134 F.3d 1194 (2d Cir. 1998)
Sequa Corporation, an aerospace manufacturer with annual revenues of nearly $2 billion, contemplated merging its wholly-owned subsidiaries Atlantic Research Corporation and Chromalloy Gas Turbine Corporation in the spring of 1989.1 Monroe Adlman, Sequa's Vice President for Taxes and an attorney, expected the transaction to generate an enormous capital loss and tax refund that the IRS would challenge, leading to litigation.2 Adlman asked Paul Sheahen, an accountant and lawyer at Arthur Andersen & Co., to evaluate the tax implications of the proposed restructuring.3
Sheahen prepared a 58-page memorandum that was submitted in draft form to Adlman in August 1989 and in final form on September 5, 1989.4 The memorandum set forth a detailed legal analysis of likely IRS challenges to the reorganization and resulting refund claim, including discussion of statutory provisions, IRS regulations, legislative history, prior judicial and IRS rulings, proposed legal theories or strategies, recommended methods of structuring the transaction, and predictions about the likely outcome of litigation.5
Sequa completed the restructuring in December 1989 in essentially the form recommended by Arthur Andersen. It sold 93 percent of its stock in ARC to Chromalloy for $167.4 million and the remaining 7 percent to Bankers Trust for $12.6 million.6 The transaction produced a $289 million loss that Sequa claimed on its 1989 return and carried back to offset 1986 capital gains, generating a claim for a $35 million refund.7
During an audit of Sequa's 1986-1989 tax returns, the IRS requested documents concerning the restructuring.8 After Adlman declined to produce the memorandum citing work-product privilege, the IRS served a summons on him on September 23, 1993, and filed an enforcement action in the United States District Court for the Southern District of New York.9 The district court rejected Adlman's claims of attorney-client and work-product privilege and ordered production of the memorandum.10
On appeal, the Second Circuit affirmed the denial of attorney-client privilege but vacated the work-product ruling because the district court had applied an incorrect standard and remanded for reconsideration.11 On remand, the district court again rejected the work-product claim, concluding that the memorandum was not prepared in anticipation of litigation.12 Adlman appealed that decision.
Whether a document prepared to evaluate the tax implications of a proposed corporate restructuring that is expected to produce litigation qualifies for work-product protection under Federal Rule of Civil Procedure 26(b)(3) when its primary purpose is to inform a business decision?13
Federal Rule of Civil Procedure 26(b)(3) protects documents prepared in anticipation of litigation. A document created because of anticipated litigation, which tends to reveal mental impressions, conclusions, opinions or theories concerning the litigation, does not lose work-product protection merely because it is intended to assist in the making of a business decision influenced by the likely outcome of the anticipated litigation.14
Yes. The memorandum analyzing the tax implications of Sequa's proposed restructuring was prepared because of the anticipated litigation with the IRS.15 Adlman expected the IRS to challenge the tax refund claim arising from the merger of the subsidiaries.16 The question whether the memorandum was prepared because of the expected litigation turns on whether it would have been prepared irrespective of the expected litigation with the IRS.17
A document prepared to inform a business decision qualifies for work-product protection under Rule 26(b)(3) if prepared because of anticipated litigation.18
Related opinions on this issue
Kearse dissents on the ground that materials prepared in connection with providing legal advice to a party as to whether or not to undertake a transaction are not prepared in anticipation of litigation where the only prospect of litigation arises if the party undertakes the contemplated transaction.19 Kearse regards the majority as having extended the work product privilege to a stage that precedes any possible anticipation of litigation. Kearse would affirm the district court because the assertion of attorney-client privilege had already been rejected on the ground that the client failed to make any record distinguishing the consultation from normal business consultations.20
Whether the district court applied the correct standard in determining that the memorandum prepared by Arthur Andersen was not created in anticipation of litigation?21
The proper test for determining whether a document was prepared in anticipation of litigation is whether the document can fairly be said to have been prepared or obtained because of the prospect of litigation.22
No. The district court opinion contains passages indicating that it applied the primarily or exclusively to assist in litigation test.23 The court stated that the primary purpose of the memorandum was to decide whether to go through with the transaction rather than to prepare for litigation.24 The district court also quoted language requiring that documents be prepared principally or exclusively to assist in anticipated litigation.25
The judgment is vacated and the case is remanded for the district court to apply the because of test.26
Whether the IRS made a sufficient showing of substantial need and unavailability to overcome work-product protection for the opinion work product memorandum?27
Even where substantial need and unavailability are shown, the court shall protect against disclosure of the mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation, and a heightened showing is required for such opinion work product.28
No. The IRS claimed necessity on the ground that the memorandum would provide insight into Sequa's subjective motivation for the restructuring.29 In camera review showed that the memorandum reflects the legal analysis of accountants rather than the motives of Sequa's executives.30 The IRS made no showing beyond bare assertion that the information in the Memorandum is unavailable by other means.31
The IRS failed to meet the high standard required to overcome protection for opinion work product.32