise” and “intended to

further the enterprise."   Schwimmer, 892 F.2d at 243.

                                  14
     The government’s reliance on language in a number of cases

from other circuits is misplaced.      It is true that cases

involving criminal prosecutions usually describe the definition

of a common defense strategy according to the contours of a

particular charging instrument.    In the context of civil

proceedings, however, these cases emphasized the need of the

parties to identify a common legal interest or strategy in

obtaining a particular legal goal whether or not litigation is

ongoing.   Such a mode of analysis is far more helpful to

appellants than to the government.     See, e.g., In re Pac.

Pictures Corp., 679 F.3d 1121, 1129 (9th Cir. 2012) (holding that

"victim" did not have common legal interest with the government

due to a "shared desire to see the same outcome in a legal

matter" –- i.e., a conviction; "[i]nstead, the parties must make

the communication in pursuit of a joint strategy in accordance

with some form of agreement –- whether written or unwritten");

United States v. BDO Seidman, LLP, 492 F.3d 806, 817 (7th Cir.

2007) (noting that "[c]ommunications do not cease to be for the

purpose of receiving legal services just because the recipient

intended to use the fruits of the legal services to guide

[commercial transactions]" and that a memorandum constituting "a

consultation between . . . in-house counsel and . . . outside

counsel with respect to the legality of the proposed financial

course of action" could fall under the common legal interest


                                  15
doctrine); Cavallaro v. United States, 284 F.3d 236, 250 (1st

Cir. 2002) (reaffirming that "when a client, a lawyer, and an

accountant are present, the accountant's presence will destroy

the privilege if the accountant is not necessary, or at least

highly useful, for the effective consultation between the client

and the lawyer") (quotation marks omitted).

     No caselaw in this or another circuit compels us to hold

that the Consortium's interest in appellants’ obtaining favorable

tax treatment for the refinancing and restructuring transaction

is not a sufficient common legal interest.    In our view, the fact

that the Consortium stood to lose a lot of money (along with

appellants) if appellants’ tax arguments failed is not support

for the position that no common legal interest existed.    To the

contrary, it was the interest in avoiding the losses that

established a common legal interest.   A financial interest of a

party, no matter how large, does not preclude a court from

finding a legal interest shared with another party where the

legal aspects materially affect the financial interests.

     For example, the Consortium's legal interest is underlined

by the extent to which the Consortium essentially insured

appellants, by extending credit and subordinating its debt, and

retained control over Mr. Schaeffler's legal decisions to settle,

pay, or sue.   In that regard, several courts have held that an

insurer shares a common legal interest with the insured in the


                                16
outcome of litigation, even when their potential defenses are not

perfectly aligned.   See Lectrolarm Custom Sys., Inc. v. Pelco

Sales, Inc., 212 F.R.D. 567, 571-73 (E.D. Cal. 2002); Travelers

Cas. & Sur. Co. v. Excess Ins. Co., 197 F.R.D. 601, 607 (S.D.

Ohio 2000) (holding that members of a reinsurance group facing

similar environmental pollution claims by United States insurance

and reinsurance companies “shared [legal] interests sufficiently

common or joint to create a need for full and frank communication

between and among counsel and their clients”); cf. Minn. Sch.

Bds. Ass’n Ins. Trust v. Emp’rs Ins. Co. of Wausau, 183 F.R.D.

627, 631-32 (N.D. Ill. 1999) (holding, in the context of work

product protection, that a reinsured’s communication with its

reinsurers did not waive the protection because the reinsured

“always intended and expected that their communications would

remain confidential and protected from common adversaries”).

     We, therefore, conclude that appellants did not waive their

attorney-client privilege.

c) Application of Work-Product Doctrine

     Because the district court concluded that the work-product

immunity, if applicable, was not waived, and the government has

not sufficiently challenged that ruling on appeal, we address

only the district court’s view that the EY Tax Memo and related

documents were not entitled to work-product protection.




                                17
     Attorney work product is of course protected from discovery.

See Hickman v. Taylor, 329 U.S. 495, 510-11 (1947); see also Fed.

R. Civ. P. 26(b)(3).   The doctrine “is intended to preserve a

zone of privacy in which a lawyer can prepare and develop legal

theories and strategy with an eye toward litigation, free from

unnecessary intrusion by his adversaries.”    United States v.

Adlman, 134 F.3d 1194, 1196 (2d Cir. 1998) (internal quotation

marks omitted).   Documents prepared in anticipation of litigation

are work product, even when they are also intended to assist in

business dealings.   Id. at 1204.    We review the district court’s

ruling on a work-product claim for abuse of discretion.    See,

e.g., Horn & Hardart Co. v. Pillsbury Co., 888 F.2d 8, 12 (2d

Cir. 1989).

     The district court acknowledged that the EY Tax Memo was

prepared at a time when appellants believed litigation was highly

probably and contained analyses of the strengths, weaknesses, and

likely outcomes of potential legal arguments. Nevertheless, the

court found that appellants would have sought and received advice

"created in essentially similar form" even if they had not

anticipated litigation.   J. App’x at 1755.   On this ground, the

court denied work-product protection.

