No. 09-750

FILED

JAN 2 6 2010OFRCE OF THE CLERK

IN THE

upceme ourt of Mni b

TEXTRON INC. AND SUBSIDIARIES,Petitioner,

V.

UNITED STATES OF AMERICA,

Respondent.

On a Petition for a Writ of Certiorari to theUnited States Court of Appeals

for the First Circuit

BRIEF OF TAX EXECUTIVES INSTITUTE, INC.AS AMICUS CURIAE

IN SUPPORT OF THE PETITIONER

* Counsel of Record

January 26, 2010

ELI J. DICKER *DANIEL B. DE JONGTIMOTHY J. MCCORMALLYTAX EXECUTIVES INSTITUTE, INC.1200 G Street, N.W., Suite 300Washington, D.C. 20005-3814(202) 638-5601

Counsel for Amicus CuriaeTax Executives Institute, Inc.

WILSON-EPES PRINTING CO., INC. - (202) 789-0096 - WASHINGTON, D. C. 20002

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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ................................iii

INTEREST OF AMICUS CURIAE .....................1

ARGUMENT ........................................................3

I. BACKGROUND ........................................3

II. AN IRRECONCILABLE THREE-WAYSPLIT AMONG THE CIRCUIT COURTSMUDDLES THE APPLICATION OFTHE WORK-PRODUCT PRIVILEGE,SPAWNING UNCERTAINTY ANDUNDERMINING THE ATTORNEY-CLIENT RELATIONSHIP .......................3

III. TAX ACCRUAL WORKPAPERS, THEDOCUMENTS AT ISSUE, CONTAINTHE MENTAL IMPRESSIONS, THEO-RIES, AND ASSESSMENTS THATTHE WORK-PRODUCT PRIVILEGE ISINTENDED TO PROTECT ......................7

A. The IRS’s Summons Power Is Subjectto the Work-Product Privilege ............ 7

B. Governmental Authorities MustFocus on Facts and not ThoughtProcesses or Mental Impressions ........ 8

C. Although Tax Accrual WorkpapersServe a ~Dual Purpose," They AreProperly Subject to Work-ProductProtection .............................................10

D. The First Circuit’s Standard WouldSubject to Discovery All DocumentsAssessing Ongoing or PotentialLitigation Risks ...................................13

(i)

iiTABLE OF CONTENTS--Continued

IV. RECENT LEGISLATIVE AND FINAN-CIAL REPORTING REQUIREMENTSMANDATING GREATER DISCLO-SURE PROVIDES AN INDEPENDENTBASIS FOR PROTECTING THEDOCUMENTS AT ISSUE FROMDISCLOSURE ...........................................

CONCLUSION ....................................................

Page

14

20

iii

TABLE OF AUTHORITIES

CASES Page

Binks Mfg. Co. v. National Presto Indus.,Inc., 709 F.2d 1109 (7th Cir. 1983) .......... 6

Couch v. United States, 409 U.S. 322(1973) .........................................................19

Hickman v. Taylor, 329 U.S. 495 (1947) .... passimIn re Grand Jury Subpoena, 357 F.3d 900

(9th Cir. 2004) ........................................... 6In Re Sealed Case, 146 F.3d 881 (D.C. Cir.

1998) .......................................................... 6Maine v. United States Dep’t of Interior,

298 F.3d 60 (lst Cir. 2002) .......................12Martin v. Bally’s Park Place Hotel &

Casino, 983 F.2d 1252 (3d Cir. 1993) ....... 6National Union Fire Ins. Co. v. Murray

Sheet Metal Co., 967 F.2d 980 (4th Cir.1992) .......................................................... 6

Simon v. G.D. Searle & Co., 816 F.2d 397(8th Cir.), cert. denied, 484 U.S. 917(1987) ......................................................... 6

Upjohn Co. v. United States, 449 U.S. 383(1981) ...................................................... 8, 19, 20

United States v. Adlman, 134 F.3d 1194(2d Cir. 1998) ......................................... 6, 12, 13

United States v. Arthur Young & Co., 465U.S. 805 (1984) ................................. 8, 14, 16, 18

United States v. Arthur Young & Co., 677F.2d 211 (2d Cir. 1982) .............................15

United States v. Bisceglia, 420 U.S. 141(1975) .........................................................16

United States v. Coopers & Lybrand, 550F.2d 617 (10th Cir. 1977) ..........................15

iv

TABLE OF AUTHORITIES--Continued

Page

United States v. El Paso Co., 682 F.2d 530(5th Cir. 1982), cert. denied, 466 U.S.944 (1984) ................................................ 6, 12, 15

