UNITED STATES of America, Plaintiff-Appellee, v. Patrick J. ROXWORTHY, in the capacity of Vice President, Tax, Yum! Brands, Inc., Defendant-Appellant.
No. 05-5776.
United States Court of Appeals, Sixth Circuit.
Argued: April 26, 2006. Decided and Filed: Aug. 10, 2006.
457 F.3d 590
OPINION
R. GUY COLE, JR., Circuit Judge.
Defendant Patrick J. Roxworthy, in his capacity as Vice President of Tax at Yum! Brands, Inc. (“Yum“), appeals the district court‘s order enforcing an Internal Revenue Service (IRS) administrative summons demanding production of two memoranda that Yum argues are protected by work product privilege. For the reasons set forth below, we reverse the district court‘s order to compel their production and remand to the district court for entry of an order granting Roxworthy‘s motion to quash.
I.
The IRS is conducting an investigation of Yum‘s tax liability for fiscal years 1997, 1998, and 1999. As part of Yum‘s response to an informal document request, it produced a “privilege log” listing seven documents that it believed were protected
Roxworthy filed objections to the magistrate judge‘s findings of fact, conclusions of law, and recommendation, and moved to expand the record to include additional affidavits and deposition testimony. The district court granted Roxworthy‘s motion to expand the record. Roxworthy introduced additional affidavits clarifying that the memoranda at issue were not prepared to assist Yum in the preparation of its taxes, but rather were created because Yum anticipated litigation due to its upcoming recognition of a $112 million loss for tax purposes but not book purposes, the conspicuousness of such a tax treatment, the certainty of an IRS audit due to Yum‘s size, the unsettled nature of the law in that area, and Yum‘s belief that the IRS was inclined to litigate such matters. After hearing oral arguments on Roxworthy‘s objections, the district court adopted the magistrate judge‘s report and recommendation as the opinion of the court. Roxworthy filed a motion for a stay pending appeal, which the district court denied. Roxworthy filed an emergency motion for a stay pending appeal in this Court, which we granted on July 25, 2005. This appeal follows.
II.
A. Standard of Review
We review a district court‘s work product privilege determination for abuse of discretion. Toledo Edison Co. v. GA Techs., Inc., 847 F.2d 335, 341 (6th Cir. 1988).1 The district court abuses its dis-
B. Meaning of “in anticipation of litigation”
The “work product privilege” was first recognized by the Supreme Court in Hickman v. Taylor, 329 U.S. 495, 67 S. Ct. 385, 91 L. Ed. 451 (1947). The doctrine‘s rationale, as originally articulated, was to permit an attorney to “assemble information, sift what he considers to be the relevant from the irrelevant facts, prepare his legal theories and plan his strategy without undue and needless interference . . . to promote justice and to protect [his] clients’ interests.” Id. at 511, 67 S. Ct. 385. The current doctrine, as set forth in
We have yet to define “in anticipation of litigation.” Other circuits have adopted the standard first articulated in Wright and Miller‘s Federal Practice and Procedures, asking whether a document was “prepared or obtained because of the prospect of litigation.” United States v. Adlman (Adlman II), 134 F.3d 1194, 1202 (2d Cir. 1998); accord Nat‘l Union Fire Ins. Co. of Pittsburgh v. Murray Sheet Metal Co., 967 F.2d 980, 984 (4th Cir. 1992); Binks Mfg. Co. v. Nat‘l Presto Indus., Inc., 709 F.2d 1109, 1119 (7th Cir. 1983); In re Grand Jury Proceedings, 604 F.2d 798, 803 (3d Cir. 1979). We have articulated and applied the “because of” standard in our unpublished cases, see Stampley v. State Farm Fire & Cas. Co., 23 Fed. Appx. 467, 470 (6th Cir. 2001); Arkwright Mutual Ins. Co. v. Nat. Union Fire Ins. Co., 1994 WL 58999, at *3, and district courts from our circuit have also applied this test, see In re OM Group Sec. Litig., 226 F.R.D. 579, 585 (N.D. Ohio 2005); Guardsmark, Inc. v. Blue Cross & Blue Shield of Tenn., 206 F.R.D. 202, 209 (W.D. Tenn. 2002). Today, we join our sister circuits and adopt the “because of” test as the standard for determining whether documents were prepared “in anticipation of litigation.”
Adopting this standard prompts the further question of when documents can be said to have been created because of the prospect of litigation. It is clear that documents prepared in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for other nonlitigation purposes, are not covered by the work product privilege.
C. Subjective anticipation of litigation
The two memoranda at issue here were made available to us for in camera review. The documents appear to be two versions of the same memorandum. Both are dated March 29, 2000, and are addressed from KPMG to Matthew M. Preston, identifying him as the Corporate Counsel of Tricon Global Restaurants, Inc. (“Tricon“), which was Yum‘s predecessor company. The memoranda are similar in content but differ in length: One is fifty-eight pages, and the other is twenty-four pages. Both bear a designation of attorney-client privilege but do not bear any work-product designation.
