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3-2 En Banc First Circuit Decision In Textron Rules That Tax Accrual Workpapers Are Not Protected Work Product.

Article Excerpt
The U.S. Supreme Court may be inclined to grant certiorari to resolve the split in the circuits and address the broad ramifications of the First Circuit's decision, including state and local implications.

On August 13, 2009, a divided U.S. Court of Appeals for the First Circuit ruled that Textron's tax accrual workpapers were "independently required by statutory and audit requirements and that the work product privilege does not apply." United States v. Textron Inc. et al., No. 07-2631 (1st Cir. Aug. 13, 2009). The majority opinion and the dissent of Judge Torruella can be found here.

Background regarding the dispute over tax accrual workpapers and the history of the Textron litigation can be found in a prior McDermott On the Subject, "Textron Decision Deems Tax Accrual Workpapers Protected Work-Product." In short, the Internal Revenue Service (IRS) issued an administrative summons to Textron pursuant to I.R.C. s. 7602 seeking tax accrual workpapers in the actual or constructive possession, custody or control of Textron or its accountants for Textron's 2001 tax returns. The workpapers at issue included summary spreadsheets showing for each disputable item the amount in controversy, estimated probability of a successful challenge by the IRS, and resulting reserve amounts, as well as back-up e-mail and notes. Textron refused to comply and asserted, among other defenses, that the tax-accrual workpapers sought were protected by the work product doctrine because the documents were prepared in anticipation of litigation, i.e., in preparation for a tax dispute with the IRS. The IRS sued to enforce the summons.

In August 2007, the U.S. District Court for the District of Rhode Island refused to enforce the summons holding that the workpapers at issue were protected work product. In January 2009, a panel of the First Circuit affirmed. In a split decision, the panel agreed that one of the purposes behind the creation of the tax-accrual workpapers was the anticipation of litigation: "the need to estimate the likelihood of success in litigation was a result of the need to set up a reserve fund to cover tax positions for...

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