District Court Denies IRS Access to Work Papers in SILO Case

IRS Is Denied Work Papers Of Textron in Pivotal Case, by Jesse Drucker:

The IRS lost a closely watched legal battle when a federal judge in Rhode Island ruled yesterday that the government didn't have a right to internal tax documents belonging to aerospace and defense contractor Textron Inc. The IRS and Justice Department had been trying to obtain tax-accrual work papers belonging to Textron. Such papers generally include legal analysis of transactions that could be challenged by the IRS. If companies think there is a chance the IRS might disallow a tax benefit, they set aside -- or accrue -- a portion of the expected savings. Those papers also could include analysis by lawyers of the transaction's legal weaknesses, and have been called the blueprint for complicated tax transactions. ...

Communications between lawyers and their clients generally are exempt from scrutiny by adversaries. The IRS had argued it had legal precedent on its side, stemming from a 1984 Supreme Court case that ruled the IRS had a right to tax-accrual documents. However, U.S. District Court Judge Ernest C. Torres denied the government's petition to enforce an IRS summons, writing that papers were protected by "work product" privilege, as "the work papers were prepared 'because of' anticipated litigation with the IRS."

He wrote: "[F]orced disclosure of those opinions would put Textron at an unfair disadvantage in any dispute that might arise with the IRS, just as requiring the IRS to disclose the opinions of its counsel regarding areas of uncertainty in the law or the likely outcome of any litigation with Textron would place the IRS at an unfair disadvantage."

United States v. Textron, Inc. & Subsidiaries, No. 06-198T (D.C. R.I. 8/29/07).