Court Says KPMG's Tax Memos Privileged

A court has said that two documents prepared by KPMG, analyzing the tax consequences of transactions by restaurant company Yum! Brands Inc., are protected from a summons issued by the Internal Revenue Service.

The IRS has been investigating Yum for its creation of a captive insurance company and related stock transfers between 1997 and 1999. According to the agency, the transactions resulted in a $112 million loss for tax purposes, but not book purposes.

As part of Yum's response to an informal document request, the company produced a privilege log listing seven documents it believed were protected from IRS because of the work product doctrine. Five of the documents were eventually given to the IRS after the parties entered into a limitation of waivers agreement.

The remaining two documents were the memos prepared by KPMG, which the company said contained possible arguments that the IRS could use against Yum's tax treatment of the transactions. A magistrate judge recommended that the summons be enforced, saying that the documents were not prepared in anticipation of litigation but to assist Yum in the preparation of its taxes and yearly audit.A district court allowed evidence that the memos were created because Yum anticipated litigation due to its upcoming recognition of the $112 million loss. The court ruled that because the memos were not related to "ordinary business purpose," they did not have to be turned over to the IRS.

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