Tax Ruling Exposes Company Data to More Scrutiny

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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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