Textron: a still uncertain future for tax accrual workpapers.

• Author: Hodes, Rochelle L.

In 1984, the IRS announced that it would not request tax accrual workpapers from taxpayers during an examination except in unusual circumstances (referred to as the "policy of restraint") (Announcement 84-46). In 2002, the IRS identified listed transactions as an unusual circumstance warranting an exception to its policy of restraint and began routinely requesting tax accrual workpapers when it believed the taxpayer had participated in a listed transaction (Announcement 2002-63; see also Internal Revenue Manual Section 4.10.20.3).

Since then, taxpayers have challenged IRS requests for tax accrual workpapers, claiming various protections against disclosure, including protection under the work-product doctrine. A significant case focusing on application of the work-product doctrine to tax accrual workpapers is Textron Inc., 507 F. Supp. 2d 138 (D.R.I. 2007). As litigation on this question enters its fourth year, it remains unclear to what extent the work-product doctrine protects tax accrual workpapers and how to effectively invoke that protection.

Request for Tax Accrual Workpapers

During an examination, the IRS determined that a Textron subsidiary participated in several sale-in, lease-out (SILO) listed transactions described in Notice 2005-13, 2005-1 C.B. 630, and requested Textron's tax accrual workpapers. When Textron refused to produce the documents, the government issued a summons and subsequently sought to enforce the summons. The lower court found that Textron's tax accrual workpapers for the year in question consisted entirely of a spreadsheet listing items on the return that Textron's counsel believed might be challenged by the IRS, counsel's estimate of the percentage likelihood of prevailing, and the dollar amount of financial statement reserves to reflect the possibility of not prevailing, along with backup workpapers for the spreadsheet.

Textron challenged the IRS request to produce these documents, claiming that they are protected by the work-product doctrine. The taxpayer also claimed that the attorney-client privilege applied. The lower court held and the appellate court affirmed that although the attorney-client privilege applied in this case, it was waived. Waiver of attorney-client privilege is not determinative with respect to waiver of work-product protection. The lower court agreed with Textron that the tax accrual workpapers in question were created in anticipation of litigation and that, as a result, the work-product...