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"Sometimes they're dealing with tax issues where there are two sides to the coin, and I can come up with a lot of good reasons why the taxpayer is right on the position they've taken," he says. "But I also have an obligation to tell them the weaknesses in their position--and you'd hate to get into a situation where someday, somebody from either the state taxing authority or the IRS comes up with a document where you've taken such an even-handed approach and uses it against your client."

Tax accrual workpapers--the documents at the center of Textron--lay out just such analyses. Public companies (and non-profits subject to Generally Accepted Accounting Principles, or GAAP) must comply with Financial Accounting Standards Board (FASB) Interpretation No. 48, or FIN 48, the standard for calculating the reserves companies set aside for uncertain tax positions. The tax accrual workpapers underlie such disclosures.

In 2007, the U.S. District Court for the District of Rhode Island found that Textron's workpapers were protected by work-product privilege and the company was not obligated to turn them over. The IRS appealed to the 1st Circuit, which in January 2009 upheld the district court decision. However, the en banc panel in August went the other way.

Its analysis focused on whether the documents were subject to work-product protection, which protects documents prepared in anticipation of litigation. The question became why the workpapers had been created in the first place.

Detractors say the ruling changes the test for determining work-product, ignores decades of precedent and creates a circuit split. In his dissent, Judge Torruella, joined by Judge Kermit Lipez, wrote that the majority was abandoning the correct "because of" test, instead creating a new "prepared for" test that "is not even a good rule."

Torruella continues, "In straining to craft a rule favorable to the IRS as a matter of tax law, the majority has thrown the law of work-product protection into disarray."

Associate Editor

Melissa Maleske

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