CASE IN POINT

Throughout the past decade various states throughout the country have aggressively challenged the legitimacy of certain deductions taken by corporations in computing their taxable income, particularly where the deductions involve payment for intellectual property. Morrison & Foerster’s State and Local Tax Practice (“SALT”) Group has been at the forefront in defending several Fortune 500 companies against these challenges. Recently, the SALT Group defended a large Midwestern manufacturing company against the Commonwealth of Massachusetts’ attempt to disallow deductions for expenses paid to an affiliate for the use of the affiliate’s intellectual property (primarily patents) in the Company’s manufacturing operations.

An appeal was filed with the Massachusetts Appellate Tax Board and partners Paul Frankel and Holly Hyans and their associates soon found themselves responding to voluminous discovery requests issued by the Commissioner of Revenue regarding the intellectual property owned by the affiliate, the business reasons for transferring that intellectual property to the affiliate and the affiliate’s operations. Responding to the Commonwealth’s discovery requests required developing an in-depth understanding of the Company’s business operations and, in particular, the activities associated with the development, protection, and maintenance of its patents.

The MoFo team made several trips to the Company’s headquarters to interview Company personnel, including the Company’s chief intellectual property lawyer, and review related transaction documents. During the document review, it became apparent that many requested documents were protected by the attorney-client privilege. This presented the associate working on the matter with an opportunity to work with attorneys in the Company’s Office of General Counsel to develop the attorney-client privilege argument and ensure that any arguments made with respect to this Massachusetts tax appeal were consistent with arguments made, and documents produced or withheld, in the Company’s worldwide patent litigations. He took the lead with recommending an overall approach to document production and in developing a strategy on attorney-client privilege issues.

Attorney-client privilege issues also arose while defending the deposition of the Company’s principal witness, the Company’s chief intellectual property lawyer. The Company was very concerned that testimony given by the attorney could be construed as a waiver of the attorney-client privilege in the Company’s on-going patent litigation. The MoFo attorneys were able to strike a balance between having the witness testify about facts necessary to prove the Company’s tax case, but not compromise privileged information.

After providing responses to the Commissioner’s discovery requests and taking and defending depositions, the MoFo team was able to negotiate a favorable settlement for the Company that covered not only the years under appeal, but certain future years as well.