2013 WL 2444639
United States District Court,
WELLS FARGO & COMPANY, Petitioner,
UNITED STATES of America, Respondent.
United States of America, Petitioner,
Wells Fargo & Company, Respondent.
Nos. 10–57 (JRT/JJG), 10–95 (JRT/JJG).
June 4, 2013.
Attorneys and Law Firms
Reid M. Figel, Derek Ho, Brendan J. Crimmins, and Saritha Tice, Kellogg, Huber, Hansen, Todd, Evans & Figel, Washington, DC, Walter A. Pickhardt and Martin S. Chester, Faegre Baker Daniels LLP, and Andrew T. Gardner, Wells Fargo & Company, Minneapolis, MN, for Wells Fargo & Company.
Karen A. Smith and Robert J. Kovacev, and James C. Strong, United States Department of Justice, Tax Division, Washington, DC, for the United States of America.
FINDINGS OF FACT, CONCLUSIONS OF LAW, AND ORDER FOR JUDGMENT
JOHN R. TUNHEIM, District Judge.
*1 Wells Fargo & Company (“Wells Fargo”) is a diversified financial services company providing banking and other services. It used KPMG LLP (“KPMG”), an accounting firm, as its independent auditor for its 2007 and 2008 taxable years. The Internal Revenue Service (“IRS”) issued three summonses on August 12, 2010, attempting to obtain information from Wells Fargo and KPMG related to Wells Fargo’s financial reporting and its “uncertain tax positions.” Wells Fargo turned over some information, but on September 1, 2010, filed a petition with this Court to quash the summons issued to KPMG, pursuant to 26 U.S.C. § 7609(b)(2). (Misc. No. 10–57, Docket No. 1.) The United States filed a counter-petition to enforce the summons against KPMG. (Misc. No. 10–57, Docket No. 7.) On December 16, 2010, the United States filed a petition, initiating a separate case, to enforce the two summonses it issued to Wells Fargo. (Misc. No. 10–95, Docket No. 1.) The parties filed a joint motion to consolidate the two cases, (Misc. No. 10–57, Docket No. 32), which the Court granted, (Misc. No. 10–57, Docket No. 34). The Court held an evidentiary hearing on this matter from July 25 to July 28, 2011. (Misc. No. 10–57, Docket Nos. 108–110, 114.)
Wells Fargo contends that it need not respond to the summonses for five ma in reasons: (1) the IRS had an improper purpose in issuing the summonses; (2) much of the information sought by the summonses is protected by the work product privilege; (3) eight of the documents sought are protected by the attorney-client privilege; (4) information sought about Wells Fargo’s state and local tax returns are irrelevant to the IRS’s audit; and (5) information about Wachovia Corporation’s (“Wachovia’s”) financial statements and tax returns are irrelevant to the IRS’s audit of Wells Fargo. On these issues, the Court will conclude, respectively, that (1) the United States has demonstrated a legitimate purpose to support its summonses; (2) certain aspects of the information Wells Fargo seeks to withhold are protected by the work product privilege, while other information does not fall under the privilege; (3) eight documents sought by the IRS are protected by the attorney-client privilege; (4) the United States has not shown that information about Wells Fargo’s state and local taxes is relevant; and (5) the United States has not shown that information about Wachovia is relevant. The Court will discuss each issue in detail below.
FINDINGS OF FACT1
IRS AUDIT AND APPEALS PROCESS
*2 3. As part of an examination, the IRS may issue summonses and information document requests (“IDRs”) to obtain documents and written explanations from the taxpayer regarding its tax positions. (Timothy L. Erickson (“Erickson”) Tr. 580:22–25, 583:2–8; Pagano Decl. ¶ 13.)
SUMMONSES AT ISSUE
*3 13. The first summons requested production of Wells Fargo’s tax accrual workpapers (“TAWs”) for the 2007 and 2008 tax years, as well as documents pertaining to the preparation of those TAWs. It directed Wells Fargo to appear at an IRS office in Minnesota in 2010 to produce these TAWs for examination. (Second Erickson Decl. ¶ 5, Ex. 1.)
all accrual and other financial workpapers or documents created or assembled by the Taxpayer, an accountant for the Taxpayer, or the Taxpayer’s independent auditor relating to any tax reserve for current, deferred, and potential or contingent tax liabilities, however classified or reported on audited financial statements, and to any footnotes disclosing reserves or contingent liabilities on audited financial statements. They include, but are not limited to, any and all analyses, computations, opinions, notes, summaries, discussions, and other documents relating to such reserves and any footnotes. Such documents may also be referred to as the “tax pool analysis,” “tax liability contingency analysis,” “tax contingency reserve analysis,” “tax cushion analysis,” or any other similar name.
(Second Erickson Decl. ¶ 6, Ex. 1.)6
*4 19. Wells Fargo provided the IRS with a log listing the TAWs it withheld. (Hager Decl., Ex. A.)
GAAP AND “FIN 48 ”
*5 30. A company’s management is primarily responsible for preparing financial statements. (Kelly Tr. 114:10–12.)
STEPS TAKEN PRIOR TO FIN 48’s TWO–STEP PROCESS
*6 42. FIN 48’s plain language seems to require that its process applies to all “tax positions,” not just UTPs. (FIN 48 ¶¶ A2, A19–20 (“Because of the difficulty of defining an uncertain tax position, the Board decided that all tax positions are subject to the provisions of this Interpretation.”).)11 Indeed, Wells Fargo’s auditor, KPMG, acknowledged in its guide to the FIN 48 process that “FIN 48 applies to all tax positions, regardless of their level of uncertainty or the nature of the position.” (United States Trial Ex. 11 at 8, Mar. 4, 2011, Docket No. 60 (emphasis added).)12
FIN 48’s TWO–STEP PROCESS
*7 48. The taxpayer must make the assumption that the tax position would be litigated, even if litigation has not been initiated and may never be initiated. (Decl. of Richard G. Stevens at 4–5, Nov. 1, 2010, Docket No. 11; Outslay Tr. 89:8–11, 97:4–98:3; see also FIN 48 ¶ 7.) As Wells Fargo’s accounting expert acknowledged, even a company with a “zero percent expectation of litigation over [a] tax position” must recognize the position as part of its financial statements unless it is more likely than not that it will be able to sustain the tax benefit. (Outslay Tr. 82:22–83:2; see also Stevens Tr. 682:4–14, 683:13–21, 684:20–24, 726:14–727:7, 761:1–762:5; Decl. of Evan R. Biafore ¶ 4, Nov. 1, 2010, Docket No. 10.) The taxpayer must also not consider the likelihood that the IRS will discover a tax position, but instead must assume the IRS would have full access to all relevant information. (Outslay Tr. 100:19–25; FIN 48 ¶¶ 7, B22; Outslay and McGill Decl. ¶ 77 (“[T]he entity must analyze each tax position and not just those that are probable of being audited and are material[.]”).) This assumption helps to avoid overly aggressive financial reporting. (Stevens Decl. at 8.)
*8 53. The measurement step, unlike the recognition step, requires the taxpayer to determine the probability of settlement outcomes with the IRS, if the IRS that had full knowledge of all relevant information, as opposed to requiring the taxpayer to envision litigating the tax position to the United States Supreme Court. (Outslay and McGill Decl. ¶ 66.)
TAX ACCRUAL WORKPAPERS
*9 59. There is no mandatory requirement, however, that an auditor gather all of the TAWs prepared by a taxpayer, and the precise content of the TAWs may vary from company to company. (Stevens Tr. 700:1–8, 701:14–702:24, 706:25–707:4, 749:15–25; Biafore Tr. 844:1–12.)
WELLS FARGO AND KPMG’s TAX ACCRUAL WORKPAPERS
*10 67. Wells Fargo’s TAWs also contain spreadsheets with various computations and information regarding Wells Fargo’s identification of and/or reserves for individual UTPs. (Horton Tr. 220:3–5.) For example, the TAWs include spreadsheets that use the amount of the tax position and the reserve percentage to compute the amount of the tax reserve to be recorded for that position. (Id. 229:13–230:7 .) Each spreadsheet identifies a particular UTP, reveals the reserve percentage for that UTP, and/or reveals the reserve amount for the UTP. (Id.; see also Wells Fargo Trial Ex. 18 ¶ 2(a).)
*11 73. Wells Fargo’s Tax Managing Counsel, Mark Hager, testified that it would be possible to produce the withheld TAWs in a redacted form that would identify each individual UTP along with any factual description of the transactions underlying the UTPs without disclosing other information in the documents. (Hager Tr. 411:4–23.)
INVOLVEMENT OF ATTORNEYS IN FIN 48
INVOLVEMENT OF WELLS FARGO’S TAX ATTORNEYS IN STRUCTURING BUSINESS TRANSACTIONS
*12 81. The TCG becomes involved in Wells Fargo’s business transactions that have tax significance before these transactions occur. (See Horton Decl. ¶ 17; Horton Tr. 157:2–8, 295:5–13; Hager Tr. 319:12–324:5, 325:1–326:14.) “The tax consequences of a transaction may be significant, and therefore brought to the Tax Controversy Group for review, [if the transaction is] (1) ‘significant in the dollars involved’; (2) ‘a very complex transaction’; and/or (3) a ‘structured transaction,’ to which the IRS gives heightened scrutiny.” (Wells Fargo Proposed Findings of Fact ¶¶ 51, 54.)
*13 89. Courts have not always agreed with Wells Fargo’s assessments, however, and have refused to recognize some tax benefits claimed by Wells Fargo. (See, e.g., Horton Tr. 296:2–23; Ex. A to United States Post–Trial Brief, Sept. 19, 2011, Docket No. 127.)
RELATIONSHIP OF STRUCTURING BUSINESS TRANSACTIONS TO IDENTIFYING FIN 48 UTPs
INVOLVEMENT OF WELLS FARGO’S ATTORNEYS IN TWO–STEP FIN 48 PROCESS
*14 94. The recognition step under FIN 48 was “largely” performed for Wells Fargo by tax attorneys. (Horton Tr. 168:13–18; see also id. 214:20–24, 239:12–17; Hager Tr. 342:17–343:22, 357:13–23.)
INVOLVEMENT OF WELLS FARGO’S ATTORNEYS IN IRS EXAMINATIONS
THE IRS’s PURPOSE IN ISSUING THE SUMMONSES
*15 106. Wells Fargo’s tax returns are complex. (First Erickson Decl. ¶ 5.) Wells Fargo’s 2007 and 2008 tax returns each number over 8,000 pages. (Id.)
*16 116. Biafore has previously discovered abusive tax avoidance transactions through his review of TAWs. (Biafore Decl. ¶ 8.)
WELLS FARGO’s MOTIVATION IN WITHHOLDING TAWs
WELLS FARGO’s EXPRESSED VIEWS ON LIKELIHOOD OF LITIGATION
*17 124. Horton and Hager testified that Wells Fargo has experienced a high degree of controversy with the IRS over the years and expects to be challenged on all of its UTPs. (Horton Tr. 155:11–15, 172:16, 20, 175:7–9; see also Hager Tr. 309:11–310:1, 355:5–15; Pagano Decl. ¶ 12.) They believe that litigation starts at the time of the IRS examination because the IRS begins building its evidentiary record at that time. (Hager Tr. 318:15–319:8, 334:19–25, 338:18–339:6; Horton Tr. 172:16–173:4, 175:15–21, 176:3–4; see also Pagano Decl. ¶ ¶ 15, 19.)
IRS’s EXPRESSED VIEWS ON LIKELIHOOD OF LITIGATION
*18 134. Erickson noted that Wells Fargo is willing to litigate its positions with the IRS and is somewhat unique in its propensity to litigate. (Erickson Tr. 567:25–568:12.) However, Erickson also noted that Wells Fargo and the IRS have resolved many issues without litigation, either at the examination stage or before IRS Appeals. (First Erickson Decl. ¶ 3; see Horton Decl. ¶ 18; Erickson Tr. 559:9–11, 569:20–570:8.)
