First Circuit Denies Textron Work Product Privilege

In a 3-2 decision Thursday, the First Circuit Court of Appeals overturned its earlier three-judge ruling and a district court to hold that the work product doctrine did not protect tax accrual workpapers of aviation and industrial conglomerate Textron Inc. from IRS summons.


Judge Michael Boudin, writing for the majority, said that because the documents sought were prepared not for litigation but for a statutorily required purpose of financial reporting, the work product privilege did not prevent their discovery by the IRS, even though they contemplated the possibility of litigation. A lengthy dissent by Judge Juan R. Torruella said such dual-purpose documents can be covered by the privilege.


The work product doctrine is intended to curb “the extent to which a party may inquire into oral and written statements of witnesses, or other information, secured by an adverse party’s counsel in the course of preparation for possible litigation after a claim has arisen,” the court said, quoting the 1947 U.S. Supreme Court case of Hickman v. Taylor (329 U.S. 495). Federal Rule of Civil Procedure 26(b)(3) applies it to items “prepared in anticipation of litigation or for trial.”


Textron acknowledged at trial that the documents’ primary purpose was to support its reserve amounts for contingent tax liabilities but argued that they also analyzed the prospects for litigation over individual tax positions. The District Court for the District of Rhode Island sided with the company although it denied attorney-client or tax practitioner privilege, saying Textron waived them by showing the documents to its outside accountants. The IRS appealed.


In January 2009, a divided First Circuit panel upheld the district court, and the IRS obtained a hearing by the full court, with oral arguments heard in early June.


The privilege does not extend to documents “prepared in the ordinary course of business or that would have been created in essentially similar form irrespective of the litigation,” the court said, quoting, indirectly, U.S. v. Adlman (134 F.3d 1194 (2nd Cir. 1998)). It is “well established in case law” that litigation need not be a document’s sole purpose, but it must be more than a hypothetical purpose, the court said.


“No one with experience of law suits would talk about tax accrual work papers in those terms,” the court said.


Torruella, the dissenting judge, said he would. The majority opinion ignored a central holding of Adlman, its broader test that a document be prepared “because of” the prospect of litigation—one, moreover, that the First Circuit had adopted in Maine v. U.S. Department of the Interior, 298 F.3d 60 (1st Cir. 2002), he said.


“The time is ripe for the Supreme Court to intervene and set the circuits straight,” Torruella wrote.



Year-end tax planning and what’s new for 2016

Practitioners need to consider several tax planning opportunities to review with their clients before the end of the year. This report offers strategies for individuals and businesses, as well as recent federal tax law changes affecting this year’s tax returns.


News quiz: Retirement planning, tax practice, and fraud risk

Recent reports focused on a survey that gauges the worries about retirement among CPA financial planners’ clients, a suit that affects tax practitioners, and a guide that offers advice on fraud risk. See how much you know with this short quiz.


Bolster your data defenses

As you weather the dog days of summer, it’s a good time to make sure your cybersecurity structure can stand up to the heat of external and internal threats. Here are six steps to help shore up your systems.