     Adlman is the governing precedent.    It posited polar

examples on a spectrum to help in determining whether documents

should be deemed prepared “in anticipation of litigation” and


                                18
therefore subject to work-product protection.                 At one end of the

spectrum, a document will be protected if, “in light of the

nature of the document and the factual situation in the

particular case, the document can fairly be said to have been

prepared or obtained because of the prospect of litigation.”

Adlman, 134 F.3d at 1202 (citations omitted).                 At the other end,

protection will be withheld from “documents that are prepared in

the ordinary course of business or that would have been created

in essentially similar form irrespective of the litigation.”                      Id.

The district court’s application of the “ordinary course of

business” or “essentially similar form” example to the documents

at issue in this appeal appears to us to virtually swallow the

work-product protection Adlman extended to documents “prepared or

obtained because of the prospect of litigation.”

      Adlman held that work-product protection would be withheld

only from documents that were prepared in the ordinary course of

business in a form that would not vary regardless of whether

litigation was expected.          In the present case, such records would

include the supporting records and papers that appellants’

external tax return preparers collected and created in the

ordinary course of annually completing appellants’ federal tax

returns.4

      4
        The government's reference to United States v. Frederick, 182 F.3d 496, 501-02
(7th Cir. 1999), as support for its position, is unpersuasive in the context of this
appeal. Frederick denied protection to "dual purpose" documents prepared by the
appellant's lawyer, who was also his tax preparer, on the ground that "people in or

                                          19
      The tax advice in the EY Tax Memo was quite different.                     It

was specifically aimed at addressing the urgent circumstances

arising from the need for a refinancing and restructuring and was

necessarily geared to an anticipated audit and subsequent

litigation, which was on this record highly likely.                   See Adlman,

134 F.3d at 1195 (predicted litigation was virtually inevitable

because of size of transaction and losses).

      We also disagree with the district court’s characterization

of the form of the advice EY would be ethically and legally

required to give appellants even in the absence of anticipated

litigation.      Neither professional standards, tax laws, nor IRS

regulations required that appellants’ tax advisors provide the

kind of highly detailed, litigation-focused analysis and advice

included in the EY Tax Memo.           Cf. id. at 1195 (noting

extraordinary detail in 58-page memorandum).                 The standards

relied upon by the district court all target concerns over the

"audit lottery," in which aggressive tax advisers might recommend

risky tax positions solely because the particular clients were

statistically unlikely ever to be audited.                See ABA Formal Op.

85-352 (1985) (establishing a governing standard requiring



contemplating litigation [should not] be able to invoke, in effect, an accountant's
privilege, provided that they used their lawyer to fill out their tax returns." Id.
at 501. However, the court further noted that legal advocacy during an audit would be
different from preparations of annual tax returns, and "[i]f, however, the taxpayer is
accompanied to [an] audit by a lawyer who is there to deal with issues of statutory
interpretation or case law that the revenue agent may have raised in connection with
his examination of the taxpayer's return, the lawyer is doing lawyer's work and the
attorney-client privilege may attach." Id. at 502.

                                          20
lawyers to advise clients whether a position is likely to

withstand litigation).   That policy concern is simply not

implicated here where appellants would not have sought the same

level of detail if merely preparing an annual routine tax return

with no particular prospect of litigation.

     Finally, we address the district court’s construct of a

hypothetical scenario in which appellants faced exactly the same

business and tax issues but did not anticipate litigation.   This

scenario appears to us to ignore reality.    The size of a

transaction and the complexity and ambiguity of the appropriate

tax treatment are important variables that govern the probability

of the IRS’s heightened scrutiny and, therefore, the likelihood

of litigation.   To hypothesize the same size of the transaction

and the same complexity and ambiguity of the tax issues but also

a lack of any anticipation of litigation posits a factual

situation at odds with reality.    It posits an expectation of

harmony with the IRS similar to that associated with the

preparation of a W-2 form in writing memoranda needed for large

transactions with no clear application of the tax laws.

     Finally, we note that 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.    This is

contrary to Adlman, which explicitly embraces the dual-purpose


                                  21
doctrine that a document is eligible for work-product protection

"if 'in light of the nature of the document and the factual

situation in the particular case, the document can fairly be said

to have been prepared or obtained because of the prospect of

litigation[,]' Charles Alan Wright, Arthur R. Miller, and Richard

L. Marcus, 8 Federal Practice & Procedure § 2024, at 343 (1994)."

Adlman, 134 F.3d at 1202.

     In our view, the EY Tax Memo contains "legal analysis that

falls squarely within [Hickman v. Taylor, 329 U.S. 495 (1947)]'s

area of primary concern-analysis that candidly discusses the

attorney's litigation strategies [and] appraisal of likelihood of

success."   Id. at 1200.    They are, therefore, protected under the

work-product doctrine.

                              CONCLUSION

     For the foregoing reasons, we vacate the judgment of the

district court and remand for such further proceedings as may be

necessary to determine, in a manner consistent with this opinion,

whether any remaining documents are protected by the attorney-

client privilege or work-product doctrine.




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