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Accounting & Auditing Tax Ruling Exposes Company Data to More Scrutiny By Tammy Whitehouse sis and reasoning. Now the Textron deci- terials really are,” he says. “I’m a little sur- sion exposes those papers to inspection by prised Textron has taken it this far.” C ompanies may want to reconsider how they assess and document their tax and litigation risks these days, after a regulators and other outside parties. “This opinion reinforces the govern- ment’s understanding that they have free Still, the opinion of the dissenting two judges was telling: “In straining to craft a rule favorable to the IRS as a matter of federal appeals court ruling that gives po- access to these documents whenever they tax law, the majority has thrown the law tential adversaries unprecedented access choose to ask for them,” says Payson Pea- of work-product protection into disarray to work papers that previously were more body, a lawyer at the law firm Dykema … The time is ripe for the Supreme Court protected. Gossett. to intervene and set the circuits straight The ruling, handed down in the First Ever since the Fi- on this issue which is essential to the daily Circuit Court of Appeals in Boston, al- nancial Accounting practice of litigators across the country.” lowed the Internal Revenue Service to see the work papers Textron Inc. had created Reverberations? while studying the tax implications of several sale-in, lease-out (SILO) transac- T he Textron decision does establish precedent in the First Circuit (New tions, a kind of real estate transaction on “This opinion England and Puerto Rico), but doesn’t IRS radar as potentially abusive. Textron necessarily carry the same authority in objected, saying the papers were pro- reinforces the other parts of the country—which gen- tected under the work-product doctrine, government’s understanding erally have afforded work papers more which says internal documents drawn up protection, says Robin Greenhouse with in preparation for litigation do not have to that they have free access to the law firm McDermott Will & Emery. be provided as evidence in a legal discov- these documents whenever But companies would be wise to take ery process. some precautionary measures anyway, Textron originally prevailed in district they choose to ask for them.” she warns. court; the IRS then appealed, and the case —Payson Peabody, “Companies need to look at how they had been watched closely by the corporate Lawyer, prepare their tax accrual work papers and auditing communities. The court’s Aug. Dykema Gossett to satisfy the FIN 48 requirement,” she 13 ruling (a split decision, three judges rul- says. “They obviously need to meet the ing in favor of the IRS but two dissenting) requirement, but not put more in those leaves both groups wondering how frank papers than is required.” they can be when speculating about the Standards Board allowed FIN 48 to go Kevin Kenworthy, of the law firm Mill- wisdom of certain tax or legal strategies. into effect in 2007, companies have pro- er & Chevalier, also warns that Textron has Of course, assessing the odds that a tested that such disclosures would give implications well beyond tax work papers, certain strategy might fail and result in the IRS a roadmap to the weakest spots in a fact even noted in the court’s dissenting losses is nothing new. Companies must do their tax returns. Ken Werner, a partner at opinion. Liabilities of any kind—tax, en- such an assessment, and establish reserves the law firm Richards Kibbe & Orbe, says
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