LITIGATION OF UTPs
POLICY OF RESTRAINT
*19 142. Under the revised policy, the IRS would request TAWs associated with a listed transaction,28 if the taxpayer’s return “claim[ed] any tax benefit arising out of a transaction that the Service … determined to be a listed transaction at the time of the request[.]” (First Erickson Decl., Ex. 5.) If the taxpayer disclosed the listed transaction, the IRS stated that it would routinely request the taxpayer’s TAWs pertaining only to the listed transaction. (Id.) If the listed transaction was not disclosed, the IRS would routinely request all of the taxpayer’s TAWs. (Id.) In addition, if the IRS determined that the taxpayer claimed tax benefits from multiple investments in listed transactions on a return, regardless of whether the taxpayer disclosed the transactions, the IRS, as a discretionary matter, would request all TAWs. (Id.) Similarly, if, in connection with the examination of a return claiming tax benefits from a disclosed listed transaction, there were reported financial accounting irregularities, the IRS, as a discretionary matter, would request all of the taxpayer’s TAWs. (Id.)
*20 150. According to Erickson, the IRS chose to seek Wells Fargo’s TAWs, at least in part, because of its participation in SILO transactions. (See First Erickson Decl. ¶ 22.) As noted above, Erickson primarily seeks Wells Fargo’s TAWs to verify the accuracy of its tax returns.
IRS’s MOTIVATIONS FOR ISSUING POLICY OF RESTRAINT
AUDITORS AND KPMG
*21 159. KPMG is Wells Fargo’s outside financial statement auditor and has performed that role for well over twenty years. (Horton Tr. 241:23–25; Newinski Tr. 642:12–16.)
*22 172. The SEC’s Financial Reporting Policies (“FRP”) similarly state that “[w]hen an adversary position between a client and its accountant with respect to the audit services rendered is created as a result of litigation, the accountant cannot be considered impartial or capable of exercising objective judgments in the performance of the audit work and could not be deemed to meet the Commission’s requirements for independence.” (Wells Fargo Trial Ex. 69 (FRP ¶ 602.02.f.ii).) Independence is impaired if litigation substantially alters the normal relationship between client and accountant, impairs the candor and communication between client and auditor regarding all aspects of the client’s business operations, or creates bias on the part of the auditor. (Id.)
*23 180. The PCAOB also has broad authority, including the authority to demand an auditor’s workpapers to determine whether the auditor has met professional standards. 15 U.S.C. § 7215(b)(2)(B).
KPMG’s RELATIONSHIP WITH WELLS FARGO
*24 188. Newinski testified that, to her knowledge, KPMG had not granted access to Wells Fargo’s TAWs to outsiders. (Newinski Tr. 661:6–19; Newinski Decl. ¶ 46.) KPMG took many steps to protect client confidentiality, such as providing training and locking confidential materials in a limited access room. (Newinski Tr. 662:7–664:1.)
STATE AND LOCAL TAWs
*25 200. On cross examination, however, Biafore stated that with respect to a taxpayer such as Wells Fargo, which deducts state and local taxes based on the amount of taxes paid, all the IRS needs to do to verify the deduction for state and local taxes would be to “pull up all [the] state returns and match up the payments.” (Biafore Tr. 849:2–851:7.) In that circumstance, Biafore stated that state and local TAWs are irrelevant. (Id. 851:1–4, 849:6–8 (“Q. If the IRS can verify the deduction for state taxes, is it your opinion that [state and local TAWs] are not relevant? A. Pretty much, yes.”).)
CONCLUSIONS OF LAW
To determine whether the summonses are enforceable, the Court must consider each of Wells Fargo’s challenges to the summonses. First, the Court will find that the IRS had a proper purpose in requesting Wells Fargo’s TAWs. Second, the Court will determine that Wells Fargo’s identification of UTPs is not entitled to work product protection but that Wells Fargo’s recognition and measurement steps are protected. Third, the Court will find that eight of Wells Fargo’s documents are protected by the attorney-client privilege. Finally, the Court will find that the United States has not shown the potential relevance of Wells Fargo’s state and local TAWs or Wachovia’s TAWs.
Pursuant to 26 U.S.C. § 7602, the IRS is authorized “[t]o examine any books, papers, records, or other data which may be relevant or material to” ascertaining the correctness of any return. 26 U.S.C. § 7602(a)(1). The IRS may issue a summons in order to obtain this information and may petition the District Court to enforce the summons. Id. §§ 7602(a)(2), 7604(b). The IRS may also summon individuals to testify under oath about information relevant to the correctness of a return. Id. § 7602(a)(2).
*26 The IRS has “broad latitude to adopt enforcement techniques helpful in the performance of [its] tax collection and assessment responsibilities.” Arthur Young & Co., 465 U.S. at 820 (quoting United States v. Euge, 444 U.S. 707, 716 n. 9 (1980)). “[I]t is for the agency, and not the taxpayer, to determine the course and conduct of an audit.” United States v. Norwest Corp., 116 F.3d 1227, 1233 (8th Cir.1997). Section 7602 reflects a congressional policy in favor of disclosure of information relevant to legitimate inquiry by the IRS and gives “expansive information-gathering authority” to the IRS. Arthur Young & Co., 465 U.S. at 816.
In order to enforce a summons, the IRS must show that (1) its investigation is pursuing a legitimate purpose; (2) the inquiry “may be relevant” to that purpose; (3) the information sought is not already in the possession of the IRS; and (4) the administrative steps required by the Internal Revenue Code have been followed. United States v. Powell, 379 U.S. 48, 57–58 (1964).
“The [IRS] Commissioner may establish a prima facie case for enforcement of a summons by a minimal showing of good faith compliance with summons requirements.” United States v. Norwood, 420 F.3d 888, 892 (8th Cir.2005) (internal quotation marks omitted). Once the IRS has met its initial burden, “[t]he taxpayer can rebut a prima facie case for enforcement under Powell by demonstrating that the Powell requirements have not been satisfied, or by showing that enforcement of the summons would represent an abuse of the court’s enforcement powers.” Id. at 893. Contravening a privilege—such as the work product or attorney-client privilege—constitutes an abuse by the IRS of the court’s enforcement powers. See United States v. Wyatt, 637 F.2d 293, 301 (5th Cir.1981) (“Such an abuse would occur … where enforcement would contravene the attorney-client privilege, or the privilege against self-incrimination ….“ (citing Reisman v. Caplin, 375 U.S. 440, 449 (1964); Couch v. United States, 409 U.S. 322, 327 (1973))).
Wells Fargo argued prior to the evidentiary hearing in July 2011 that the IRS was required to establish the right to enforcement under Powell at the evidentiary hearing, and only then would the burden shift to Wells Fargo to rebut the government’s prima facie case. However, as the Eighth Circuit recognized:
[T]he burden on the IRS to make a prima facie showing as to the Powell good faith requirements is slight, and the burden on the challenger to rebut the IRS showing as to one or more of these requirements or to demonstrate that judicial enforcement of the summons would otherwise constitute an abuse of the court’s process is great.
Robert v. United States, 364 F.3d 988, 996 (8th Cir.2004) (internal quotation marks omitted). Applying this standard, on July 20, 2011, this Court held that the IRS had established a prima facie case of good faith under Powell. (Docket No. 104.)31 Thus, the burden fell to Wells Fargo to establish that the IRS lacked a legitimate purpose in enforcing the summonses or that enforcement of the summonses would constitute an abuse of the Court’s process.32 The Court further noted that, even without the Powell analysis, Wells Fargo would bear the burden of proof on the issue of privilege. (Docket No. 104 at 5 (quoting In re Zurn Pex Plumbing Prods. Liab. Litig., MDL No. 08–1958, 2009 WL 1178588, at *1 (D.Minn. May 1, 2009) (“A party asserting the attorney-client privilege or protection under the work-product doctrine has the burden to provide a factual basis for the privilege or protection.” (internal citation omitted))). The Court will thus apply the burdens identified in this previous Order.
*27 Wells Fargo first challenges the summonses by claiming that the IRS lacked a legitimate purpose in issuing them. It is improper to issue summonses for certain purposes, such as to harass a taxpayer or put pressure on a taxpayer to settle a collateral dispute. See Powell, 379 U.S. at 58. To establish that the summonses lacked a legitimate purpose, Wells Fargo was required to “disprove the actual existence of a valid civil tax determination or collection purpose by the Service.” See United States v. LaSalle Nat’l Bank, 437 U.S. 298, 316 (1978). This burden is a “heavy” one. Norwood, 420 F.3d at 893 (citing United States v. Kaiser, 397 F.3d 641, 643 (8th Cir.2005)).
The Court will explain that the IRS has established a legitimate purpose for the issuance of the summonses: verifying the accuracy of Wells Fargo’s tax returns. There appears to be no equally effective means of verifying this information and, even if there were other means, the existence of other methods would not overcome the legitimacy of the summonses. Furthermore, the Court will conclude, based on the evidence presented, that the United States was not motivated to deter or punish Wells Fargo and that the IRS’s potential violation of the policy of restraint does not render the IRS’s purpose illegitimate.
The Court finds that the IRS has established a legitimate purpose in requesting Wells Fargo’s TAWs in this case. Specifically, the IRS had a legitimate purpose to issue the summonses “to verify that [Wells Fargo’s] tax return was substantially correct.” (See Erickson Tr. 637:3–6.) Wells Fargo failed to disprove the legitimacy of that purpose.
The TAWs at issue would illuminate aspects of Wells Fargo’s tax returns or, at the very least, be potentially relevant to learning more about Wells Fargo’s returns. Indeed, a unanimous United States Supreme Court has found that TAWs can be “highly relevant” to IRS inquiry in at least some cases. Arthur Young & Co., 465 U.S. at 815. Wells Fargo’s tax returns and UTPs are complex. United States witnesses Biafore and Erickson established that requesting TAWs can—and, in at least one case involving Biafore, did—allow the IRS to discover tax positions it would not otherwise find. Given the complexity of Wells Fargo’s tax positions and returns, the IRS was within its discretion in requesting the TAWs. See id. at 814 (stating that the language “may be relevant” in that § 7602 “reflects Congress’ express intention to allow the IRS to obtain items of even potential relevance to an ongoing investigation, without reference to its admissibility”).33
The IRS’s request was also proper because Wells Fargo has claimed tax benefits from listed transactions and engaged in other questionable tax practices in the past. As noted above, the Federal Circuit held that Wells Fargo improperly claimed tax deductions stemming from SILO transactions. Wells Fargo & Co. v. United States, 641 F.3d 1319, 1320–21 (Fed.Cir.2011). Wells Fargo has been found to engage in other abusive tax avoidance techniques, as well. See WFC Holdings Corp. v. United States, Civ. No. 07–3320, 2011 WL 4583817, at * 48 (D.Minn. Sept. 30, 2011) (“WFC has not shown that the [lease restructuring transaction], viewed as a whole, had economic substance or a real purpose other than tax avoidance.”). Particularly because Wells Fargo has engaged in questionable tax practices in the past, the IRS had a legitimate purpose in requesting TAWs to help verify the accuracy of Wells Fargo’s tax returns. See Merck & Co. v. United States, 652 F.3d 475, 488 (3d Cir.2011) (“To the extent that the IRS pursued [the taxpayer] more vigorously because [the taxpayer] had a history of failing to comply with the tax laws, this represents commendable agency diligence in the light of past experience, not some kind of impermissible bias against [the taxpayer].”).
*28 Wells Fargo argues that the IRS did not have a proper purpose in issuing the summonses because there were other methods the IRS could have used to verify the accuracy of Wells Fargo’s tax returns. Wells Fargo focuses primarily on the Schedule M–3, arguing that reviewing this form would have allowed the IRS to identify Wells Fargo’s UTPs. The Schedule M–3, which corporate taxpayers with total assets of $10 million or more must complete as a part of their tax return, requires taxpayers to reconcile their book-tax differences as part of their tax return. (Pagano Decl. ¶ 32.) Specifically, Schedule M–3 requires taxpayers to provide a complete reconciliation of financial accounting net income or loss to taxable income or loss in a standardized and detailed format. (Id.) Wells Fargo also points to the Reportable Transaction Disclosure Statement (“Form 8886”) as a useful technique for the IRS in discovering abusive tax transactions. (Pagano Decl. ¶ 35.) Form 8886 requires corporations to disclose “reportable” transactions, including “listed” transactions, as part of their tax returns. (Id.)
The Court concludes that Wells Fargo has not established that the Schedule M–3 and Form 8886 would necessarily allow the IRS to identify all transactions related to the UTPs. Multiple sources support the fact that the Schedule M–3 will not always lead the IRS to identify UTPs,34 and the Form 8886 only lists certain types of transactions. Thus, Wells Fargo has not established that the Schedule M–3 or Form 8886 would allow the IRS to identify all tax positions that warrant further investigation.