Yum argues that the documents themselves are the best evidence that they were created in anticipation of litigation. Indeed, apart from eleven pages of background facts regarding Tricon‘s creation of a captive insurance company and subsequent transfer of stock, both of which occurred prior to the memoranda‘s completion, the memoranda contain dense legal analysis of current tax law, including arguments and counter-arguments in certain areas of law that the memoranda argue are unsettled. The “Conclusions” portion of each memo states that “it is more likely than not that the following federal tax consequences (among others) will result from the transactions described herein and that such consequences will be supported by ‘substantial authority’ within the meaning of
Nevertheless, the key issue in determining whether a document should be withheld is the function that the document serves. Coastal States Gas Corp. v. Dep‘t of Energy, 617 F.2d 854, 858 (D.C. Cir. 1980). Because documents are not protected if they were created for nonlitigation purposes, regardless of content, “[d]etermining the driving force behind the preparation of each requested document is therefore required in resolving a work product immunity question.” Nat‘l Union, 967 F.2d at 984. Thus we must examine not only the documents themselves, but the circumstances surrounding the documents’ creation.
The original affidavits available to the magistrate judge contained for the most part conclusory assertions that the documents were created in anticipation of litigation. For instance, Matthew M. Preston, the Vice President, Associate General Counsel, and Assistant Secretary of Yum (and addressee of the KPMG memoranda), asserted that “it was anticipated that there would be a tax controversy, including potential litigation, between the Company and the Internal Revenue Service,” that he sought opinion letters from KPMG “in anticipation of litigation with the IRS,” and that he “would not have obtained the opinion letters from KPMG but for the anticipation of federal income tax controversy proceedings, including litigation, between [Yum] and the IRS.” Joint Appendix (“J.A.“) at 110-11 (Preston Aff. June 28, 2004, ¶¶ 8-9, 11). Greg Engel, a partner at KPMG, provided an affidavit substantially similar to Preston‘s. See J.A. 114 (Engel Aff. June 24, 2004, ¶¶ 6-7).
The magistrate judge concluded that Yum‘s “bare, conclusory affidavit allegations” failed to show it “had a subjective belief that litigation was a real possibility” at the time the memoranda were completed. J.A. 45-47 (Report and Recommendation at 15-17). The magistrate judge further concluded that the memoranda were more likely prepared to assist Yum in the preparation of its taxes and the avoidance of understatement penalties if the IRS disagreed with Yum‘s tax treatment, and therefore concluded that the documents were part of the regular course of business and would have been created irrespective of any potential for litigation. J.A. 44-45 (Report and Recommendation at 14-15). The district court adopted these findings when it adopted the magistrate judge‘s report and recommendation as the opinion of the court. J.A. 55 (Dist. Ct. Order at 6).
The parties disagree as to the primary rationale underlying the district court‘s determination that Yum has not satisfied its burden of demonstrating subjective anticipation of litigation. The IRS argues that the magistrate judge‘s report and recommendation and the district court‘s opinion rest on Yum‘s simple failure to fulfill its burden of coming forth with evidence that the documents were created in anticipation
The magistrate judge concluded that Yum failed to provide adequate proof that the two documents were prepared because of the prospect of litigation, and surmised that the more likely use of the documents was to “buttress[ ] [Yum‘s] federal income tax return to the IRS should the IRS assess penalties for a substantial understatement,” and that the documents were therefore created irrespective of the potential for litigation. J.A. 44-45 (Report and Recommendation at 14-15). In reaching this conclusion, the magistrate judge placed particular emphasis on the “dubious time sequence” of the transaction‘s closing prior to Yum obtaining the memoranda, and the coinciding of the memoranda‘s completion with the March 15 deadline for corporate tax filings. J.A. 47-48 (Report and Recommendation at 17-18). The magistrate judge also inferred from the record that Preston, the individual who had requested the report, was “the company‘s tax lawyer, not an in-house or law firm litigation counsel.” Id. The magistrate judge concluded that “Yum ha[d] not provided proof to contravene the obvious inference that the opinions were provided in connection with KPMG‘s regular responsibilities in the preparation of the corporate tax return due immediately after the opinions were rendered.” Id.
