Another Twist in the Textron Tax-Accrual Workpapers Case

Tax Controversy Alert

As we previously reported in these pages (Textron Appeal - a Significant, but Incomplete, Taxpayer Victory, 1/22/09), the First Circuit in January affirmed the trial court’s ruling that Textron’s tax accrual workpapers qualified for work product protection. Therefore, the court held, Textron could resist an IRS summons for those workpapers pending the outcome of a waiver issue to be resolved by the trial court on remand. The decision was 2-1, over a strong dissent by former Chief Judge Boudin, in which he argued that the panel’s decision conflicted with existing First Circuit precedent and hence could properly be issued only by the court sitting en banc.

On March 25, 2009, the First Circuit granted the government’s petition for rehearing en banc by a majority vote of all judges in active service. Its order invites the parties and the amici curiae to file supplemental briefs by April 22 and schedules oral argument before the full court for June 2. Presumably, the reason for allowing supplemental briefs is to give the parties an opportunity to address specifically the points made in the majority and dissenting opinions issued by the panel. In accordance with the First Circuit’s usual procedures, the order granting rehearing en banc has the effect of vacating the panel decision, but the points made in those opinions will still play a big role in the en banc court’s consideration.

The en banc review is likely to focus on the correctness of Judge Boudin’s contention that “tax-accrual workpapers are not protected because they are prepared for reasons independent of the need to prepare for or conduct litigation” -- notwithstanding that the workpapers address the probable outcome of litigation and it is the prospect of litigation that creates the need for the workpapers in the first place. By contrast, the panel majority ruled that work product protection applies to dual purpose documents like the workpapers, where “the business purpose derives from and is inextricably related to anticipating litigation.”

The First Circuit is far and away the smallest of the regional circuits, with only five active judges. Those five include Judge Torruella, who wrote the majority opinion for the panel, and Judge Boudin, who wrote the dissent. (The third judge on the original panel was Judge Schwarzer, a visiting district judge from California, and pursuant to First Circuit rules he does not participate in the en banc proceedings.) Assuming that Judge Torruella did not vote to have his own opinion vacated, that means that at least two of the three judges not previously involved in the case voted for rehearing.

Rehearing en banc is relatively rare, and judges usually do not vote for it unless they have some qualms about the panel’s decision. For Textron to prevail, it will have to convince at least one of the judges who voted for rehearing that the panel was correct in affirming the trial court. Thus, the First Circuit’s decision to revisit its earlier ruling is an unfavorable development for Textron. Still, the outcome of the en banc review is not a foregone conclusion. The First Circuit granted rehearing without even asking Textron to file a response to the government’s rehearing petition. That may suggest that the judges did not get deeply involved in considering the merits of the case. Instead, they perhaps voted for rehearing mostly because they were persuaded by Judge Boudin’s dissent that en banc consideration was necessary to resolve an important dispute over the meaning of the First Circuit’s earlier decision in Maine v. U.S. Dep’t of the Interior, 298 F.3d 60 (1st Cir. 2002). If so, they may still be open to concluding that the interpretation of the work product protection set forth by Judge Torruella in the panel opinion should prevail over Judge Boudin’s narrower view.

Please consult either of the following individuals for assistance with the issues discussed in the Alert:

Kevin Kenworthy,, 202-626-5848

Alan Horowitz,, 202-6265839

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