Facebook Opposes IRS Summons Enforcement on Withheld Documents

UNITED STATES OF AMERICA,
Petitioner,
v.
FACEBOOK, INC. AND SUBSIDIARIES,
Respondent.

Scott H. Frewing (SBN 191311)
Andrew P. Crousore (SBN 202195)
Victoria Kovanis (SBN 289275)
Robert Hammill (SBN 298689)
BAKER & McKENZIE LLP
660 Hansen Way
Palo Alto, CA 94304-1044
Telephone: +1.650.856.2400
Facsimile: +1.650 856.9299
frewing@bakermckenzie.com
andrew.crousore@bakermckenzie.com
victoria.kovanis@bakermckenzie.com
robert.hammill@bakermckenzie.com

Attorneys for Respondent Facebook, Inc.

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN FRANCISCO DIVISION

FACEBOOK'S OPPOSITION TO UNITED STATES' BRIEF
REGARDING PRIVILEGED DOCUMENTS STILL IN DISPUTE

DATE: March 29, 2018
TIME: 9:30 am
DEPT.: Courtroom 15-C

---

TABLE OF CONTENTS

I. INTRODUCTION

II. STATEMENT OF FACTS

III. ARGUMENT

IV. CONCLUSION

TABLE OF AUTHORITIES

Cases

Compaq Computer Corp. v. Comm'r, 78 T.C.M. (CCH) 20 (T.C. 1999)

Curtis v. Alcoa, Inc., No. 3:06-CV-448, 2009 U.S. Dist. LEXIS 71581 (E.D. Tenn. Mar. 27, 2009)

Eli Lilly & Co. v. Comm'r, 84 T.C. 996 (1985), aff'd in part, rev'd in part, 856 F.2d 855 (7th Cir. 1988)

In re Grand Jury Investigation, 974 F.2d 1068 (9th Cir. 1992)

In re Grand Jury Subpoena 92-1 (SJ), 31 F.3d 826 (9th Cir. 1994)

In re Grand Jury Subpoena Duces Tecum, 731 F.2d 1032 (2d Cir. 1984)

Hickman v. Taylor, 329 U.S. 495 (1947)

Jaffee v. Redmond, 518 U.S. 1 (1996)

Mitcham v. Calderon, 1996 U.S. Dist. LEXIS 22557 (N.D. Cal. Dec. 20, 1996)

Mohawk Indus., Inc. v. Carpenter, 558 U.S. 100 (2009)

Motisola Malikha Abdallah v. Coca-Cola Co., 2000 U.S. Dist. LEXIS 21025 (N.D. Ga. Jan. 25, 2000)

Muro v. Target Corp., 250 F.R.D. 350 (N.D. Ill. 2007)

Murray v. Bd. of Education of New York, 199 F.R.D. 154 (S.D.N.Y. 2001)

In re Napster Inc., 479 F.3d 1078

Nat'l Semiconductor Corp. v. Comm'r, 67 T.C.M. (CCH) 2849 (T.C. 1994)

Perkin-Elmer Corp. v. Comm'r, 66 T.C.M. (CCH) 634 (T.C. 1993)

Roth v. Aon Corp., 254 F.R.D. 538 (N.D. Ill. 2009)

Samuels v. Mitchell, 155 F.R.D. 195 (N.D. Cal. 1994)

In re San Juan Dupont Plaza Hotel Fire Litig., 859 F.2d 1007 (1st Cir. 1988)

Schaeffler v. United States, 806 F.3d 34 (2d Cir. 2015)

Seagate Tech., Inc. v. Comm'r, 102 T.C. 149 (1994)

Solomon v. Scientific American, Inc., 125 F.R.D. 34 (S.D.N.Y. 1998)

Sundstrand Corp. v. Comm'r, 63 T.C.M. (CCH) 2043 (T.C. 1992)

Sundstrand Corp. v. Comm'r, 96 T.C. 226 (1991)

United States v. Adlman, 68 F.3d 1495 (2d Cir. 1995)

United States v. Chevron Texaco Corp., 241 F. Supp. 2d 1065 (N.D. Cal. 2002)

United States v. Deloitte, 610 F.3d 129 (D.C. Cir. 2010)

United States v. Graf, 610 F.3d 1148 (9th Cir. 2010)

United States v. Microsoft Corp., 2017 U.S. Dist. LEXIS 69223 (W.D. Wash., June 17, 2015)

United States v. Nobles, 422 U.S. 225 (1975)

United States v. Rowe, 96 F.3d 1294 (9th Cir. 1996)

United States v. Roxworthy, 457 F.3d 590 (6th Cir. 2006)

United States v. Textron Inc., 577 F.3d 21 (1st Cir. 2009)

United States v. Torf (In re Grand Jury Subpoena), 357 F.3d 900 (9th Cir. 2003)

Upjohn Co. v. United States, 449 U.S. 383 (1981)

Valero Energy Corp. v. United States, 569 F.3d 626 (7th Cir. 2009)

VERITAS v. Commissioner, 133 T.C. 297 (2009)

Visa U.S.A., Inc. v. First Data Corp, 2004 U.S. Dist. LEXIS 17117 (N.D. Cal. 2004)

Wells Fargo & Co. v. United States, 2013 U.S. Dist. LEXIS 79814 (D. Minn., 2013)

Statutes

26 U.S.C. § 482

26 U.S.C. § 6662

26 U.S.C. § 7525

Other Authorities

26 C.F.R. § 1.482-74

31 C.F.R. § 10.3

Fed. R. Civ. P. 26(b)(3)

Fed. R. Evid. 501

Fed. R. Evid. 502

---

I. INTRODUCTION

After auditing Facebook for more than four years, the Internal Revenue Service (“IRS”) ended its audit on July 26, 2016, when it issued a Statutory Notice of Deficiency. Instead of waiting for discovery to commence in the to be pending action in the U.S. Tax Court, the IRS elected to burden this Court to enforce seven extraordinarily broad summonses (the “Summonses”) issued in the 11th hour of the audit.

At great cost, and through considerable effort, Facebook has now complied with the Summonses. Facebook has produced over 2.1 million pages of documents in response to the Summonses. The sole remaining issue relates to 153 privilege log entries out of an initial total number of log entries exceeding 9,000.

Much of the dispute centers on advice Facebook received with respect to the 2010 cost sharing arrangement that is the focus of the U.S. Tax Court action. Cost sharing arrangements, like Facebook's, are not new — the Treasury Regulations have prescribed them as an arm's length method for sharing research and development costs dating back to the 1960s. In deciding whether to enter into a cost sharing arrangement, and how to comply with complex tax laws, where litigation was anticipated, Facebook obtained legal advice from its lawyers, and, as is common in such transactions, from two accounting firms, Ernst & Young, LLP (“EY”) and PricewaterhouseCoopers (“PwC”).

