## Facts

- The IRS issued a Notice of Final Partnership Administrative Adjustment (FPAA) to Evergreen Trading, LLC on September 26, 2005, asserting improper reporting of a series of transactions and applicability of penalties.
- Evergreen and certain partners filed suit in the U.S. Court of Federal Claims on February 21, 2006, challenging, among other things, accuracy-related penalties under I.R.C. § 6662.
- In discovery, the government served document requests, including a request for all remaining documents bearing an “NS” prefix that had not yet been produced.
- Plaintiffs produced substantial “NS” materials but withheld additional “NS” documents on attorney–client privilege, work-product, and I.R.C. § 7525 grounds, initially without providing an adequate privilege log.
- The United States moved to compel production, arguing waiver due to failure to timely provide a compliant privilege log under RCFC 26(b)(5).
- The court required multiple supplemental privilege logs and conducted an in camera review of the withheld documents, many involving communications among counsel, accountants, and related entities concerning tax planning and anticipated disputes.

## Issues

1. Whether failure to timely provide an adequate privilege log under RCFC 26(b)(5) required a categorical waiver of privileges.
2. Whether withheld documents were protected by the attorney–client privilege where communications involved tax planning, transaction implementation, and mixed legal and accounting advice.
3. Whether withheld documents qualified as work product as materials prepared in anticipation of litigation with the IRS rather than ordinary business or tax compliance.
4. Whether I.R.C. § 7525 protected communications with accountants to the same extent as attorney–client privilege in this noncriminal tax context.
5. Whether privilege extended to communications involving accountants and third parties under Kovel principles or among multiple parties under the common-interest doctrine, and whether privilege was waived by disclosures to taxing authorities or by placing reliance on counsel at issue.

## Decision

- The court declined to impose a blanket waiver based solely on initial privilege-log defects and instead resolved privilege on a document-by-document basis after supplemental logs and in camera review.
- The government’s motion to compel was granted in part and denied in part.
- The court ordered production of documents where the asserted protections did not apply or were waived (including by prior disclosure to taxing authorities or by placing advisor communications at issue).
- The court sustained privilege and/or work-product protection for documents reflecting confidential legal advice or litigation-oriented analysis, including certain communications involving accountants acting as agents necessary for counsel’s legal advice and certain communications exchanged pursuant to a shared legal interest.

## Legal Principles

- RCFC 26(b)(5) requires a party withholding material on privilege grounds to expressly claim the privilege and provide sufficient descriptive information to permit assessment; noncompliance informs remedial discretion but does not mandate automatic, categorical waiver in all cases.
- Attorney–client privilege protects confidential communications for the primary purpose of obtaining or providing legal advice; routine accounting, return preparation, or business communications are not privileged merely because counsel is copied or involved.
- Work-product protection applies to materials prepared because of the prospect of litigation; documents generated primarily for ordinary tax planning, compliance, or transaction execution generally are not work product.
- I.R.C. § 7525 provides a limited privilege for communications with federally authorized tax practitioners in noncriminal tax matters, coextensive with (and not broader than) attorney–client privilege, and inapplicable to ordinary return preparation and certain tax-shelter-related communications.
- Under Kovel principles, communications involving accountants may be privileged when the accountant serves as an agent necessary to translate or interpret financial matters for counsel’s legal advice; independent accounting or business services do not qualify.
- The common-interest doctrine can preserve privilege among separate parties only when communications further a shared legal interest (not merely a commercial interest) and confidentiality is maintained.
- Voluntary disclosure of privileged communications to taxing authorities typically waives privilege, and asserting a reliance-on-counsel theory can create an implied waiver as to communications placed at issue.

## Conclusion

The Court of Federal Claims issued an interlocutory discovery ruling applying RCFC 26(b)(5), attorney–client privilege, work product, and I.R.C. § 7525 to tax-planning communications involving attorneys and accountants, rejecting an automatic waiver theory and compelling production only where privilege did not apply or had been waived.


Evergreen Trading, LLC v. United States, 80 Fed. Cl. 122 (Fed. Cl. 2007)