In addition, Wells Fargo’s expert, Walter Pagano, suggested that documents like the Schedule M–3 might make only a piece of a transaction apparent to the IRS, requiring follow-up with other investigative techniques. (Pagano Tr. 466:20–23.) These other techniques include requesting source documents and the internal documents that a company used in preparing and analyzing a transaction. (Pagano Decl. ¶ 33; Pagano Tr. 464:12–465:18; see also United States Trial Ex. 46 at 2.) These are the types of documents that Wells Fargo might seek to classify as work product or attorney-client privileged if the documents involved attorneys and the identification and analysis of UTPs. For this additional reason, Wells Fargo has not shown that the Schedule M–3 or other forms will serve as a definite substitute to requesting Wells Fargo’s TAWs and UTPs.
Furthermore, the IRS need not prove that TAWs are “critical” to its ability to discover Wells Fargo’s tax positions. (See Pagano D ecl. ¶ IV.) Under Powell, to establish that TAWs are relevant to an audit, the Court need determine merely that the TAWs might shed some light on the tax return. See Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 323 (1985); Norwest Corp., 116 F.3d at 1233 (“The issue … is not whether the IRS needs the … material … but whether the summoned material might ‘illuminate any aspect of the return.’ “ (emphasis in original) (quoting Arthur Young & Co., 465 U.S. at 815)). For the reasons already described, this standard easily is met here. The availability of other investigative techniques, particularly techniques that might be less effective or supplementary, does not render improper the IRS’s purpose in requesting relevant information.
*29 Wells Fargo argues that the IRS’s purpose in requesting TAWs was to “punish,” or at a minimum deter, Wells Fargo’s behavior because it enters into transactions that the IRS dislikes. Wells Fargo has not persuaded that Court that the IRS had this purpose in requesting the TAWs, and even if the IRS’s purpose was, in part, to deter questionable tax practices, the IRS has nonetheless established a proper purpose for its summonses.
First, Wells Fargo has not established that the IRS intended to “punish” or even deter Wells Fargo through the issuance of the summonses. No final decisionmaker on the issuance of the summonses was present at the evidentiary hearing to testify about his or her motivations. Erickson, the IRS’s senior team coordinator for Wells Fargo’s 2007 and 2008 returns, testified, reliably, that his motivation in requesting Wells Fargo’s TAWs was to verify the accuracy of Wells Fargo’s tax returns. His primary concern in reviewing the TAWs from Wells Fargo would be to ensure that the IRS had identified all tax issues that might deserve more attention from the IRS. In addition, Erickson does not believe there is “anything wrong” with Wells Fargo pursuing a refund for its tax positions, showing his lack of any intent to punish Wells Fargo. Furthermore, Biafore, although not directly involved in the examination of Wells Fargo, described how TAWs could help IRS agents identify issues on tax returns. In Biafore’s opinion, the IRS reviews TAWs to help identify issues that have not been discovered in an IRS examination. Thus, the evidence strongly suggests that the IRS’s motivation in issuing the summonses was to identify Wells Fargo’s UTPs. The Court finds no persuasive evidence of the IRS’s intent to “punish” Wells Fargo.
The primary evidence that Wells Fargo offers to support its position that the IRS was motivated to punish Wells Fargo is quotations from the Chief Counsel at the IRS stating that one purpose, not the sole purpose, of issuing the policy of restraint was to deter taxpayers from pursuing abusive tax avoidance techniques. The Court finds these quotations to be of minimal relevance to determining if the IRS, in this particular case, was motivated by a desire to deter—much less punish—tax avoidant behavior. For the reasons already outlined, the Court finds that there was no such improper motivation in this case.
Even if deterring tax avoidant behavior was one motivating factor in issuing the summons, however, this fact would not establish that the summonses were improper. As long as there is a legitimate purpose in issuing a summons, the existence of another purpose does not render the summons illegitimate. See Tiffany Fine Arts, 469 U.S. at 318 n. 5 (“[A]ll that matters is that the IRS was pursuing a legitimate investigation,” therefore “it is irrelevant whether [the IRS’s legitimate purpose] was the IRS’s primary or secondary purpose.”).35 This is particularly true here where the IRS’s alleged second motive, attempting to deter a taxpayer from avoiding its tax obligations, is consistent with the overall purpose of the Internal Revenue Code—namely, collecting the amounts lawfully owed to the United States.36 See, e.g., 26 U.S.C. § 7602(a) (providing summons authority to “determin[e] the liability of any person for any internal revenue tax”). The Court thus declines to find that the IRS possessed an improper purpose in issuing the summonses.
*30 Wells Fargo also argues that the IRS lacked a legitimate purpose because it violated its policy of restraint. (See First Erickson Decl., Ex. 5.) The policy of restraint stated that the IRS would request TAWs only if a taxpayer had claimed the benefits of a listed transaction on its tax return. Wells Fargo argues that, because it did not claim the benefits of a listed transaction on its 2007 or 2008 returns, the IRS violated its policy of restraint. Even assuming that the IRS violated its policy of restraint,37 the Court concludes that the IRS has shown a legitimate purpose under Powell.
As a preliminary matter, the Court notes that the policy of restraint does not purport to be an interpretation of the law or a definition of “legitimate purpose.” Rather, it is a stated intention regarding when the IRS planned to seek certain information. However, even if the IRS intended its policy of restraint to define the bounds of its authority to demand TAWs, the policy would be “worth no more than its inherent persuasive value.” See Godinez–Arroyo v. Mukasey, 540 F.3d 848, 850 (8th Cir.2008) (quoting Kai v. Ross, 336 F.3d 650, 655 (8th Cir.2003)).38 The Court is not persuaded that the IRS must abide by the policy of restraint in order to have a legitimate purpose to request TAWs. Rather, for the reasons outlined above, the Court finds that the IRS’s request had a legitimate purpose and met the requirements of Powell, regardless of the fact that the requests may not have complied with the policy of restraint.
In addition to the fact that the policy of restraint provides stricter boundaries on the IRS’s authority than are necessary under the Supreme Court’s holding in Powell, the Court finds the policy unpersuasive because of the IRS’s “somewhat inconsistent posture” on when it will request TAWs. See Morton v. Ruiz, 415 U.S. 199, 237 (1974). The IRS has changed its position numerous times on when it will request UTPs and TAWs, including a decision in 2010 to implement a “Schedule UTP,” on which certain corporations are required to report their UTPs as part of their tax return. See Uncertain Tax Positions—Modified Policy of Restraint, Mar. 23, 2011, http:// www.irs.gov/Businesses/Corporations/ Uncertain–Tax–Positions—Modified–Policy–of–Restraint;Uncertain Tax Positions—Schedule UTP, http:// www.irs.gov/Businesses/Corporations/ Uncertain–Tax–Positions—Schedule–UTP.
The IRS has shown a legitimate purpose for requesting Wells Fargo’s TAWs, for the reasons outlined above, including that it wished to verify the accuracy of Wells Fargo’s tax returns and that it knew Wells Fargo had claimed tax benefits from listed transactions and engaged in other questionable tax practices in the past. Accordingly, the Court will not quash the IRS’s summonses on this basis.
III. WORK PRODUCT PRIVILEGE
Wells Fargo next claims that it is entitled to work product protection for certain information in its TAWs. (See Wells Fargo Trial Ex. 18 ¶¶ 1(a-c), 2(a-b), 3(a-c), 5(1a–3a), 5(5), 6(a).) A party need not respond to an IRS summons with information protected by the work product privilege. Upjohn Co. v. United States, 449 U.S. 383, 398 (1981).
*31 The work product privilege doctrine was established in Hickman v. Taylor, 329 U.S. 495 (1947). The doctrine is now outlined in Federal Rule of Civil Procedure 26(b)(3), which states, “[o]rdinarily, a party may not discover documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative.” (emphasis added). Work product consists not only of “ ‘tangible material’ but also of ‘its intangible equivalent in unwritten or oral form.’ “ United States ex rel. (Redacted) v. (Redacted), 209 F.R.D. 475, 478 (D.Utah 2001) (quoting Restatement (Third) of the Law Governing Lawyers § 87 (2000)). Excluded from work product are “[m]aterials assembled in the ordinary course of business, or pursuant to public requirements unrelated to litigation, or for other nonlitigation purposes.” Proposed Amendments to the Federal Rules of Civil Procedure Relating to Discovery, 48 F.R.D. 487, 501 (1970). The party asserting the privilege bears the burden of establishing that the information it seeks to protect was prepared in anticipation of litigation. PepsiCo, Inc. v. Baird, Kurtz & Dobson LLP, 305 F.3d 813, 817 (8th Cir.2002).
There are two types of work product: “opinion work product,” which contains the mental impressions, conclusions, opinions, or legal theories of an attorney, and “ordinary work product,” which is any other work product, such as raw factual information strategically selected or organized by an attorney. See In re Murphy, 560 F.2d 326, 329 n. 1 (8th Cir.1977).39 If ordinary work product is prepared in anticipation of litigation, it is not discoverable unless the party seeking discovery has a substantial need for the material and cannot obtain the substantial equivalent through other means. Id. at 334. The party seeking discovery bears the burden of showing a substantial need and undue hardship. Baker v. Gen. Motors Corp., 209 F.3d 1051, 1054 (8th Cir.2000). Opinion work product, in contrast, “enjoys a nearly absolute immunity and can be discovered only in very rare and extraordinary circumstances.” In re Murphy, 560 F.2d at 336.
To establish that it anticipated litigation at the time that it created the work product, Wells Fargo need not demonstrate that litigation was already in progress. See Hickman, 329 U.S. at 498, 514 (providing work product protection to documents created by an attorney retained three days after the sinking of a tug boat, where litigation against the tug boat owners was highly likely but had not yet begun). On the other hand, “the work product rule does not … come into play merely because there is a remote prospect of future litigation” or because an issue “might ultimately result in litigation of some sort in the future.” Diversified Indus., Inc. v. Meredith, 572 F.2d 596, 604 (8th Cir.1977), modified on other grounds on reh’g, 572 F.2d 606 (8th Cir.1978) (en banc); see also Folk v. State Farm Mut. Auto. Ins. Co., No. 4:10–CV–574 HEA, 2010 WL 3620477, at *2 n. 1 (E.D.Mo. Sept. 9, 2010). To receive work product protection, documents must be prepared after a “specific threat” of litigation became “palpable.” Black v. Pilot Travel Ctrs., LLC, No. CIV. 09–4170–KES, 2011 WL 1828039, at * 2 (D.S.D. May 12, 2011).
*32 If litigation is anticipated, circuit courts vary in the precise standard they use to determine if materials are considered “prepared in anticipation of litigation” and thus protected by the work product privilege. In the Eighth Circuit, materials are considered “prepared in anticipation of litigation” if they are created “because of” litigation. PepsiCo, Inc., 305 F.3d at 817. The Circuit outlined this standard in Simon v. G.D. Searle & Co., 816 F.2d 397 (8th Cir.1987).
Simon involved a company that had multiple products liability actions pending against it. Id. at 398. The company created risk management documents to anticipate the costs of claims upon which it had already received a “notice of a claim or suit.” Id . at 400. These documents had information about attorneys’ estimates of anticipated legal expenses, settlement values, lengths of time to resolve litigation, and other factors. Id. at 400–01. The company used this information to set a case reserve for each of the outstanding claims. Id. at 400.
The Court held that aggregate case reserve information in the company’s documents was not work product because it did not reveal figures for individual cases and revealed a lawyer’s thoughts, at best, “in an indirect and diluted manner.” Id. at 401–02. The Court held that some information in the documents was protected, however. Specifically, the Court held:
Although the risk management documents were not themselves prepared in anticipation of litigation, they may be protected from discovery to the extent that they disclose the individual case reserves calculated by [Defendant]’s attorneys. The individual case reserve figures reveal the mental impressions, thoughts, and conclusions of an attorney in evaluating a legal claim. By their very nature they are prepared in anticipation of litigation and, consequently, they are protected from discovery as opinion work product.
Id. at 401. Thus, the Court concluded that the company was required to disclose its aggregate data but could redact individual case data from the documents as protected work product. Id. at 405 n. 9.
Simon establishes that information closely related to an attorney’s legal thinking about an individual case—including attorneys’ estimates of anticipated settlement values—is protected by the work product privilege even if disclosed within business documents. See id. at 401.40 It also shows that certain factual data that does not reveal an attorney’s legal opinions, such as the overall cash reserves in Simon, are not protected from discovery; rather, this information may be disclosed while any protected information in the same documents is redacted. See id. at 401–02.