Facebook entered into the cost sharing arrangement with an expectation, based on the experiences of numerous other multinational companies, that the IRS would challenge this cost sharing arrangement. Facebook's expectation has been borne out by a four-plus year audit that has led to proceedings before this Court and the U.S. Tax Court.

The advice and underlying analyses Facebook's lawyers and federally authorized tax practitioners provided to evaluate this transaction under the tax laws and to ensure their defensibility in litigation are privileged, and protected from disclosure to the government in this summons proceeding. The Summonses should not be enforced as to 153 log entries at issue.

II. STATEMENT OF FACTS

A. Transfer Pricing and U.S. Taxation of International Operations

Multinational corporations like Facebook operate globally. In connection with its global enterprise, Facebook operates through its various subsidiaries and affiliates. This leads to controversy regarding what portions of Facebook's income are taxable by the different countries in which Facebook operates. Decl. of Ted Price, March 2, 2018, ¶ 9. Each country generally seeks to tax as much of Facebook's profits as it can. Id. at 12.

Countries around the world have agreed that the price at which related parties transfer goods, services, and intellectual property across national boundaries should be based on the arm's length standard. Id. at 13. The arm's length standard provides that these items should trade among related affiliates upon the comparable terms and prices as those items would trade among unrelated parties. Id. The U.S. imposes the arm's length standard upon taxpayers under the transfer pricing rules of 26 U.S.C. § 482 and the hundreds of pages of regulations thereunder. Id. The arm's length price to be charged or paid by related parties for goods, intellectual property, and services is but one of a myriad of issues that arise under the international tax provisions of the Internal Revenue Code. Id. For example, U.S. taxpayers that operate abroad may need to analyze complex rules that turn on whether a foreign subsidiary is providing certain types of services that give rise to current or deferred income in the United States. Id. The answer to this question requires a detailed understanding of the services, where the services are performed, and the details of any contracts that govern the relationships. Id. Application of the tax law in the corporate international tax context depends as much upon the facts as upon the law. Id.

B. IRS Transfer Pricing Litigation

As explained in the Declarations of Ted Price, Facebook's Vice President of Tax; Gary Sprague, partner at Baker McKenzie; and Fred Chilton, former partner at McDermott, Will & Emery; other multinational corporations' high-profile disputes with the IRS over transfer pricing, show why Facebook had good reason to anticipate the very litigation now before the U.S. Tax Court. Price Decl. ¶ 17; Decl. of Gary Sprague, March 1, 2018, ¶¶ 18, 27; Decl. of Fred Chilton, March 1, 2018, ¶ 7.

For the last three decades, the IRS has consistently challenged multinational-corporation transfer pricing. Sprague Decl. ¶ 19. Leading up to Facebook's 2010 consideration of the cost sharing arrangement at issue, there had been numerous high-profile cases involving the IRS and transfer pricing. See, e.g., Eli Lilly & Co. v. Comm'r, 84 T.C. 996 (1985), aff'd in part, rev'd in part, 856 F.2d 855 (7th Cir. 1988); Sundstrand Corp. v. Comm'r, 96 T.C. 226 (1991); Sundstrand Corp. v. Comm'r, 63 T.C.M. (CCH) 2043 (T.C. 1992); Perkin-Elmer Corp. v. Comm'r, 66 T.C.M. (CCH) 634 (T.C. 1993); Seagate Tech., Inc. v. Comm'r, 102 T.C. 149 (1994); Nat'l Semiconductor Corp. v. Comm'r, 67 T.C.M. (CCH) 2849 (T.C. 1994); Compaq Computer Corp. v. Comm'r, 78 T.C.M. (CCH) 20 (T.C. 1999); VERITAS v. Commissioner, 133 T.C. 297 (2009). Short of litigation, multinational corporations (particularly in the high-tech sector) have found themselves frequently defending against the IRS's audit positions on global transfer pricing and related issues. Price Decl. ¶ 19. The IRS has also endeavored to change the law and regulations, and to pour more resources into audits and into litigating transfer pricing cases. Id.

In 2008, Facebook, the multinational taxpayer community, and most technology companies in Silicon Valley were focused on an IRS challenge to the cost sharing arrangement entered into by VERITAS Software Corporation. Id. at 17. In VERITAS v. Commissioner, 133 T.C. 297 (2009), VERITAS granted its subsidiary the right to use certain preexisting intangibles in Europe, the Middle East, Africa, and Asia. The IRS pursued a $2.5 billion adjustment to income, a position that was ultimately determined to be arbitrary, capricious and unreasonable. Following the loss, the IRS put corporate taxpayers on notice that more litigation was forthcoming when it issued a formal notice stating that it was not acquiescing to the Tax Court's decision. See Action on Decision 2010-05.

C. Facebook's Establishment of an International Headquarters

In 2008, Facebook's mission was to “To give people the power to share and make the world more open and connected.” Price Decl. ¶ 5. Consistent with the Company's mission, in 2008 Facebook's executives began discussing how to organize and grow its operations outside the United States. Id. Blake Chandlee, Facebook's then Director of UK Sales, who Facebook hired in 2007 as one of Facebook's first employees based outside the U.S., sought to expand Facebook's footprint in Europe. Id. Also in 2008, Sheryl Sandberg joined Facebook from Google and focused on Facebook's expansion outside the United States. Id.

Like all multinational corporations, Facebook had to contend with the fact that multiple countries would seek to tax its income. Id. at 9. Indeed, Facebook had to ensure that its operations were structured such that Facebook could comply with complex tax rules in multiple jurisdictions. Id. Given that tax rules vary widely by country, Facebook faced the possibility of being taxed on the same income by multiple jurisdictions. Id. Facebook had to consider how to operate in light of these double taxation concerns. Id.

Facebook had to choose from various alternatives for expanding overseas, including inter alia hiring third-party resellers, licensing its platform to third parties or its own affiliates, or entering into a cost sharing arrangement. Id. at 10. Under a licensing approach, Facebook could license its platform to third parties or affiliates, and the licensee would earn a return in line with its functions and risks. Id. Alternatively, under a cost sharing arrangement, costs are shared between participants based on the parties' reasonably anticipated benefits. Id.

Cost sharing arrangements were enshrined in the U.S. transfer pricing regulations in 1968, when Treasury published regulations that allowed offshore affiliates of U.S. companies to agree to share research and development costs and thereby also share ownership of the intellectual property created through this joint investment. Id. at 14. Under the regulations, if one party came to the cost sharing arrangement with intellectual property already developed, the other cost sharing entities were required to make arm's length payments for the licensed intellectual property. Id. The payment for pre-existing intellectual property came to be known under the regulations as a “buy-in payment.” Id.

Facebook anticipated that the IRS would challenge the buy-in payments to be paid by Facebook's offshore affiliate, a dispute the Company knew could involve billions of dollars. Id. at 17. Facebook's hope was that once the buy-in disputes were resolved, disputes going forward over transfer pricing for intellectual property could be minimized. Id.

