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WASHINGTON — The Association of Corporate Counsel and the U.S. Chamber of Commerce have joined an aerospace defense company in its court fight with the Internal Revenue Service in a closely watched tax case with work product protection at its core. U.S. v. Textron, pending in the 1st U.S. Circuit Court of Appeals, concerns the enforcement of an IRS summons seeking production of Textron’s tax accrual work papers. A federal district court last August held that the Rhode Island-based company’s workpapers were protected by the work product protection and it refused to enforce the summons. The Textron case, according to some tax practitioners, is the first test of the IRS’ new and more aggressive position on requests for tax accrual workpapers. Textron’s tax accrual workpapers consisted of a spreadsheet that listed items on the company’s tax returns which its in-house counsel believed might raises issues on which the tax laws were unclear and could be challenged by the IRS. The papers also contained estimates by counsel, in percentage terms, of Textron’s chances of prevailing in litigation over any of the issues as well as dollar amounts reserved for the possibility that Textron might lose in any litigation. Textron is considered a “large case taxpayer” and its tax returns are audited routinely by the IRS. Previous audits resulted in disagreements that ended in litigation. In the audit involved in the 1st Circuit case, the IRS issued the summons for the tax accrual workpapers after questioning a number of transactions. Textron challenged the summons, arguing it was issued for an improper purpose — to gain leverage in settlement negotiations — and that its workpapers were protected by the attorney-client and tax practitioner privileges as well as by work product protection. Although the district court agreed with Textron that the papers were protected by the attorney-client and tax practitioner privileges, it held that the company waived those privileges when it gave those papers to a third party — its auditors. But the court held that the work product protection was not waived. 507 F. Supp.2d 138 (D.R.I. 2007). The Chamber and the ACC recently filed an amicus brief supporting Textron in the government’s appeal. “Courts must send a clear message to corporations that healthy cooperation and dialogue with auditors in pursuit of financial fitness and integrity will not work against the company’s long term interests or require the sacrifice of the company’s rights to confidential counsel and legal advice,” said Susan Hackett, ACC senior vice president and general counsel. For nearly 20 years, the IRS exercised a policy of restraint under which it would not request tax accrual workpapers without some unusual circumstance. The policy reflected concerns that unlimited access by the IRS to those papers would affect adversely accurate financial statements. But in 2002, the IRS announced a new policy requiring its examiners to request the workpapers for any listed transaction claimed on a tax return. Hackett said ACC and the Chamber argue in their brief that the workpapers fall under work product protection and the attorney-client privilege.

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