The Court must determine how the work product doctrine applies to the summonses at issue. First, the Court will find that Wells Fargo’s identification of UTPs and factual information related to those UTPs is not protected by the privilege because this information was created in the ordinary course of business and not in anticipation of litigation. Second, the Court will determine that the recognition and measurement analysis sought by the summonses is work product because it involves legal analysis prepared in anticipation of litigation.41 Third, the Court will explain why KPMG’s TAWs and testimony are protected to the same extent as Wells Fargo’s TAWs and testimony. Fourth, the Court will explain that the IRS has not shown extraordinary circumstances entitling it to Wells Fargo’s work product. Finally, the Court will specify which content Wells Fargo and KPMG must disclose in documents that Wells Fargo alleges are protected by the work product privilege.42
*33 The Court must determine if Wells Fargo’s UTPs and the factual information surrounding them are protected by the work product privilege. The IRS summoned Wells Fargo’s TAWs, but it also—and, in fact, primarily—seeks the identification of Wells Fargo’s UTPs. In accordance with this goal, the IRS issued summonses seeking copies of Wells Fargo’s TAWs, including its documentation of UTPs, and directing Wells Fargo to produce a witness or witnesses to testify about the contents of the TAWs and “the procedure and process by which Wells Fargo complied with FIN 48 for its years [ending in 2007 and 2008], including, but not limited to, the procedure and process used to identify UTPs.”43 Wells Fargo asserts that this information is protected by the work product privilege. The Court finds that Wells Fargo has not established that the identification of Wells Fargo’s UTPs or the factual information surrounding those UTPs falls under the work product privilege.
First, it is necessary to determine, based on the evidence presented, when and how Wells Fargo identified its UTPs. The evidence supports Wells Fargo’s claim that it identified its UTPs before it began its financial reporting analysis, in conjunction with formulating transactions aimed at tax benefits. (See, e.g., Horton Decl. ¶ 35; Wells Fargo Proposed Findings of Fact ¶ 100.) Non-attorneys on Wells Fargo’s staff were the first to identify UTPs and request the assistance of Wells Fargo’s attorneys with respect to those positions. (See Wells Fargo Proposed Findings of Fact ¶¶ 51, 54 (“The tax consequences of a transaction may be significant, and therefore brought to the Tax Controversy Group for review, [if the transaction is] (1) ‘significant in the dollars involved’; (2) ‘a very complex transaction’; and/or (3) a ‘structured transaction,’ to which the IRS gives heightened scrutiny .” (emphasis added)).) Once UTPs were identified, Wells Fargo’s attorneys became involved in further analyzing the tax positions and, in conjunction with others at Wells Fargo, structuring the business transactions aimed at obtaining the identified tax benefits. Later, Wells Fargo’s UTPs were listed in summarized form when Wells Fargo conducted its FIN 48 analysis; at that point, Wells Fargo drew on preexisting knowledge and “it was not necessary for the Tax Controversy Group to engage in any additional legal research or evaluation of Wells Fargo’s UTPs for financial reporting purposes .” (See Wells Fargo Post–Trial Mem. at 13, Sept. 16, 2011, Docket No. 124.)
The Court finds that Wells Fargo’s identification of UTPs around the time it entered into business transactions was not a task prepared in anticipation of litigation but rather an event that occurred in the ordinary course of business. See Hickman, 329 U .S. at 510 n. 9 (“Reports … if made in the ordinary course of routine, are not privileged” (internal quotation marks omitted)). As a preliminary matter, the Court is not convinced that Wells Fargo’s attorneys were, in fact, the first to identify UTPs. See Arthur Young & Co., 465 U.S. at 808 (describing accountants preparing TAWs to assess a taxpayer’s contingent tax liabilities, including identifying questionable positions the taxpayer may have taken on its tax return). But even assuming that Wells Fargo’s attorneys identified these positions, when an attorney is acting “as a conduit for a client’s funds, as a scrivener, or as a business advisor, the privilege does not apply.” See United States v. Spencer, 2012 WL 5416151, at *2 (8th Cir. Nov. 7, 2012).44 Here, the Court finds that Wells Fargo’s attorneys were acting more as business advisors helping to structure business transactions associated with tax positions than as attorneys offering legal advice or preparing for litigation.
*34 Wells Fargo seems to claim that every time that it contemplated and entered into a transaction potentially controversial with the IRS, often well before its tax returns were filed or the IRS expressed concern about an issue, it anticipated and prepared for litigation. However, Wells Fargo also claimed that it would not enter into a transaction related to a UTP unless it had a seventy percent or greater certainty that the tax benefits stemming from its transactions would be upheld by a court of law. With this level of confidence, the Court finds it unlikely that Wells Fargo anticipated that the IRS would challenge—much less litigate—each UTP.45 Furthermore, Wells Fargo and the IRS do not litigate over every UTP. Wells Fargo may be willing to resolve issues under some circumstances, assuming the IRS identifies and challenges an issue, and the IRS is also willing to resolve certain issues because its goal is to resolve disputes at the lowest possible level. See, e.g., United States v. Baggot, 463 U.S. 476, 480 (1983) (“[T]he purpose of the audit is not to prepare for or conduct litigation, but to assess the amount of tax liability through administrative channels.”). Thus, based on the totality of the evidence, the Court declines to find that Wells Fargo anticipated or prepared for litigation each time it identified its UTPs.46
It is difficult to pinpoint the moment when a hypothetical possibility of litigation in the future becomes “anticipation of litigation” for purposes of the work product doctrine. At some point, Wells Fargo’s work related to its UTPs “shift[ed] from the ordinary course of business to an anticipation of litigation.” See U.S. Fid. & Guar. Co. v. Braspetro Oil Servs. Co., Nos. 97Civ.6124, 98Civ.3099, 2000 WL 744369, at *9 (S.D.N.Y.2000). “[T]here is no hard and fast rule as to when this occurs; rather, a fact-specific inquiry is required to determine when this shift occurs.” Id. Wells Fargo has made no attempt to argue that it anticipated litigation regarding select UTPs as soon as they were identified; instead, it makes a far-reaching claim that it anticipated and prepared for litigation regarding all of its UTPs from the moment of their identification.47 The Court is thus unable to conduct a fact-specific inquiry into each UTP to determine if Wells Fargo anticipated litigation at the time of its identification. See id. Wells Fargo has the burden of establishing the existence of the privilege; accordingly, the Court finds that Wells Fargo has not established that it was preparing for anticipated litigation when it identified its UTPs.
Wells Fargo might argue that its identification of UTPs is protected because it did not occur at the time that it entered into transactions but instead occurred when its attorneys conducted the FIN 48 analysis. Even if Wells Fargo had established this fact, which it did not, the identification of its UTPs would still not be protected. To be covered by the work product privilege, opinion work product must be “concerning the litigation” at issue. Fed.R.Civ.P. 26(b)(3)(B). Furthermore, ordinary work product must relate in some way to legal thinking connected to litigation. See, e.g., In re Chrysler Motors Corp., 860 F.2d at 846; Shelton v. Am. Motors Corp., 805 F.2d 1323, 1328 (8th Cir.1986). The mere identification of which tax positions a company should analyze under FIN 48 is too far removed from any litigation to be protected work product or considered created “because of” litigation. See Simon, 816 F.2d at 401.48 Instead, Wells Fargo listed its UTPs for FIN 48 as part of a regularly conducted business activity.49 Thus, because the Court concludes that Wells Fargo’s identification of its UTPs is not protected by the work product privilege, the Court will order that Wells Fargo and KPMG disclose Wells Fargo’s identification of its UTPs, its process for identifying UTPs, and other factual information surrounding its UTPs.
*35 Unlike Wells Fargo’s identification of UTPs, Wells Fargo has established that the recognition and measurement analysis reflected in its TAWs was prepared in anticipated of litigation. Like the business documents in Simon, the TAWs themselves were not prepared in anticipation of litigation. See Simon, 816 F.2d at 401. Rather, they were prepared to comply with Wells Fargo’s financial reporting requirements. See, e.g., Tronitech, Inc. v. NCR Corp., 108 F.R.D. 655, 656–57 (S.D.Ind.1985) (distinguishing between audit letter regarding pending litigation and TAWs because TAWs are “not prepared for any pending or future litigation”). Nonetheless, the recognition and measurement analysis in Wells Fargo’s TAWs was created in anticipation of litigation.
The Court has reviewed the TAWs at issue and concludes that the recognition and measurement analysis in them reflects the legal analysis conducted by Wells Fargo’s attorneys in preparation of litigation. Wells Fargo was actively participating in litigation or IRS Appeals on many of the UTPs and, for others, such litigation appeared likely.50 The recognition and measurement analysis in the TAWs appears to have been created while Wells Fargo anticipated litigation, instead of created at the very beginning of transactions, because the analysis references items such as challenges by the IRS and developments in possible litigation. Furthermore, this analysis appears to be pre-existing and not merely created for FIN 48; it includes settlement figures, the strengths and weaknesses of Wells Fargo’s case, and assessments of Wells Fargo’s chances of prevailing in litigation that were prepared in anticipation of litigation. See Mead Corp. v. Riverwood Natural Res. Corp., 145 F.R.D. 512, 520 (D.Minn.1992) (“Opinion work-product is material which contains or reveals an attorney’s mental impressions, legal strategy, intended lines of proof, evaluation of strengths and weaknesses of the case, inferences drawn from interviews of witnesses, or similar matters.”).
“[M]aterial developed in anticipation of litigation can be incorporated into a document produced during an audit without ceasing to be work product.” United States v. Deloitte LLP, 610 F.3d 129, 138 (D.C.Cir.2010). Allowing the IRS to access Wells Fargo’s recognition and measurement analysis in the TAWs would provide a window into the legal thinking of Wells Fargo’s attorneys on active litigation strategy, running counter to the purpose of the work product doctrine. See Hickman, 329 U.S. at 510–11.51 Thus, like the individual case reserve data in Simon, information in Wells Fargo’s TAWs regarding the recognition and measurement analysis is protected by the work product privilege. See Simon, 816 F.2d at 401.
The fact that Wells Fargo’s Tax Accounting Group created many of the TAWs at issue does not alter the Court’s decision. The recognition and measurement analysis in the TAWs reflects the legal thinking of Wells Fargo’s attorneys on anticipated litigation and is therefore protected. See id. at 399, 401 (holding that documents “prepared by nonlawyer corporate officials” were protected from disclosure to the extent they contained individual case reserve figures prepared by lawyers). These attorneys’ preexisting thoughts, conclusions, and opinions about ongoing and likely litigation, later incorporated into the TAWs, are protected work product.
*36 The Court cautions that this ruling is limited to the unique circumstances of Wells Fargo, a company that has substantially limited the number of tax positions that it subjected to a FIN 48 analysis and specifically proved its anticipation of litigation with regard to each of its UTPs at the time it created its TAWs. The Court does not adopt Wells Fargo and amicus curiae’s argument that all TAWs, by their very nature, are created “because of” litigation simply because the taxpayer must “assume” under FIN 48 that positions will be litigated.52 A hypothetical assumption that litigation will occur, even in cases where there might be little to no actual possibility of litigation, is not equivalent with anticipating litigation. See Diversified Indus., 572 F.2d at 604 (explaining that “the work product rule does not … come into play” because an issue “might ultimately result in litigation of some sort in the future”). Nonetheless, the Court concludes, under these unique facts, that Wells Fargo’s TAWs contain pre-existing legal judgments prepared in anticipation of litigation that are not discoverable.
Wells Fargo seeks to protect not only TAWs that it created but also TAWs created by non-lawyers at KPMG. As explained above, Simon establishes that information closely related to an attorney’s legal thinking about anticipated litigation is protected by the work product privilege even if it is disclosed within business documents drafted by non-lawyers. Simon, 816 F.2d at 401. Based upon the Court’s review of KPMG’s TAWs, the Court finds that KPMG’s analysis of the recognition and measurement steps is closely tied to the analysis of Wells Fargo’s attorneys. KPMG’s TAWs test the analysis of Wells Fargo’s attorneys, explicitly and implicitly; for example, the TAWs discuss whether Wells Fargo’s reserves and assessments are reasonable. The Court thus concludes that KPMG’s measurement and recognition analysis is protected by the work product privilege. As with Wells Fargo’s TAWs, however, KPMG must disclose information about Wells Fargo’s UTPs and the facts surrounding those UTPs.
