Textron Ruling Issued Relating To Tax Accrual Workpapers

Textron Ruling Issued Relating To Tax Accrual Workpapers
Jan. 22, 2009
FEI Summary

On Jan. 21, 2009 the U.S. Circuit Court of Appeals for the First Circuit issued its ruling in the Textron case.  (See U.S. v Textron Inc. 07-2631 (pdf); a copy can also be obtained on the First Circuit’s Web site http://www.ca1.uscourts.gov/).

The Textron case concerns attorney-client, tax practitioner-client and work product privileges with regard to tax-accrual workpapers. It also addresses when those privileges could be waived or overcome.

As shown in the court opinion, FEI had filed an amicus curiae brief in support of Textron. The petition was jointly filed by FEI's Committee on Taxation (COT) and Committee on Corporate Reporting (CCR) and prepared by the law firm Miller and Chevalier.

Matt Miller, FEI’s director of Tax and Economic Policy, explained the crux of the First Circuit Court’s ruling: “The majority ruling affirmed the District Court’s holding that Textron’s internal tax accrual work papers are privileged material, but it vacated the determination that work-product protection was not waived, and remanded to a lower court to reconsider whether the IRS can force Textron to turn over documents prepared by the company’s auditors, Ernst & Young LLP.

“This is an important case and we are pleased that the majority of the court sustained Textron’s position that the IRS is not entitled to their tax accrual work papers,” said Miller. He added, “It is critical that taxpayers maintain their ability to prepare the most accurate possible financial statements while still retaining work-product protection against disclosure of the mental impressions of their attorneys in potential litigation against the IRS.”

The First Circuit Court of Appeals also ordered the lower court to reconsider whether the IRS can force Textron to turn over documents prepared by their auditors.

FEI's Miller emphasized, “This issue is an important one for FEI’s membership. As our amicus brief stated, ‘Disclosure of work product to an independent auditor does not waive work product protection because the disclosure is not inconsistent with keeping the material from an adversary.’ The auditor and the company are working toward the shared goal of presenting accurate financial statements to the investing public, and these statements are unquestionably prepared 'because of' potential litigation.”  

See also this Miller and Chevalier Tax Controversy Alert, published on Jan. 22, "Textron Appeal --A Significant, But Incomplete, Taxpayer Victory." 

For further information about FEI's Committee on Taxation, contact Matt Miller at mmiller@financialexecutives.org or 202.626-.804.