Schaeffler, et al. v. U.S.A.

14-1965-cv (2d Cir. Nov. 10, 2015)
The attorney-client privilege was not waived by the sharing of documents with a consortium of banks having a common legal interest with appellants in the tax treatment of a refinancing and corporate restructuring resulting from an ill-fated acquisition originally financed by the consortium. The Court held that parties may share a "common legal interest" even if they are not parties in ongoing litigation. In this case, the parties had a common legal interest in avoiding possible economic losses. Accordingly, a financial interest, no matter how large, does not preclude a court from finding a legal interest shared with another party where the legal aspects materially affect the financial interests. In addition, the work-product doctrine protects documents analyzing the tax treatment of the refinancing and restructuring prepared in anticipation of litigation with the Internal Revenue Service.
Procedural context:
During the IRS' audit of the Appellant, Appellant sought to quash the IRS' summons for legal opinions. The District Court denied the motion to quash, which Appellant appealed to the U.S. Court of Appeals for the Second Circuit.
The individual Appellant, who owned 80% of The Schaeffler Group (a German company), was the subject of an IRS audit as a result of his company's debt refinancing and restructuring. The company Appellant was forced to restructure an eleven billion Euro loan with a consortium of banks because the changed economic circumstances in the fall of 2008 threatened the company's solvency and ability to meet its payment obligations to the bank consortium. The Appellants engaged counsel and Ernst & Young to advise on the federal tax implications of the transactions and possible future litigation with the IRS. As part of the IRS audit, Appellants sought to withhold memoranda from the IRS, such as a memorandum prepared by Ernst & Young that identified potential U.S. tax consequences of the refinancing and restructuring, identified and analyzed possible IRS challenges to the Appellant's tax treatment of the transactions, and discussed in detail the relevant statutory provisions, U.S. Treasury regulations, judicial decisions, and IRS rulings. This memorandum was shared among the consortium of banks, and the IRS contended that the Appellants waived their attorney-client privilege by doing so.
Winter, Walker and Droney

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