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    Wisconsin Lawyer
    October 01, 2011

    Protected Thoughts? IRS Threatens Attorney Work-Product Doctrine

    The Internal Revenue Service has achieved some success persuading courts to limit the application of the attorney work-product doctrine, forcing disclosure of work product – including an attorney’s mental impressions – in certain situations. If the IRS continues to make in-roads, other government agencies, or even private parties, may follow. That should concern all litigators.

    Jay W. Miller

    Wisconsin LawyerWisconsin Lawyer
    Vol. 84, No. 10, October 2011


    The attorney work-product doctrine, although well established in legal jurisprudence, has come under assault from the Internal Revenue Service. The IRS has achieved at least partial success persuading courts to limit the doctrine’s application, forcing disclosure of some work product in certain situations.

    This article examines 1) the attorney work-product doctrine, 2) the financial context that has given rise to litigation involving the doctrine, 3) the conflict among federal appellate courts in interpreting the doctrine’s scope, 4) why the conflict has relevance beyond taxes, 5) the IRS’s temporary disregard for the doctrine, 6) the IRS’s sudden change in position, and 7) the doctrine’s current status and what attorneys can do to minimize the risk of losing its protection inadvertently.

    Work-product Doctrine Background

    The seminal case recognizing the work-product doctrine is Hickman v. Taylor.1 In Hickman, the U.S. Supreme Court held that an attorney’s files prepared “with an eye toward litigation” are normally protected from discovery by the opposing party.

    Several years later the work-product doctrine was codified in Rule
    26(b)(3) of the Federal Rules of Civil Procedure: “Ordinarily, a party may not discover documents … prepared in anticipation of litigation or for trial by or for another party or its representative … [unless] … the party shows a substantial need … and cannot, without undue hardship, obtain their substantial equivalent by other means.”

    To underscore the protection afforded an attorney’s own thought processes, Federal Rule of Civil Procedure 26(b)(3)(B) adds that the court “must protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of a party’s attorney or other representative concerning the litigation.” This provision has been interpreted as meaning that an attorney’s “mental impressions” are “virtually undisclosable.”2

    Whether that is still true has been called into question as a result of recent judicial and administrative developments. Before looking at those developments, this article looks at the financial context in which they arose.

    Assessing Tax Litigation Risks in a Nonlitigation Context

    When a company considers business transactions, it often wants to know the tax ramifications before deciding what to do. Because of the complexity of the tax laws, the answer may be far from certain. If, in the face of that uncertainty, the company still decides to go forward with the deal, it could be presented with a range of tax-return possibilities.

    What gets reported on the return may depend on an interpretation of the tax laws. If that interpretation does not prevail following an IRS audit of the return and possible litigation, the taxpayer will owe additional taxes. Several years could pass, however, before the final tax liability is determined.

    Therefore, federal securities laws require public companies to issue financial statements (certified by an independent auditor) that “include estimates of potential liability [reserves] if the IRS decides to challenge debatable positions taken by the taxpayer in its return.”3

    Assessing a company’s tax liability exposure for financial statement purposes often necessitates a legal analysis, which might be contained in memoranda or written opinions of one or more attorneys. Although such documents include the attorneys’ “mental impressions,” federal courts are sharply divided as to whether the documents are prepared “in anticipation of litigation” for purposes of the work-product doctrine and, consequently, whether they are protected from disclosure to the IRS.

    A Split Among the Federal Circuits

    Webxtra video: More from the author: IRS Threatens Attorney Work-Product Doctrine

    In this video, Jay Miller explains how the IRS is threatening the attorney work-product doctrine and why all attorneys should care.

    In United States v. El Paso Co. and United States v. Textron Inc., the Fifth Circuit and the First Circuit, respectively, limited the scope of work-product protection. The El Paso court stated that it would afford work-product protection only “if the primary motivating purpose behind the creation of the document was to aid in possible future litigation,”4 and the Textron court said it would likewise extend such protection only if the document were prepared “for use in litigation.”5 For these courts, an attorney’s work product used in preparing financial statements would not be protected from disclosure to the IRS, since financial statements are intended to address regulators’ concerns in the ordinary course of business.

    The fact that the content of the attorney’s documents focuses on the risk from certain tax positions being challenged by the IRS in administrative proceedings and in court does not matter under the “primary-purpose” test. This is so even though authority exists for the proposition that work done “in anticipation of litigation” can include memoranda prepared in advance of an IRS audit that is likely to lead to litigation.6

    In short, the Fifth and First circuits would narrow the scope of the attorney work-product doctrine by virtue of the primary-purpose test that they have adopted.

