On January 17, 2020, a federal district court in Washington ordered Microsoft Corporation (“Microsoft”) to produce many documents to the Internal Revenue Service (“IRS”) that Microsoft asserted were privileged. Microsoft had argued that most of the documents were protected by protected by the work product doctrine and the federally authorized tax practitioner privilege set forth in 26 U.S.C. § 7525 (“tax practitioner privilege”), and that a small number of documents were protected by the attorney-client privilege. For the majority of the documents, the court held that none of these protections applied. The court held the work product protection did not apply because there was no active litigation at the time and the primary purpose of the communications was business, not legal. The court held the tax practitioner privilege did not apply to Microsoft’s communications with KPMG LLP (“KPMG”) because the communications fell within the tax shelter exception to the tax practitioner privilege (in § 7525(b)). The court concluded that “a significant purpose, if not the sole purpose, of Microsoft’s transactions was to avoid or evade federal income tax.”
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