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In a 3-2 decision, 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 from IRS summons the tax accrual workpapers of aviation and industrial conglomerate Textron Inc.


Judge Michael Boudin, writing for the majority, said that because the documents sought were prepared not for litigation but for financial reporting, the work product privilege did not prevent their discovery by the IRS, even though they contemplated the possibility of litigation. 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 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 en banc.


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 full 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.


  U.S. v. Textron , No. 07-2631 (1st Cir., Aug. 13, 2009).




The IRS requested public comment on proposed regulations issued earlier on allocation of gain or loss in partnership mergers.


In Notice 2009-70, the IRS asked for general observations and posed particular questions to guide further study the Service and Treasury Department will undertake before finalizing regulations proposed in 2007 (REG-143397-05). The rules would address implications for partnership mergers under IRC § 704(c), which was enacted in the 1980s to prevent artificial shifting among partners of tax consequences arising from built-in gain or loss of contributed property upon the property’s disposition.


Section 704(c)(1)(A) requires income, gain, loss and deductions arising from property contributed to a partnership by a partner to be shared among the partners in a way that takes into account the difference between the property’s basis to the partnership and its fair market value at the time of the contribution. Subparagraph (B) provides that for such property distributed by the partnership within seven years of its contribution and then sold, the contributing partner is treated as recognizing gain or loss in an amount that would have been allocated to that partner under subparagraph (A) if the property had been sold for its fair market value at the time of distribution.


The proposed regulations raised further questions, however, of the treatment of layers of forward and reverse section 704(c) gain and loss, especially within tiered partnerships. Consequently, the Service in the notice posed 19 questions concerning the regulations’ application to single partnerships and layered tiers of partnerships, as well as divisions, further implications of mergers and international issues. It also invited comments on any other aspects of the issues not included in the questions.


Comments may be submitted by Feb. 22, 2010, by mail to Internal Revenue Service, P.O. Box 7604, Washington, DC 20044, Attn: CC:PA:LPD:PR (Notice 2009-70), Room 5203 or by e-mail to with “Notice 2009-70” in the subject line.



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