    On the other hand, in reviewing comparable tax issues, the District of Columbia Circuit in United States v. Deloitte LLP and the Second Circuit in United States v. Adlman adhered to the more commonly accepted and broader “because of” test, asking only whether the document in question had been prepared or obtained “because of the prospect of litigation.”7 Under this test, an attorney’s work product used to assess litigation risks for financial statement purposes would still be protected, since what matters is the content of the work product, that is, the risk of possible litigation. As the Second Circuit has reasoned, “[A] document … does not lose work-product protection merely because it is intended to assist in the making of a business decision influenced by the likely outcome of the anticipated litigation.”8

    Although the Seventh Circuit and, from a state law perspective, the Wisconsin Supreme Court have been cited as subscribing to the because-of test, they have done so in a context removed from taxes.9 Whether these courts would adhere to that test in another context is unknown.

    To illustrate the uncertainty of it all, the majority in Textron likewise purported to be applying the because- of test. Yet, as a substantive matter, that same majority ruled that it would not extend work-product protection to tax documents unless they specifically were prepared for use in litigation, which is a far cry from what the because-of test requires.

    Ramifications Beyond the Tax Arena

    This debate is of interest to more than tax attorneys. Attorneys in a variety of fields write memoranda and opinions for clients, containing their mental impressions about the risk of litigation, or litigation strategies, associated with a particular transaction. The attorneys’ work may concern antitrust, intellectual property, or securities laws, just to name a few nontax subjects. Moreover, if the purpose for the analyses is to inform some business decision about proceeding with a project – not to prepare for litigation – the analyses arguably would be discoverable if the primary-purpose test espoused in the Fifth or First circuits were held to apply.

    Jay MillerJay W. Miller, Arizona 1974, LL.M.-Taxation New York Univ., is a sole practitioner in Whitefish Bay and focuses his practice on representing clients who have disputes with the IRS. He is an adjunct professor in the graduate tax program, Lubar School of Business, UW-Milwaukee. Contact Jay at

    As another nontax example, the Second Circuit in Adlman provided the hypothetical situation of attorneys evaluating litigation risks to a company if it were to publish a book when another company purported to hold the book’s exclusive publication rights. In that situation, the court noted, adversaries later might be able to discover the attorneys’ work product under the primary-purpose test because the work was prepared primarily to help the company decide whether to publish the book, not to assist in litigation.??

    The attorney-client privilege provides the first line of defense in protecting such a document from discovery. But disclosing that document to a third party, either in the private sector or government, waives the privilege.

    That is not the case with the work-product doctrine, however. As the D.C. Circuit observed in Deloitte LLP, “While voluntary disclosure waives the attorney-client privilege, it does not necessarily waive work-product protection.”11 Disclosing work product to a third party waives the protection only if such disclosure is made to an adversarial party. The D.C. Circuit ruled in Deloitte LLP that the taxpayer’s independent auditor was not its adversary with respect to the tax-related documents disclosed.

    Accordingly, in situations in which disclosures are made to third parties, the attorney work-product privilege may prove to be sturdier than the attorney-client privilege. Yet that counts for little if the doctrine otherwise is not given effect in specific circumstances.

    How the IRS Seemingly Disregarded the Doctrine’s Application

    The IRS substantially heightened concerns in the legal community about the lack of effect to be given to the work-product doctrine when it issued Announcement 2010-9 in early 2010. To understand what the IRS did, however, it is necessary first to examine more closely its “victory” in Textron in August 2009.

    In an en banc decision, the Textron court ruled 3-2 that analysis Textron relied on to determine its contingent tax liabilities in accordance with securities laws and financial accounting principles was not entitled to be withheld from the IRS under the work-product doctrine. Assessing litigation risks made no difference to the majority, because – consistent with the primary-purpose test – the analysis was prepared primarily for financial statement purposes and not for use in litigation. The fact that the contingent tax liabilities stemmed from tax shelters characterized as so-called “listed transactions” (transactions the IRS determined to be of a tax-avoidance nature) probably bolstered the majority’s resolve to override work-product protection, regardless of the decision’s broader ramifications.