The Court must next address whether the IRS can overcome the work product privilege because of its need for the information requested in the summonses. As stated above, the TAWs, with the exception of the identification of the UTPs, reflect Wells Fargo’s opinion work product; they include the mental impressions, conclusions, opinions, or legal theories of Wells Fargo’s attorneys. See In re Murphy, 560 F.2d at 329 n. 1. “[O]pinion work product enjoys a nearly absolute immunity and can be discovered only in very rare and extraordinary circumstances.” Id. at 336. The Court finds that, although the protected information in the TAWs may assist the IRS in its investigation of Wells Fargo’s tax returns, the IRS has not shown any extraordinary circumstances requiring this information. In fact, Erickson stated that his primary interest in obtaining the information requested in the summons would be to identify Wells Fargo’s UTPs, which would then allow the IRS to conduct its own analysis of these positions. No IRS witness explained why the IRS had a significant interest in obtaining the opinion work product in the TAWs. Accordingly, the Court finds that Wells Fargo’s opinion work product, as defined above, is protected and not discoverable.
*37 The Court must finally determine if Wells Fargo waived the privilege by disclosing its work product to KPMG. “The work product privilege is not absolute and may be waived.” Pamida, Inc. v. E.S. Originals, Inc., 281 F.3d 726, 732 (8th Cir.2002). A party waives the privilege when it intentionally discloses work product to its adversaries. In re Chrysler Motors Corp., 860 F.2d at 846.53 This rule holds true even when the party seeking the information is not the adversary to whom the initial disclosure was made; in other words, a waiver to one adversary is a waiver to all. See id. at 844–46 (allowing the United States access to work product, for the purposes of sentencing in a criminal case, where the work product had been turned over to plaintiffs in a civil class action).
As the Court will explain below, Wells Fargo did not waive its privilege through disclosure because (1) Eighth Circuit law requires that a party intend for its adversary to see the work product in order to waive the privilege; (2) KPMG is not an adversary; (3) Wells Fargo did not intend for an adversary to see its work product; and (4) Wells Fargo did not intend for a conduit to an adversary to see its work product.
A critical question in this case is whether, under Eighth Circuit law, a party must intend for an adversary to see its work product in order to waive the privilege through disclosure. The Eighth Circuit cases that speak most directly to this issue are Pittman v. Frazer, 129 F.3d 983, 988 (8th Cir.1997), and Crundacker v. Unisys Corporation, 151 F.3d 842, 848 (8th Cir.1998). The Court will conclude, based on these cases, that a party must intend for an adversary to see its work product in order to waive the privilege through disclosure.
In Pittman, the Eighth Circuit addressed whether a railroad company waived work product privilege as to items in an investigator’s file by voluntarily disclosing some photographs taken by the investigator. 129 F.3d at 987–88. The Court held that there was no waiver of work product privilege as to the remaining items in the file because the railroad company merely used the photographs, which had already been disclosed to the other side during discovery, as trial exhibits and because any waiver would only extend to the photographs themselves. Id. at 988. In reaching this holding, the Court stated:
If documents otherwise protected by the work-product rule have been disclosed to others with an actual intention that an opposing party may see the documents, the party who made the disclosure should not subsequently be able to claim protection for the documents as work product.
Id. (quoting 8 C. Wright & A. Miller, Federal Practice and Procedure § 2024 at 209 (1994)) (emphasis added). Beyond this quotation, the Court engaged in no further discussion of an intentionality requirement. Id.
A year after Pittman, the Eighth Circuit decided Gundacker, which addressed whether the inadvertent disclosure of a document waived the work product privilege. 151 F.3d at 848. The Court held that the inadvertent disclosure did not waive the privilege. Id. In reaching this holding, the Court cited Pittman and stated, “[a]lthough disclosure to an adversary ordinarily waives work product protection, there must be an intention that the opposing party see the work product.” Id. (emphasis added) (citing Pittman, 129 F.3d at 988). The Court did not further discuss Pittman or an intentionality requirement; it simply concluded that “the district court did not abuse its discretion in finding that the document was privileged under the attorney work product doctrine.” Id.
*38 Subsequent to these opinions, district courts have questioned whether Eighth Circuit precedent in fact dictates that waiver due to disclosure only exists when a party intends for an adversary to see its work product. In United States v. Johnson, for example, the United States District Court for the Northern District of Iowa suggested that Pittman stated only that “an actual intention that an opposing party may see the documents is sufficient to waive the work-product privilege, [but] it does not state that such an actual intention is required.” 378 F.Supp.2d 1041, 1046 (N.D.Iowa 2005) (emphasis in original) (internal quotation marks omitted). Accordingly, Johnson discounted Gundacker ‘s apparent adoption of an intentionality requirement. Id. at 1046–47.54
This Court declines to adopt the reasoning of Johnson and will instead follow Gundacker. It is possible, as Johnson notes, that Gundacker ‘s holding did not necessarily follow from Pittman in the way the Gundacker court suggested, but it is not this Court’s role to second-guess the holdings of the Eighth Circuit. See United States v. Foster, 763 F.Supp.2d 1086, 1088 (D.Minn.2011) (“This Court must ordinarily follow Eighth Circuit precedent regardless of whether that precedent is, in this Court’s opinion, correctly decided.”). Gundacker clearly stated that, for disclosure to an adversary to waive work product protection, “there must be an intention that the opposing party see the work product.” Gundacker, 151 F.3d at 848. This statement was not dicta but rather appears tied to the court’s holding that the inadvertent disclosure of the document did not waive work product. The Court will thus apply this rule. See, e.g., St. Paul Reinsurance Co., 197 F.R.D. at 640 (citing Gundacker for the proposition that “waiver requires both disclosure to an adverse party and intention that the adverse party see the work product”). Because waiver by disclosure requires the intentional disclosure to an adverse party, this Court must determine whether KPMG is an adversary and whether there was intentional disclosure to an adversary.
First, the Court concludes that KPMG is not an adversary. There is no dispute that KPMG was not a litigation adversary of Wells Fargo at the time Wells Fargo provided its TAWs to KPMG. In fact, the two companies have never been litigation adversaries. Furthermore, there is no evidence that KPMG was in a non-litigation dispute with Wells Fargo.
The IRS argues instead that KPMG is a potential adversary. See, e.g., United States v. Mass. Inst. of Tech., 129 F.3d 681, 687 (1st Cir.1997) ( “[D]isclosure to an adversary, real or potential, forfeits work product protection.”). It is not clear if the Eighth Circuit recognizes waiver stemming from disclosure to a potential adversary. See Gundacker, 151 F.3d at 848 (“Although disclosure to an adversary ordinarily waives work product protection, there must be an intention that the opposing party see the work product.” (emphasis added)).
*39 Assuming that there is waiver for disclosure to a potential adversary, however, the Court finds that there was not a high enough risk of an adversarial relationship in this particular case to waive the privilege. See Deloitte LLP, 610 F.3d at 140. Wells Fargo presented evidence at trial, which the United States did not contradict, that litigation between auditors and their clients is rare. Indeed, AICPA’s Code of Professional Conduct states that an auditor’s duty of independence may be impaired when there is a potential of litigation between an auditor and its client, possibly leading to the auditor’s need to withdraw as the client’s auditor. KPMG has been Wells Fargo’s outside financial statement auditor for well over twenty years, without a history of litigation or apparent conflict. Furthermore, Horton described Wells Fargo’s relationship with KPMG as “cooperative and professional.” The Court finds no indication—based on the evidence presented about KPMG or auditors in general—that there is likely to be litigation or other disputes between KPMG and Wells Fargo.55
Second, because KPMG is not an adversary, Wells Fargo did not intentionally disclose its work product to an adversary. Newinski testified that KPMG has not disclosed any of Wells Fargo’s or KPMG’s 2007 or 2008 TAWs to any third party, and the United States has not disputed this point. KPMG took many steps to protect client confidentiality, such as providing training and locking confidential materials in a limited access room. Thus, because KPMG is not an adversary and because Wells Fargo has not disclosed its TAWs to any other party, Wells Fargo has not waived the privilege.
The United States argues that, even if KPMG is not an adversary, Wells Fargo waived the privilege because KPMG is a “conduit” to an adversary. As a preliminary matter, the United States has cited to no Eighth Circuit cases establishing that waiver exists if a party discloses a document to a mere conduit to an adversary. The Court will thus assume without deciding that the Eighth Circuit would recognize a waiver under these circumstances.
It is possible that, as the United States argues, there could be situations in which KPMG would be a conduit to an adversary. The United States persuasively argues that there are situations where KPMG may be expected to disclose Wells Fargo’s TAWs to the SEC or the PCAOB. See, e.g., 15 U.S.C. §§ 77s(c), 78u(b), 7215(b)(3), (c)(4); Arthur Young & Co., 465 U.S. at 820; Free Enter. Fund, 130 S.Ct. at 3148. In fact, Section 10A of the Securities Exchange Act of 1934 imposes an affirmative and absolute duty on independent auditors to make certain disclosures to the SEC regarding company violations of laws, rules, or regulations, which could include violations of the tax code. 15 U.S.C. § 78j–1(b)(3) & (4). This understanding was reflected in KPMG’s service agreement with Wells Fargo. Given this evidence, it is possible that—presented with different evidence—this Court may have found that KPMG was a conduit to an adversary.
*40 In this case, however, there is no evidence to establish that KPMG was a conduit to an adversary. The United States has presented no evidence about how often auditors in general make disclosures to the SEC or other entities. Furthermore, the United States presented no evidence that KPMG in particular had ever made disclosures to adversaries. The evidence thus shows nothing more than a remote possibility of disclosure, which is insufficient to deem a party a conduit to an adversary. See, e.g., Johnson, 378 F.Supp.2d at 1047 (“[W]aiver occurs when the disclosure to a third party substantially increases the likelihood that an adversary will come into possession of the material.” (emphasis in original)). Furthermore, the Eighth Circuit appears to require an intention that a document be disclosed to the adversary for the privilege to be waived, and no such intention was demonstrated here. See Gundacker, 151 F.3d at 848. The Court thus concludes, based on the evidence presented in this case, that KPMG is not an adversary, potential adversary, or conduit to an adversary and that there has been no waiver of the work product privilege.
For the reasons outlined above, not all of the content of Wells Fargo’s TAWs is protected by the work product privilege. Specifically, the Court holds that Wells Fargo must disclose the identity of its UTPs, the processes for identifying its UTPs, and some underlying facts surrounding those UTPs, but not Wells Fargo’s recognition or measurement analysis.
In the sealed documents submitted to the Court, Wells Fargo has attempted to categorize its TAWs by category, through highlighting them in different colors according to the topic they discuss.56 However, as noted above, some items categorized as “revealing the identity of uncertain tax positions” in fact have information that falls into other categories. For example, one item in this category discusses the anticipated potential settlement of certain tax positions. (See KPMG Sealed Document 78 at 8.) Accordingly, Wells Fargo’s current categorization of material is an inadequate basis for this Court to delineate which material Wells Fargo must disclose. Instead, the Court will order that Wells Fargo and KPMG disclose items in the TAWs according to the following directives.
The Court will order the disclosure of material in the TAWs that identifies: (1) Wells Fargo’s federal UTPs, (2) facts underlying its federal UTPs (namely, the business transactions underlying the UTPs), and (3) Wells Fargo’s process for identifying its federal UTPs. Wells Fargo and KPMG will likewise be ordered to provide testimony, pursuant to the IRS testimonial summons, consistent with these categories of information. However, as explained above, this Order does not require Wells Fargo to disclose information that reveals the settlement analysis of Wells Fargo’s attorneys, its attorneys’ FIN 48 measurement and recognition analyses,57 or its attorneys’ assessments of its likelihood of pursuing or prevailing in a dispute with the IRS.
*41 The Court must next decide if certain of Wells Fargo’s submitted documents are protected by attorney-client privilege. “A party asserting the attorney-client privilege … has the burden to provide a factual basis for the privilege or protection.” In re Zurn Pex Plumbing Prods. Liab. Litig., 2009 WL 1178588, at *1.
