Case Analysis: First Circuit Issues Important Decision On Work Product Protection for Accounting Workpapers

In a case with important implications for companies that utilize legal analysis in establishing reserves for their financial statements, the United States Court of Appeals for the First Circuit recently decided that tax accrual work papers incorporating counsel's views of the possibility – and likely outcome – of disputes with the IRS are subject to work-product protection. However, the court also decided that the work-product protection could be waived if a company's legal analysis was incorporated into the work papers of its outside auditor.

United States v. Textron Inc., No. 07-2631, 2009 WL 136752 (1st Cir. Jan. 21, 2009), involved workpapers prepared by Textron for the purpose of determining a reserve for additional tax liability should certain debatable positions taken on its tax returns be disallowed. Textron's tax counsel prepared the workpapers by analyzing the positions the company had taken on its tax returns, estimating a percentage likelihood that the