    The dissent’s vehemence in Textron demonstrates the controversy this issue has engendered. It asserted that allowing the IRS to gain access to taxpayers’ litigation risk assessments would disclose “the sort of mental impressions … that Hickman sought to protect.” The dissent also warned that “[c]orporate attorneys preparing such analyses should now be aware that their work product is not protected in this circuit.”12

    Although the Textron holding is binding only in Puerto Rico and the four New England states that are within the First Circuit’s jurisdiction, the IRS apparently seized on the majority opinion to issue Announcement 2010-9,13 which would have had application across the country. Moreover, that Announcement cast a pall on the work-product doctrine that exceeded anything that the Textron majority did.

    To start, the Announcement stated that corporate taxpayers with assets in excess of $10 million and established tax reserves for uncertain tax positions on their financial statements generally were subject to its rules. Among other things, the Announcement required that such taxpayers disclose to the IRS each uncertain tax position for which a reserve was maintained.

    Moreover, the disclosure was to include not only the rationale for the position but also the reasons for determining that a position was uncertain. In other words, taxpayers covered by the Announcement were to explain why a tax position was vulnerable – providing the ultimate roadmap for an adversary, here the IRS. The Announcement added that the disclosure should include the maximum potential tax liability the IRS could obtain from a successful challenge of that position.

    This is startling stuff. If the Announcement were enforced, corporate taxpayers otherwise meeting the criteria would have to disclose the weaknesses in their positions to the IRS, even if the expectation were that the issue might result in litigation. Moreover, the IRS did not carve out an exception for work that attorneys may have performed, including their mental impressions. In short, the Announcement appeared to pay no attention to work-product protection.

    Not unexpectedly, the Announcement sent a shock wave through the tax legal community. Whereas disclosure to the IRS in Textron depended on a taxpayer having purportedly engaged in listed transactions, Announcement 2010-9 (for the most part) required disclosure whenever a taxpayer established a tax reserve for an issue for financial statement purposes, whether or not the issue involved a listed transaction.

    The American Bar Association strongly protested, claiming that the Announcement was “inimical to the fundamental protections afforded by … the attorney work product doctrine.”14

    Sudden Change in IRS Position Still Leaves Questions

    In the midst of this furor, the D.C. Circuit released its ruling in Deloitte LLP at the end of June 2010. The court disagreed with the reasoning of the majority in Textron and instead adopted the because-of test,15 leaving a major question about how its holding could be squared with Announcement 2010-9.

    Whether it was a coincidence is not known, but in September 2010 – only a few months after Deloitte LLP was decided – the IRS sharply reversed course from that charted in Announcement 2010-9 (and seemingly foreshadowed by Textron) with the issuance of announcements 2010-75 and 2010-76.16 The announcements said that the IRS was “expanding its policy of restraint” with respect to disclosing uncertain tax positions and would “forego seeking particular documents that relate to uncertain tax positions.” These announcements represent the IRS’s current position.

    Documents that will no longer be sought include those containing an attorney’s opinion (that is, mental impressions) regarding a taxpayer’s weaknesses that might lead to litigation. Instead, the IRS now requires only a concise description of each issue for which a taxpayer either establishes a reserve on its audited financial statement or does not establish a reserve because it expects to litigate the issue. Importantly, the IRS will not ask for the reasons for and against a certain tax position, including those that an attorney might posit.

    The IRS schedules also no longer require disclosing the maximum potential federal tax liability associated with a tax position – or the size of the position. Instead, each tax position is to be ranked by size (without reporting the actual amount itself). The relative size is to be determined by the tax reserve recorded on the taxpayer’s audited financial statement for that position. Moreover, a tax position for which the reserve exceeds 10 percent of the total reserves for all positions must be separately designated.

    Announcement 2010-76 went on to say the following:

    “If a document is otherwise privileged under … the work product doctrine and the document was provided to an independent auditor as part of an audit of the taxpayer’s financial statement, the Service will not assert during an examination that privilege has been waived by such disclosure.”

    After the announcements were issued, IRS chief counsel William Wilkins cautioned that although the announcement indicates what the IRS examination policy is, it does not purport to state the scope of the attorney work-product doctrine or what the law of waiver is.17

    Steps to Protect Application of the Work-product Doctrine

    Where are we today? If an attorney is preparing work with an eye toward litigation – but also for another purpose – some courts might determine the doctrine does not apply unless the primary purpose of the work is actually for preparation for or use in litigation.

