filed as amended. second amendment.: March 12, 1990.
On Appeal From the United States District Court For the Western District of Pennsylvania, D.C. Civ. No. 88--536.
Higginbotham, Becker and Nygaard, Circuit Judges.
This opinion addresses cross appeals by the United States and Internal Revenue Service Special Agent Robert Hackett, and by Rockwell International Corporation, from an order of the district court granting in part and denying in part the government's petition to enforce an Internal Revenue Summons served on Rockwell. The order placed conditions upon the enforcement of a summons for certain tax accrual papers known as a "free reserve file," which serves as a basis for calculating contingent future tax liability. Specifically, the court ordered that the file be reviewed by an independent accounting firm (to be chosen by the IRS and paid by Rockwell) to determine its relevance to the IRS's joint civil/criminal investigation of the closing of Rockwell's Chattanooga, Tennessee plant. It is undisputed that Rockwell had understated by some 13 million dollars its income in connection with the plant closing.
At the outset, we must determine whether we have appellate jurisdiction. Arguably, the appeal is premature because the independent accounting firm has yet to be selected, and the IRS may return to the district court for relief or further action after the selected firm's review of the file, which action might itself moot the issue. However, because it is clear that the district court's order was the court's last word on the subject, leaving nothing further for the court to do, we conclude that the order was final, and therefore appealable under 28 U.S.C. § 1291.
Turning to the merits, we face several important questions. First, we address whether the district court erred in conditioning the enforcement of the summons on review by an independent accounting firm. We hold that the court itself must determine the relevancy of the documents. Second, we address the IRS's contention that the district court erred in determining that the purpose of the IRS's investigation was limited to investigating the Chattanooga plant closing, and not Rockwell's entire 1983 tax return. Special Agent Hackett, whose testimony was apparently credited by the district court, stated repeatedly that the joint investigation was concerned with Chattanooga only. The IRS, on the other hand, asserts that it was looking (as it clearly had the power to look) at Rockwell's entire 1983 tax return.
Although we would hesitate to conclude that the district court's finding as to the scope of the investigation was clearly erroneous as a matter of fact, we find legal error in the method employed by the district court in reaching its conclusion. More specifically, the district court erred by ignoring the overarching institutional purpose of the IRS, and by making its decision solely on the basis of a single agent's statements. Under United States v. LaSalle Nat'l Bank, 437 U.S. 298, 57 L. Ed. 2d 221, 98 S. Ct. 2357 (1978), the government's good (or bad) faith in pursuit of its investigation must be measured against the institutional purpose, which the IRS represents to be an investigation into the correctness of the entire 1983 return. Consequently, we will remand for the district court to determine whether the free reserve file is relevant, not merely to the Chattanooga plant closing, but to the 1983 Rockwell tax return as a whole.
If the district court concludes that none of the material in the free-reserve file pertains to the 1983 tax return, that determination would appear to end the matter. However, if some of the material in the file is found to be relevant, the district court will have to address Rockwell's contention that the free reserve file was protected from disclosure by the attorney-client privilege or the work product doctrine.
We cannot review the attorney-client privilege question, however, because the district court failed to make the requisite factfindings. The court made no findings, for example, as to the source of preparation of the file documents (i.e., by accountants or lawyers), as to the precise purpose of the file, or as to who controlled it. The IRS forcefully argues that, even assuming that a privilege exists, it was waived by Rockwell's disclosure of the free-reserve file to its outside auditors. The court however, did not, make findings as to the circumstances and purpose of the disclosure and as to whether Rockwell disclosed more than necessary in order to comply with SEC strictures. Therefore, we must direct the district court on remand to make sufficient findings on these (and other relevant points) before deciding the waiver of attorney-client privilege issue. Similarly, the district court made no findings relating to the work product question. Although it appears that the file was not prepared in anticipation of any specific litigation -- and that the work product doctrine may therefore be inapplicable -- such a conclusion must be supported by district court findings on the circumstances of preparation and purpose of the documents.
Although we affirm in part, for the reasons stated the order of the district court must be vacated and the case remanded for further proceedings consistent with this opinion.