United States v. Matras, 487 F.2d 1271(8th Cir. 1973) ...........................................15

United States v. Powell, 370 U.S. 48 (1964) 8United States v. Roxworthy, 457 F.3d 590

(6th Cir. 2006) ...........................................6

STATUTES AND RULES

15 U.S.C. § 78b .............................................1926 U.S.C. § 6662(b)(2)(B) ..............................16, 1726 U.S.C. § 7602 ..........................................7, 8, 1526 U.S.C. § 7602(a) .......................................8Fed. R. Civ. P. 26(b)(3) ................................passimFed. R. Civ. P. 26(b)(3)(A)(ii) ........................ 5Fed. R. Civ. P. 26(b)(3)(B) ............................5Fed. R. Evid. 501 ..........................................16Sarbanes-Oxley Act of 2002, Pub. L. No.

107-204, 116 Stat. 745 (codified asamended in scattered sections of 15U.S.C.) ........................................................16

Sup. Ct. R. 10 .................................................4Sup. Ct. R. 37 ................................................1

MISCELLANEOUS

Diss & Hanson, Tax Contingency AuditWorkpapers: 1981-1982 Developments,Observations and Proposals, 14 TaxAdviser 154 (March 1983) ........................19

V

TABLE OF AUTHORITIES~Continued

Page

Financial Accounting Standards Board,Financial Accounting Series, No. 281-B,FASB Interpretation No. 48: Accountingfor Uncertainty in Income Taxes (2006)... 17

Internal Revenue Manual § 4024.4 (1981)..18I.R.S. Announcement 2002-63, 2002-2 C.B.

72 ...............................................................17, 18Note, Protecting the Auditor’s Work

Product from the IRS, 1982 Duke L.J.604 .............................................................19

S. Rep. No. 97-494, 94th Cong., 2d Sess.274 (1982) ..................................................17

Tax Executives Institute, Inc., Standardsof Conduct, http://www.tei.org/Resource.phx/public/standards.htx ..........................2

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IN THE

Supreme Ceurt ef the Unite State

No. 09-750

TEXTRON INC. AND SUBSIDIARIES,Petitioner,

v.

UNITED STATES OF AMERICA,Respondent.

On a Petition for a Writ of Certiorari to theUnited States Court of Appeals

for the First Circuit

BRIEF OF TAX EXECUTIVES INSTITUTE, INC.AS AMICUS CURIAE

IN SUPPORT OF THE PETITIONER

INTEREST OF AMICUS CURIAE

Pursuant to Rule 37 of the Rules of this Court, TaxExecutives Institute, Inc. respectfully submits thisbrief as amicus curiae in support of the petition for awrit of certiorari.1 Tax Executives Institute (hereinai~er

1 Pursuant to Rule 37.6, amicus Tax Executives Institute, Inc.states that no counsel for a party has written this brief in wholeor in part and that no person or entity, other than amicus, itsmembers, or its counsel, has made a monetary contribution tothe preparation or submission of this brief. Pursuant to Rule37.2(a), counsel of record for both parties received timely noticeof the intent to file an amicus brief under this rule and both par-ties have consented to its submission in letters filed with the Clerk.

2

"TEI" or "the Institute") is a voluntary, nonprofitassociation of corporate and other business executives,managers, and administrators who are responsiblefor the tax affairs of their employers. TEI wasorganized in 1944 under the laws of the State of NewYork and is exempt from taxation under section501(c)(6) of the Internal Revenue Code (26 U.S.C.).The Institute is dedicated to promoting the uniformand equitable enforcement of the tax laws, reducingthe costs and burdens of administration and com-pliance to the benefit of both the government andtaxpayers, and vindicating the Commerce Clause andother constitutional rights of business taxpayers.Among the standards of professional conduct that allTEI members subscribe to is the following:

[The member] will present the facts required intax returns and all the facts pertinent to the res-olution of questions at issue with representativesof the government imposing the tax.2

TEI has approximately 7,000 members who rep-resent more than 3,000 of the leading corporations inthe United States, Canada, Europe, and Asia. TEImembers have a vital interest in the resolution of thework-product privilege issue in this case. Substantiallyall TEI members are employed by corporations thatare subject to federal securities and tax laws,compliance with which requires the preparation oftax accrual workpapers or similar documents; mostwork for companies that, because of their sizeand complexity, are under continuous audit by theInternal Revenue Service (IRS). Consequently, TEImembers or their coworkers are almost withoutexception involved in the preparation or review of tax

See http://www.tei.org/Re source.phx]public/standards.htx.

