• Textron En Banc Reversal
  • September 4, 2009
  • Law Firm: Blank Rome LLP - Office
  • En banc First Circuit reverses panel decision in Textron holding 3-2 that “work product privilege does not apply” to tax accrual workpapers. 1 The Court’s decision may be read narrowly to apply to tax workpapers both relating to tax shelters and prepared under “compulsion of the securities laws and auditing requirements.”

    Executive Summary and Observations

    • This victory will likely embolden the IRS to compel taxpayers to produce workpapers that have been prepared in order to issue financial statements—even if those workpapers may also have been prepared in anticipation of litigation. Considering the trend of expanding financial statement disclosures—most recently with the adoption of Financial Account Standards Board Interpretation (FIN) 48, Accounting for Uncertain Tax Positions (FIN 48)—it is critical for taxpayers and their attorneys to understand the boundaries of the work product privilege. For this reason and the fact that contrary precedent currently exists in the Eleventh Circuit 2, the Supreme Court of the United States may decide to definitively resolve this issue in the near future.
    • The en banc First Circuit was sharply divided (3-2). The vigorous dissent charts the course for a petition for a writ of certiorari to the Supreme Court of the United States.
    • The en banc reversal of the prior panel decision should cause taxpayers to pay even stricter attention to the manner in which they prepare their FIN 48 workpapers. As the dissent points out, the en banc First Circuit seems to have been bothered that the workpapers at issue related to tax shelters. For this reason, the decision may be read narrowly thus limiting its impact.


    On January 21, 2009, Judge Torruella authored a panel decision holding that Textron had prepared its tax accrual workpapers in anticipation of litigation. As a result, the tax workpapers were protected attorney work product which the IRS was precluded from compelling Textron to produce in the course of its audit.

    On June 3, 2009, Textron and the government presented oral argument to the en banc First Circuit. On August 13, 2009, the en banc majority reversed the earlier panel decision finding that that “there is no evidence in this case that the work papers were prepared for such a use [anticipation of litigation] or would in fact serve any useful purpose for Textron in conducting litigation if it arose.”

    Writing for the en banc majority, Judge Boudin noted that “how far work product protection extends turns on a balancing of policy concerns rather than application of abstract logic.” Judge Boudin concluded that “the Textron work papers were independently required by statutory and audit requirements and that the work product privilege does not apply.” The majority further noted that Textron’s tax accrual workpapers were prepared so that it could “obtain a clean audit.” Tracing the history of attorney work product protection, the majority found that a “set of tax reserve figures, calculated for purposes of accurately stating a company’s financial figures, has in ordinary parlance only that purpose: to support a financial statement and the independent audit.” (emphasis added). For these reasons, the majority determined that the tax workpapers were not protected because the work product “privilege [was not] designed to help the lawyer prepare corporate documents or other materials prepared in the ordinary course of business.”

    These statements of the majority properly acknowledge that Textron’s tax workpapers were indeed required for a purpose independent of anticipated litigation. They, however, overlook that the workpapers may have served the dual purpose of being prepared in anticipation of litigation.

    Further, the majority found that “Textron’s work papers were prepared to support financial filings and gain auditor approval; the compulsion of the securities laws and auditing requirements assure that they will be carefully prepared, in their present form, even though not protected; and IRS access serves the legitimate, and important, function of detecting and disallowing abusive tax shelters.” By mentioning tax shelters the majority demonstrates its distaste for tax abuses and suggests that this distaste may have unduly influenced its decision. For the court to resolve such a critical legal principle based on perceived taxpayer malfeasance for which no record support exists, however, leads it into the proverbial trap of allowing bad facts to create bad law. In the words of the dissent, “[s]uch outcome determinative reasoning is plainly unacceptable.”

    Judge Torruella’s dissent is poignant and acrid. More importantly, however, it provides a valuable outline for a petition for writ of certiorari should one be filed.

    1. United States v. Textron, Inc. and Subsidiaries, No. 07-2631 (1st Cir. Aug. 13, 2009) (en banc).
    2. Regions Financial Corp. v. United States, Case. No. 2:06-CV-00895-RDP (N.D. Al. May 8, 2008).