In connection with the preparation of financial statements, corporations prepare tax accrual work papers, which reflect an assessment of the merits of tax positions the Internal Revenue Service might challenge in an audit. Such work papers are generally prepared by the company’s accounting staff, frequently with the assistance of internal and outside counsel. Over the past two years, this column has tracked the IRS’s attempts to compel one corporate taxpayer, Textron Inc., to disclose its tax accrual work papers in connection with an audit.1
After both the district court and a panel of the U.S. Court of Appeals for the First Circuit upheld Textron’s claim that the work papers were privileged under the attorney work product doctrine, an en banc panel of the First Circuit reversed course, dealing a blow to the ability of taxpayers to maintain the confidentiality of candid assessments of their chances of success in litigation with the IRS. As a strong dissenting opinion points out, the First Circuit’s en banc decision in Textron is at odds with the Second Circuit’s decision in United States v. Adlman,2 and has far-reaching implications.
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