3

accrual workpapers. As such, a decision by thisCourt whether to hear this case and resolve inter-pretative questions about the scope of the workproduct privilege will directly affect TEI membersand the companies by whom they are employed.Accordingly, the Institute has a special interest inthis matter.

ARGUMENT

I. BACKGROUND

In 2003, the IRS began an examination of thefederal income tax returns of petitioner, Textron Inc.,for the tax years 1998 to 2001. In connection withthat examination, the IRS issued an administrativesummons for petitioner’s 2001 workpapers. Citing,among other things, the work-product privilege,Textron withheld certain documents, including aspreadsheet prepared by its lawyers listing items onits return that the IRS could potentially dispute and,as to each item, estimated the likelihood of success inthe event of a dispute. The government filed apetition to enforce a summons for the documents inthe U.S. District Court for the District of RhodeIsland. The district court denied the petition. Apanel of the U.S. Court of Appeals for the FirstCircuit initially affirmed. After granting rehearingen banc, the court of appeals reversed.

II. AN IRRECONCILABLE THREE-WAY SPLITAMONG THE CIRCUIT COURTS MUD-DLES THE APPLICATION OF THE WORK-PRODUCT PRIVILEGE, SPAWNING UN-CERTAINTY AND UNDERMINING THEATTORNEY-CLIENT RELATIONSHIP

This case concerns the scope of the work-productprivilege codified in Rule 26(b)(3) of the Federal

4

Rules of Civil Procedure and, specifically, the mean-ing of the phrase ~in anticipation of litigation"in applying the privilege. More fundamentally, itinvolves whether the IRS can properly gain access tothe thoughts, mental impressions, opinions, and legaltheories of a taxpayer’s attorneys about the merits ofpositions taken on a tax return.

Pursuant to Rule 10, one of the considerationsgoverning the review of petitions for writs of certi-orari is whether the underlying case involves aconflict among the U.S. courts of appeals or whetherit involves a decision of a U.S. court of appeals on animportant question of federal law that has not been,but should be, settled by the Court. Such a conflictexists here in respect of the proper scope of the work-product privilege. While not every circuit conflictmerits resolution by the Court, where the law isthrown into disarraymhere, with the emergence ofnot two, but three, divergent and irreconcilableviews--the matter becomes "ripe for the SupremeCourt to intervene and set the circuits straight on[the] issue." (App. 45a (Torruella, J., with Lipez, J.,dissenting).)~ Amicus TEI respectfully submits thatthe Court should act to end the confusion surround-ing the proper scope of Rule 26(b)(3) and therebyprovide the certainty essential to vindicate the policyundergirding the work-product privilege.

The work-product privilege was first recognized bythis Court in Hickman v. Taylor, 329 U.S. 495 (1947).There, in discovery, the plaintiff sought materials

3 The court below also recognized the conflict: "IT]here issome difference in the interpretations adopted in differentcircuits .... " Order Staying Mandate, United States of Americav. Textron Inc. and Subsidiaries, September 16, 2009. (App.120a.)

5"secured by an adverse party’s counsel in the courseof preparation for possible litigation after a claim hasarisen." The Court held that the %york product" ofthe lawyer, "written materials obtained or preparedby an adversary’s counsel with an eye toward litiga-tion," was protected from disclosure. The Courtexplained that "proper preparation of a client’s casedemands that he assemble information . . . preparehis legal theories and plan his strategy without undueand needless interference." Id. at 512. As JusticeJackson wrote in his concurring opinion, ~[d]iscoveryis hardly intended to enable a learned profession toperform its functions either without wits or with witsborrowed from the adversary." Id. at 516 (Jackson, J.,concurring).

In 1970, the Federal Rules of Civil Procedure wereamended to codify the work-product privilege. Rule26(b)(3) provides that the work-product privilegecovers "documents and tangible things that are pre-pared in anticipation of litigation or for trial by or foranother party or its representative."

The work-product privilege is not absolute. Thus,where a party to litigation can show that it "hassubstantial need for the materials to prepare its caseand cannot, without undue hardship, obtain theirsubstantial equivalent by other means," the party canobtain production of otherwise protected materials.Fed. R. Civ. P. 26(b)(3)(A)(ii). Even such a showing,however, will not entitle a party to obtain ~opinionwork-product," i.e., materials that would ~disclos[e]...the mental impressions, conclusions, opinions, orlegal theories of a party’s attorney or other rep-resentative concerning the litigation." Fed. R. Civ. P.26(b)(3)(B).

