Professor Johnson’s Article Cited by First Circuit in closely-watched Textron Tax Controversy Case

Citing a helpful article by Steve Johnson, E.L. Wiegand Professor of Law and Associate Dean for Faculty Development and Research at the UNLV Boyd School of Law, the First Circuit Court of Appeals in an en banc decision rejected August 13th prior decisions by the court’s own three-judge panel and by the United States District Court for the District of Rhode Island.

Associate Dean Steve Johnson

Published in the scholarly journal Tax Notes, Johnson’s article focuses on an essential point in the court’s Textron decision and a current hot-button legal issue: the work product doctrine. In it, he argues tax accrual workpapers should not qualify for nondisclosure under the work product doctrine because disclosure of them to the IRS does not materially undercut the core purposes of the doctrine, including most relevant to this Texton case an attempt to avoid a chilling effect on trial preparation.

The origin of the case goes back to 2006 when the IRS demanded to see papers Textron used to prepare its 2001 tax returns. Among these papers where spreadsheets related to nine of Textron’s sale-in-lease-out (SILO) transactions, in which the company purchased equipment and then leased it back to the seller on the same day. The IRS considers SILO transactions to be possible tax shelters.

Although Textron (maker of Cessna planes and Bell helicopters) had shown the spreadsheets to its outside auditor, it nevertheless refused to turn over its papers to the IRS, asserting that, because they were prepared by Textron’s attorneys and accountants, they were protected by the work-product doctrine.

The work-product doctrine protects from discovery during a court case those materials prepared in anticipation of litigation. The dispute focused on whether this privilege applies to documents not purposely prepared for litigation, but that mention issues potentially resulting in litigation.

Writing that the chilling effect “is easily dispatched,” Johnson points out, “Tax accrual workpapers are prepared for reasons independent of dealing with the IRS. They are prepared because of the securities laws and financial accounting requirements. Those root reasons would remain, regardless of whether the IRS could obtain the documents, and they would still compel preparation of the analyses in tax accrual workpapers.”

Agreeing with Johnson, the first circuit ruled that, because the papers were prepared for a tax return and not explicitly for litigation, they were not covered under the work-product privileges.

Referencing specifically Johnson’s argument supporting the court’s decision, Judge Boudin wrote, “Legal commentators can be found on each side; the most persuasive of them favors the IRS.”