Thursday, March 26, 2009

Is the First Circuit Backing Off its Taxpayer-Friendly Stance

Workpapers Privileged Ren't They–

Back in January, the First Circuit Court of Appeals dealt the IRS a blow when it decided that Textron did not have to disclose documents it used to calculate its tax reserve. Now, the Appeals Court has agreed to rehear the issue.

The IRS had subpoenaed the documents because it discovered that Textron had participated in several Sale in/Lease out (SILO) transactions. The documents listed the various controversial positions that the company had taken on its tax returns and calculated the amount of additional tax that would result if the positions were disallowed after an audit and/or litigation. The documents also rated the different positions’ likelihood of success (that would tell a litigator which positions to give up on and which positions to hold on to when negotiating a settlement).

Despite establishing its case for enforcing the summonses, the IRS was denied access to the corporation's tax accrual work papers because they were protected by the work product privilege. The First Circuit concluded that documents prepared for alternative dispute resolution purposes (such as an audit or administrative appeal) could qualify for the work product privilege because they were prepared “because of litigation” and the company’s use of the documents for other purposes did not vitiate the privilege. However, since the company had shown the documents to its outside auditor, the case was remanded to see if the auditor’s work papers could be obtained and if those documents would disclose the company’s tax accrual positions.

The District Court had found that disclosing the documents to an outside auditor did not vitiate the privilege either, since it did not make their disclosure to the IRS more likely. However, some would argue that any disclosure would vitiate the privilege – More to come-

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