## Facts

- The IRS conducted a routine audit of The El Paso Company’s federal income tax returns for 1976–1978.
- The IRS issued a summons seeking documents identifying potential tax liabilities or tax problems for those years, including El Paso’s “tax-pool analysis” (tax-accrual workpapers) summarizing contingent tax exposure and related reserves for financial reporting.
- El Paso, a publicly held holding company with many subsidiaries, prepared the tax-pool analysis after filing returns using an in-house tax department that included accountants and attorneys.
- El Paso shared portions of tax-pool information and potential tax issues with independent auditors so they could assess the adequacy of reserves and related financial statement disclosures.
- El Paso refused to produce the tax-pool analysis, asserting attorney–client privilege on a blanket basis (without document-by-document support) and invoking work-product-type concerns.
- The United States petitioned to enforce the summons in the Southern District of Texas; the district court ordered production.
- El Paso appealed; a Fifth Circuit panel affirmed (with a dissent).

## Issues

1. Whether tax-pool analysis/tax-accrual workpapers were protected from an IRS summons by the attorney–client privilege.
2. Whether disclosure of the tax-pool analysis or its contents to independent auditors waived any attorney–client privilege.
3. Whether federal law recognizes an accountants’ work-product privilege (or similar protection) barring IRS access to tax-accrual workpapers in a routine audit.
4. Whether the IRS satisfied the requirements for summons enforcement under 26 U.S.C. § 7602, including legitimate purpose and relevance.

## Decision

- The Fifth Circuit affirmed the enforcement order compelling production of El Paso’s tax-pool analysis.
- The court held the tax-pool analysis was not protected by attorney–client privilege so as to bar the summons.
- The court held that, even if some privileged material existed, El Paso waived any privilege by disclosure to independent auditors.
- The court declined to recognize an accountants’ work-product privilege shielding tax-accrual workpapers from an IRS summons.
- The court concluded the IRS met the statutory and judicial standards for summons enforcement in a routine audit.

## Legal Principles

- Attorney–client privilege is narrowly construed and protects only confidential communications made for the purpose of obtaining or providing legal advice.
- Documents prepared primarily for business or accounting purposes, including financial reporting and reserve-setting, are less likely to qualify as privileged attorney–client communications.
- Voluntary disclosure of privileged communications or their substance to independent third parties generally waives the privilege; independent auditors are not treated as necessary agents for obtaining legal advice where their role is to render independent professional judgment.
- Federal courts will not create a broad accountants’ work-product privilege absent established authority, particularly in IRS summons enforcement.
- To enforce an IRS summons under § 7602, the government must show a legitimate investigatory purpose, relevance of the information sought, lack of prior possession, and compliance with required administrative steps.

## Conclusion

The Fifth Circuit required El Paso to produce its tax-accrual workpapers in response to an IRS summons, concluding the materials were primarily business/accounting analyses for financial reporting, that any attorney–client protection was waived by disclosure to independent auditors, and that no separate accountant-focused privilege barred enforcement in a routine audit.


United States v. El Paso Co., 682 F.2d 530 (5th Cir. 1982)