Work-Product Doctrine and Tax Accrual Workpapers - IRS Prevails
By Vince Nardone, Tax Attorney, Columbus Ohio | Email Me
Columbus, Ohio tax attorney, Vince Nardone, discusses the recent decision of U.S. v. Textron Inc., 577 F.3d 21, (1st Circuit August 13, 2009).
The question for the court was whether the attorney-work-product doctrine shields from an IRS summons tax-accrual workpapers prepared by lawyers and others in Textron's Tax Department to support Textron's calculation of tax reserves for its audited corporate financial statements. As we all know now from the earlier decisions, Textron is a major aerospace and defense conglomerate, with well over a hundred subsidiaries, whose consolidated tax return is audited by the IRS on a regular basis. Textron refused to produce its tax-accrual workpapers, asserting that they were privileged and that the summons was issued for an improper purpose. The IRS ultimately filed an action in federal district court to enforce the summons.
On August 28, 2007, the district court held that Textron’s tax-accrual workpapers were protected by the work-product doctrine because the taxpayer would not have prepared them—but for—the fact that Textron anticipated the possibility of litigation with the IRS. On January 1, 2009, the First Circuit, affirming the district court, held that Textron’s tax-accrual workpapers were protected by the work-product doctrine. But, the court set aside the district court’s ultimate determination that the work-product doctrine was not waived, and sent the case back to the district court to reassess the question of whether disclosure of the auditor’s workpapers would reveal the information contained in Textron’s workpapers. On rehearing, enbanc, the court reversed its own decision and concluded that Textron’s workpapers, which were prepared to support financial filings and gain auditor approval, were not protected by the work-product privilege.
The case ultimate stands for the proposition that tax-accrual workpapers prepared by lawyers and others in a corporate taxpayer's tax department to support a taxpayer's calculation of tax reserves for its audited corporate financial statements are independently required by statutory and audit requirements. And thus, the attorney-work-product doctrine does not shield work papers from an Internal Revenue Service summons, where immediate motive for preparing the work papers is to fix the amount of tax reserve on a taxpayer's books and to obtain a clean financial opinion from its auditor. It is not enough to trigger work-product protection that the document's subject matter relates to a subject that might conceivably be litigated. Rather, the work-product doctrine protects materials prepared for any litigation or trial as long as they were prepared by or for party to subsequent litigation. The court reasoned that the work product privilege is centrally aimed at protecting the litigation process, specifically; work done by counsel to help him in litigating a case. It is not a privilege designed to help a lawyer prepare corporate documents or other materials prepared in the ordinary course of business. See the attached case for further analysis and reasoning of the court.
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