The Supreme Court declined to hear Textron’s appeal in a key tax case, letting stand a lower court decision that allows the Internal Revenue Service to demand legal and tax work papers from companies.

The company had appealed a ruling by the First Circuit Court in the case (see Textron Case Endangers Tax Workpaper Protection). The IRS had requested tax accrual workpapers from the corporate jet manufacturer, including a spreadsheet compiled by its attorneys showing potential items of contention with the IRS and its chances of winning them. The company asserted a work product privilege and won two rulings against the IRS, including by a three-judge panel at the First Circuit Court. But when the full "en banc" court heard the appeal, it ruled in the IRS’s favor. The Supreme Court let that decision stand on Monday.

Supreme Court nominee Elena Kagan filed a brief as solicitor general in the case (see Kagan Filed Brief on Behalf of IRS in Textron Case).

Tax law partner John Barrie, an attorney at international law firm Bryan Cave LLP said the ruling “creates a mess in terms of the protection of documents and materials subject to litigation.” Despite the issue coming up in a tax case, the case has broader ramifications beyond tax work papers, he believes.

“This ruling potentially exposes the strategic thinking of a company and its counsel—related to the assessment of a litigation— whether tax-related or not,” he said. “If you know there’s only a 60-percent chance you’ll win a case, you don’t want opposing counsel to know that too. It’s like being told in advance that the pitcher’s throwing a curve ball that will break inside to the right.”

Barrie believes that corporate taxpayers need to be more careful what they put in writing if it is not specifically or solely for the purpose of preparing for trial – or in anticipation of a trial – because it could be subject to discovery. That could cause internal tension, with outside independent accountants wanting documentation in order to approve the amount of a client company's tax reserves. 

“We’ll likely see skirmishes over how much information must be disclosed to a company's independent accounting firm versus the desire to minimize potentially public disclosure exposure,” he said.

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