Tax accrual workpapers not protected by work-product privilege.

• Author: Beavers, James

Sitting en banc, the First Circuit reversed the ruling of a panel of the court and held that a corporation's tax accrual workpapers were not protected from an IRS summons by the work-product privilege.

Background

In the course of an audit of the 19982001 tax returns of Textron, Inc., a major aerospace and defense conglomerate, the IRS issued an administrative summons for Textron's tax accrual workpapers. These workpapers are spreadsheets prepared by persons (some of whom were lawyers) in Textron's tax department to support Textron's calculation of its tax reserves for its audited financial statements. The IRS sought the workpapers because it had identified from Textron's 2001 return nine sale-in, lease-out (SILO) transactions that Textron Financial Corp., a Textron subsidiary, had engaged in that the IRS believed were listed transactions. Textron refused to produce the workpapers, and the IRS sought an order in district court to enforce the summons.

The Work-Product Doctrine

The work-product doctrine, which was originally articulated by the Supreme Court in Hickman v. Taylor, 329 U.S. 495 (1947), was codified for the federal courts in the Federal Rules of Civil Procedure. Fed. R. Civ. P. 26(b)(3) provides that

a party may obtain discovery of documents and tangible things otherwise discoverable ... and prepared in anticipation of litigation or for trial by or for another party or by or for that other party's representative (including the other party's attorney, consultant, surety, indemnitor, insurer, or agent) only upon a showing that the party seeking discovery has substantial need of the materials in the preparation of the party's case and that the party is unable without undue hardship to obtain the substantial equivalent of the materials by other means. The question of when the doctrine is applicable (i.e., when documents have been "prepared in anticipation of litigation or for trial") has been the source of considerable litigation. Two competing tests for determining when a document was prepared in anticipation of litigation have arisen. Under the "primary purpose" test, a document is privileged only if the primary purpose for producing the document was to aid in possible future litigation. Under the "because of" test, a document is privileged if it is produced because of the prospect of litigation. The tests can produce different results in the case of documents that were created partially for business purposes and partially for...