The federal common law of attorney-client privilege applies to this case because it is based on federal question jurisdiction. See E.E. O.C. v. Woodmen of the World Life Ins. Soc’y, No. 8:03CV165, 2007 WL 1544772, at *1–2 (D.Neb. Mar. 23, 2007). “Generally, it is well established under common law that confidential communications between an attorney and a client are privileged and not subject to disclosure absent consent of the client.” United States v. Horvath, 731 F.2d 557, 562 (8th Cir.1984). The attorney-client privilege applies to communications made by corporate employees to counsel to secure legal advice and to legal advice from corporate counsel to their clients. PaineWebber Grp., Zinsmeyer Trusts P’ship, 187 F.3d 988, 991 (8th Cir.1999). The privilege is limited to circumstances in which communications are made for the purpose of legal advice. Olson v. United States, 872 F.2d 820, 822 n. 4 (8th Cir.1989); Diversified, 572 F.2d at 609 (en banc).
Wells Fargo has asserted the attorney-client privilege as a basis for protecting eight documents from disclosure to the IRS. (See Wells Fargo Trial Ex. 18 ¶¶ 1(c) and 3(b).) At least one Wells Fargo in-house lawyer is a sender or recipient of each e-mail that Wells Fargo seeks to protect, and none were disclosed to KPMG or anyone else outside of Wells Fargo.
The Court will divide the allegedly privileged documents into three groups for the purposes of analyzing them. First, three of the e-mails that Wells Fargo seeks to protect relate to drafts of TAWs. (See id. ¶ 1(c).) These e-mails identify UTPs and have drafts of UTP cover sheets, including recognition and measurement analyses, attached to them. The Court concludes that these e-mails and attachments are privileged because they include draft documents sent to counsel for the purposes of securing legal advice related to the recognition and measurement steps of FIN 48. As explained above, Wells Fargo used pre-existing legal analysis and advice in completing its recognition and measurement analysis.
The United States argues that these e-mails are not protected by the attorney-client privilege because final drafts of the TAWs were eventually disclosed to KPMG. However, the disclosure of a final draft of a document does not erase attorney-client privileges that attached to earlier versions of the document.58 The Court concludes that these drafts and e-mails are protected by the privilege because they were sent to Wells Fargo’s attorneys for the purposes of accessing their pre-existing legal thinking about settlement strategy and other litigation issues.
Second, three of the allegedly privileged e-mails discuss the applicability of work-product protection and the attorney-client privilege to Wells Fargo’s TAWs. (See Wells Fargo Trial Ex. 18 ¶ 3(b)(i).) These e-mails detail legal advice from Wells Fargo’s attorneys regarding the applicability of the privileges and thus fall under attorney-client privilege. See PaineWebber Grp., Inc., 187 F.3d at 991 (stating that the privilege applies where a corporate client receives legal advice from its attorney).
*42 Third, the last two e-mails discuss issues related to the settlement of UTPs. (See Wells Fargo Trial Ex. 18 ¶ 3(b)(ii).) These e-mails plainly include legal analysis related to anticipated litigation. Accordingly, the Court finds that these e-mails are protected by the attorney-client privilege doctrine.59
The Court is troubled that one of the eight documents submitted by Wells Fargo for in camera review appears to contradict—or at least potentially contradict—trial testimony. (See Wells Fargo Sealed Document 28.) However, the Court finds that this fact is insufficient to overcome the privilege. In an Eighth Circuit case, Baker v. General Motors Corp., plaintiffs argued that a defendant waived the attorney-client privilege because the defendant had “used witness testimony and made factual representations that were allegedly contrary to what the privileged documents w[ould] reveal.” 209 F.3d 1051, 1055 (8th Cir.2000). The Eighth Circuit rejected plaintiffs’ argument, holding that both Michigan and Missouri courts rejected the extension of waiver to such circumstances. Id. But see In re S. & E. Dist. Asbestos Litig., 730 F.Supp. 582, 585 (S.D.N.Y.1990). Although the instant case does not involve the application of Michigan and Missouri law, the Court has found no cases suggesting that the Eighth Circuit would decide this issue differently under federal law.60 Thus, the Court finds that all eight of Wells Fargo’s documents are protected by the attorney-client privilege.
The Court must next decide if the IRS may summons TAWs related to Wells Fargo’s state and local tax UTPs. (See Wells Fargo Trial Ex. 18 ¶¶ 4, 5(4), and 6(b).) The United States argues that state and local TAWs are potentially relevant to identifying inconsistencies in positions that Wells Fargo takes in its federal, as opposed to state and local, tax returns.
Under Powell, the IRS must make a prima facie case that the information it seeks in an audit “may be relevant” to a “legitimate” investigative purpose. Powell, 379 U.S. at 57. The relevance standard is a broad one; the Court need determine “merely … that [the state and local TAWs] might shed some light on the tax return.” See Norwest Corp., 116 F.3d at 1233. “The IRS need not state with certainty how useful, if at all, the summoned material will in fact turn out to be.” Id. In addition, “it is for the agency, and not the taxpayer, to determine the course and conduct of an audit, and the judiciary should not go beyond the requirements of the statute and force IRS to litigate the reasonableness of its investigative procedures.” Id. (internal quotation marks omitted); see also United States v. U.S. Bancorp, 12 F.Supp.2d 982, 985 (D.Minn.1998). On the other hand, the information sought must meet some basic threshold of relevance because the United States must make a prima facie case that the information it seeks is potentially relevant. See Powell, 379 U.S. at 57–58.
*43 The Court finds that the United States has not made a prima facie case that the state and local TAWs are even potentially relevant. Erickson asserted, without further explanation, that information about state and local taxes may reveal inconsistencies in positions Wells Fargo takes in its federal, as opposed to state and local, tax returns. However, the United States has not given any examples of such a potential inconsistency.
The United States argues that it does not need to provide an example of a potential inconsistency because the IRS need not accept the summoned party’s word as to what records are relevant to its examination; rather, the IRS is entitled to determine relevance for itself. See Tiffany Fine Arts, 469 U.S. at 323; United States v. Bisceglia, 420 U.S. 141, 146 (1975) (“The purpose of the [summons] statutes is not to accuse, but to inquire.”). It is accurate that the United States need not accuse Wells Fargo of a particular inconsistency or identify the precise relevance of the state or local TAWs. However, the Court finds it inadequate to simply allege that there could be possible “inconsistencies” without giving a single example of when such an inconsistency has been identified from TAWs in the past or when an inconsistency could theoretically be identified in the future. Indeed, the IRS’s own witness, Biafore, admitted that state and local TAWs were irrelevant with respect to a taxpayer such as Wells Fargo, which deducts state and local taxes based on the amount of taxes paid.
The Court does not decide whether state or local taxes could ever be relevant to a federal tax return or even whether Wells Fargo’s particular state and local TAWs could be relevant. However, based on the evidence presented, the United States has not articulated a prima facie case that the state and local TAWs may be relevant. See Powell, 379 U.S. at 57.61 Accordingly, Wells Fargo need not disclose these TAWs to the IRS.
Finally, Wells Fargo argues that its TAWs relating to Wachovia’s tax liability are irrelevant. (See Wells Fargo Trial Ex. 18 ¶ 5(6).) Wells Fargo’s acquisition of Wachovia closed on December 31, 2008, and Wachovia filed its own separate consolidated federal income tax returns for 2007 and 2008. The United States provided no explanation as to why Wachovia’s TAWs are relevant and, as with the state and local TAWs, has not met its burden to show that Wachovia’s TAWs are relevant. Indeed, the Court has not identified any evidence to rebut Wells Fargo’s claim that Wachovia’s TAWs are irrelevant to Wells Fargo’s federal tax liability. Because the United States has failed to state a prima facie case in support of the disclosure of Wachovia’s TAWs, Wells Fargo need not disclose them.
The Court concludes that, with the exception of the state, local, and Wachovia TAWs, the United States has established the Powell prima facie factors that support its summonses. However, Wells Fargo has shown that the enforcement of the summonses would represent an abuse of the court’s enforcement powers in certain respects because much, but not all, of the material sought by the summonses is protected by the work product doctrine. The Court further concludes that eight of the documents sought by the United States are protected by attorney-client privilege.
*44 Based on the foregoing, and all the files, records, and proceedings herein, IT IS HEREBY ORDERED that:
(1) The identification of Wells Fargo’s federal UTPs,
(2) Historical facts underlying Wells Fargo’s federal UTPs, and
(3) Wells Fargo’s process for identifying its federal UTPs.
(1) The identification of Wells Fargo’s federal UTPs,
(2) Historical facts underlying Wells Fargo’s federal UTPs,
(3) Wells Fargo’s process for identifying its federal UTPs, and
(4) Other opinions and materials generated by accountants at KPMG regarding the UTPs, as well as the opinions and materials generated by any other non-lawyer, unless this information incorporates the legal analysis of Wells Fargo’s attorneys.
(1) The identification of Wells Fargo’s federal UTPs,
(2) Historical facts underlying Wells Fargo’s federal UTPs, and
(3) Wells Fargo’s process for identifying its federal UTPs.
