WASHINGTON — Corporate counsel and business organizations have jumped back into the fray over whether a company’s so-called tax accrual work papers, prepared with the assistance of in-house and external counsel, are protected work product.
The U.S. Chamber of Commerce and the Association of Corporate Counsel (ACC) recently filed an amicus brief supporting Textron Inc. in its ongoing legal battle with the Internal Revenue Service now before the en banc 1st U.S. Circuit Court of Appeals.
In late March, the 1st Circuit withdrew a Jan. 21 panel decision in U.S. v. Textron Inc., which held that tax accrual workpapers are protected from discovery by the work-product privilege. The panel, however, remanded the case to the district court to determine whether the privilege here had been waived by disclosure of the work papers to the company’s independent auditor, Ernst & Young.
After withdrawing the panel decision, the 1st Circuit vacated the judgment and granted the government’s petition for rehearing en banc.
Arguments are scheduled for June 2.
A company’s tax accrual workpapers are relied upon by independent auditors to determine the accuracy of financial statements. As with Textron, those workpapers often contain legal analyses and evaluations of potential litigation risks associated with particular tax transactions.
In the Textron decision on Jan. 21, the 2-1 panel majority rejected the IRS’ argument “that tax accrual workpapers are prepared in the ordinary course of a public company’s business in order to comply with federal securities laws, not because of litigation.”
The court said one of the purposes behind creation of the documents here was anticipation of litigation.
“We reject the IRS’s contention that the mere presence of a business or regulatory purpose defeats work-product protection,” the majority said. “But, it is also true that `[d]ual purpose’ documents created because of the prospect of litigation are protected even though they were also prepared for a business purpose.”
In their amicus brief before the en banc court, the Chamber and the ACC, represented by Robert Malionek, partner in New York’s Latham & Watkins, said: “Given the complexity and multi-faceted nature of the challenges facing modern companies, those companies must be able to rely upon counsel to evaluate these issues from all angles — ensuring corporate compliance with law while considering practical business implications of various courses of action — and the ability of attorneys to conduct these evaluations fully depends upon the certainty that the clients’ adversaries will not have carte blanche access to the evaluations, as the IRS suggests that they should.”
