The reversal in Textron: anatomy of a bad decision

The First Circuit Court's recent reversal in the Textron case came as a most unwelcome surprise to practicing tax professionals. In overturning a decision of the Court's own three-judge panel, the First Circuit has made it infinitely more difficult for taxpayers to shield internal documents supporting aggressive and questionable tax positions from IRS scrutiny. In making its ruling, the First Circuit seemingly adopts a legislative policymaking role by arbitrarily deciding that the interests of the public override well-established jurisprudence regarding IRS access to tax accrual working papers. Corporate taxpayers who find themselves in a post-FlN 48 disclosure world should consider the factors enumerated in Textron when preparing workpapers related to disclosures made in the financial statements. Given that these workpapers must be reviewed by the firm's auditor in order to issue an opinion on the financial statements, they are not protected by the attorney-client privilege or the tax practitioner-client privilege from summons by the IRS. However, the workpapers may be protected by the work-product doctrine under either the "anticipation of litigation" or "prepared for use in litigation" standards used in the Textron decisions.