After the district court granted Yum‘s motion to expand the record, Yum introduced affidavits clarifying that Yum did not file its taxes on March 15 but rather received a six-month extension every year, J.A. 246 (Roxworthy Aff. Oct. 14, 2004, ¶ 6); J.A. 243 (Preston Aff. Oct. 18, 2004, ¶ 5), that the March 15 tax deadline was of no significance to Yum, id., that Preston‘s duties were those of a general in-house counsel and not primarily those of a tax attorney, J.A. 243-44 (Preston Aff. Oct. 18, 2004, ¶ 6), that Roxworthy and other members of the tax department prepare Yum‘s tax returns in-house, J.A. 246 (Roxworthy Aff. Oct. 14, 2004, ¶ 4), that KPMG has never played any part in Yum‘s tax return preparation, J.A. 246 (Roxworthy Aff. Oct. 14, 2004, ¶ 5), that this was “the first and only time that . . . anyone in Yum‘s legal department sought a written opinion from KPMG on a U.S. federal tax issue,” J.A. 243 (Preston Aff. Oct. 18, 2004, ¶ 3), and that the memoranda at issue were not prepared to assist in the preparation of tax returns, J.A. 243 (Preston Aff. Oct. 18, 2004, ¶ 5); J.A. 246 (Roxworthy Aff. Oct. 14, 2004, ¶ 6).
The additional affidavits also provided further details explaining why, exactly, Yum anticipated litigation. Specifically, Preston stated that Engel advised him that “the tax treatment of captive insurance companies, including the treatment of premium payments to captive insurance companies, was very unsettled and had been the subject of considerable litigation between the Internal Revenue Service . . . and other large corporate taxpayers like Yum.” J.A. 242 (Preston Aff. Oct. 18, 2004, ¶ 2). He also stated that he expected litigation concerning a $112 million loss recognized by Yum in connection with the transaction, because the loss was recog-
We have stated that a party may satisfy its burden of showing anticipation of litigation “in any of the traditional ways in which proof is produced in pretrial proceedings such as affidavits made on personal knowledge, depositions, or answers to interrogatories,” and that the showing “can be opposed or controverted in the same manner.” Toledo Edison, 847 F.2d at 339. See also Bowne of New York City, Inc. v. AmBase Corp., 150 F.R.D. 465, 473 (S.D.N.Y. 1993) (“In requiring a party to prove the factual basis for its claims of privilege, the courts generally look to a showing based on affidavits or equivalent statements that address each document at issue.“). Where an “undisputed affidavit . . . is specific and detailed to indicate that the documents were prepared in anticipation of litigation or trial,” then the party claiming work product protection has met its burden. Toledo Edison, 847 F.2d at 341. However, application of the privilege will be rejected where the “only basis” for the claim is an affidavit containing “conclusory statement[s].” Guardsmark, 206 F.R.D. at 210; accord Bowne, 150 F.R.D. at 474; Senate of P.R. ex rel. Judiciary Comm. v. U.S. Dep‘t of Justice, 823 F.2d 574, 586 (D.C. Cir. 1987) (rejecting party‘s “bare assertion” that documents were withheld in anticipation of litigation where facts of case raised “enough questions as to its accuracy to render it insufficient as a matter of law“).
We find no evidence in the record to controvert the affidavits supplied by Yum. Although the memoranda do not bear a work-product designation, we agree with the magistrate judge‘s observation that the absence of a designation alone does not settle the inquiry of whether the documents were created in anticipation of litigation. Although Yum‘s supplemental affidavits do not clarify why the memoranda were not submitted until after the transactions were complete, we find error in the magistrate judge‘s speculation that the timing decreases the likelihood that the memoranda were completed in anticipation of litigation. The company‘s decision to obtain a legal opinion only after it had completed a series of transactions could easily lead to the conclusion that the opinion was more likely to be in anticipation of litigation as opposed to being used for ordinary business purposes. Yum‘s uncontroverted assertions that it anticipated litigation because of the uncertainty surrounding the area of tax law at issue are also corroborated by the memoranda‘s highly detailed discussions of hypothetical legal arguments. Finally, the additional specifics regarding why Yum anticipated litigation, particularly its explanation that it planned to claim a $112 million tax loss with no corresponding book loss, that KPMG had advised the company that the law surrounding captive insurance companies was unsettled, and that the IRS had demonstrated an inclination to litigate in that area, provide more than bare self-serving conclusions. Thus, Yum‘s unambiguous sworn affidavits and deposition testimony satisfy its burden of demonstrating that the memoranda were prepared due to Yum‘s subjective anticipation of litigation and not in the ordinary course of business.
To the extent that the magistrate judge‘s opinion rests on Yum‘s failure to put forth specific credible evidence, we conclude that the district court‘s adoption of these findings, after additional evidence contradicting the magistrate judge‘s conclusions had been submitted, constituted clear error. In the absence of any evidence to the contrary, the affidavits and deposition testimony supplied by Yum are adequate to demonstrate that Yum did not commission the memoranda as part of the ordinary course of business of completing the transactions and that Yum in fact anticipated litigation because of the certainty of an IRS audit, the conspicuousness of the $112 million discrepancy between tax and book loss, and the unsettled law surrounding captive insurance company transactions.