(1) The identification of Wells Fargo’s federal UTPs,
(2) Historical facts underlying Wells Fargo’s federal UTPs,
*45 (3) Wells Fargo’s process for identifying its federal UTPs, and
(4) Other opinions and materials generated by accountants at KPMG regarding the UTPs, as well as the opinions and materials generated by any other non-lawyer, unless this information incorporates the legal analysis of Wells Fargo’s attorneys.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Not Reported in F.Supp.2d, 2013 WL 2444639, 112 A.F.T.R.2d 2013-5380, 2013-1 USTC P 50,368
|All of the Findings of Fact set forth herein are undisputed or have been proven by a preponderance of the evidence. To the extent that the Court’s Conclusions of Law include what may be considered Findings of Fact, they are incorporated herein by reference.|
|The Court’s citations to “Tr.” are to the transcript of the evidentiary hearing that took place from July 25 to July 28, 2011. jr. of Evidentiary Hr’g, Aug. 15, 2011, Docket Nos. 116–119.) For clarity, the Court will include the name of the witness testifying prior to “Tr.”|
|From this point forward, when the Court cites to a docket number, the document can be found in miscellaneous case number 10–57.|
|Wells Fargo’s practice is to pay the income tax assessed by the IRS, and thereafter to file a claim for refund with the IRS with a protest challenging all of the disputed tax assessments for that year. (James A. Horton (“Horton”) Tr. 176:25–177:8.)|
|The exhibits from this declaration are located at Docket No. 54.|
|The IRS provided this same definition in the other two summonses issued on August 12, 2010. The Court will describe TAWs in more detail below.|
|“Accountants long have recognized that ‘generally accepted accounting principles’ are far from being a canonical set of rules that will ensure identical accounting treatment of identical transactions. ‘Generally accepted accounting principles,’ rather, tolerate a range of ‘reasonable’ treatments, leaving the choice among alternatives to management.” Thor Power Tool Co. v. Comm’r, 439 U.S. 522, 544 (1979) (footnote omitted).|
|See also 17 C.F.R § 210.4–01(a)(1) (“Financial statements filed with the [Securities and Exchange] Commission which are not prepared in accordance with generally accepted accounting principles will be presumed to be misleading or inaccurate, despite footnote or other disclosures, unless the Commission has otherwise provided.”).|
|An example of a UTP that Wells Fargo has identified in the past is whether computer software constituted tangible property or intangible property and whether it was eligible for an investment tax credit. (Hager Tr. 311:9–13.) Other examples include disputes over the depreciation of furniture and fixtures (id. 311:20–25), whether online banking and ATMs qualified as research and experimentation expenditures (id. 312:1–7), and whether asbestos expenditures were deductible (id. 312:10–14). UTPs have also included disputed transactions that are currently the subject of active litigation by Wells Fargo. (Id. 314:18–316:25.)|
|At trial, there was some confusion over the number of federal UTPs in 2007 and 2008. Wells Fargo’s Tax Managing Counsel, Mark Hager, testified that there were eleven federal UTPs in 2007 and 2008 and that none “fell off” between 2007 and 2008. (Hager Tr. 420:17–421:3.) Counsel for Wells Fargo later corrected Hager’s testimony to state that there were sixteen federal UTPs in 2007 and 2008 and that one did “fall off” between 2007 and 2008, (Reid M. Figel Tr. 496:7–497:10), although it is unclear when or why this UTP was released from Wells Fargo’s reserves.|
|In fact, FIN 48 discusses a highly certain tax position being subjected to the recognition and measurement steps. (FIN 48 ¶¶ A2, A19–20.) (See also Outslay Tr. 56:9–24; KPMG FIN 48 Implementation at 4, Mar. 4, 2011, Docket No. 60 (describing application of recognition step to highly certain tax positions).)|
|FIN 48 defines a “tax position” as a “position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods.” (FIN 48 ¶ 4; Outslay Tr. 55:14–17.)|
|Wells Fargo enters into thousands, and perhaps millions, of transactions. (Hager Tr. 421:9–11.) Wells Fargo argues that, because virtually any transaction has tax implications, it had no choice but to apply a materiality threshold for positions it analyzes under FIN 48’s two-step framework, applying the framework only to those positions that are of significant size, nature, and complexity to merit the IRS’s attention. (Id. 421:12–21; see also Outslay and McGill Decl. ¶ 53.) Because a company can recognize the full amount of highly certain tax positions in its financial statements, Wells Fargo’s accounting expert Edmund Outslay opined that best practices do not require FIN 48’s two-step analysis to be applied to highly certain tax positions. (Outslay Tr. 56:7–57:5, 71:10–72:1.) It is unnecessary for the purposes of this order for the Court to decide if Wells Fargo complied with FIN 48, and the Court declines to do so.|
|A “tax benefit” is the resulting economic benefit of a tax position, such as a reduction in tax liability that the taxpayer has or expects in the future. (Outslay Tr. 56:2–6.)|
|Horton stated that, when Wells Fargo began preparing the memoranda, “[t]here was no actual change in the process. This memorandum was actually just incremental to the process, again, to demonstrate [Wells Fargo’s attorneys’] contemporaneous involvement. We wanted to make sure that that evidence was included as part of our documentation.” (Horton Tr. 227:10–14; see also Wells Fargo Proposed Findings of Fact ¶ 117, Sept. 16, 2011, Docket No. 125.)|
|Although Evan Biafore, a senior team coordinator for the IRS who is part of the cadre of IRS experts on TAWs, is not an expert in FIN 48 and has not reviewed TAWs completed under FIN 48, his experience with TAWs prior to the implementation of FIN 48 gives him some familiarity with the ability of accountants to identify UTPs and complete at least some aspects of TAWs. (See Biafore Tr. 814:8–19, 817:17–818:24, 853:11–18.)|
|See also Hager Tr. 344:22–346:8, 350:10–21 (stating that the core responsibilities of Wells Fargo’s attorneys did not change with the adoption of FIN 48); Horton Tr. 169:9–25 (“Just because FIN 48 came along didn’t change our assessment of what the tax risks were that the company faced. The tax law didn’t change. Just how you accounted for it changed.”).|
|Accountants, not attorneys, are responsible for preparing and filing Wells Fargo’s federal corporate income tax returns, with rare exceptions. (Horton Tr. 187:8–188:1.)|
|Because Erickson did not issue the summonses, nor did he purport to fully understand the IRS’s policy of restraint, the Court agrees with Erickson’s testimony that he could not offer a fully informed opinion on whether the IRS complied with its policy of restraint—a policy discussed further below—in issuing the summonses. (See Erickson Tr. 536:18–537:23, 609:4–12.) The Court further finds Erickson’s speculation about the possible motivations of IRS officials in creating the policy of restraint to be of minimal relevance, because it was not established that Erickson had any personal knowledge of those individuals’ motivations. (See id. 611:17–612:3; see also Wells Fargo Trial Ex. 58 at 2.)|
|Erickson testified in his deposition that TAWs were irrelevant to the IRS beyond the identification of UTPs. (Erickson Tr. 523:12–15.) The Court finds reliable Erickson’s testimony at trial that, upon further reflection, he determined that TAWs would be relevant for other purposes. Erickson appeared forthright on the stand and gave specific reasons why TAWs could be useful to the IRS for purposes other than the mere identification of UTPs, such as identifying the size and importance of a UTP.|
|The Court will further address these issues in its Conclusions of Law.|
|The aggregate amount of Wells Fargo’s reserve for unrecognized tax benefits was approximately $2.7 billion in 2007 and $3.2 billion in 2008. (Horton Decl. ¶ 41.)|
|The Court notes that some items categorized as “revealing the identity of UTPs” in fact have information that fall into other categories. For example, one item in this category discusses the anticipated potential settlement of certain tax positions, which relates to Wells Fargo’s measurement analysis. (KPMG Sealed Document 78 at 8.) Another item discusses the likelihood that Wells Fargo would intend to litigate an uncertain tax position, which is again related to Wells Fargo’s measurement analysis. (KPMG Sealed Document 82 at 2.)|
|Stevens testified that the IRS tries to take an impartial view of tax ambiguities, but that it tends to resolve ambiguities in its own favor. (Stevens Tr. 715:11–716:2.)|
|Stevens admitted that TAWs may have some information in them that would be useful to the IRS if it enters into litigation with a taxpayer over a particular issue. (Stevens Tr. 730:7–24.) When Stevens testified that TAWs can have “dual purposes,” his meaning was that TAWs could potentially be useful in litigation and not that they were created for the purpose of litigation. (See id. 730:1–20, 733:23–737:24, 739:19–740:19, 763:9–766:21.) When faced with persistent questioning during cross examination, Stevens continually returned to this basic premise, and the Court finds his testimony as to this opinion credible. (See id.)|
|As noted above, Erickson took an evenhanded approach to discussing Wells Fargo and its tax positions. Erickson testified, for example, that Wells Fargo was entitled to litigate issues and to file refund claims if it believed that the IRS was wrong in challenging a tax position. (Erickson Tr. 592:4–593:9.) Biafore similarly testified that he had told a taxpayer that it overreported its tax, showing that his primary goal was also not always to increase the IRS’s revenue. (See Biafore Tr. 784:7–10.)|
|Horton stated that the majority of the 2007 and 2008 UTPs were, in January 2011, in active litigation or at IRS Appeals. (Horton Decl. ¶ 46; see also Horton Tr. 238:3–10.) All but two of those same UTPs were in active litigation or at IRS Appeals when the TAWs were created. (Horton Decl. ¶ 46.) Regarding the one-third of UTPs “subject to prior examination,” Hager stated that “these issues were raised as issues in the examinations of prior [cycle years]. Some of those may have gone on to appeals. Some of those may have gone on to litigation. But we know that the IRS was concerned about [those] issues and had raised those in examinations.” (Hager Tr. 356:3–12.) Horton also stated that most of the UTPs at issue in this case had been the subject of some sort of formal challenge by the IRS at the time the TAWs were created, such as: public pronouncements of the IRS’s intent to challenge the position; the issuance of a notice of proposed adjustment in a previous examination; escalation of a dispute to IRS Appeals; or existing litigation. (Horton Decl. ¶ 34.) No witness stated that all of the UTPs had at some point gone to litigation or IRS Appeals.|
|The term “listed transaction” is defined and discussed below.|
|The Court finds that, because Wells Fargo’s expert, Pagano, retired from the IRS in 1983, his opinions about the modern-day motivations of the IRS in requesting TAWs are of minimal weight. (See Pagano Tr. 485:3–4.) Pagano further testified that, under the initial policy of restraint, he was “not aware of any basis for concluding that the IRS was unable to do its job effectively.” (Pagano Decl. ¶ 41.) The Court also finds this statement to be of minimal weight because Pagano retired from the IRS in 1983 and does not have direct first-hand knowledge of struggles the IRS may have faced in auditing large companies such as Wells Fargo. (See Pagano Tr. 485:3–4.) Furthermore, the Court finds persuasive the testimony of IRS witnesses who stated that complex transactions can render it difficult to identify UTPs. (See, e.g., Biafore Decl. ¶ 8 (noting that the IRS had previously discovered abusive tax avoidance transactions through its review of TAWs).)|
|The agreement also stated, “[i]n the case of illegal acts which, in [KPMG’s] judgment would have a material effect on the consolidated financial statements of Wells Fargo, [KPMG is] also required to follow the procedures set forth in the Private Securities Litigation Reform Act of 1995, which under certain circumstances requires [KPMG] to communicate [its] conclusions to the SEC.” (Horton Decl., Ex. D at 175.)|
|The Court further finds that the United States established a prima facie case under Powell during the evidentiary hearing, for the reasons outlined below. The only exceptions, where the United States has not made a prima facie case under Powell, are for TAWs related to state and local taxes and Wachovia’s tax liability. The Court will separately discuss these issues below.|
|In its July 20, 2011, Order, the Court held that the parties should focus on work product privilege and not the IRS’s allegedly improper purpose. (Docket No. 104 at 3.) At the evidentiary hearing, however, the parties each submitted substantial evidence on the issue of legitimate purpose and the Court did not restrict the admission of such evidence. The Court will therefore address the issue of the IRS’s legitimate purpose in this Order.|
|Furthermore, the mere fact that the IRS may—unbeknownst to the IRS—already be aware of the underlying tax positions that Wells Fargo has identified in its FIN 48 analysis does not render its summonses improper under any of Powell’s requirements, including the third requirement that the IRS may not summon information already in its possession. The IRS attested that it does not possess Wells Fargo’s TAWs or any of the other information it seeks. Thus, the burden shifts to Wells Fargo to show, at a minimum, “actual possession of the information by the IRS.” See United States v. Davis, 636 F.2d 1028, 1037 (5th Cir.1981). Wells Fargo has not met this burden, nor has it argued that the IRS failed to meet the third factor of its prima facie case under Powell. Furthermore, the fact that the IRS may possess some of the information it seeks does not invalidate the summonses because the IRS has no way to exclude from its request information which it unknowingly possesses. See id. at 1037–38 (holding that the IRS may request information it already possesses in pursuit of an “effective investigation,” as long as the need for this investigation outweighs any unnecessary harassment of the taxpayer); United States v. John G. Mutschler & Assoc., Inc., 734 F.2d 363, 368 (8th Cir.1984).|
|See, e.g., Adam M. Braun, Note, Open Reserve-ations?: United States v. Textron Inc. and Its Application to International Tax Accounting, 86 Notre Dame L.Rev. 823, 840 n. 113 (2011) (“While new efforts to make tax positions more transparent, such as the requirement to complete Schedule M–3 …, assist in locating evasive tax shelters, the IRS cannot possibly examine and understand an entity’s tax positions from these forms alone.”); J. Richard Harvey, Jr., Schedule UTP: An Insider’s Summary of the Background, Key Concepts, and Major Issues, 9 DePaul Bus. & Com. L.J. 349, 355 (2011) (“Schedule M–3 was not designed to directly disclose all material issues to the IRS [and][i]n many cases, Schedule M–3 will not provide any clue there is a tax issue.”). Although Wells Fargo’s expert, Pagano, disagreed with these opinions, the Court finds that he did not sufficiently or specifically address the IRS’s assertion that tax shelters have become more sophisticated and thus that certain tax positions might not be identified. (See Pagano Tr. 482:25–483:8, 486:10–490:18); see also Dennis J. Ventry, Jr., A Primer on Tax Work Product for Federal Courts, 123 Tax Notes, 875, 881 (2009), http://ssrn.com/abstract=1405523 (“In these cases of ambiguity, tax accrual workpapers help the IRS to verify the accuracy and completeness of return positions, clarify turbid facts and data, reveal unidentified issues and positions, and expose information hidden from view on transaction documents.”).|