6

Thus, the work-product privilege must be appliedin a manner that permits the attorney’s analyticaland strategic work to be done in private. Otherwise,its efficacy will be diminished. As the Court ex-plained in Hickman, the privilege in respect ofdocuments prepared "in anticipation of litigation"(as the term is used in Rule 26(b)(3)) is necessarybecause "it is essential that a lawyer work with acertain degree of privacy, free from unnecessaryintrusion by opposing parties and their counsel." 329U.S. at 511.

Regrettably, the absence of guidance from thisCourt since its decision six decades ago in Hickmanhas muddled the contours of the work-productprivilege. Thus, three different standards have beencrafted and applied by the courts of appeals ininterpreting the phrase "in anticipation of litigation."Eight circuits have embraced a "because of’ standard,protecting from disclosure documents prepared be-cause of the prospect of litigation. See, e.g., In ReSealed Case, 146 F.3d 881, 884 (D.C. Cir. 1998);United States v. Adlman, 134 F.3d 1194, 1202-03 (2dCir. 1998); Martin v. Bally’s Park Place Hotel &Casino, 983 F.2d 1252, 1260 (3d Cir. 1993); NationalUnion Fire Ins. Co. v. Murray Sheet Metal Co., 967F.2d 980, 984 (4th Cir. 1992); United States v.Roxworthy, 457 F.3d 590, 593 (6th Cir. 2006); BinksMfg. Co. v. National Presto Indus., Inc., 709 F.2d1109, 1118-19 (7th Cir. 1983); Simon v. G.D. Searle &Co., 816 F.2d 397, 401 (8th Cir.), cert. denied, 484U.S. 917 (1987); In re Grand Jury Subpoena, 357F.3d 900, 907 (9th Cir. 2004). A ninth court ofappeals--the Fifth Circuit--employs a test that looksto whether the "primary motivating purpose" for whichthe document was prepared was to assist in litiga-tion. United States v. El Paso Co., 682 F.2d 530 (5th

7

Cir. 1982), cert. denied, 466 U.S. 944 (1984). Andfinally, the First Circuit in this case conjured up itsown idiosyncratic standard that would permit thedisclosure of documents except where they were"prepared for use in possible litigation." (App. at lla.)

These three standards are incompatible with oneanother, and the resulting confusion robs partiesto disputes (or potential disputes) of the protectionintended by the work-product privilege. The situ-ation calls out for intervention by this Court.Otherwise, attorneys and their clients will be unableto know with certainty which documents are "pre-pared in anticipation of litigation" and thus protectedfrom disclosure. The uncertainty will impede candorbetween attorneys and their clients, and the diver-gent standards could even prompt litigants to forumshop, seeking to file lawsuits in the jurisdictionwhose interpretation of Rule 26(b)(3) benefits them.Because the work-product privilege is essential to theproper functioning of the adversarial legal system,the Court should grant the writ of certiorari and holdthat the "because of’ standard applies in interpretingthe "in anticipation of litigation" requirement of Rule26(b)(3).

III. TAX ACCRUAL WORKPAPERS, THEDOCUMENTS AT ISSUE, CONTAIN THEMENTAL IMPRESSIONS, THEORIES,AND ASSESSMENTS THAT THE WORK-PRODUCT PRIVILEGE IS INTENDED TOPROTECT

.4, The IRS’s Summons Power Is Subjectto the Work-Product Privilege

Section 7602 of the Internal Revenue Code autho-rizes the IRS to issue administrative summonses for

8the production of "any books, papers, records, orother data which may be relevant or material" in"ascertaining the correctness of any return . ,determining the liability of any person for any inter°nal revenue tax..., or collecting any such liability ....26 U.S.C. § 7602(a). This Court has described section7602 as a "broad summons authority" reflecting a"congressional policy choice in favor of disclosure ofall information relevant to a legitimate IRS inquiry."United States v. Arthur Young & Co., 465 U.S. 805,816 (1984) (emphasis added).

The obligations imposed by the tax summons, how-ever, are not without limit. Rather, they are subjectto the conditions of United States v. Powell, 370 U.S.48 (1964),4 and, as important, to "traditional privilegesand limitations." Upjohn Co. v. United States, 449U.S. 383, 399 (1981). Nothing in the language ofthe IRS summons provision or its legislative historysuggests an intent on the part of Congress to pre-clude application of the work-product doctrine tomaterials summonsed by the IRS. Id.

B. Governmental Authorities Must Focuson Facts and not Thought Processes orMental Impressions

Textron’s dispute with the IRS centers on thecorrectness of its 2001 tax return, the evaluation ofwhich requires the IRS to examine the facts andcircumstances related to the transactions at issue

4 The Court granted certiorari in Powell "[b]ecause of the dif-fering views in the circuits on the standards the InternalRevenue Service must meet to obtain judicial enforcement of itsorders .... " 379 U.S. 50-51 (footnote omitted). As explained inthe prior section, the same concern should prompt the Court’sreview in this case.