Yum focuses on the magistrate judge‘s discussion of the possible use of the KPMG memoranda in Yum‘s audit process, and argues that the magistrate judge erroneously assumed that use of the memoranda for such a purpose precludes assertion of a work-product privilege. As the magistrate judge‘s report and recommendation and the IRS‘s brief both note, the tax code imposes a twenty percent penalty on substantial understatements of income tax.
We are persuaded by Yum‘s argument that even if the KPMG memoranda were prepared in part to assist Yum in avoiding underpayment penalties during an audit, the documents do not lose their work prod-
Yum further argues that the magistrate judge erred in concluding that anticipation of an audit does not constitute anticipation of litigation under
Because the magistrate judge‘s conclusion is unsupported by both the record and the law, we conclude that the district court committed clear error in adopting the magistrate judge‘s conclusion that Yum has not demonstrated subjective anticipation of litigation.
D. Objectively reasonable anticipation of litigation
The magistrate judge further concluded that Yum had failed to show “particular facts that would reasonably give rise” to a belief that “litigation was a real possibility.” J.A. 46 (Report and Recommendation at 16). The district court adopted the magistrate judge‘s conclusion, noting that “any possibility of litigation was too far removed to be concrete or significant.” J.A. 54 (Dist. Ct. Order at 5).
Courts have articulated various tests for determining when anticipation of litigation is too speculative to be objectively reasonable. The D.C. Circuit has required the objecting party to prove that a document was “prepared with a specific claim supported by concrete facts which would likely lead to litigation in mind,” Coastal States, 617 F.2d at 865, but has also found the privilege to apply in the absence of a specific claim where an attorney “rendered legal advice in order to protect the client from future litigation about a particular transaction,” In re Sealed Case, 146 F.3d at 885 (recognizing privilege attached to documents that were created after public stir surrounding transaction but two years before formal investigation began). See also Delaney, 826 F.2d at 127 (finding that privilege applied to memorandum discussing possible legal challenges to IRS‘s proposed statistical sampling program even though no litigation was pending and pro-
Here, Yum argues that it anticipated litigation because a yearly IRS audit of Yum was a certainty due to the company‘s size, the transaction at issue involved a $112 million discrepancy between tax loss and book loss, and the company had been advised by KPMG that the area of law was unsettled and that the IRS had recently targeted this type of transaction. Yum points to a case with analogous facts in which a district court upheld the work-product privilege. In ChevronTexaco, 241 F. Supp. 2d at 1082, as here, the company‘s tax returns were routinely examined by the IRS, the company was engaged in a transaction involving “a very substantial amount of tax dollars,” and the IRS “had previously questioned similar transactions.” The court concluded that the withholding party “reasonably believed that it was a virtual certainty that the IRS would challenge the . . . transaction.” Id.
Likewise, in United States v. Adlman, 68 F.3d 1495, 1496 (2d Cir. 1995) (Adlman I), an accounting firm prepared documents evaluating the tax consequences and likely IRS challenges to a company‘s proposed reorganization in which the company would claim a capital loss of $290 million. The Second Circuit held that the district court erred in concluding that the prospect of litigation was too remote for work-product privilege to apply, observing that “[i]n many instances, the expected litigation is quite concrete, notwithstanding that the events giving rise to it have not yet occurred.” Id. at 1501. The court remanded the matter for the district court to apply the proper standard.
We find these factually analogous cases persuasive. As contemplated by Adlman I, Yum has demonstrated that the “expected litigation” here is “quite concrete” despite the absence of any overt indication from the IRS that it intends to pursue litigation against Yum. Yum has identified a specific transaction that could precipitate litigation, the specific legal controversy that would be at issue in the litigation, the opposing party‘s opportunity to discover the facts that would give rise to the litigation, and the opposing party‘s general inclination to pursue this sort of litigation. We believe that Yum has established that the memoranda at issue sought to protect Yum “from future litigation about a particular transaction,” see In re Sealed Case, 146 F.3d at 885, that Yum has also established that KPMG and Yum had in mind a “specific claim supported by concrete facts which would likely lead to litigation,” see Coastal States, 617 F.2d at 865, and that Yum has established that it “face[d] an actual or a potential claim following an actual event or series of events that reasonably could result in litigation,” Nat‘l Union, 967 F.2d at 984. Because we believe that Yum‘s circumstances clearly constitute objectively reasonable anticipation of litigation under any of the tests we have seen employed by our sister circuits, we need not decide which of these articulations is most useful.
We therefore conclude that the district court committed an error of law in determining that Yum‘s anticipation of litigation
III.
For the reasons set forth above, we REVERSE the district court‘s order granting the IRS‘s Petition to Enforce the Internal Revenue Summons and we REMAND with instructions to the district court to grant Roxworthy‘s Motion to Quash.