D. Cost Sharing Arrangements Under 26 C.F.R. § 1.482-7

As discussed above, per the Treasury Regulations governing cost sharing arrangements, when one participant transfers interests that are reasonably anticipated to contribute to the development of the cost shared intangibles, also known as a platform contribution transaction (“PCT”), the participant receiving the transferred intangibles must make a buy-in payment as consideration. See Treas. 26 C.F.R. § 1.482-7;¹ Price Decl. ¶ 14. The buy-in payment, which can be made in royalties, installment payments, or a lump-sum, must be the arm's length charge for the use of the transferred intangibles. The cost sharing regulations provide five specific methods for evaluating the arm's length amount charged in a PCT. Id. A best method rule applies to the choice of method, meaning that taxpayers must determine the arm's length result of controlled transactions under the method that, under the facts and circumstances, provides the most reliable measure of the arm's length result. Id. The regulations identify requirements and considerations for each available method. Id. Use of an unspecified method is allowed provided that it yields a result that is the most reliable measure of the arm's length result under the principles of the best method rule. Id. The regulations also require taxpayers to make numerous fact-specific determinations, such as a determination of a controlled participant's reasonably anticipated benefits to be derived from exploiting the cost shared intangibles and analysis of the alternative methods available. Id. Each consideration required under the cost sharing regulations typically requires legal and tax advice from one or more trusted advisors. Id.

E. Role of Section 6662 Transfer Pricing Documentation

The U.S. transfer pricing regulations recognize that transfer pricing is an area of significant controversy between taxpayers and the IRS. Id. at 41. The regulations under 26 U.S.C. § 6662 (“Section 6662”) incentivize taxpayers to prepare reports describing their transfer pricing and provide those reports to the IRS upon audit. If a taxpayer's valuations used for Section 482 purposes are successfully challenged by the IRS, and if the adjustments exceed certain relatively low thresholds, the taxpayer can be liable for 20% or 40% penalties under Section 6662. Price Decl. ¶ 41. To avoid these penalties, the taxpayer must prepare a contemporaneous transfer pricing report supporting its Section 482 valuations and positions (“Section 6662 Transfer Pricing Report”) prior to submission of the tax return and provide that report and related documents to the IRS upon request during audit. Id. U.S. multinationals routinely prepare Section 6662 Transfer Pricing Reports as insurance against IRS penalties. Id.

F. Facebook Considered Financial Reserves in Anticipation of Litigation with the IRS

On July 13, 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48 (“FIN 48”), codified at ASC 740. Under FIN 48, companies like Facebook evaluate their tax position and consider reserving certain amounts depending on the likelihood of prevailing in litigation. Price Decl. ¶ 28. Companies consider whether it is more likely than not that a tax position will be sustained upon examination by the IRS, including resolution of any related appeals or litigation processes, based on the technical merits of the position. Id. Facebook evaluated its exposure in connection with the cost sharing arrangement, in anticipation of the dispute that the Company is currently facing. Id.

G. Advisors Retained by Facebook

Facebook hired several advisors in connection with the establishment of its International HQ and related cost sharing arrangement. Id. at 28. Recognizing the inevitability of an IRS challenge, Facebook engaged advisors who would adequately prepare Facebook to defend its decisions related to its new International HQ, including its cost sharing arrangement. Id. at 26. Facebook wanted to ensure that its best position and defense was prepared. Id. at 39.

Facebook engaged EY to assist with several different matters, including but not limited to: (1) tax planning in connection with the establishment of an international HQ, and (2) preparing Facebook's Section 6662 transfer pricing report. Id. at 36. As part of EY's tax planning services, EY also advised Facebook regarding potential disputes with the IRS related to Facebook's cost sharing arrangement and related issues. Id. EY was engaged separately for each matter and billed each matter separately. Id. The EY team that prepared the Section 6662 Transfer Pricing Report primarily consisted of Nick Ronan, Eric Olson, and Jenny Lau. Id. The EY team engaged to do tax planning primarily consisted of Chad Bower, Susan Baker, and Faizal Nurani. Id.

Facebook engaged Baker McKenzie and McDermott Will & Emery to advise on the legal and tax consequences related to the establishment of Facebook's International HQ and transfer of intangibles, and to provide sound advice in anticipation of a dispute with the IRS. Id. at 27.

PwC provided limited advice on the establishment of Facebook's International HQ, and advised Facebook on considering the appropriate FIN 48 tax reserve position. Id. at 28, 35.

To advise on the complex and intensely fact-driven tax issues associated with the establishment of Facebook's International HQ and the related transfer of intangibles, Facebook's advisors had to understand many detailed facts about Facebook's business. Id. at 22.

H. Disputed Document Privilege Log

Facebook's final disputed document log (“Disputed Document Log”) is attached as Appendix A to the United States' Brief Regarding Privileged Documents Still in Dispute, ECF No. 55-1. The Disputed Document Log includes 153 entries, many of which are protected by multiple claims of privilege and work product.

Attorney-Client Privilege	71
Section 7525	61
Work Product	53

III. ARGUMENT

A. Facebook Has Met Its Burden to Show the Disputed Documents Are Privileged

“[T]he obligation imposed by a tax summons remains subject to the traditional privileges and limitations.” Upjohn Co. v. United States, 449 U.S. 383, 398 (1981) (citation and internal quotation marks omitted). Federal law governs privilege issues in a summons enforcement proceeding. See Fed. R. Evid. 501.

Facebook has made the prima facie showing necessary to establish privilege and work product for the 153 entries. The Ninth Circuit has recognized a prima facie showing of privilege when a log with supporting affidavits identified:

(a) the attorney and client involved, (b) the nature of the document, (c) all persons or entities shown on the document to have received or sent the document, (d) all persons or entities known to have been furnished the document or informed of its substance, and (e) the date the document was generated, prepared, or dated.

In re Grand Jury Investigation, 974 F.2d 1068, 1071 (9th Cir. 1992) (citing Dole v. Milonas, 889 F.2d 885, 888 n.3, 890 (9th Cir. 1989)).

The Disputed Document Log and declarations filed with this brief demonstrate that Facebook has proved the facts necessary to establish the requirements of attorney-client privilege, work product, and the Section 7525 privilege as to the disputed documents. The log sets forth document dates, authors, recipients, and the nature of the documents. The declarations filed with this brief further support the elements of privilege and work product protection. See Price Decl.; Sprague Decl.; Declaration of Joseph A. Myszka, March 1, 2018; Decl.; Decl. of Jue Lin, March 2, 2018; Decl. of David Kling, March 2, 2018.

The Government's arguments regarding the Disputed Document Log are wrong. First, the Government urges Facebook to do the very thing it later says vitiates privilege: provide too much information. Contrary to the Government's assertion, the log entries are not too generic. Facebook's descriptions enable the Government to assess the basis for its privilege claims, as required by the Federal Rules of Civil Procedure, and the Price, Lin, and Kling Declarations make clear the reasons Facebook sought legal and tax advice. Nothing more is required.

