Academic journal article Journal of Accountancy
"Significant Purpose" of Tax Avoidance Trumps Document Privilege
The U.S. District Court for the Northern District of Illinois required Valero Energy Corp. to produce documents sought by the IRS, saying they were not protected by the tax practitioner privilege of IRC [section] 7525 because they concerned a tax shelter. In so holding, the court adopted a more expansive view of what constitutes "promotion" of a tax shelter than the one that figured in the U.5. v. Textron ruling now pending appeal in the First Circuit.
At issue in Valero were written communications between the oil refiner and its then-tax adviser, Arthur Andersen, in connection with Valero's merger with Ultramar Diamond Shamrock Corp., a Canadian company A series of transactions between Valero and its Canadian subsidiaries resulted in large foreign currency losses (claimed under sections 987 and 988) for Valero that produced $46 million in U.S. tax savings. The government claims in ongoing litigation that the losses were due to two circular cash flows undertaken expressly to create the tax loss.
After the court ruled in August 2007 that the work product privilege applied to some sought documents but not others, Valero supplied additional documents, some of them redacted, but withheld others, claiming they were confidential communications protected by the practitioner privilege (section 7525(a)(3)). The government moved to produce all the documents without redaction.
The court noted that under section 7525(b), the privilege does not apply to written communication "in connection with the promotion of the direct or indirect participation" of a corporation in a tax shelter as defined in section 6662(d)(2)(C)(ii). …