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