9

and to apply the pertinent tax law to those facts.Without question, those facts were readily availableto the IRS by means of an examination of Textron’stax return and the agency’s administrative fact-finding processes (including its ability to issue admin-istrative summonses). Indeed, during the course ofthe examination, the IRS issued more than 500formal requests for information, with Textron pro-ducing "many filing cabinets" worth of material inresponse to those requests. (App. 91a.)

Notwithstanding this voluminous production, thegovernment sought more. It did not confine itsrequests to factual information relating to transactions;it sought access to Textron’s tax accrual workpapers,which contain the company’s theories, opinions, argu-ments, and speculations about its contingent taxliabilities, i.e., the thought processes underlying thepositions Textron reported on its tax return.

The opinions and conclusions of Textron’s counseland tax advisers, as embodied in the tax accrualworkpapers, would provide the IRS with a "blueprint"(App. 20a) or "roadmap" into the company’s ownanalysis of the strengths and weaknesses of itspositions (including its negotiation and litigationstrategy). As such, they are the very "mentalimpressions" that the Court in Hickman sought toprotect from disclosure. 329 U.S. at 510. Further,those opinions do not directly bear on the determina-tion of Textron’s tax liability. The determination ofany tax owed by Textron must be based on factualinformationmreadily available from the tax returnor through formal requests for informationmnot onopinions reflecting the thought processes of Textron’sattorneys.

10

The First Circuit stated that "if a blueprint toTextron’s possible improper deductions can be foundin Textron’s files, it is properly available to thegovernment unless privileged." (App. 20a (emphasisin original).) That statement, however, is tautologicalbecause the question presented is whether the docu-ments are, in fact, privileged. Noting that thepetitioner in Hickman sought documents "to makesure he that he has overlooked nothing," 329 U.S. at513, the Court held: "That is insufficient under thecircumstances to permit him an exception to thepolicy underlying the privacy of [opposing counsel’s]professional activities." Id.5

C. Although Tax Accrual WorkpapersServe a "Dual Purpose," They AreProperly Subject to Work-ProductProtection

It is beyond question that the documents at issueserved two purposes: one, to assist Textron’s auditorsin determining the amount to be set aside in reservefor potential tax liabilities, and two, to g~ide Textronin making litigation or settlement decisions concern-ing the treatment of certain items. (App. 35a-36a.)Confoundingly, the First Circuit embraced the first(App. 12a), but ignored the second (App. 14a-15a).More important, the court disregarded the essentialnature of the documents--legal analysis (i.e., attor-ney work-product) of the issues relating to bothpurposes. In other words, it denied the complexity of

5 The court below dismissed Textron’s concerns about givingthe IRS a "blueprint" by stating that tax collection is not agame. (App. 20a.) That is indisputably true, but the integrity ofthe voluntary, self-assessment tax system is best preserved byenabling taxpayers to secure candid and complete legal advice.

11

the marketplace and interdependence of the applicabletax (legal) and financial regulatory regimes thatnecessitate the involvement of attorneys and accessto the lawyer’s "mental impressions, conclusions, orlegal theories" in respect of the transactions reflectedon the taxpayer’s tax return.

Tax accrual workpapers represent a bridge betweenthe tax and financial reporting worlds. Here, thedocuments at issue were prepared by Textron’sattorneys because the company anticipated the pos-sibility of litigation with the IRS regarding variousitems on its return. They reflected the opinions ofTextron’s attorneys about which items might bechallenged by the IRS, their legal assessment of thehazards of litigating those issues, and their recom-mendation of the tax reserve amounts that should beaccrued because of those hazards. The workpaperswould not have been prepared "but for" the fact thatTextron anticipated the possibility of litigation withthe IRS.

Indeed, absent litigation, or the prospect of it, therewould have been no reason for Textron to establishany reserve or to prepare the workpapers used tocalculate the reserve. This is the case even thoughthe workpapers assisted Textron in determining theamount to be reserved to cover any potential tax lia-bilities and were useful in obtaining an "unqualified"opinion from its auditors regarding the adequacy ofreserves.

