Thursday, August 13, 2009
The First Circuit today, in a 3-2 en banc decision, reversed the 2-1 panel and held that Textron's tax accrual work papers were not protected under the work product doctrine and thus had to be turned over to the IRS in its tax shelter investigation. United States v. Textron, Inc., No. 07-2631 (1st Cir. Aug. 13, 2009) (en banc). The majority stated:
Textron apparently thinks it is "unfair" for the government to have access to its spreadsheets, but tax collection is not a game. Underpaying taxes threatens the essential public interest in revenue collection. If a blueprint to Textron's possible improper deductions can be found in Textron's files, it is properly available to the government unless privileged. Virtually all discovery against a party aims at securing information that may assist an opponent in uncovering the truth. Unprivileged IRS information is equally subject to discovery.
The practical problems confronting the IRS in discovering under-reporting of corporate taxes, which is likely endemic, are serious. Textron's return is massive--constituting more than 4,000 pages--and the IRS requested the work papers only after finding a specific type of transaction that had been shown to be abused by taxpayers. It is because the collection of revenues is essential to government that administrative discovery, along with many other comparatively unusual tools, are furnished to the IRS. ...
To sum up, the work product privilege is aimed at protecting work done for litigation, not in preparing financial statements. Textron's work papers were prepared to support financial filings and gain auditor approval; the compulsion of the securities laws and auditing requirements assure that they will be carefully prepared, in their present form, even though not protected; and IRS access serves the legitimate, and important, function of detecting and disallowing abusive tax shelters.
In a vigorous dissent, Judges Juan Torruella and Kermit Lipez criticized the majority:
In straining to craft a rule favorable to the IRS as a matter of tax law, the majority has thrown the law of work-product protection into disarray. Circuits have already split interpreting the meaning of "anticipation of litigation," between the "primary purpose" and "because of" tests. Now this court has proceeded to further the split by purporting to apply the "because of" test while rejecting that test's protection for dual purpose documents. In reality, the majority applied a new test that requires that documents be actually "prepared for" use in litigation. The time is ripe for the Supreme Court to intervene and set the circuits straight on this issue which is essential to the daily practice of litigators across the country.
Press and blogosphere coverage:
Prior TaxProf Blog coverage:
- Ventry: Regions Bank Settles Dispute Over IRS Access to Tax Workpapers (6/7/09)
- NLJ on Yesterday's 1st Circuit Oral Argument in Textron Tax Accrual Work Papers Case (6/3/09)
- Today's En Banc 1st Circuit Oral Argument in Textron Tax Accrual Work Papers Case (6/2/09)
- Ventry: A Primer on Tax Work Product for Federal Courts (5/19/09)
- 1st Circuit Orders Rehearing En Banc in Textron Tax Accrual Work Papers Case (3/25/09)
- Commentary on Textron Tax Accrual Work Papers Case (1/23/09)
- Ventry: Textron Deals Blow to IRS's Anti-Tax Shelter Efforts (1/22/09)
- NLJ: Corporate Counsel Fight IRS in Key Work Product Protection Case (4/14/08)
- WSJ: Textron Battles DOJ on Access to Work Papers in SILO Tax Shelter Case (6/20/06)