The decision in United States v. Textron gives taxpayers a boost in efforts to protect tax workpapers from an IRS summons, although the Service's Chief Counsel Donald Korb cautions the victory "may be short-lived." The U.S. District Court in Rhode Island said the work product privilege applied to the corporate conglomerate's workpapers even though the documents were previously disclosed to an independent auditor. The government also failed to show "substantial need" for the documents to defeat the work product privilege.
The IRS sought to enforce a summons issued pursuant to IRC [section] 7602 to force Textron to produce workpapers for an audit of the tax years 1998-2001. The audit focused on nine "sale-in, lease-out" (SILO) transactions, which the IRS has classified as listed transactions engaged in for the purpose of tax avoidance, pursuant to Treas. Reg. [section] 1.6011-4(b)(2). Textron argued, in part, that the information was privileged.
The workpapers contained the opinions of Textron's attorneys and accountants regarding the estimated hazards of litigation percentages and their calculations of tax reserve amounts. The court concluded the workpapers were subject to the attorney-client privilege and the tax practitioner privilege of IRC [section] 7525(a)(1), but Textron waived those privileges when it disclosed the documents to an independent auditor, Ernst & Young. The court still denied the government's motion because the workpapers were protected by the work product privilege.
The workpapers fell within the work product rule described by the Supreme Court in Hickman v. Taylor, 329 U.S. 495 (1947), and codified in Federal Rule of Civil Procedure 26(b)(3). The court said the materials contained the "mental impressions, conclusions, opinions, or legal theories of an attorney or other representative of a party concerning the litigation," and the materials were created "because of" anticipated litigation...