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United States v. Textron Inc.

United States District Court for the District of Rhode Island

August 28, 2007, Decided; August 29, 2007, Filed

C.A. No. 06-198T



Pursuant to 26 U.S.C. §§ 7402(b) and 7604, the United States has filed a petition to enforce an Internal Revenue Service (IRS) summons served on Textron Inc. and its subsidiaries ("Textron") in connection with the IRS's examination of Textron's tax liability for tax years 1998-2001. The summons seeks Textron's "tax accrual workpapers" for its 2001 tax year. Textron has refused to produce the requested documents on the grounds that (1) the summons was not issued for a legitimate purpose and (2) the tax accrual workpapers are privileged.

Because this Court finds that the requested documents are protected by the work product privilege, the petition for enforcement is denied.


Based  [**2] on the pleadings, affidavits submitted by the parties, and the evidence presented at a hearing conducted on June 26, 2007, this Court finds the relevant facts to be as follows.

Textron, Inc. is a publicly traded conglomerate with approximately 190 subsidiaries. One of its subsidiaries is Textron Financial Corporation (TFC), a company that provides commercial lending and financial services. In 2001 and 2002, Textron had six tax attorneys and a number of CPAs in its tax department but TFC's tax department consisted only of CPAs. Consequently, TFC relied on attorneys in Textron's tax department, private law firms, and outside accounting firms for additional assistance and advice regarding tax matters.

Like other large corporations, Textron's federal tax returns are audited periodically at which time the IRS examines the returns for the tax years that are part of the audit cycle. In conducting its audits, the IRS, typically, gathers relevant information by issuing "information document requests" (IDRs) to the taxpayer. If the IRS disagrees with a position taken by the taxpayer on its return, the IRS issues a Notice of Proposed Adjustments to the taxpayer. A taxpayer that disputes the proposed  [**3] adjustments has several options to resolve the dispute within the agency. Those options range from an informal conference with the IRS team manager to a formal appeal to the IRS Appeals Board. If the dispute is not resolved within the agency, the taxpayer may file suit in federal court. In seven of its past eight audit cycles covering the period between 1980  [*142]  and the present, Textron appealed disputed matters to the IRS Appeals Board; and three of these disputes resulted in litigation. 1

During the 1998-2001 audit cycle, the IRS learned, from examining Textron's 2001 return, that TFC had engaged in nine "sale-in, lease-out" (SILO) transactions involving telecommunications equipment and rail equipment. The IRS has classified such transactions as "listed transactions" because it considers them to be of a type engaged in for the purpose of tax avoidance.  [**4] See 26 C.F.R. § 1.6011-4(b)(2). The IRS issued more than 500 IDRs in connection with the 1998-2001 audit cycle, and Textron complied with all of them, except for the ones seeking its "tax accrual workpapers."

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507 F. Supp. 2d 138 *; 2007 U.S. Dist. LEXIS 63921 **; 2007-2 U.S. Tax Cas. (CCH) P50,605; 100 A.F.T.R.2d (RIA) 2007-5848


Subsequent History: Affirmed in part and vacated in part by, Remanded by United States v. Textron, Inc., 553 F.3d 87, 2009 U.S. App. LEXIS 1538 (1st Cir. R.I., 2009)

Vacated by, Remanded by, En banc United States v. Textron Inc., 577 F.3d 21, 2009 U.S. App. LEXIS 18103 (1st Cir. R.I., Aug. 13, 2009)

Disposition:  The government's petition to enforce the summons was denied.


workpapers, auditor, summons, accrual, disclosure, attorney-client, waived, audit, advice, confidential, practitioner, anticipated, shelter, contingent, spreadsheet, hazards, subsidiaries, work-product, cycle

Tax Law, Audits & Investigations, Administrative Summons, Enforcement, General Overview, Evidence, Burdens of Proof, Burden Shifting, Allocation, Federal Tax Administration & Procedures, Administrative Law, Agency Investigations, Civil Procedure, Discovery, Privileged Communications, Attorney-Client Privilege, Work Product Doctrine, Scope of Protection, Opinion Work Product, Waiver of Protections