Work Product Wars

The tax shelter battles fought in the first half of this decade have come and gone, and there's little doubt that the government won. But the Internal Revenue Service's (IRS) laser-like focus on shelters also left some unfinished business behind.

"When Congress took aim at tax shelters, the IRS moved from a policy under which it was very reluctant to request tax accrual work papers to one where auditors were expected to ask for work product whenever a taxpayer was involved in a suspicious transaction," says Kevin Kenworthy, a tax partner at Miller Chevalier.

For its part, the Textron court came out with a strong ruling supporting the "because of" test.

What is clear on close analysis, however, is that the supporting affidavits filed by the taxpayers in both cases were as critical to the favorable rulings as the tests that the court applied. And therein, perhaps, lies the most important lesson general counsel can glean from these cases.

The proposals have put in-house counsel in a dither. Many believe the changes would force them to reveal their litigation strategies to adversaries, intrude on attorney-client privilege and encourage lawsuits if predictions are wrong.

"FASB has walked right over attorney-client privilege and the work product doctrine in its pursuit of transparency," Walton says. "If the changes go through, they'll be a gold mine for opposing counsel."


Julius Melnitzer

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