Second, the Government's complaint regarding email chains with attachments does not weaken Facebook's assertion of privilege. Individual logging of each email in a string is not required. Muro v. Target Corp., 250 F.R.D. 350, 363 (N.D. Ill. 2007); see United States v. Chevron Texaco Corp., 241 F. Supp. 2d 1065, 1074 n.6 (N.D. Cal. 2002). Furthermore, the Company went to great lengths to redact documents, where appropriate, to avoid the very complaint the Government now lodges. The Company has satisfied its burden.

Third, the Government has failed to make the showing required for in camera review. That said, Facebook does not object if the Court deems it necessary. If a review takes place, Facebook contends that the review should afford Facebook the opportunity to supply the Court, in camera and ex parte, with additional evidence and argument supporting the privilege. See In re Napster Inc., 479 F.3d 1078, 1093, abrogated on other grounds by Mohawk Indus., Inc. v. Carpenter, 558 U.S. 100, 130 S. Ct. 599, 175 L. Ed. 2d 458 (2009) (“[T]he party resisting an order to disclose materials allegedly protected by the attorney-client privilege must be given the opportunity to present evidence and argument in support of its claim of privilege.”). Mitcham v. Calderon, No. C 94-2854 SBA, 1996 U.S. Dist. LEXIS 22557, at *19 (N.D. Cal. Dec. 20, 1996) (“[C]ourts often determine whether information must be protected from disclosure to a party's opponent in confidential proceedings without the opponent's participation”).

B. Facebook Properly Claimed Attorney Client Privilege (“ACP”) for Communications with Outside Counsel and In-House Counsel

The ACP applies to 71 of the log entries that remain in dispute. Facebook has demonstrated the facts necessary to establish the elements of ACP as to all these documents.

“The attorney-client privilege protects confidential communications between a client seeking legal advice and an attorney providing such advice.” In re Grand Jury Subpoena 92-1 (SJ), 31 F.3d 826, 829 (9th Cir. 1994). The elements of ACP are:

(1) Where legal advice of any kind is sought (2) from a professional legal adviser in his capacity as such, (3) the communications relating to that purpose, (4) made in confidence (5) by the client, (6) are at his instance permanently protected (7) from disclosure by himself or by the legal adviser, (8) unless the protection be waived.

United States v. Graf, 610 F.3d 1148, 1156 (9th Cir. 2010) (citation and internal quotations omitted).

1. Facebook properly claimed ACP for outside counsel advice regarding U.S. tax issues.

The Disputed Document Log and declarations establish the attorney-client privilege as to 18 of the 71 disputed ACP log entries concerning advice related to U.S. tax laws.² “Communications offering tax advice or discussing tax planning or the tax consequences of alternate business strategies are 'legal' communications.” Chevron Texaco Corp., 241 F. Supp. 2d at 1076.

More specifically, the 18 log entries: (i) analyze the tax considerations that arose in connection with establishing Facebook's International HQ and (ii) were intended to be confidential and were kept confidential.

First, the Sprague and Price declarations affirm that the documents reflect legal advice, not business discussions or non-legal advice. See id. These documents include discussions about the tax and legal requirements for transferring intangibles and the tax and legal consequences of forming subsidiaries in various countries. Sprague Decl. ¶11. Facebook was expanding its international operations. Assessing the tax implications falls directly within the purview of the Company's tax advisors. Sprague Decl. ¶ 11; Price Decl. ¶ 4.

Second, Facebook intended for the documents to be confidential and kept them confidential. The Sprague, Price, and Kling declarations confirm that these specific 18 log entries were intended to be privileged, and that Facebook maintained them in confidentiality. See Sprague Decl. ¶¶ 14, 30; Price Decl. ¶¶ 24, 44; Kling Decl. ¶ 43.

The attorney-client privilege also extends to advice related to intercompany agreements entered into in connection with the establishment of Facebook's International HQ. The privilege for these 12 log entries³ related to intercompany agreements was not waived. Price Decl. ¶ 11; Sprague Decl. ¶ 14. As described in the Sprague (Baker McKenzie) declaration, Sprague and his colleagues gave targeted legal advice about specific issues related to the agreements that was intended to be confidential and the advice was not revealed to EY or others outside the privilege. Sprague Decl. ¶¶ 14, 16. As a seasoned lawyer and tax professional, Sprague carefully chose when to send substantive legal comments related to the intercompany agreements, such as interpretations of certain tax regulations and other tax matters ancillary to the agreements, that would be covered by ACP. Id. Likewise, Facebook decision-makers Jue Lin and Ted Price both understood privilege rules and carefully selected which documents to provide to EY. Price Decl. ¶ 24; Lin Decl. ¶ 11.

Facebook and Baker McKenzie never had an expectation of confidentiality or privilege with regard to other communications about the drafting of the intercompany agreements because they knew such documents would be shared with the EY transfer pricing team. Price Decl. ¶ 24; Sprague Decl. ¶ 16. See In re Grand Jury Subpoena Duces Tecum, 731 F.2d 1032, 1037 (2d Cir. 1984) (communications that are not intended to be confidential are not privileged.); In re San Juan Dupont Plaza Hotel Fire Litig., 859 F.2d 1007, 1016 no.6 (1st Cir. 1988). On the other hand, targeted comments about specific provisions of those agreements were intended to be privileged. Price Decl. ¶ 24. The specific legal advice reflected in comments was not shared with EY. Id.

2. Facebook properly claimed ACP for in-house counsel advice.

Facebook properly claimed privilege for 43 of the 71 disputed ACP log entries for legal advice requested of, or provided by in-house counsel⁴ on the following subject matters: (1) hiring and employment law; (2) agreements with third parties; (3) regulatory compliance; (4) data privacy; (5) legal issues with pending acquisitions; (6) legal issues with data center placement/international structuring; and (7) internal legal project status memos. The primary purpose of each of these entries was securing legal advice.

ACP extends to legal advice provided by in-house counsel. See United States v. Rowe, 96 F.3d 1294, 1296 (9th Cir. 1996) (ACP applies “to confidential communications concerning legal matters made between a corporation and its house counsel . . . This principle has been followed with virtual unanimity by American courts.”) (internal quotation and citation omitted) (emphasis in Rowe). Internal communications involving in-house counsel will be privileged provided the company can “make a clear showing that the speaker made the communications for the purpose of obtaining or providing legal advice.” Chevron Texaco Corp., 241 F. Supp. 2d at 1076 (internal quotations omitted).

The Disputed Document Log and declarations show that the 43 in-house counsel disputed documents reflect communications made between Facebook and its in-house attorneys, or their agents, in confidence, for the purpose of seeking or obtaining legal advice, and the privilege was not waived. For example, Summons 1, Tab 882 includes a discussion of Ted Ullyot and Katherine Tassi's legal views of complex data privacy regulatory compliance. Kling Decl. ¶ 37. This was not business advice, and there was an expectation of confidentiality. Likewise, the primary purpose of the other log entries involving in-house counsel was to give or receive legal advice.