    Although the IRS has retreated from its Announcement 2010-9 position, it is uncertain if the IRS will change its position again, especially if it secures another victory like that in Textron. Moreover, even now, the IRS requires corporate taxpayers of a certain asset size ($100 million and above in 2010, phasing down to $10 million for 2014) to disclose the ranking of their tax positions. In so doing, the scope of the work-product doctrine arguably is still being curtailed.

    This is so because it is quite possible that the relative rankings of a corporate taxpayer’s disclosed tax positions result, in part, from an assessment of litigation risks by its attorney(s) – or, in other words, result from the attorneys’ mental impressions. Such mental impressions used in anticipation of litigation are supposed to be virtually undisclosable, but that remains questionable in light of the rankings.

    Public corporations already are required to record tax reserves on their audited financial statements, and the IRS may review those statements. There is a big difference, however, between disclosure of reserves on financial statements and disclosures of the type the IRS requires. The tax reserve figure reflected on audited financial statements is an aggregate total without any breakout of individual positions. Conversely, the tax reserve rankings required by the IRS are listed separately for each tax position, with an accompanying concise description for each. The latter obviously is far more revealing than the former.

    How attorneys assessing litigation risks can protect their work product. Avoid sharing such assessments with a third party whenever possible. The work should then comport with the attorney-client privilege, if nothing else. To the extent that sharing cannot be avoided, such as in the tax cases discussed above, it is important to establish a “paper trail” to underscore the significance of such work from the perspective of preparing for possible litigation. An example of the danger of not doing so occurred in Textron, in which the majority pointed out that only one suggestion (by Textron’s chief tax counsel) was made in the case that the tax work papers in dispute might be useful in litigation and that the suggestion was not supported elsewhere in the record.18

    The more that can be done to demonstrate that documents in question satisfy the primary-purpose test, the more likely that the work product will be protected regardless of which test a court employs.

    Finally, parties need to remember that this issue remains in flux and be alert to where future cases19 are tried, including in the Seventh Circuit. Given the lack of agreement among federal appellate courts to date, it is likely the U.S. Supreme Court eventually will step into the fray.


    The federal courts are split on what is meant by “in anticipation of litigation” for purposes of the work-product doctrine, in situations when attorneys’ analyses of litigation risks also are being used in a nonlitigation context. Also, for a brief time the IRS appeared to ignore altogether the doctrine. Even now the IRS arguably has established a beachhead in limiting the doctrine’s scope. Until the U.S. Supreme Court delineates the work-product doctrine’s boundaries, these issues will persist in tax cases and perhaps in other contexts as well.

    A variety of parties are paying close attention to what openings might arise when they wish. to discover opposing counsel’s thoughts about a contested issue. Attorneys who think they need only cite Hickman as a shield should beware.


    1 325 U.S. 495 (1947).

    2 Office of Thrift Supervision v. Vinson & Elkins LLP, 124 F.3d 1304, 1307 (D.C. Cir. 1997).

    3 United States v. Textron Inc., 577 F.3d 21, 22-23 (1st Cir. 2009) (en banc), cert. denied, 130 S. Ct. 3320 (2010).

    4 United States v. El Paso Co., 682 F.2d 530, 542 (5th Cir. 1982).

    5 Textron, 577 F.3d at 30.

    6 United States v. Roxworthy, 457 F.3d 590, 599-600 (6th Cir. 2006).

    7 United States v. Deloitte LLP, 610 F.3d 129 (D.C. Cir. 2010); United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998).

    8 Adlman, 134 F.3d at 1195.

    9 Sandra T.E. v. South Berwyn Sch. Dist. 100, 600 F.3d 612, 622 (7th Cir. 2010); Lane v. Sharp Packaging Syst. Inc., 251 Wis. 2d 68, 117, 640 N.W.2d 788 (2002).

    10 Adlman, 134 F.3d at 1199.

    11 Deloitte LLP, 610 F.3d at 139.

    12 Textron, 577 F. 3d at 38.

    13 2010-7 I.R.B. 408.

    14 American Bar Association Letter, “IRS Proposal Requiring Disclosure of Uncertain Tax Positions” (May 28, 2010).

    15 Deloitte LLP, 610 F.3d at 138.

    16 2010-41 I.R.B. 428, 432.

    17 BNA Daily Tax Report Oct. 19, 2010.

    18 Textron, 577 F.3d at 28.

    19 See, e.g., Wells Fargo & Co. v. U.S., No.0:10-MC-00057 (D. Minn.7-20-11), in which the court said that the taxpayer had the burden of proof to show that certain documents were protected from disclosure to the IRS by the work-product doctrine.

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