I. FACTS AND PROCEDURAL HISTORY
In the course of conducting its routine annual audit of Rockwell, the Internal Revenue Service stumbled across a memorandum, authored by Rockwell tax accountant Joseph Vitullo, which suggested that Rockwell had understated income on its 1983 tax return by approximately 13 million dollars by incorrectly reporting income derived from the closing of Rockwell's plant in Chattanooga, Tennessee. The memorandum also noted that documentation of the mistake could be found in Rockwell's "free reserve file."*fn1
Upon discovering the memorandum, the IRS launched a joint civil/criminal investigation to determine whether Rockwell or its employees had criminally violated any tax laws with respect to the aforementioned Chattanooga plant closing.*fn2 The joint investigation was supervised by Special Agent Hackett of the IRS's criminal division (who was responsible for the criminal aspects of the investigation) and Revenue Agent Gerald Masters of the civil division (who was responsible for the civil aspects). The criminal investigation was concerned, inter alia, with a possible cover-up of the deficiency.
On November 6, 1987, Agent Hackett, under the authority of 26 U.S.C. § 7602, issued a summons pertaining to the "fiscal year ending 9/30/83," App. at 9, which demanded, inter alia, that Rockwell produce
[the] account or folder containing the summary of deferred tax items in which potential tax liabilities are set aside for possible subsequent adjustments for the fiscal periods ended 9/30/82, 9/30/83, 9/30/84, and 9/30/85.
Id. at 10. This description refers to Rockwell's free reserve file.
Maintenance of the free reserve file allows Rockwell to calculate its contingent future tax liability by analyzing "those areas in which the taxpayer has taken a position that may, upon challenge, negotiation, or litigation, require the payment of more taxes." United States v. El Paso Co., 682 F.2d 530, 534 (5th Cir. 1982), cert. denied, 466 U.S. 944, 80 L. Ed. 2d 473, 104 S. Ct. 1927 (1984); see also United States v. Arthur Young & Co., 465 U.S. 805, 813, 79 L. Ed. 2d 826, 104 S. Ct. 1495 (1984); supra note 1. These calculations are required both by generally accepted accounting principles and by Securities and Exchange Commission regulations. App. at 80, 82-83.
In many cases, such files are prepared by accountants (both in-house and otherwise). Preparation thus does not always require consultation with an attorney. See El Paso, 682 F.2d at 534-35. In Rockwell's case, however, Charles C. Stoops, Jr., an attorney who serves as Rockwell's General Tax Counsel, testified that he maintains the file himself, with the assistance of attorneys and accountants acting under his direct supervision. The file is kept in Stoops's office and it may not be inspected without his permission. App. at 67. Stoops testified that, in addition to the calculations mentioned above, the file contains his mental impressions as to settlement positions, litigation strategy, and interpretation of trends in the tax law. Id. at 35-36. Rockwell employed the independent accounting firm of Deloitte, Haskins and Sells to serve as its outside auditors. According to Stoops, he has never surrendered the file to outside auditors, although he has discussed with them some of the contents of the file for purposes of estimating liability and exposure. Id. at 43-44.
Upon receipt of the summons, Stoops ordered approximately fifteen members of Rockwell's accounting and tax departments to conduct a review of the books and records pertaining to the Chattanooga plant closing. After completing the five-day investigation, Rockwell concluded that it had understated its taxable income by thirteen million dollars as a result of its tax treatment of the plant closing.*fn3 Id. at 25. Consequently, Rockwell reported the understatement to Agent Hackett and explained the reasons for the mistake.
On November 16, 1987, in response to the IRS summons, representatives of Rockwell appeared before Special Agent Hackett and surrendered to him all requested documents except the free reserve file. Id. at 5. Apparently concerned about the confidentiality of information within the file, Rockwell instead offered to allow Agent Hackett to review the file on Rockwell's premises, either by himself or with the assistance of a retired IRS agent or an independent accounting firm. Hackett refused the offer because it would have precluded Revenue Agent Masters from reviewing the file. Hackett testified as follows:
There are two of us assigned to this investigation, and the information, as I understand it, is available by summons, and it is my feeling that both of us should see the information so ...