Salem Financial, Inc. v. United States
102 Fed. Cl. 793
Fed. Cl.2012Background
- STARS transaction structured to generate foreign tax credits and deductions for Branch and BB&T; Branch ceased STARS in 2007.
- IRS issued a Notice of Deficiency in 2010 for 2002–2007 years; Branch paid taxes and penalties totaling approximately $884.7 million the same day.
- Plaintiff sued in 2010 seeking recovery of federal taxes and penalties, plus interest and refunds.
- Parties began discovery in 2010; Government sought to compel production of documents in three privilege-related categories.
- Court analyzed whether tax reserves, tax practitioner privilege, and attorney-client privilege protections apply, and whether waivers occurred due to reliance on third-party advice.
- Court granted in part and denied in part; ordered quick peek procedures and set future status conference.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Are tax reserve documents protected work product? | Reserves were prepared in anticipation of litigation; protected. | Reserves are for financial reporting, not litigation; not protected; waiver via PwC advice. | Waiver found; not protected work product. |
| Do post-closing KPMG communications fall within the tax practitioner privilege exception for tax shelters? | Post-closing KPMG advice not within the exception; still protected. | Post-closing KPMG advice promotes or facilitates STARS; falls within exception. | Post-closing communications do not fall within the exception; not privileged; waiver possible for some documents. |
| Are KPMG communications involving proposed changes in law/unwinding STARS protected by the tax practitioner privilege? | Should be protected (different subject matter); no waiver. | Waived because used as defense to penalties; privilege extends to same subject matter. | Waiver found; privilege not applicable to those post-closing topics. |
| Do KNIGHT transaction communications fall under attorney-client privilege or waiver? | KNIGHT discussions are protected legal advice. | KNIGHT documents may be non-legal or non-privileged; but generally relevant to STARS unwinding. | General KNIGHT-related communications may be protected if for legal advice; quick peek contemplated to resolve disputes. |
| Are Brockway communications (non-legal capacity concern) protected by attorney-client privilege? | Brockway communications were legal advice to BB&T. | Some argue Brockway acted in a non-legal capacity during promotion. | Court finds Brockway communications privileged as to BB&T legal advice. |
Key Cases Cited
- In re EchoStar Comms. Corp., 448 F.3d 1294 (Fed. Cir. 2006) (subject-matter waiver governs waiver of work product in related communications)
- United States v. Textron Inc., 577 F.3d 21 (1st Cir. 2009) (tax work papers; debate on whether protected work product)
- Evergreen, 80 Fed.Cl. 122 (Fed. Cl. 2007) (tax practitioner privilege; waiver extends to same subject matter)
- Fort James Corp. v. Solo Cup Co., 412 F.3d 1340 (Fed. Cir. 2005) (overarching goal of subject matter waiver)
- Am. Standard, Inc. v. Pfizer, Inc., 828 F.2d 734 (Fed. Cir. 1987) (attorney-client privilege limitations; substance of confidential client communications)
- Stovall v. United States, 85 F.3d 810 (Fed. Cir. 2009) (attorney-client privilege scope in distinguishing purely legal advice)