The presence of dual purpose documents in a caseinvolving the work-product privilege does not presenta new, unique, or insuperable analytical challenge.Such documents have been evaluated by courts sincethe Court’s decision in Hickman. The applicability ofthe work-product privilege to dual purpose documents

12

in a tax case has been addressed in several cases,most notably United States v. Adlman, 134 F.3d1294 (2d Cir. 1998), which the First Circuit has citedwith approval. See Maine v. United States Dep’t ofInterior, 298 F.3d 60, 68 (lst Cir. 2002) (~In light ofthe decisions of the Supreme Court, we thereforeagree with the formulation of the work-product ruleadopted by Adlman and by five other courts ofappeals.").

In Adlman, the Second Circuit considered whetherthe work-product privilege applied where a documentin a tax case was created both in anticipating litiga-tion and for a business purpose. In embracing the~because of’ interpretation of Fed. R. Civ. P. 26(b)(3),the court rejected the ~primary purpose" test extantin the Fifth Circuit, which only grants work-productimmunity to workpapers prepared ~primarily moti-vated to assist in future litigation over the return."See United States v. E1 Paso Co., 682 F.2d 530,543 (5th Cir. 1982). The Second Circuit made clear,moreover, that the ~because of’ formulation is notlimited to documents prepared for use in litigation:

We believe that the requirement that documentsbe produced primarily or exclusively to assist inlitigation in order to be protected is at odds withthe text and the policies of the Rule. Nowheredoes Rule 26(b)(3) state that a document musthave been prepared to aid in the conduct of liti-gation in order to constitute work product, muchless primarily or exclusively to aid in litigation.Preparing a document ~in anticipation of litiga-tion" is sufficient. Nothing in the Rule states orsuggests that documents prepared ~in anticipationof litigation" with the purpose of assisting in the

13

making of a business decision do not fall withinthis rule.

Adlman, 134 F.3d at 1198-99.

The Second Circuit’s analysis of dual purpose docu-ments for purposes of Rule 26(b)(3) is clearly correct.Textron’s tax accrual workpapers by their verynature assessed matters implicated by the attorney-client privilege--the legal consequences associatedwith making certain business decisions (e.g., enteringinto a transaction and reporting it on a tax return).They are unquestionably suffused with the mentalimpressions and opinions of Textron’s attorneys and,hence, should be accorded the protection of the work-product privilege.

D. The First Circuit’s Standard WouldSubject to Discovery All DocumentsAssessing Ongoing or Potential Litiga-tion Risks

Lei~ standing, the First Circuit’s exceptionally nar-row interpretation of Rule 26(b)(3) would have far-reaching consequences beyond tax accrual work-papers and the establishment of financial reservesfor tax contingencies. Specifically, its effect wouldextend to all litigation and allow parties in a broadrange of litigation contexts--both public and private--to access documents reflecting lawyers’ strategy oranalysis of their clients’ claims.

Stated differently, attorneys and clients engaged(or potentially engaged) in disputes involving, forexample, environmental liability, products liability,or intellectual property, would be subject to thevagaries of the First Circuit’s tortured construction ofthe work-product privilege. Every document pre-pared by counsel that assesses risks of ongoing or

14

potential litigation could well be subject to discoverybecause, under the First Circuit’s standard, suchdocuments could not be said to have been prepared"for use" in litigation. One could conclude under theinterpretation of the First Circuit that no documentprepared prior to the initiation of litigation wouldqualify for protection under the privilege, as prior tothat initiation, there is no litigation in which to usethe document.

In short, the standard propounded by the courtbelow threatens to vitiate the work-product privilege,depriving clients of its protection in a broad range ofcases with respect to a broad range of documents.It would allow the IRS, in the words employed byJustice Jackson in Hickman, "to perform its functionseither without wits or on wits borrowed from theadversary." 329 U.S. at 516 (Jackson, J., concurring).

RECENT LEGISLATIVE AND FINANCIALREPORTING REQUIREMENTS MAN-DATING GREATER DISCLOSURE PRO-VIDE AN INDEPENDENT BASIS FORPROTECTING THE DOCUMENTS ATISSUE FROM DISCLOSURE

Two and a half decades ago, the Court reviewed adecision of the Second Circuit holding that accountant-prepared tax accrual workpapers were protectedfrom disclosure under an analog of the work-productprivilege, but declined to uphold the appeals court’sdecision that public policy requires that an IRSsummons for such documents ordinarily not beenforced. United States v. Arthur Young & Co., 465U.S. 805 (1984), reversing 677 F.2d 211 (2d Cir.

