Commissioner of Revenue v. Comcast Corp.

901 N.E.2d 1185

453 Mass. 293

COMMISSIONER OF REVENUE v. COMCAST CORPORATION & another.¹

SJC-10209

Supreme Judicial Court of Massachusetts, Suffolk.

Argued November 4, 2008.

Decided March 3, 2009.

William W. Porter, Assistant Attorney General, for the plaintiff.

David J. Nagle, Boston, for the defendants.

John S. Brown, George P. Mair, Donald-Bruce Abrams, & Matthew D. Schnall, Boston, for The New England Cable & Telecommunications Association, Inc., amicus curiae, submitted a brief.

Shirley K. Sicilian & Sheldon H. Laskin, for Multistate Tax Commission, amicus curiae, submitted a brief.

Present: MARSHALL, C.J., IRELAND, SPINA, COWIN, CORDY, & BOTSFORD, JJ.

MARSHALL, C.J.

We transferred this appeal here on our own motion to consider whether the attorney-client privilege or the work product doctrine protect from disclosure communications between an in-house corporate counsel and outside tax accountants consulted by him regarding the structuring of a sale of stock mandated by an antitrust consent judgment.

In connection with an audit examination by the Commissioner of Revenue (commissioner)² of Comcast Corporation's (Comcast's)³ corporate excise tax returns for the tax period November 1, 1996, through December 31, 1997, the commissioner is investigating whether Comcast and its affiliates improperly failed to pay Massachusetts corporate excise taxes in connection with the forced liquidation of shares of stock that yielded approximately $500,000,000 in capital gains. The capital gains were reported on a Comcast affiliate's Federal tax return but were not reported on any Massachusetts corporate excise tax return. The commissioner sought the production of documents through an administrative summons pursuant to G.L. c. 62C, § 70.⁴ Comcast responded that some of the documents were protected by the attorney-client privilege and the work product doctrine.⁵ The commissioner then filed a complaint in the Superior Court seeking to compel production of the withheld documents. The commissioner's request was denied, the judge ruling that the documents at issue in this appeal were protected by the privilege and the work product doctrine. The commissioner moved unsuccessfully for reconsideration. Pursuant to a joint motion of the parties, final judgment entered in the Superior Court. See Mass. R. Civ. P. 58(a), as amended, 371 Mass. 908 (1977). The commissioner appealed. We conclude that the documents are protected from disclosure by the work product doctrine. We affirm.⁶

1. Factual background. The audit examination of Comcast and its affiliates, see note 3, supra, by the Department of Revenue (department) was commenced in June, 2000, three years after the acquisition of Continental Cablevision, Inc. (Continental Cablevision), by US West, Inc. (U.S. West), a predecessor to Comcast. That acquisition gave rise to an antitrust challenge by the United States Department of Justice. We describe briefly the antitrust action and the related corporate transactions before turning to the documents at the center of this litigation. The facts are undisputed unless otherwise noted.

a. The stock sale. In February, 1996, Colorado-based U.S. West announced plans to purchase Continental Cablevision, a Massachusetts cable television company with headquarters in Boston.

Through a wholly owned subsidiary, Continental Teleport, Inc. (Continental Teleport), Continental Cablevision at the time owned 11.2 per cent of the stock of Teleport Communications Group, Inc. (TCG), a company that, like U.S. West, was a local telecommunications services provider.⁷ Continental Teleport, like its parent Continental Cablevision, was a Massachusetts corporation. The acquisition of Continental Cablevision by U.S. West was completed on November 15, 1996, and Continental Cablevision was immediately merged into MediaOne Group, Inc. (MediaOne), a wholly owned subsidiary of U.S. West.

Meanwhile, on November 5, 1996, the Department of Justice filed a civil antitrust action against U.S. West and Continental Cablevision, see 15 U.S.C. §§ 18, 25, alleging that the acquisition would lessen competition in the market for dedicated telecommunications services. The Department of Justice, U.S. West, and Continental Cablevision agreed to settle the antitrust claims, and on February 28, 1997, a final judgment entered whose terms required that, to preserve competition in the sale of dedicated communication services in certain markets, U.S. West divest, on or before June 30, 1997, the portion of TCG stock necessary to reduce U.S. West's ownership interest to less than ten per cent of the outstanding shares of TCG common stock, and to further divest all remaining interest in TCG on or before December 31, 1998.

