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First Circuit reversal in Textron opens tax accrual workpapers to IRS

August 14, 2009

In a big-deal case for public companies, the First Circuit Court of Appeals ruled yesterday that running tax accrual workpapers through a law firm doesn't turn them into "work product" protected by attorney-client privilege. The First Circuit reversed a district court ruling that held that the workpapers were privileged.

It always seemed that this was a too-good-to-be-true result. It would have been great for corporate law firms, though, as they would have been participants in the annual financial statement audit revenue stream had the district court ruling stood:

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.


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.

The TaxProf has a roundup. Prior Tax Update coverage here.

Cite: United States v. Textron, Inc., No. 07-2631 (1st Cir. Aug. 13, 2009) (en banc).

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