|Accord Norwood, 420 F.3d at 894 (“Even [if] an IRS summons may not issue for ‘solely’ a criminal investigative purpose, the summons in this case would not represent an abuse of the court’s process, because the IRS had a non-criminal purpose in summoning [defendant].”); United States v. Barter Sys., Inc., 694 F.2d 163, 169 (8th Cir.1982) (finding “no indication” that Congress intended to limit the issuances of summonses that had dual purposes, including a legitimate purpose).|
|Furthermore, the Court finds that, at most, the quotations offered by Wells Fargo show a motivation to deter tax avoidant behavior—not a desire to punish taxpayers.|
|The Court declines to decide whether the IRS has in fact violated the policy of restraint—currently or at the time it issued the summonses—because it is unnecessary to the disposition of this matter. The Court notes, however, that it is possible that the IRS did not violate the policy of restraint because Wells Fargo had filed a claim for refund of tax benefits relating to SILO transactions during the 2005/2006 examination cycle, and, at the time that the summonses were issued, Wells Fargo stated that it might file a similar refund claim for the 2007/2008 cycle. See PAA Mgmt., Ltd. v. United States, 962 F.2d 212, 219 (2d Cir.1992) (“[W]e have in the past looked to the date of issuance of the summons in determining its validity under section 7602.”).|
|See also Christensen v. Harris Cnty., 529 U.S. 576, 587 (2000) (“Interpretations such as those in opinion letters—like interpretations contained in policy statements, agency manuals, and enforcement guidelines, all of which lack the force of law—do not warrant Chevron-style deference.”); Groder v. United States, 816 F.2d 139, 142 (4th Cir.1987) (holding that the violation of an IRS Manual guideline that does not confer substantive rights or privileges on the taxpayer is “without legal effect to quash a summons”).|
|For example, a computer tape that contained data strategically selected by counsel qualified as ordinary work product. In re Chrysler Motors Corp. Overnight Evaluation Program Litig., 860 F.2d 844, 846 (8th Cir.1988) (“The computer tape was prepared by counsel in anticipation of litigation and reflects counsel’s selection of certain categories of information from the gate passes that counsel believed would be relevant for trial preparation. As such, the computer tape is a ‘compendium of relevant evidence prepared by the attorney.’ “ (citation omitted)).|
|Simon gave some indication that documents created for business purposes do not qualify for work product protection, even if they contain information about litigation by stating, “even though litigation is already in prospect, there is no work product immunity for documents prepared in the regular course of business rather than for purposes of litigation.” See Simon, 816 F.2d at 401 (quoting 8 C. Wright & A Miller, Federal Practice and Procedure § 2024, at 198–99 (1970)). However, ultimately, the Court held, “[a]lthough the risk management documents were not themselves prepared in anticipation of litigation, they may be protected from discovery to the extent that they disclose the individual case reserves calculated by [Defendant]’s attorneys.” Id. (emphasis added).|
|The fact that some of the information in the TAWs is protected does not establish that their entire contents are not discoverable. Simon, 816 F.2d at 401–02; Deloitte LLP, 610 F.3d at 139 (remanding for determination of whether TAWs were entirely work product, or whether partial or redacted versions of the TAWs should be disclosed).|
|The Court finds, as Wells Fargo concedes, that the aggregate data Wells Fargo already disclosed to the United States is not protected because it does not identify individual case information. See Simon, 816 F.2d at 401–02.|
|As noted above, work product protection can apply to testimony sought by an opposing party. See Shelton v. Am. Motors Corp., 805 F.2d 1323, 1328 (8th Cir.1986) (holding that an attempt to depose an attorney about documents her client possessed was protected by the work product privilege, as this knowledge would reflect her judgment as an attorney in identifying, examining, and selecting from her client’s voluminous files those documents on which she relied in preparing her client’s defense).|
|See also In re Prof’ls Direct Ins. Co., 578 F.3d 432, 439–40 (6th Cir.2009); United States v. Frederick, 182 F.3d 496, 501 (7th Cir.1999); Davis, 636 F.2d at 1043; Lindley v. Life Investors Ins. Co. of Am., Nos. 08–CV–0379, 09–CV–0439, 2010 WL 1741407, at *4 (N.D.Okla. Apr. 28, 2010), reconsideration denied, 2010 WL 2541704 (N. D.Okla. Jun. 18, 2010); Dunkin’ Donuts Inc. v. Mary’s Donuts, Inc., 206 F.R.D. 518, 520 (S.D.Fla.2002) (“[T]he work product privilege is not broad enough to prohibit all inquiry regarding information received from working with counsel….”); St. Paul Reinsurance Co. v. Commercial Fin. Corp., 197 F.R.D. 620, 637 (N.D.Iowa 2000); Marvin Lumber & Cedar Co. v. PPG Indus., Inc., 168 F.R.D. 641, 646 (D.Minn.1996) (holding that a company’s investigation of a wood rot problem was not protected work product, even though the company’s in-house attorneys were involved in the investigation, because it was an ordinary business activity); Mission Nat’l Ins. Co. v. Lilly, 112 F.R.D. 160, 164–65 (D.Minn.1986) (refusing work product protection to investigations conducted by attorneys that were “routine business of an insurance company” (internal quotation marks omitted)).|
|See Schlicksup v. Caterpillar, Inc., No. 09–CV–1208, 2011 WL 4007670, at *7 (C.D.Ill. Sept. 9, 2011) (“Businesses must assess and plan for litigation risks as part of the ordinary course of their business and as part of complying with accounting requirements. While that planning may be literally ‘because of the prospect of litigation,’ the prospect itself is too generalized and uncertain to warrant work product protection.”); Onwuka v. Fed. Express Corp., 178 F.R.D. 508, 514 (D.Minn.1997) (holding that it was insufficient to establish work product protection with respect to all employee complaints to assert that all employee grievances “are litigious by nature”); McFadden v. Norton Co., 118 F.R.D. 625, 630 (D.Neb.1988) (holding that in-house counsel’s statement that receipt of notice of personal injury “almost always results in litigation” was insufficient to establish that party anticipated litigation on the claim at issue (internal quotation marks omitted)).|
|Wells Fargo witnesses attempted to define UTPs as positions where Wells Fargo anticipated litigation. (See, e.g., Hager Tr. 360:18–361:2.) The Court declines to adopt this selfserving definition of a UTP. See United States v. Textron Inc., 577 F.3d 21, 27 (1st Cir.2009) (en banc) (declining to apply work product doctrine even though the taxpayer’s witnesses “us[ed] the word ‘litigation’ as often as possible in their testimony”). Instead, for the reasons outlined, the Court finds that Wells Fargo’s identification of UTPs involved “acknowledging the fact that there exist[ed] the possibility that a taxing authority could have a different interpretation of [a] particular tax position[.]” (See Outslay Tr. 62:11–21.)|
|The Court notes that it would set troubling precedent to allow a taxpayer to make such sweeping assertions, far prior to any threat of litigation, simply because there is a history of some litigation between an agency and a company. To do so would potentially allow the nondisclosure of wide swaths of information, created long before litigation, that is conducted in the ordinary course of business before any specific threat of litigation becomes palpable. See, e .g., WFC Holdings Corp., 2011 WL 4583817, at *32, *48 (finding, based largely on history of transaction beginning in the 1990s, that transaction entered into by Wells Fargo lacked economic substance or a real purpose other than tax avoidance); Onwuka, 178 F.R.D. at 513 (holding that the use of “work-product protections … to shroud otherwise discoverable corporate affairs in a veil of secrecy” is an “intolerable prospect”).|
|Textron Inc., 577 F.3d at 28 (“[I]t is doubtful that tax accrual workpapers, which typically just identify … vulnerable return positions, would be useful in the litigation anticipated with respect to those positions.” (internal quotation marks omitted)); United States v. Adlman, 134 F.3d 1194, 1195 (2d Cir.1998) (classifying as work product “a document created because of anticipated litigation, which tends to reveal mental impressions, conclusions, opinions or theories concerning the litigation” (emphasis added)).|
|As KPMG admitted, FIN 48 only requires the identification of tax positions, not UTPs. By stating that it only applies FIN 48 to “uncertain” tax positions, Wells Fargo has attempted to add an extra layer of judgment into the FIN 48 analysis. Nonetheless, the Court concludes that identifying tax positions under FIN 48—whether called “tax positions” or UTPs—is a task required by financial reporting that has no necessary connection to whether litigation is ongoing or even likely. (See, e.g., Outslay Tr. 82:22–83:2 (agreeing that “[e]ven a company with a ‘zero percent expectation of litigation over a tax position’ must recognize the position….”).)|
|In contrast, the IRS examination process is not, in and of itself, litigation and will not necessarily lead to litigation. See, e.g., Rupert v. United States, 225 F.R.D. 154, 157 (M.D.Pa .2004); Peterson v. United States, 52 F.R.D. 317, 320–21 (S.D.Ill .1971). As noted, above, although Agent Erickson testified that IRS examinations are “inherently adversarial,” the Court finds that an IRS examination is not necessarily adversarial and that Wells Fargo has not shown that all tax positions will lead to litigation or be anticipated to lead to litigation. However, Wells Fargo has established that it anticipated litigation in regard to each of the UTPs at issue because of the challenges surrounding them.|
|Although the recognition analysis required Wells Fargo to hypothesize that each tax position be litigated to the United States Supreme Court, this analysis is still protected. Wells Fargo’s assessments of the likelihood of success in litigation to the United States Supreme Court are closely related to its real-world assessments of success at other levels of litigation. Thus, Wells Fargo’s estimates regarding its chances of prevailing reflect its real-world litigation assessments and strategies, not simply a hypothetical exercise conducted for the purposes of FIN 48.|
|In fact, in many circumstances, it may be appropriate for the IRS or other agencies to request a company’s TAWs, where the taxpayer opines more obliquely—and cannot prove—that the material in its TAWs was prepared in anticipation of litigation. TAWs can, under some circumstances, be discovered by governmental agencies such as the SEC and IRS, as well as by the PCAOB. See, e.g., 15 U.S.C. §§ 77s(c), 78u(b), 7215(b)(2)(B); Arthur Young & Co., 465 U.S. at 820 & n. 16.|
|Work product privilege may also be waived when “the interests [of] fairness and consistency mandate a finding of waiver,” such as when a party brings an action involving the issues it seeks to protect. Pamida, Inc, 281 F.3d at 732; see also Monsanto Co. v. E.I. Du Pont De Nemours & Co., No. 4:09CV00686, 2011 WL 4408184, at * 3 (E.D.Mo. Sept. 20, 2011) (“A so-called at-issue waiver may also occur where the client places the subject matter of the privileged communication at issue[.]” (internal quotation marks omitted)).|
|See also BoDeans Cone Co., L.L. C. v. Norse Dairy Sys., L.L. C., 678 F.Supp.2d 883, 892 (N.D.Iowa 2009).|
|The United States points to KPMG’s promotion and approval of certain tax positions, later disallowed by courts, as points of potential conflict between KPMG and Wells Fargo. Because Wells Fargo has been a staunch defender of these positions in court, the Court finds it highly unlikely that Wells Fargo intends to litigate against KPMG regarding these tax positions. The United States has presented no evidence to the contrary.|
|As stated above, these topics are (1) information revealing the identity of UTPs; (2) information revealing recognition analysis under FIN 48; (3) information revealing measurement analysis under FIN 48; (4) irrelevant information related to state and local tax liability; (5) irrelevant information related to Wachovia tax liability; and (6) information revealing privileged attorney-client communications.|
|By its FIN 48 measurement and recognition analyses, the Court means the analysis surrounding—as part of the FIN 48 analysis—whether it is more likely than not that the tax benefit derived from the tax position will be sustained upon examination; the measurement of the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with a taxing authority; and the quantification, in regard to specific UTPs, of the monetary amount that Wells Fargo recorded as a reserve. This analysis would also include information about the units of account under FIN 48, which appears closely related to the recognition and measurement analysis and touches on how Wells Fargo anticipates that the IRS will analyze and challenge its tax positions. It also, of course, includes the above-described protected work product, such as Wells Fargo’s discussions of settlement positions or KPMG’s restatement and approval of Wells Fargo’s settlement analysis.|
|See, e.g., United States v. New York Metro. Transp. Auth., Nos. CV–2004–4237, 2006 WL 3833120, at *1 (E.D.N.Y. Dec. 29, 2006) (“Draft documents ultimately sent to third parties retain their privilege if they were prepared for the purpose of obtaining legal advice and/or contain information a client considered but decided not to include in the final version.”) (internal quotation marks omitted); In re Brand Name Prescription Drugs Antitrust Litig., No. 94 C 897, MDL No. 997, 1995 WL 557412, at *2 (N.D.Ill. Sept. 19, 1995) (“The mere fact that the final version of these documents may have been intended for public dissemination does not take them out from under the protection of the privilege, if the drafts of these documents were intended to be confidential communications concerning legal advice.”).|
|Furthermore, one of the e-mails is related to a state tax issue which, as the Court will discuss below, is not relevant.|
|Furthermore, the Court notes that Wells Fargo’s seemingly inconsistent document does not appear to fit neatly into either situation that commonly allows for “at issue” waiver: (1) “when proof of a party’s legal contention implicates evidence encompassed in the contents of an attorney-client communication—for example, when a client uses reliance on legal advice as a defense or when a client brings a legal malpractice action,” or (2) “when a client’s testimony refers to a specific privileged document.” See Baker, 209 F.3d at 1055.|
|Wells Fargo considers the California franchise tax to be a federal tax position, so this position does not support the relevance of state or local TAWs.|