US West retained the investment firm Lehman Brothers Inc. to assist it with the required sale of the TCG stock. Because the stock sale was anticipated to have significant tax consequences for U.S. West, Thomas Kennedy, executive director of U.S. West's tax department, turned to Attorney Andrew E. Ottinger, Jr., at the time serving in U.S. West's Colorado-based law department, for advice regarding options for structuring the stock sale. Ottinger was an experienced tax litigator, but was unfamiliar with Massachusetts tax law. Concerned that the Massachusetts Department of Revenue (department) would challenge, in Ottinger's words, "the appropriateness of the chosen vehicle" for U.S. West's sale of the TCG stock, Ottinger sought the advice of two Massachusetts-based partners of Arthur Andersen LLP (Andersen), in circumstances we shall later describe in some detail.

After receiving advice from Andersen, U.S. West caused the following transactions to occur. On February 11, 1997, a new entity, Continental Holding Company (Continental Holding), a Massachusetts corporate trust, G.L. c. 62, § 8, was established by U.S. West. That same day, Continental Teleport was dissolved, and its assets, including its then remaining TCG shares,⁸ were simultaneously transferred to Continental Holding. US West subsequently divested itself of the TCG shares in four separate transactions, culminating with the largest sale on November 30, 1997.⁹

Continental Holding reported a capital gain of $495,733,830 from the sale of the TCG shares on its December 31, 1997, Federal tax return. Claiming an exemption as a Massachusetts corporate trust under G.L. c. 62, § 8 (b), it did not file a Massachusetts corporate excise tax return for that same taxable period.¹⁰,¹¹ Continental Holding was dissolved on February 12, 1999, two years after its creation, and its assets transferred to U.S. West's successor b. Retention of Arthur Andersen LLP. Prior to U.S. West's disposition of the TCG stock, its in-house tax counsel Ottinger retained Andersen for advice. Because the circumstances of that retention are central to the legal issues, we recite them in some detail.

Ottinger graduated from law school in 1977 and joined the tax department of U.S. West in 1986. In 1987, he transferred to U.S. West's law department, where he served as State and local tax counsel until 2000, except for a brief period as regulatory counsel in 1995-1996. Ottinger initially became involved with U.S. West's acquisition of Continental Cablevision while he was serving as regulatory counsel, but it was in his position as State and local tax counsel that he sought Andersen's advice regarding the impending sale of TCG stock.

As State and local tax counsel, Ottinger was U.S. West's attorney "chiefly responsible" for property tax, State income tax, and sales and use tax matters. He spent approximately forty per cent of his time working on tax-related litigation, handling one-half of those matters himself and retaining outside counsel for the remainder. In connection with his own cases, Ottinger regularly prepared assessments analyzing litigation risks for U.S. West to evaluate the appropriateness of a tax determination. Because U.S. West had, in Ottinger's words, a "sophisticated Tax Department," he rarely hired outside tax consultants to assist him, although he did so on occasion.

With respect to the particular matter at issue here—the sale of the TCG stock compelled by the antitrust consent decree—Ottinger understood the transaction to have significant tax consequences for U.S. West. Accordingly, he explained, he examined "planning opportunities" for the transaction himself, but turned to experienced "outside consultants" to help him "interpret Massachusetts law," because he himself lacked sufficient understanding of Massachusetts tax law.¹² Specifically, Ottinger stated that he considered "various ways to set up the transaction, to determine the best, legitimate vehicle by which to deal with the tax consequences from the sale of [TCG] shares, and to assess the risks of litigation associated with the different vehicles." Ottinger ultimately retained Michael E. Porter, III, and Edward Gartland, two Massachusetts-based Andersen partners. Both had previously been employed by the department, Porter as a senior attorney at the department.¹³ During January and February, 1997, Ottinger spoke with Porter and Gartland on several occasions, discussing the various options for U.S. West to follow relating to the sale of TCG stock, and to assess the risks of and exposure to litigation for any "vehicle" considered. He asked the Andersen partners to prepare a memorandum discussing the "pros and cons of the various planning opportunities and the attendant litigation risks," which they did. The Andersen memoranda (various drafts of the requested memorandum) are the documents in contention here.

Ottinger stated that he considered all of his communications with the Andersen partners to be attorney-client communications and attorney work product, and, accordingly, "took all necessary precautions" to ensure that documents received from Andersen remained "confidential and privileged," including sending the documents to the segregated, locked files of...