IRS defeats Textron over accrual work papers

By a 3-2 majority, the US Court of Appeals for the First Circuit ruled on Thursday that the Internal Revenue Service (IRS) can see tax accrual work papers prepared by Textron, an aerospace and defence company, to back up calculations made for its audited financial statements...
IRS defeats Textron over tax accrual work papers
International Tax Review

By a 3-2 majority, the US Court of Appeals for the First Circuit ruled on Thursday that the Internal Revenue Service (IRS) can see tax accrual work papers prepared by Textron, an aerospace and defence company, to back up calculations made for its audited financial statements.

The IRS had appealed a district court judgement, confirmed subsequently by the first circuit, that the papers, which related to sale-in lease-out (Silo) transactions, were privileged. The US tax authorities consider Silo transactions to be potential abusive tax shelters. Textron argued the papers had been prepared in case there was litigation and so qualified for attorney-client privilege.

"The work product privilege is aimed at protecting work done for litigation, not in preparing financial statements," Judge Michael Boudin wrote, in the majority opinion. "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."

Judge Juan Torruella, who dissented along with Judge Kermit Lipez, wrote: "This court should accept the district court's factual conclusion that Textron created these documents for the purpose of assessing its chances of prevailing in potential litigation over its tax return in order to assess risks and reserve funds. Under these facts, work-product protection should apply."

The court remanded the case for further proceedings.

The majority came up with the right verdict, said Linda Beale, a professor at Wayne State University.

"This is an important decision and one that was correctly decided," she blogged at ataxingmatter. "It is time the courts recognized the boundaries to work-product protection. Tax accrual workpapers do not merit protection. Textron should hand over the workpapers and determine to engage in less aggressive tax planning in the future."

Adler Pollock & Sheehan and Steptoe & Johnson represented Textron.