Are Tax Accrual Work Papers Ever Protected by the Attorney-Client Privilege or the Work Product Doctrine?

October 24, 2007

Courts frequently have trouble determining if the attorney-client privilege or the work product doctrine protects documents such as tax accrual work papers. Such documents clearly serve a business function, so the question is whether the legal or litigation aspects outweigh the business use.

In United States v. Textron Inc., C.A. No. 06-198T, 2007 U.S. Dist. LEXIS 63921 (D.R.I. Aug. 8, 2007), the IRS sought Textron’s tax accrual work papers. The work papers listed tax return items that the IRS might challenge, Textron’s lawyers’ percentage estimate of Textron’s odds of success, and the dollar amount to be reserved for that issue. Although originally prepared by Textron’s accountants, the final documents reflected Textron’s lawyers’ changes. The court found that the attorney-client privilege protected the work papers, because they “essentially consist of nothing more than counsel’s opinions regarding items that might be challenged because they involve areas in which the law is uncertain.” Id. at *18. The court also found that the work product doctrine applied, because the documents “would not have been prepared at all ‘but for’ the fact that Textron anticipated the possibility of litigation with the IRS.” Id. at *27. The court noted that the IRS had formally challenged “unagreed” issues in seven out of eight of Textron’s previous audit cycles, and that three of the issues resulted in litigation. Id. at *28.

Not every court would be this generous, but the Textron case provides a useful roadmap for companies seeking both protections.