3. Facebook properly claimed ACP for legal advice regarding corporate law issues from in-house and outside counsel.

The Government also challenges 31 of the 71 disputed ACP log entries involving legal advice about corporate law issues.⁵ The Disputed Document Log and declarations show that the disputed documents reflect communications between Facebook and its attorneys, or their agents, in confidence, for the purpose of seeking or obtaining legal advice, and the privilege was not waived.

Facebook's corporate law compliance necessitated consideration of legal issues. See In re Grand Jury Subpoena Duces Tecum, 731 F.2d at 1037-38 (law firm was consulted as to the tax consequences of a reorganization and as to corporate law considerations in structuring the reorganization, which was protected by ACP); Roth v. Aon Corp., 254 F.R.D. 538, 541 (N.D. Ill. 2009) (“Consultation as to the scope of the provisions of the Act, as to language, and as to how best to legally comply with SEC regulations, for instance, are precisely the type of day-to-day guidance for which a corporation would likely rely on counsel . . . The determination of what information should be disclosed for compliance is not merely a business operation, but a legal concern.”).

Here, the Price, Kling, and Sprague declarations establish that the documents for which Facebook claims ACP reflect confidential legal advice from Facebook's in-house counsel and outside advisors related to employee stock purchases and the sale of stock, SEC compliance, legal issues with entity formation, legal terms in agreements with third parties, and legal advice provided to Facebook's Board of Directors, among other matters. See Price Decl. ¶ 25; Kling Decl. ¶ 3, 40; Sprague Decl. ¶ 24. For example, Summons 7, Tab 734 contains legal advice from David Kling regarding due diligence concerns in contract negotiations. Kling Decl. ¶ 16. Although related to a corporate contract negotiation, this was legal advice, not business advice. Id. Likewise, the primary purpose of the remaining corporate documents is seeking or providing legal advice, not business or non-legal advice. See Sprague Decl. ¶ 31.

4. The Government's claim that documents relating to establishment of an international HQ were non-privileged business advice is wrong.

The Government wrongly alleges that any legal advice concerning the decision to establish a corporate headquarters cannot be withheld (Government's Br. at 15). The presence of business considerations in a corporate setting do not invalidate attorney client privilege claims. See Curtis v. Alcoa, Inc., No. 3:06-CV-448, 2009 U.S. Dist. LEXIS 71581, at *9-10 (E.D. Tenn. Mar. 27, 2009) (mere fact that business considerations are weighted in rendering legal advice does not vitiate ACP) (citation and internal quotation marks omitted). See also Visa U.S.A., Inc. v. First Data Corp, 2004 U.S. Dist. LEXIS 17117, at *16 (N.D. Cal. 2004) (suggesting that a more protective “because of” analysis can be used when determining the discoverability of documents that have both a legal and non-legal purpose as opposed to the less protective “primary purpose” test).

Even under the more stringent primary purpose analysis, the documents challenged by the Government are protected by ACP because the primary purpose of the documents was (1) the provision of U.S. tax advice (Summons 1, Tab 16; Summons 2, Tabs 173A and 176H), (2) the provision of legal advice regarding Facebook's international corporate structure or employment law issues, from in-house counsel (Summons 2, Tabs 98, 159; Summons 6, Tabs 11A and 11B), or (3) the provision of legal advice about corporate law issues.⁶ Business considerations can often lead to the need for legal advice. For example, Summons 6, Tabs 11A and 11B involve legal advice regarding employment law issues. Kling Decl. ¶ 29. Just because Facebook had a business that needed to be staffed does not mean that privileged legal advice about employment issues cannot be withheld.

5. The Government's claim that Facebook withheld non-privileged documents regarding strategy or unprivileged corporate governance issues is also wrong.

The Government makes two claims that Facebook incorrectly withheld corporate governance and business strategy documents. Government's Br. at 22-23. Both claims are wrong.

First, the Government claims that Facebook attempted to claim privilege over documents merely because of the presence of in-house counsel. This is false. For example, the Government raises Summons 7, Tab 1049, because the heading over the redacted portion says “Purchase Price.” In the context of corporate acquisitions, attorneys often must handle legal issues relating to stock and SEC compliance. Here, Facebook counsel David Kling made a comment (redacted), the primary purpose of which was to convey advice about the legal consequences of the terms of the deal. While in-house counsel often wear multiple hats, including at times as a business advisor, internal communications involving in-house counsel will be privileged provided the company can show the primary purpose was legal advice. See Chevron Texaco Corp., 241 F. Supp. 2d at 1076. As the head of Facebook's corporate legal team, Kling often handled similar issues regarding stock and SEC compliance. Kling Decl. ¶ 18; see also Summons 7, Tabs 179, 182, 628, 688 and 734. Similarly, Facebook's CFO conveyed legal advice previously received from Facebook Legal and Facebook's corporate counsel, Fenwick & West, regarding SEC disclosures and share ownership. See Summons 7, Tab 699. Kling Decl. ¶ 40. The primary purpose of these documents was legal advice.

Second, the Government's objections to withheld draft board documents and other corporate governance documents are unfounded. See Summons 1, Tabs 355, 362, 363, 367, 369, 377, 554, 671, 840 and 886 (all involve corporate advice from Baker McKenzie and Fenwick & West). See Chevron Texaco, 241 F. Supp. 2d at 1073 (communications with outside counsel presumed to be for the purpose of obtaining legal advice). For example, in Summons 1, Tab 355, Jue Lin requested legal advice from Gary Sprague concerning corporate legal requirements related to a Board of Directors meeting. Lin's purpose in writing to Sprague was to obtain legal advice about next steps, not to solicit his business opinion. Lin Decl. ¶ 8. The Government's objection to Summons 1, Tab 139, Summons 2, Tabs 486 and 809G, and Summons 7, Tab 615, is also unfounded, because the primary purpose of these documents was the request or provision of legal advice about matters such as issues relating to stock structure, corporate governance issues, and other issues. Kling Decl. ¶¶ 10, 11, 39, 41. Similarly, the primary purpose of Summons 1, Tabs 840 and 886 was legal advice related to signature requirements and board meeting requirements.

C. Facebook Properly Claimed Privilege Under 26 U.S.C. § 7525

Facebook properly claimed privilege over 61⁷ documents protected by the tax practitioner privilege. This privilege, codified in 26 U.S.C. § 7525 (“Section 7525”), extends the protections of the attorney-client privilege to communications between a taxpayer and any federally authorized tax practitioner (“FATP”). The statute provides:

With respect to tax advice, the same common law protections of confidentiality which apply to a communication between a taxpayer and an attorney shall also apply to a communication between a taxpayer and any federally authorized tax practitioner to the extent the communication would be considered a privileged communication if it were between a taxpayer and an attorney.

