Wednesday, May 18, 2011

IRS Backs Off Positions in 'Textron' and 'Deloitte'

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The IRS Sept. 24, in announcing the 2010 instructions for Schedule UTP at the American Bar Association Section of Taxation meeting in Toronto, backed off its positions in Textron Inc. v. United States and United States v. Deloitte. IRS Commissioner Douglas Shulman stated that the IRS would not seek documents that are privileged even if they are disclosed to a taxpayer's financial advisers. Shulman, in addressing the concern, stated that "these concerns principally arose from the fact that the draft instructions required Schedule UTP filers to provide the rationale for a position reported on the Schedule along with a description of the nature of the uncertainty related to that position. ... We adopt a policy that we will not seek documents that would otherwise be privileged, even though the taxpayer has disclosed the document to a financial auditor as part of an audit of the taxpayer's financial statements."

Recall that in Textron, the U.S. Court of Appeals for the First Circuit ruled that tax accrual workpapers were not privileged, in the process construing the work product privilege narrowly. Meanwhile, in Deloitte, the U.S. Court of Appeals for the D.C. Circuit ruled that the government could not compel the auditing firm to produce tax accrual workpapers in response to a subpoena.

Lawrence Hill, of Dewey & LeBouef LLP, New York, told BNA Sept. 25 that the IRS also "appears to have gone a remarkable step further and announced that it won't seek privileged information provided to outside auditors under the attoney-client privilege and Section 7525 of the IRC, even though the provision of such documents to a third-party would clearly waive such privilege, unless the taxpayer has otherwise waived privilege or violated the pre-existing policy of restraint. The presumption follows, a fortiori, that it will not assert subject matter waiver of privilege either in this context."

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