The business and legal communities, concerned about the erosion of the attorney-client privilege in corporate investigations by federal prosecutors, face another privilege battlefront, one with potentially wide-ranging impact: attorney work-product demands in tax investigations. While the attorney-client privilege controversy plays out in the halls of the Department of Justice and Congress, the work-product fight is now taking clear shape in the federal courts.
The 1st U.S. Circuit Court of Appeals has set a Sept. 5 date for arguments in the closely watched U.S. v. Textron Inc., No. 07-2631, and the government has filed its notice of appeal to the 11th Circuit in a similar tax case, Regions Financial Corp. v. U.S., No. 2:06-CV-00895 (N.D. Ala. 2008).
In each case, a federal trial judge, relying on the work-product doctrine, rejected the IRS's demand for the company's so-called tax accrual workpapers. Such workpapers are prepared with the assistance of in-house and external counsel and relied upon by independent auditors to determine the accuracy of financial statements.
As in the Textron and Regions cases, those workpapers often contain legal analyses and evaluations of potential litigation risks associated with particular tax transactions.
The two key issues facing the circuits in this controversy are whether the workpapers are protected work product and, if they are, whether that protection is waived when a company shares the workpapers with its auditors.