26 U.S.C. § 7525(a)(1).

Attorneys and certified public accountants (“CPAs”) can both be FATPs. The statute defines FATP as “any individual who is authorized under Federal law to practice before the Internal Revenue Service if such practice is subject to Federal regulation under section 330 of title 31, United States Code.” 26 U.S.C. § 7525(a)(3)(A). Practice before the IRS is governed by 31 U.S.C. § 330, and IRS regulations allowing attorneys and CPAs to practice before the IRS. See 31 C.F.R. § 10.3.

The Section 7525 tax practitioner privilege is largely co-extensive with the attorney-client privilege. Schaeffler v. United States, 806 F.3d 34, 38 n.3 (2d Cir. 2015) (the Section 7525 privilege is “essentially coterminous with the attorney-client privilege both in scope and in waiver”).

1. Facebook properly claimed Section 7525 protection over tax advice regarding Facebook's international structure, setting reserves, and other tax issues.

The tax advice Facebook requested and received regarding Facebook's international structure, tax issues associated with setting reserves for litigation exposure from the transaction, and other U.S. tax issues related to the establishment of Facebook's International HQ was tax advice, akin to legal advice, and not general accounting advice. See Valero Energy Corp. v. United States, 569 F.3d 626, 630 (7th Cir. 2009). Facebook retained EY, PwC, and Baker McKenzie to evaluate the tax consequences of entering into a cost sharing or licensing arrangement and to advise Facebook, about the Section 482 transfer pricing issues, other issues under the tax code, and the exposure for anticipated litigation. Price Decl. ¶ 20; Sprague Decl. ¶ 17. Facebook has not claimed privilege for the type of accounting advice not protectable under Section 7525, which is generally information gathered to facilitate the filing of a tax return. See Valero, 569 F.3d at 631; Price Decl. ¶ 34.

2. Facebook's privileged documents reflect tax advice, not business advice.

The Government wrongly asserts that Facebook is withholding documents that address business planning with respect to (1) the establishment of Facebook's International HQ, (2) the transfer of intangibles and the financial analysis and pricing of those transfers, and (3) miscellaneous business advice. Government's Br. at 9, 16, 20.

First, Facebook's ACP response is equally applicable to Facebook's 7525 claims because courts look to the body of common law interpreting ACP in order to interpret Section 7525, see United States v. Microsoft Corp., 2017 U.S. Dist. LEXIS 69223, at *6 (W.D. Wash., June 17, 2015), Facebook's ACP response is equally applicable to Facebook's 7525 claims with respect to the Government's assertion regarding the establishment of Facebook's International HQ (discussed above). As previously described, documents regarding the establishment of Facebook's International HQ were properly withheld.⁸

Second, contrary to the government's assertion, tax advice regarding the transfer of intangibles is protected under Section 7525. See Chevron Texaco Corp., 241 F. Supp. 2d at 1076 (“[d]etermining the tax consequences of a particular transaction is rooted virtually entirely in the law”).⁹ Section 482 and the regulations thereunder identify specific requirements and considerations for such valuations. 26 C.F.R. § 1.482-7; Price Decl. ¶ 15. Tax advice related to these rules and regulations is covered by Section 7525. See Summons 1, Tabs 47, 61, 104, 113, 124, 125, 248, 262, 263,¹⁰ 535, 536, 558, 610, 613, 625, 628, 637, 643, 649, 652, 859, all of which include advice protected by Section 7525, contrary to the Government's assertions on pages 19 and 21-22 of the Government's Brief.¹¹ This is separate from the work performed by the EY transfer pricing team, for which Facebook has not asserted privilege. Price Decl. ¶ 42.

Third, the Government's general challenges to Summons 1, Tabs 2, 510, 535, and 536 are unfounded. Government's Brief at 16 and 20. Summons 1, Tab 2, is a statement of work from EY that includes tax advice that describes the scope of advice to be provided over the course of the EY engagement. Lin Decl. ¶ 9. Summons 1, Tab 510 includes a discussion among Ted Price, Jue Lin, Chris Kim, and Baker McKenzie (EY was dropped off of the chain) about legal advice from Chris Kim and Baker McKenzie about certain agreement terms and their legal effect. Kling Decl. ¶ 33; Sprague Decl. ¶ 11. Summons 1, Tabs 535 and 536 include requests for tax advice regarding cost sharing and FBAR filing options, not business advice. Lin Decl. ¶ 10.

D. Facebook Properly Claimed Work Product (“WP”) Protection

Work product protection applies to 53 of the log entries that remain in dispute.¹² The work product doctrine protects “documents and tangible things that are prepared in anticipation of litigation or for trial by or for another party or its representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent).” Fed. R. Civ. P. 26(b)(3). “Such documents may only be ordered produced upon an adverse party's demonstration of 'substantial need [for] the materials' and 'undue hardship [in obtaining] the substantial equivalent of the materials by other means.'” United States v. Torf (In re Grand Jury Subpoena), 357 F.3d 900, 906 (9th Cir. 2003) (quoting Fed. R. Civ. P. 26(b)(3)); see also Hickman v. Taylor, 329 U.S. 495, 510-11 (1947). WP covers documents or the compilation of materials prepared by agents of the attorney in preparation for litigation. United States v. Nobles, 422 U.S. 225, 238 (1975).

1. Facebook properly claimed WP for documents prepared in anticipation of litigation with the IRS.

Courts have regularly held that taxpayers like Facebook may reasonably anticipate tax litigation before entering into transactions and filing tax returns. In United States v. Adlman, 68 F.3d 1495, 1501 (2d Cir. 1995) (Adlman I), an accounting firm prepared documents evaluating the tax consequences and likely IRS challenge to a company's proposed reorganization. The court held that the district court erred in concluding the prospect of litigation was too remote for WP to apply, noting that “[i]n many instances, the expected litigation is quite concrete, notwithstanding that the events giving rise to it have not yet occurred.” Id. Likewise, Facebook sought to prepare for the likely IRS challenge should Facebook enter into a cost sharing or licensing arrangement. Price Decl. ¶ 20. The IRS response to the VERITAS loss remained front and center. Id. at 19.

Facebook did not need the IRS to expressly indicate an intent to litigate Facebook's matter for WP to apply. In United States v. Roxworthy, 457 F.3d 590, 600 (6th Cir. 2006), the IRS sought memoranda prepared by KPMG analyzing the tax consequences of certain transactions entered by taxpayer, including possible arguments that the IRS could mount against taxpayer's chosen tax treatment of the transactions. Id at 592. The taxpayer in Roxworthy established that the memoranda at issue sought to protect taxpayer from future litigation about a particular transaction, that KPMG and taxpayer had in mind a specific claim supported by concrete facts which would likely lead to litigation, and that taxpayer faced an actual or potential claim following an actual event or series of events that reasonably could result in litigation. Id. at 600. The court found that the expected litigation was concrete despite the absence of any overt indication from the IRS that it intended to pursue litigation. Id; see also Motisola Malikha Abdallah v. Coca-Cola Co., CIVIL ACTION NO. 1:98-CV-3679-RWS, 2000 U.S. Dist. LEXIS 21025, at *17 (N.D. Ga. Jan. 25, 2000) (document prepared in anticipation of an investigation by a government agency can be protected by WP). There should be little dispute that Facebook reasonably anticipated the very dispute it now confronts in the U.S. Tax Court. See Price Decl. ¶ 19.

