A Primer on Tax Work Product for Federal Courts

tax notes A Primer on Tax Work Product for Federal Courts By Dennis J. Ventry Jr. Table of Contents I. II. Dennis J. Ventry Jr. is an acting professor of law at University of California Davis School of Law and a visiting professor of law at American University Washington College of Law. He thanks Bryan Camp, Cal Johnson, Steve Johnson, and Michelle Kane. III. In this report, the author discusses the application of the work product doctrine in the tax context. He provides an overview of the burdens that an applicant seeking immunity for its tax materials must meet as well as the procedures used by courts to verify an applicant’s claim for a privilege traditionally reserved for documents prepared with an objectively reason- able anticipation of litigation in mind. The author roots the discussion in the primary question currently before the en banc First Circuit in United States v. Textron: Are a company’s tax accrual workpapers protected from discovery under the work product doctrine? IV. The author concludes that tax accrual workpapers never qualify as protected work product. Corporate taxpayers create these documents to comply with federal securities law, not because of future litigation. Workpapers may discuss the prospect of future litiga- tion or contain analyses that later become the subject of litigation. But the appearance of those discussions and analyses in documents created exclusively for regulatory purposes does not transform the docu- ments into materials created in anticipation of litiga- tion. Moreover, it certainly does not transform them into materials created in objectively reasonable anticipa- tion of litigation as required by the work product doctrine. In the event an applicant or a court attempts to justify turning regulatory documents into litigation documents, it must face the attenuated temporal con- nection between preparation of workpapers and fu- ture litigation. In combination with the many dispute resolution procedures available to taxpayers and the government, anticipating litigation when preparing workpapers is distinctly unreasonable both as a matter of logic and mathematical probability. Copyright 2009 Dennis J. Ventry Jr. All rights reserved. TAX NOTES, May 18, 2009 Introduction . . . . . . . . . . . . . . . . . . . . . . . What Work Product Is and Isn’t . . . . . . . . A. The Applicant’s Burden . . . . . . . . . . . . B. The Court’s Burden . . . . . . . . . . . . . . . What Accrual Workpapers Are and Aren’t . A. Workpapers Never Deserve Immunity . . B. Anticipation of Litigation Is Never Reasonable . . . . . . . . . . . . . . . . . . . . . C. The Work Product Doctrine on Steroids . Conclusion . . . . . . . . . . . . . . . . . . . . . . . I. Introduction One of the best things about being a law professor (besides the outsized year-end bonuses) is the singular obligation to seek and disseminate knowledge. This primer analyzing work product in the tax context is offered in that spirit. 1 It does not suggest what the law should be or could be or what clients and their tax practitioners may want it to be, but rather what it is. Its contents are meant to assist federal courts in thinking through the work product doctrine’s application to tax materials and to help them perform effective, thorough, and proper work product analyses. In recent years, courts have increasingly considered work product issues in cases in which the government seeks documents from corporate taxpayers as part of its regulatory duty to evaluate the legitimacy of tax return positions, and taxpayers, in turn, assert work product immunity over these tax materials. Such a dispute is now before the First Circuit, which has granted en banc review in the closely followed case United States v. Textron. 2 To help bring the issues surrounding tax work product into focus, this primer addresses the central question in Textron: Are a company’s tax accrual workpapers 3 protected from dis- covery by the work product doctrine, an immunity Because this is a primer rather than a comprehensive examination of tax work product, I have minimized the use of citations, particularly discursive citations. For a fuller discus- sion of these issues, see Dennis J. Ventry Jr., ‘‘Protecting Abusive Tax Avoidance,’’ Tax Notes, Sept. 1, 2008, p. 857, Doc 2008-18132, or 2008 TNT 171-26. United States v. Textron Inc., No. 07-2631 (1st Cir. Mar. 25, 2009), Doc 2009-1304, 2009 TNT 12-11. The rehearing is sched- uled for June 2, 2009. Tax accrual workpapers support a corporate taxpayer’s reserve for deferred or contingent tax liabilities and for related representations in the taxpayer’s audited financial statements. They also discuss and provide support for all tax assets and liabilities reflected in the financial statements, including de- ferred tax assets and liabilities. (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. SPECIAL REPORT