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United States v. Microsoft Corp.

United States District Court, W.D. Washington, Seattle

May 5, 2017

MICROSOFT CORPORATION, et al., Respondents.




         This matter comes before the Court upon Respondent Microsoft Corporation's (“Microsoft”) Brief Regarding Privileged Documents Still in Dispute. Dkt. #140. For the reasons discussed herein, the Court ORDERS Microsoft to submit the majority of the documents still in dispute to the Court for in camera review.


         The Court previously set forth the procedural and factual background to this action and incorporates it by reference herein. See Dkt. #107 at 2-5.

         In summary, in December 2014 the government filed a petition with the Court requesting an order to enforce Microsoft's compliance with a designated summons served by the Internal Revenue Service (“IRS”) on October 30, 2014. Dkt. #1 at 1. The designated summons was served as part of the IRS's examination of Microsoft's federal income tax liabilities for the taxable periods ending on June 30, 2004, June 30, 2005, and June 30, 2006. Id. ¶ 4. On November 17, 2014, the IRS also served KPMG LLP (“KPMG”), an accounting firm, with a third-party summons. See Case No. 2:14-mc-136-RSM, Dkt. #1 ¶¶ 7-8. During the tax years in question, Microsoft hired KPMG to assist in restructuring Microsoft's related foreign entity in Puerto Rico. See Dkts. #144 ¶ 10, #140 at 13, and #145 at 6-10. The government alleges that with KPMG's help, Microsoft designed and implemented a cost sharing arrangement with its newly structured Puerto Rican entity. See Dkt. #145 at 6-14. On November 19 and 20, 2014, the IRS served Microsoft with two additional, related summonses. See Case Nos. 2:14-mc-133-RSM, Dkt. #1, and 2:14-mc-143-RSM, Dkt. #1. These summonses are all related to the IRS's examination of cost sharing agreements Microsoft entered into with its Puerto Rican affiliate, and with its Asian affiliate.[1] See Dkt. #1 ¶ 10. The IRS is examining these cost sharing arrangements to determine the accuracy of Microsoft's federal income tax obligations for the tax years in question. Id. ¶¶ 21-22.

         On November 20, 2015, the Court granted the government's petitions to enforce the IRS's summonses. Dkt. #107 at 17. Soon after, the parties stipulated that “notwithstanding the Court's denial of Microsoft's common defenses to enforcement of the document summonses, specific document production requests remain in dispute.” Dkt. #110 at 2. Microsoft was thus “afforded an opportunity to brief specific objections tailored to specific document production requests[.]” Id. Microsoft now objects to disclosing a number of documents responsive to the IRS's summonses. See Dkt. #140.


         Microsoft is withholding 174 documents from production. Id. at 7. Microsoft is withholding the majority of the documents in dispute based on the federally authorized tax practitioner privilege and/or the work production protection. See Dkt. #141, Exs. A-D. The attorney-client privilege is asserted for twelve documents. Id. ¶¶ 9-11. To support these assertions, Microsoft has produced four privilege logs. Dkt. #141, Exs. A-D. Each privilege log lists the documents withheld from production for each of the four summonses served by the IRS. See id. (privilege logs titled “Designated Summons Privilege Log, ” “KPMG Central Files Privilege Log, ” “KPMG Personal Files Privilege Log, ” and “Related Summonses 2 and 3 Privilege Log”). The government disputes the applicability of the privileges and protection asserted by Microsoft, and requests production of the documents withheld. See Dkt. #145. In the alternative, the government requests that the Court conduct an in camera review of the disputed documents to determine if the asserted privileges actually apply. Id. 16-17.

         The Court addresses the propriety of the asserted privileges and the work product doctrine in turn.

         A. Federally Authorized Tax Practitioner Privilege[2]

         Section 7525 of Title 26 of the United States Code effectively extends the attorney-client privilege to “federal authorized tax practitioner[s].” A “federally authorized tax practitioner” is “any individual who is authorized under Federal law to practice before the Internal Revenue Service if such practice is subject to Federal regulation under section 330 of title 31, United States Code.” 26 U.S.C. § 7525(a)(3)(A). Communications between a taxpayer and a “federally authorized tax practitioner, ” are protected “to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.” Id. § 7525(a)(1). This limited privilege does not extend to anything other than a lawyers' work. United States v. BDO Seidman, 337 F.3d 802, 810 (7th Cir. 2003) (“[T]he § 7525 privilege is no broader than that of the attorney-client privilege . . . .”); United States v. Frederick, 182 F.3d 496, 502 (7th Cir. 1999). This privilege is thus limited to the scope of the attorney-client privilege, and courts “look to the body of common law interpreting the attorney-client privilege to interpret the § 7525 privilege.” BDO Seidman, 337 F.3d at 810; Valero Energy Corp. v. United States, 569 F.3d 626, 630 (7th Cir. 2009) (“This privilege is no broader than the existing attorney-client privilege.”). The tax practitioner privilege applies to communications made in confidence and “the confidences [must] constitute information that is not intended to be disclosed by the [tax practitioner].” BDO Seidman, 337 F.3d at 811. Accordingly, “the success of a claim of [the tax practitioner] privilege depends on whether the advice given [is] general accounting advice or legal advice.” Valero, 569 F.3d at 630. An exception to the tax practitioner privilege does not protect written communications connected to the promotion of participation in tax shelters. 26 U.S.C. § 7525(b).

         Microsoft contends the tax practitioner privilege applies to 164 documents withheld because each of these documents purportedly reflects a confidential communication between Microsoft and its tax advisors for the purpose of seeking tax advice. Dkt. #140 at 15-21. To support this assertion, Microsoft argues it has made a prima facie showing of the propriety of this privilege through its submission of four privilege logs. Id. at 18. Microsoft argues these privilege logs comport with the requirements found to satisfy a prima facie showing of the attorney-client privilege in the Ninth Circuit. Id. at 18 (citing and quoting In re Grand Jury Investigation, 974 F.2d 1068, 1071 (9th Cir. 1992)). Microsoft further contends the documents asserting this privilege all “reflect core tax advice, ” not business or non-legal advice. Dkt. #140 at 19-20.

         The government disagrees with Microsoft's assertion of the tax-practitioner privilege, and argues that Microsoft's privilege logs “are deficient in several respects” and fail to satisfy Microsoft's prima facie burden. Dkt. #145 at 15-16. However, even if this burden is satisfied, the government argues Microsoft cannot establish the tax-practitioner privilege applies because the accountants hired by Microsoft provided business instead of tax advice. To support this argument, the government cites to documents produced in response to its summonses which appear to indicate that at least one accounting firm, KPMG, was not providing Microsoft with legal advice. Id. at 17-19 (quoting Dkt. #146, Exs. 13 and 27). However, if the Court finds the tax-practitioner ...

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