At least six types of circumstances may lead a taxpayer like Facebook to reasonably anticipate heightened IRS scrutiny, an administrative dispute, and litigation. See Roxworthy, 457 F.3d at 600; Schaeffler, 806 F.3d at 44; Chevron Texaco, 241 F. Supp. 2d at 1083. All of these circumstances were present here.

First, Facebook had identified cost sharing as an issue that could result in IRS litigation. Price Decl. ¶ 19; Sprague Decl. ¶¶ 20, 27. Second, based on the VERITAS litigation, and the advice of Facebook's advisors who had decades of experience dealing with the IRS on transfer pricing issues, Facebook predicted that the valuation of Facebook's intellectual property would be at issue. Id. Third, Facebook was a high profile Company. Price Decl. ¶ 19. Fourth, the intangible property transferred as part of the cost sharing arrangement was worth billions. Price Decl. ¶ 17. Fifth, the cost sharing transaction required interpretation of complex tax laws. Price Decl. ¶¶ 14-16. Sixth, Facebook hired EY and EY prepared documents because Facebook anticipated a legal challenge from the IRS. Id. at 26.

The government's attempt to rely on a one-line sarcastic comment made by Ted Price following years of working on a project that was predicated, in substantial part, upon potential litigation with the IRS, fails the straight-face test. Price Decl. ¶ 21. See Government's Br. at 11.

2. Facebook properly claimed WP for FIN 48 reserves.

Courts have held that FIN 48 analyses are protected work product when they reflect recognition and measurement analysis created in preparation of litigation. In Wells Fargo & Co. v. United States, 2013 U.S. Dist. LEXIS 79814 at *112-16, 130 (D. Minn., 2013), the court found that certain tax accrual workpapers (“TAWs”), which included FIN 48 reserve amounts, reflected recognition and measurement analysis protected by WP. The analysis was created while taxpayer anticipated litigation “because the analysis references items such as challenges by the IRS and developments in possible litigation.” Id. at 113. The fact that taxpayer's tax accounting group created many of the TAWs did not alter the court's decision. Id.¹³

Facebook's contemplation of FIN 48 reserves and the analysis underlying those potential reserves falls squarely within the work product doctrine as explained by the court in Wells Fargo. Facebook's references to FIN 48 reserves reflect analysis from Facebook Tax, outside legal counsel, and FATPs at EY who performed the equivalent of legal analysis. Price Decl. ¶ 29. These advisors considered challenges by the IRS and developments in possible litigation with the IRS specifically regarding Facebook's cost sharing arrangement, including Facebook Ireland's buy-in payment. Price Decl. ¶ 30. Allowing the IRS to access this recognition and measurement analysis “would provide a window into the legal thinking . . . on active litigation strategy, running counter to the purpose of the work product doctrine.” Wells Fargo, 2013 U.S. Dist. LEXIS 79814 at *113.

3. Facebook properly claimed WP because the documents were created because of Facebook's anticipation of litigation with the IRS.

The 53 documents for which Facebook claims WP were prepared “because of” the anticipated litigation, even those that served a dual purpose.¹⁴ See Torf, 357 F.3d at 907-08 (applying “because of” test; the inquiry is whether, under the totality of the circumstances, the document was created because of the anticipated litigation and would not have been created in substantially similar form but for the prospect of that litigation). None of these documents would have been created in substantially similar form but for the prospect of litigation with the IRS. Price Decl. ¶ 30 ; Chilton Decl. ¶ 13. The presence of non-litigation purposes in these 53 documents does not vitiate the WP claim because the litigation purpose is intertwined with any non-litigation purpose. Torf, 357 F.3d at 910 (WP found where the litigation purpose so permeates any non-litigation purpose that the two purposes cannot be discretely separated).

Consideration of the business motivations behind Facebook's decision to establish an international HQ and enter into a cost sharing arrangement does not vitiate the WP protection. EY, Baker McKenzie, and McDermott, Will & Emery each assisted Facebook in preparing for litigation. The documents prepared were not created in the ordinary course of business. Rather, they reveal the issues Facebook and its advisors evaluated and a roadmap to Facebook's mental impressions, strategies, assessments of strengths and weaknesses, and assessments of positions by Facebook representatives.¹⁵

4. The Government's claim that Facebook seeks to protect all business planning documents from disclosure is made-up hyperbole and is contradicted by the evidence.

Contrary to the Government's assertion that Facebook's work product claims “have the practical effect of shielding all business planning documents from disclosure” (Government's Br. at 10.), Facebook has produced 2.1 million pages of business and accounting documents to the IRS. Of the 153 documents still in dispute, Facebook seeks to protect only 53 documents under the work product doctrine, all of which were prepared because of anticipated litigation with the IRS. See Price Decl. ¶¶ 20, 26; Sprague Decl. ¶ 17; Kling Decl. ¶ 42.

In particular, the 53 documents include specific advice about IRS audit risks and exposure related to Facebook's International HQ structure, audit risk related to cost sharing, and thoughts and impressions about exposure.

E. The Government's Waiver Argument Fails Because There Was No Selective Disclosure and No Waiver Among Facebook's Advisors.

1. There was no selective disclosure.

Facebook did not waive privilege for the documents on the privilege log. Subject matter waiver in Federal audits or proceedings has essentially been eliminated unless a party makes selective disclosures in order to obtain an unfair tactical advantage. See Fed. R. Evid. 502.¹⁶ The Advisory Committee Note explains that Rule 502(a) “provides that a voluntary disclosure in a federal proceeding or to a federal office or agency, if a waiver, generally results in a waiver only of the communication or information disclosed; a subject matter waiver (of either privilege or work product) is reserved for those unusual situations in which fairness requires a further disclosure of related, protected information, in order to prevent a selective and misleading presentation of evidence to the disadvantage of the adversary.” See Fed. R. Evid. 502 Advisory Committee Note (Subdivision (a)). Subject matter waiver “is limited to situations in which a party intentionally puts protected information into the litigation in a selective, misleading and unfair manner.” Id.

The Government has not shown that Facebook made a selective waiver to obtain a tactical advantage. The Government merely claims that it needs the protected documents: “[t]he fairness rationale here is that the selective disclosure of documents, or portions of documents, will undermine the ability of the IRS to make an accurate determination of Facebook's tax liability.” Government's Br. at 14-15. This is not the test. Facebook has made no selective use of the privileged documents,¹⁷ and thus there can be no subject matter waiver under Rule 502.

