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United States Court of Appeals for the First Circuit
August 13, 2009, Decided
[*22] OPINION EN BANC
BOUDIN, Circuit Judge. The question for the en banc court is whether the attorney work product doctrine shields from an IRS summons "tax accrual work papers" prepared by lawyers and others in Textron's Tax Department to support Textron's calculation of tax reserves for its audited corporate financial statements. Textron is a major aerospace and defense conglomerate, with well over a hundred subsidiaries, whose consolidated tax return is audited by the IRS on a regular basis. To understand the dispute, some background is required concerning financial statements, contingent tax reserves and tax audit work papers.
] As a publicly traded corporation, Textron is required by federal securities law to have public financial statements certified by an independent auditor. See 15 U.S.C. §§ 78l, 78m (2006); 17 C.F.R. § 210 et seq. (2009). To prepare such financial statements, Textron must calculate reserves to be entered on the company books to account for contingent tax liabilities. Such liabilities, which affect the portrayal of assets and earnings, include estimates of potential liability if the IRS [*23] decides to challenge debatable positions [**3] taken by the taxpayer in its return.
The calculation of such reserves entails preparing work papers describing Textron's potential liabilities for further taxes; these underpin the tax reserve entries in its financial statement and explain the figures chosen to the independent auditor who certifies that statement as correct. By examining the work papers the accountant discharges its own duty to determine "the adequacy and reasonableness of the corporation's reserve account for contingent tax liabilities." United States v. Arthur Young & Co., 465 U.S. 805, 812, 104 S. Ct. 1495, 79 L. Ed. 2d 826 (1983) (rejecting claim of accountant work product privilege protecting such work papers). 1 The work papers are thus one step in a process whose outcome is a certified financial statement for the company.
In Textron's case, its [**4] Tax Department lists items in the tax return that, if identified and challenged by the IRS, could result in additional taxes being assessed. The final spreadsheets list each debatable item, including in each instance the dollar amount subject to possible dispute and a percentage estimate of the IRS' chances of success. Multiplying the amount by the percentage fixes the reserve entered on the books for that item. The spreadsheets reflecting these calculations may be supported by backup emails or notes.
Full case includes Shepard's, Headnotes, Legal Analytics from Lex Machina, and more.
577 F.3d 21 *; 2009 U.S. App. LEXIS 18103 **; 2009-2 U.S. Tax Cas. (CCH) P50,574; 104 A.F.T.R.2d (RIA) 2009-5719
UNITED STATES OF AMERICA, Petitioner, Appellant, v. TEXTRON INC. AND SUBSIDIARIES, Respondent, Appellee.
Subsequent History: As Amended August 24, 2009.
As Amended, September 14, 2009.
US Supreme Court certiorari denied by Textron Inc. v. United States, 560 U.S. 924, 130 S. Ct. 3320, 176 L. Ed. 2d 1219, 2010 U.S. LEXIS 4373 (U.S., May 24, 2010)
Prior History: [**1] APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF RHODE ISLAND. Hon. Ernest C. Torres, Senior U.S. District Judge.
United States v. Textron, Inc., 553 F.3d 87, 2009 U.S. App. LEXIS 1538 (1st Cir. R.I., 2009)United States v. Textron Inc., 507 F. Supp. 2d 138, 2007 U.S. Dist. LEXIS 63921 (D.R.I., 2007)
Disposition: The judgment of the district court was vacated and the case was remanded for further proceedings consistent with the decision.
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Securities Law, Recordkeeping & Reporting Requirements, Issuers of Securities, General Overview, Tax Law, Audits & Investigations, Administrative Summons, Enforcement, Federal Taxpayer Groups, Exempt Organizations, Examinations, Authority of Internal Revenue Officers, Civil Procedure, Privileged Communications, Work Product Doctrine, Scope of Protection, Discovery & Disclosure, Disclosure, Constitutional Law, Fundamental Rights, Procedural Due Process, Self-Incrimination Privilege