15

1982).6 Specifically, the Court framed the issue aswhether a general accountant-client privilege shouldbe created, rather than a work-product privilegelinked (and limited) to the independent auditors’ rolein preserving the integrity of the financial marketsby encouraging open communication between com-panies and their auditors. In 1984, the Court an-swered that question in the negative. Significantchanges in federal securities laws and financialreporting since the Court’s decision in Arthur Young,however, should prompt the Court to revisit thatissue and to hold that tax accrual workpapers are

6 The appeals court in Arthur Young acknowledged that taxaccrual workpapers may be potentially relevant within themeaning of section 7602 of the Internal Revenue Code (26U.S.C. § 7602), but drew upon the Court’s decision in Hickmanv. Taylor to hold that public policy requires that a summons forsuch workpapers ordinarily not be enforced; accordingly, itfashioned a work-product privilege that, in the absence of fraud,would shield the documents from compelled disclosure. 677F.2d at 220-21. Taking a different approach, the Tenth Circuitin United States v. Coopers & Lybrand, 550 F.2d 617 (10th Cir.1977), held that a summons for such documents was not enfor-ceable under section 7604 because those documents are notrelevant to the taxpayer’s tax liability. Id. at 619 (severalfactors must be weighed in deciding whether tax accrual work-papers are relevant, including the adverse effect might have onthe interchange between taxpayers and its independent auditorsand any resulting weakening of the securities law). AccordUnited States v. Matras, 487 F.2d 1271, 1275 (8th Cir. 1973) ("Ifwe were to accede to the government’s view [that the generalneed for a ’road map’ was sufficient], it is difficult to imaginecorporate materials that might not contribute to a more com-prehensive understanding of the workings of the corporation,and thus, according to the government, be deemed relevant tothe tax investigation.~). In contrast, the Fifth Circuit in UnitedStates v. El Paso Co., supra, refused to limit the IRS’s summonspower in respect of tax accrual workpapers.

16

protected by a separate work-product privilege fordocuments prepared in connection with the prepara-tion of audited financial statements.

In reaching its decision in Arthur Young, the Courtsaid that "absent unambiguous directions from Con-gress," 465 U.S. at 816 (quoting United States v.Bisceglia, 420 U.S. 141, 150 (1975)), it felt constrainednot to shield tax accrual workpapers from disclosure.Amicus TEI respectfully suggests that "the principlesof the common law as they may be interpreted by thecourts of the United States in light of reason andexperience," Fed. R. Evid. 501, support the Court’sreexamination of the issue.

Corporate scandals in the first few years of thecentury involving Enron, WorldCom, and many othercompanies spotlighted the fragility of financial controlsand the ease with which companies could concealfrom financial statement auditors activities thatthreatened the viability of their enterprises and,indeed, the underlying integrity of the U.S. securitiesmarket. In the wake of these scandals, in order torestore investor and public confidence in the securitiesmarkets, Congress enacted the Sarbanes-Oxley Actof 2002, Pub. L. No. 107-204, 116 Stat. 745 (codifiedas amended in scattered sections of 15 U.S.C.),which heightened public company financial controls,toughened penalties, and imposed new disclosureobligations. Congress did not, however, mandateeither the creation or disclosure of tax accrualworkpapers, even though a robust disclosure regimealready exists in the Internal Revenue Code. See e.g.,26 U.S.C. § 6662(b)(2)(B) (penalty for understatement

17of tax reduced for items disclosed to the InternalRevenue Service).7

In addition, new and more demanding accountingrules on the calculation and reporting of tax assetsand liabilities--including the calculation of contingenttax liabilities for purposes of establishing financialstatement reserves--have come into force. Specifi-cally, in 2006, the Financial Accounting StandardsBoard introduced a new standard for calculating"uncertain tax positions" that was designed to increase"relevance and comparability in financial reporting ofincome taxes by clarifying the way companies accountfor uncertainty in income tax assets and liabilities."8Under the new standard, public companies such asTextron here, must evaluate each tax position takenon their returns to determine whether those positionsare supported by technical authority that, in theopinion of the company, would "more likely than not"be sustained by a taxing authority. This processoi~en results in detailed written analyses of numeroustax issues including the likelihood of succeeding inlitigation and the related mental impressions of taxprofessionals including both accountants and attorneys.

Finally, in 2002, the IRS issued Announcement2002-63, 2002-2 C.B. 72, which mandated broader

7 The legislative history of 26 U.S.C. § 6662 expressly notes

that in no event shall this provision "require the disclosure ofaccountant’s work papers.~ S. Rep. No. 97-494, 94th Cong., 2dSess. 274 (1982) (Report of Senate Committee on Finance).

8 The accounting standards body issued FASB Interpretation

No. 48, Accounting for Uncertainty in Income Taxes, on December16, 2006. The interpretation is now codified in the FASB’s ASC740.

