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U.S. v. KPMG LLP

May 4, 2004.

UNITED STATES OF AMERICA, Petitioner,
v.
KPMG LLP, Respondent



The opinion of the court was delivered by: THOMAS HOGAN, Chief Judge, District

MEMORANDUM OPINION

Pending before the Court is the United States of America's Petition to Enforce Internal Revenue Service Summonses. For the reasons set forth below, that Petition, as well as other relief, will be granted.

I. BACKGROUND/PROCEDURAL HISTORY*fn1

  As part of an Internal Revenue Service ("IRS") examination of KPMG's promotion of and participation in transactions that the IRS contends are tax shelters, the United States filed on July 9, 2002 the instant petition to enforce nine IRS summonses served in January, March, and May 2002. Specifically, on January 28, 2002, the IRS issued a summons requesting information relating to two types of transactions, known as the Foreign Leveraged Investment Program ("FLIP") and the Offshore Portfolio Investment Strategy ("OPIS"). This summons is referred to as the "FLIP/OPIS Summons." See Petition to Enforce Internal Revenue Service Summons ("Pet. to Enf") at 2-3. On March 19, 2002, the IRS issued six additional summonses to KPMG. These summonses are also referred to by the transactions to which they are directed, as the "BLIPS/TRACT/IDV Summons," the "401(k) ACCEL Summons," the " § 6111(c) Summons," the " § 6111(d) Summons," the "Foreign Transactions Summons," and the "MIDCO Summons." Id at 4-6. On May 3, 2002, the IRS issued two more summonses to KPMG, the "Tax Treaty Summons" and the "FOCUS Summons." Id. at 6-7.

  The IRS contends that although KPMG had produced many boxes of records in response to the FLIP/OPIS Summons and had produced individuals who provided sworn testimony in response to this summons, KPMG failed to fully comply with the summons. See Pet. to Enf. at 2-4. The IRS also claims that despite granting KPMG additional time to comply with the summonses issued on March 19 and May 3, KPMG failed to produce much of the responsive material. Therefore, on July 9, 2002, the Government filed the Petition to Enforce Internal Revenue Summonses to enforce these nine administrative summonses issued to KPMG as part of the IRS examination.

  KPMG withheld from the IRS certain documents that are responsive to the various summonses on grounds that these documents are privileged, and KPMG provided the IRS with a privilege log of the documents withheld in response to the FLIP/OPIS summons ("FLIP/OPIS privilege log"). The FLIP/OPIS privilege log provides a document-by-document description of the documents withheld from production, "setting forth the document number assigned to each privileged document, the date of the document, the names of the author(s) and recipient(s), a brief description of the contents of the documents, and the privileges applicable to each document." Reply in Opp. to Protective Order at 4-5; see also Petition to Enforce at Ex. 3 (the FLIP/OPIS privilege log). Despite the privilege log, however, the IRS asserts that these withheld documents "are not in fact privileged." Petition to Enforce at 3.

  KPMG filed a Motion for a Protective Order to avoid the additional burden of preparing a document-by-document privilege log of the materials responsive to the summonses that were withheld on privilege grounds. On September 11, 2002, this Court referred KPMG's Motion for a Protective Order to Magistrate Judge Kay for resolution. Magistrate Judge Kay issued a Memorandum Opinion and Order on September 30, 2002 in which he denied KPMG's motion for the following reason:
KPMG persuasively argues that the burden of preparing a document-by-document privilege log for the materials withheld would be great. See Memorandum at 2 (explaining log would contain at least 8,500 entries). KPMG requests permission to prepare a categorical privilege log instead. This Court acknowledges both the burden of this task and the Court's discretion to permit KPMG to prepare a less burdensome, category-by-category privilege log. See, e.g., United States v. Gericare Medical Supply Inc., No. CIV.A.99-0366-CB-L, 2000 WL 33156442, at *3-4 (S.D. Ala. Dec. 11, 2000) (upholding use of privilege log prepared by category). However, the difficulty, as the Government points out, is in assessing KPMG's claims of privilege which are not apparent to this Court even from the more detailed privilege log prepared in response to the FLIP/OPIS summons. The essential function of a privilege log is to permit the opposing party, and ultimately the court, to evaluate a claim of privilege. Allowing KPMG to prepare an even less detailed, category-by-category privilege log would not further this determination.
AK Mem. Op. of 9/30/02 at 6-7 (emphasis added).

  Magistrate Judge Kay concluded

 
that the categorical privilege log suggested by KPMG would not provide the trial court with sufficiently detailed information to make a determination on the validity of the privileges asserted. This Court finds that Chief Judge Hogan will be better able to evaluate the asserted privilege claims after reviewing in camera the details contained in the FLIP/OPIS privilege log accompanied by a random sample of the documents falling within each category of the privileges KPMG has asserted. This will assist Chief Judge Hogan in determining whether the FLIP/OPIS privilege log provides adequate detail to make a ruling on the validity of the claimed privileges, by affording the Court an opportunity to compare the sufficiency of the document description contained in the privilege log with the actual documents, and ultimately determining the validity of KPMG's assertion of privilege.
Accordingly, KPMG's Motion for a Protective Order is DENIED. In addition, the Court orders that KPMG produce the following numbered documents listed in the FLIP/OPIS privilege log to Chief Judge Hogan for an in camera review. These documents shall be submitted to the Chief Judge's chambers by close of business on Tuesday, October 1, 2002. Document numbers: 22-28, 42-51, 158-161, 435-447, 537-547, 549, 815-825, 835-870, 976-987, 1019-1034, 1040-1051, 1133-1148.
Id. at 7-8 (emphasis added).

  This Court received the above numbered documents on October 1, 2002 and, after conducting an in camera review, the Court could "only state with confidence that four (4) out of thirty (30) (i.e., 13.3 percent) of the randomly selected privilege log entries are completely supportable." United States v. KPMG, 237 F. Supp.2d 35, 48 (D.D.C. 2002). The Court therefore referred this matter to retired Magistrate Judge Patrick J. Attridge, who agreed to serve as a Special Master. Magistrate Judge Attridge conducted an examination of the withheld documents, evaluated the asserted privileges, and filed an initial Report and Recommendation on January 27, 2003 and a final Report and Recommendation on October 10, 2003.*fn2 The Petition was held in abeyance while the Court reviewed the final Report and Recommendation and the objections filed thereto pursuant to Fed.R.Civ.P. 53.

  The Court conducted a hearing on April 1, 2004. That hearing served as both a hearing on the report and as an opportunity for the parties to update the Court as to any recent developments related to this matter. During that hearing, the Court learned that KPMG's board of directors had agreed to waive in this matter KPMG's own attorney-client privilege and attorney work product privilege. Counsel for the Petitioner represented to the Court that the two main issues remaining for the Court to decide are (1) whether KPMG must release the identity of one of its clients who allegedly participated in a "CLAS" tax shelter and (2) issues surrounding the 26 U.S.C. § 7525 Confidentiality Privilege. Counsel for the Respondent generally agreed with those representations, but noted that there were still several attorney-client issues pending before the Court.

 II. LEGAL STANDARD

  A. Special Master — Report and Recommendation

  The Court must decide de novo all objections to conclusions of law made or recommended by a master. Fed.R.Civ.P. 53(g)(4). Further, except in circumstances not present in the instant case, the Court must also decide de novo all objections to ...


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