Update on Schaeffler Privilege and Work Product Dispute With IRS

28 Flares Filament.io 28 Flares ×

Last December we discussed the Schaeffler Group’s multi-million dollar dispute with the IRS and in particular the Second Circuit’s opinion concerning attorney-client privilege and work product protection. See PT guest poster Ben Bolas’s Schaeffler v. United States: Second Circuit Rejects District Court’s Limitations on Attorney-Client Privilege and Work Product Doctrine in the Context of Tax Advice.

As Ben discussed, the Second Circuit reversed the district court and pushed back on opinions that had limited privilege in the face of parties having a common interest beyond a legal interest. The Second Circuit held that Schaeffler did not waive the attorney-client privilege and work product protections when Schaeffler shared opinions and communications with financial institutions pursuant to a common interest agreement even though the parties had a shared commercial interest. In resolving the summons dispute with respect to some of the documents at issue, the Second Circuit remanded the case to determine whether other documents were protected by the attorney client privilege or work product doctrine.

Law 360 a couple of weeks ago reported that the parties had settled the underlying tax dispute. See Schaeffler, IRS End $25M Dispute Over Stake Sale Loss, (not a free link) where it stated that the parties had “come to an accord ‘with respect to all issues’ in the U.S. Tax Court case.

With that resolution I was somewhat surprised when I came across last week the district court issuing an opinion and order that resolved an ongoing dispute regarding the IRS summons despite the merits settlement. In this brief post, I will discuss the nature of the dispute and offer a reason why the parties were still fighting about the summons even though the underlying case settled.

read more...

Here is how the District Court framed the dispute:

On appeal, the United States Court of Appeals for the Second Circuit vacated this Court’s judgment and remanded the case for “further proceedings.” The IRS recently withdrew the summons and now moves to dismiss the petition for lack for subject matter jurisdiction on the ground that it is moot. Schaeffler has cross-moved for entry of a judgment quashing the summons.

The District Court opinion detailed further the parties’ actions following the Second Circuit opinion:

Schaeffler appealed the Court’s decision to the Second Circuit.See Notice of Appeal, filed June 6, 2014 (Docket # 55). The Circuit vacated this Court’s judgment and “remand[ed] 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.” Schaeffler v. United States, 806 F.3d 34, 45 [116 AFTR 2d 2015-6708] (2d Cir. 2015). The Second Circuit’s mandate issued on January 28, 2016. Mandate, filed Jan. 28, 2016 (Docket # 64).

This Court then ordered “[t]he parties … to consult to determine whether there should be any further proceedings in this matter.” Order, filed Jan. 29, 2016 (Docket # 65). On February 5, 2016, the parties submitted a joint letter “agree[ing] that there is no need for further proceedings ….” Letter from Todd Welty and Rebecca S. Tinio, filed Feb. 5, 2016 (Docket # 66). The parties represented that they were “working to draft stipulated dismissal documents.” Id.

One week later, however, on February 12, 2016, the IRS withdrew the summons that was the subject of the petition to quash. Ramirez Decl. ¶ 5. In a letter, the IRS informed Ernst & Young that “[n]o further attempt will be made by the Internal Revenue Service to seek production of records from Ernst & Young under this summons.” Letter from Hugo Ramirez to Melissa Galetto, dated Feb. 12, 2016, appended as Exhibit 1 to Ramirez Decl. The instant motions to dismiss and for entry of judgment followed.

The rest of the opinion essentially discusses the mootness doctrine, which stems from Article III of the constitution. That doctrine requires that courts have an actual controversy before it. Last week’s district court opinion notes that there are many cases that have held that the withdrawal of an IRS summons moots a petition to quash that summons. In finding that no exception to the mootness doctrine applied, the opinion granted the IRS’s motion to dismiss and denied Schaeffler’s motion for entry of judgment quashing the summons.

What was going on with the dispute? It was not entirely clear to me but I discussed the opinion with Jack Townsend, who authors the Federal Tax Crimes blog and who is the successor author with me on the Saltzman and Book criminal tax penalties chapter in IRS Practice and Procedure. Jack suggests that in opposing the government’s motion to withdraw and in cross-moving for an entry of a judgment quashing the summons Schaeffler “might want the issue to be final between Schaeffler and the Government via some type of preclusion (res judicata or collateral estoppel) if the issue arises in the future as may be likely in subsequent audit proceedings or litigation.” While this is merely an inference it makes sense to me.

While for Schaeffler the resolution of the summons dispute means that there is no court order quashing the summons on privilege grounds (and some opening for future disputes between the parties), the Second Circuit opinion remains a powerful weapon for parties seeking the attorney client privilege and work product as well as the ability to raise the common legal interest doctrine generally.

 

 

 

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*