In a decision that could have major implications for accountant work-product privileges, a federal appeals court has reversed a lower court decision and ordered aerospace and defense contractor Textron to hand over tax accrual work papers to the IRS as part of an investigation of tax shelters.

The U.S. Court of Appeals for the First Circuit in Boston reversed the lower district court in a 3-2 ruling. The IRS challenged nine sale-in-lease-out, or SILO, transactions, in which the company purchased equipment from a foreign utility or transit operator and then leased it back to the seller on the same day. The IRS considers SILO transactions to be “listed transactions,” akin to tax shelters. Textron had argued that the work papers were confidential and asserted the attorney-client work-product doctrine. It had shown the spreadsheets to its outside auditor, Ernst & Young, but refused to show them to the IRS.

“Textron apparently thinks it is ‘unfair’ for the government to have access to its spreadsheets, but tax collection is not a game,” said Circuit Judge Michael Boudin, writing for the majority. “Underpaying taxes threatens the essential public interest in revenue collection.”

He concluded, “The work-product privilege is aimed at protecting work done for litigation, not in preparing financial statements. 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.”

However, the dissenting opinion by Judges Juan Torruella and Kermit Victor Lipex took the opposite tack. “In straining to craft a rule favorable to the IRS as a matter of tax law, the majority has thrown the law of work-product protection into disarray,” they wrote.

They argued that the majority opinion had abandoned a “because of” test that depended on whether a document had been prepared or obtained because of the prospect of litigation. “The time is ripe for the Supreme Court to intervene and set the circuits straight on this issue which is essential to the daily practice of litigators across the country,” they wrote.


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