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disclosure of tax accrual workpapers than required atthe time of the Court’s decision in Arthur Young.9

These developments since 1984 collectively place apremium on the assessment of tax risk and thecalculation of financial reserves in respect of a com-pany’s tax position. They also place a premium onconfidential communications between companies andtheir legal advisers in aid of that assessment. On theone hand, financial statement auditors are obligatedto pinpoint potentially vulnerable areas of a com-pany’s tax returns, make inquiries into the company’slegal analysis of those positions and its considerationof whether and how to litigate those issues if theirreported treatment were challenged by the relevanttax authority, and document the review. On theother hand, if the IRS can i~eely seek access to acompany’s files in pursuit of a "blueprint" (as thecourt below put it) or in the course of a "fishingexpedition" (such as explained in Hickman), the com-pany might prepare less documentation for its posi-tions or be less forthcoming in providing it to the

9 IRS Announcement 2002-63 significantly broadened the sit-uations in which the IRS would seek access to tax accrualworkpapers. In Arthur Young, the Court cited with approvalthe IRS’s "administrative sensitivity" to "the intrusiveness ofdemands for the production of "tax accrual workpapers" in%-ightening [off its internal requirements for the issuance ofsummonses" for tax accrual workpapers. 465 U.S. at 820-21 &n.17. See Internal Revenue Manual § 4024.4 (1981) (access maybe had to accountants’ tax accrual workpapers only in "unusualcircumstances"). The Court stated that the IRS’s promulgationof its so-called policy of restraint refuted the taxpayer’s argu-ment that granting the IRS access to a roadmap of mentalimpressions was unfair. 465 U.S. at 821.

19auditor, making it more difficult for the auditor to doits job. 10

A careful balancing of different and sometimescompeting interests is necessary in resolving the taxaccrual workpaper disclosure issue---specifically, thegovernment’s interest "in the enforcement of its lawsand collection of the revenue," Couch v. United States,409 U.S. 322, 336 (1973), and the "national publicinterest,... [in] insur[ing] the maintenance of fairand honest markets in [securities] transactions," 15U.S.C. § 78b (1976). Balancing those issues in 1984,this Court in Arthur Young found it unnecessaryto fashion a work-product privilege to protect taxaccrual workpapers. That determination is ripe forreconsideration in light of the intervening changes tothe statutory and regulatory landscape applicable tothe preparation and auditing of corporate financialstatements.11 At a minimum, the changing times

1°See Diss & Hanson, Tax Contingency Audit Workpapers:1981-1982 Developments, Observations and Proposals, 14 TaxAdviser 154, 162 (March 1983) (if summonses for tax accrualworkpapers are routinely enforced, "[c]orporations and auditorsmay be tempted to resort to the ’unwritten’ expedient, the veryresult the Supreme Court wishes to prevent when it firstannounced the work-product privilege in Hickman v. Taylor.~);Note, Protecting the Auditor’s Work Product from the IRS, 1982Duke L.J. 604, 616 (if auditor workpapers are not protectedfrom disclosure, auditors could "change documentation pro-cedures to ensure that the IRS could gain little from reviewingCPA audit workpapers’).

1~ It was concern about policies underlying the securities lawthat led to the Court’s decision in Upjohn Co. v. United States,449 U.S. 383 (1981). In that case, the government argued thatno privilege was necessary because there were independentreasons for the corporation to seek legal advice. The Courtfound, however, that, even assuming an investigation to ensurecompliance were undertaken, "the depth and quality of any

20

reinforce the need to vivify the holding of Hickman byreversing the court below.

Amicus Tax Executives Institute respectfully sub-mits that the different times require a differentbalance than that struck by the court below: Thestrong public interest in maintaining a high levelof financial reporting--a public interest fortified bythe corporate scandals in the past decade--outweighsthe IRS’s purported "need" for a roadmap of thearguments that a taxpayer may raise in defendingcertain positions in the event of an examination.

CONCLUSION

For the foregoing reasons, the Court should grantthe petition for a writ of certiorari and reverse thedecision below.

Respectfully submitted

* Counsel of Record

ELI J. DICKER *DANIEL B. DE JONGTIMOTHY J. MCCORMALLYTAX EXECUTIVES INSTITUTE, INC.1200 G Street, N.W., Suite 300Washington, D.C. 20005-3814(202) 638-5601

Counsel for Amicus CuriaeTax Executives Institute, Inc.

January 26, 2010

investigations to ensure compliance with the law would suffer~

unless the privilege were extended to those individuals in thecorporation who had knowledge of the relevant information.449 U.S. at 392-93 & n.2.