2. There was no waiver among Facebook's advisors.

Contrary to the government's assertions, the communications in the disputed documents between and among EY, Baker McKenzie, McDermott [etc] did not waive Facebook's privileges. The government's claims fail for (i) communications among EY personnel (Government's Br. at 16); (ii) communications from Baker McKenzie to EY (Government's Br. at 17); and (iii) communications from McDermott to EY (Government's Br. at 17).

First, communications from EY to EY did not waive protection of section 7525 tax advice provided by EY. EY was one of Facebook's trusted tax advisors, including for several matters unrelated to this case. EY served three functions relevant to this case: (1) to provide U.S. tax advice related to the establishment of Facebook's International HQ and the related transfer of intangibles (unrelated to tax return preparation), (2) to help Facebook prepare for and defend against an audit of Facebook's cost sharing arrangement, and (3) to prepare transfer pricing documentation. The fact that some EY advisors wore multiple hats does not constitute waiver. Specifically, Nicholas Ronan and Eric Olson advised Facebook both on defense of Facebook's cost sharing position and they were members of the EY transfer pricing team. Price Decl. ¶ 36. Occasionally, they also conveyed tax advice from the tax planning team. Id. Facebook was careful to preserve privilege by including the transfer pricing team only on specific tax planning matters where necessary. Id. Facebook does not seek to shield transfer pricing documentation or the underlying facts and assumptions supporting such documentation. Id. at 42.

Second, communications from Baker McKenzie to EY did not waive legal advice protected by ACP or tax advice protected by Section 7525 because the communications were disclosed within a privileged relationship.¹⁸ See Murray v. Bd. of Education of New York, 199 F.R.D. 154, 155 (S.D.N.Y. 2001) (“[D]isclosure of communications protected by the attorney-client privilege within the context of another privilege does not constitute waiver of the attorney-client privilege.”). ACP is not waived if the disclosure itself is a privileged communication. See Solomon v. Scientific American, Inc., 125 F.R.D. 34 (S.D.N.Y. 1998) (no waiver of attorney client privilege following disclosure to plaintiff's wife, relying on the spousal communications privilege); Murray, 199 F.R.D. at 155 (S.D.N.Y. 2001) (no waiver of attorney client privilege following disclosure to plaintiff's psychiatrist, relying on privilege between licensed psychotherapists and their patients recognized in Jaffee v. Redmond, 518 U.S. 1, 15 (1996)); but cf. Chevron Texaco, 241 F. Supp. 2d at 1070-1072 (Chevron Texaco is distinguishable because unlike Chevron, Facebook does not argue that a “Kovel” relationship existed with EY. Instead, the ACP communications were conveyed within privileged communications with EY, covered by Section 7525.). Facebook requested a level of cooperation between Baker McKenzie and EY with regard to tax planning and audit defense. As the primary EY advisors and the Baker McKenzie tax attorneys who assisted Facebook were FATPs, some of the shared advice was protected under Section 7525, all within privileged Section 7525 relationships. With regard to ACP, Facebook shared advice from Baker McKenzie in two areas: (1) basic intercompany agreement drafting, and (2) limited corporate governance documentation. First, Facebook and Baker McKenzie attorneys did not intend for emails related to basic drafting of intercompany agreements to be privileged. Price Decl. ¶ 24; Sprague Decl. ¶ 16. Gary Sprague knew the agreements would be reviewed by the EY transfer pricing team and he did not intend for them to be confidential. Sprague Decl. ¶ 16. Legal advice about other issues ancillary to the agreements was carefully shared with Facebook only, and was not waived.¹⁹ Id. Second, to the extent that corporate legal advice was shared with EY, it was only shared through privileged communications within the confines of a privileged relationship with EY's tax planning team. Only unprivileged corporate documents were shared with the EY transfer pricing team responsible for the Section 6662 Transfer Pricing Documentation.

There was similarly no waiver of WP advice from Baker McKenzie to EY, because there was no danger of subsequent disclosure to adverse parties. For example, in Samuels v. Mitchell, 155 F.R.D. 195, 201 (N.D. Cal. 1994), the court held there was no waiver of work product following disclosure to an accountant acting in the capacity of a consultant. Here, EY was not acting as an auditor, but as a tax advisor engaged by Facebook to provide tax advice and advice about defending Facebook's position in anticipation of a subsequent audit and litigation. There was no risk that EY would subsequently disclose such information to an adverse party as there was no duty of disclosure. WP protection for the one document that was disclosed to the EY auditor, Summons 1, Tab 121, also was not waived because (1) EY was not a potential adversary in the sort of litigation that the protected communications address (future litigation was expected with the IRS; the tax implications of the establishment of Facebook's International HQ and related topics would not likely be relevant in any dispute Facebook might have with EY), and (2) Facebook had a reasonable expectation of confidentiality given EY's obligation to refrain from disclosing confidential client information per Rule 301 of the American Institute of Certified Public Accountants (“AICPA”) Code of Professional Conduct. See United States v. Deloitte, 610 F.3d 129, 140, 142 (D.C. Cir. 2010) (disclosure to Deloitte did not waive WP because the documents at issue would not likely be relevant in any dispute taxpayer might have with Deloitte and taxpayer had a reasonable expectation of confidentiality because of Deloitte's confidentiality obligation under Rule 301 of the AICPA Code of Professional Conduct).

Third, communications from McDermott to EY did not waive Section 7525 protection or WP.²⁰ The same analysis that applied to communications from Baker McKenzie to EY similarly applies to communications from McDermott to EY. Section 7525 communications were made within the context of a privileged relationship with EY. WP was not waived as there was no danger of subsequent disclosure to adverse parties.

F. The IRS miscellaneous claims are similarly flawed.

The Government makes three arguments on page 24 of its Brief, all of which fail.

First, contrary to the Government's assertion, Facebook did not waive privilege with respect to Summons 5, Tab 500. The basis of privilege for Tab 500 is a request for legal advice sent to Facebook's in-house counsel. Although the Government has a copy of one of the attachments to this email, the basis of the privileged communication, which is the request for advice, was not produced to the Government and there was no waiver. See Muro, 250 F.R.D. at 363 (a party can legitimately withhold an entire document forwarding prior materials to counsel, wile also disclosing those prior materials themselves).

Second, Facebook rejects the Government's broad and general challenge to the documents listed in the Government's Brief, page 20 line 25 through page 21 line 1, and page 24, lines 17 through 19. Facebook has met its burden with respect to these documents by establishing the elements of ACP, the Section 7525, and WP were met.

Third, the Government's challenge of the advice provided by PwC in Summons 1, Tab 723 is flawed. Although the Government correctly states that the Section 7525 privilege does not protect advice regarding foreign law, this communication includes U.S. tax planning, which is protected by Section 7525.

IV. CONCLUSION

Facebook respectfully requests that the Court find that the disputed documents are not subject to production under the IRS summonses because the documents are privileged and work product.

Dated: March 2, 2018

BAKER & MCKENZIE LLP

SCOTT H. FREWING

ANDREW P. CROUSORE

Attorneys for Facebook, Inc.