IRS Is Denied Work Papers

By JESSE DRUCKER
August 30, 2007; Page A6

The Internal Revenue Service lost a closely watched legal battle when a federal judge in Rhode Island ruled yesterday that the government didn’t have a right to internal tax documents belonging to aerospace and defense contractor Textron Inc.

The IRS and Justice Department had been trying to obtain tax-accrual work papers belonging to Textron. Such papers generally include legal analysis of transactions that could be challenged by the IRS. If companies think there is a chance the IRS might disallow a tax benefit, they set aside — or accrue — a portion of the expected savings. Those papers also could include analysis by lawyers of the transaction’s legal weaknesses, and have been called the blueprint for complicated tax transactions.

In 2001, Textron, which makes Cessna Aircraft, Bell Helicopters and golf carts, bought several telephone networks and a railroad system overseas and then leased them back to their owners, according to a Justice Department court filing. Such arrangements can produce big tax benefits because depreciation can be claimed on the assets to reduce taxable income.

Some leasing transactions that reduce taxes are legitimate, but the IRS has tried to crack down on aggressive ones it calls “sale in, lease out” deals. In 2004, Congress outlawed future so-called SILOs, and the IRS in 2005 said it would begin presuming that past SILO transactions violated tax laws.

As part of an audit of the Textron transactions, the IRS had requested all of the company’s tax work papers for several years. The company had offered to provide the work papers around the SILO transactions, but declined to provide other work papers, arguing that they were covered by privilege.

Communications between lawyers and their clients generally are exempt from scrutiny by adversaries. The IRS had argued it had legal precedent on its side, stemming from a 1984 Supreme Court case that ruled the IRS had a right to tax-accrual documents.

However, U.S. District Court Judge Ernest C. Torres denied the government’s petition to enforce an IRS summons, writing that papers were protected by “work product” privilege, as “the work papers were prepared ‘because of’ anticipated litigation with the IRS.”

He wrote: “[F]orced disclosure of those opinions would put Textron at an unfair disadvantage in any dispute that might arise with the IRS, just as requiring the IRS to disclose the opinions of its counsel regarding areas of uncertainty in the law or the likely outcome of any litigation with Textron would place the IRS at an unfair disadvantage.”

“We’re gratified the court agreed with our position on what we believe is a very important matter of privilege,” said Karen Quintal, a Textron spokeswoman.

The Justice Department litigated the case on behalf of the IRS. When asked if the decision would be appealed, a Justice Department spokesman said, “It’s under review and the department has made no determination what its next step in this matter should be.”

Textron was represented by two prominent tax-controversy lawyers, Arthur Bailey and J. Walker Johnson of Steptoe & Johnson LLP.

The decision “is a very big deal,” said Lawrence Hill, chairman of Dewey Ballantine LLP’s tax-controversy and litigation group. “The IRS is going to have to step back and evaluate its position.”

Textron Chief Executive Lewis B. Campbell is a director of Dow Jones & Co., publisher of The Wall Street Journal.

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Wanted: A Silver Bullet Formula for Effective Corporate Policies for Email Backup Tape Storage and Rotation

Email backup tape rotation (and related issues concerning over-retention of electronically stored information) is the most complex records and information management challenges organizations face today.

Backup tapes should be used only for disaster recovery, but many organizations still use those media for archives, retention or storage, with a trend toward increased use of archive storage technologies.  Archiving does not solve the information lifecycle challenges organizations face and the more information retained the more that is subject to collateral legal disclovery. 

Legal/compliance departments must be in lockstep with IT/RIM departments in terms of development and enforcement of policy and procedures concerning backup tapes. Flawless execution on litigation holds is essential to mitigation of legal and financial risk.

This is a take-no-prisoner compliance area and courts are not accepting the “keystone cops” defense anymore.  All organizations need to tighten up and audit their procedures for backup tape rotation, establish high-level catalogues/inventories of existing tapes; or develop policy and procedures if they have no policy and procedures in place (ASAP). Keeping everything is not a good alternative, and once you access information on email backup tapes, for whatever reason, it is difficult to argue in court that you cannot produce information from those tapes on the basis that the ESI is not reasonably accessible.

Senate Asks FTC to Oversee Internet Safety

Chloe Albanesius – PC Magazine

Members of Congress last week turned their attention to online child predators with the introduction of a bill intended to strengthen public awareness about Internet safety.

The measure, introduced by the chairman and ranking member of the Senate Commerce Committee, calls on the Federal Trade Commission (FTC) to oversee a government-directed public awareness campaign, directs the Commerce Department to establish an online safety and technology working group, requires schools that receive e-rate funding to include tutorials on the detriments of “cyberbullying” and strengthens child pornography enforcement.

For more see PC Magazine.

Hit ‘Delete’ to Prevent EDD Disaster

The volume of e-discovery and its costs continue to rise for corporations, law firms and even solo attorneys. This phenomena has triggered a plethora of articles on the pitfalls and potential problems in EDD for the uninitiated or unaware. Frequently missing from the discussion, however, is practical experience and analysis from the trenches. This article addresses key EDD issues and pitfalls in a particular case involving 44 million pages of electronic records and a jury verdict of approximately $570 million, with a focus on the consequences of retaining too much electronic information and ways to solve problems that plague large companies in e-discovery.

For more see law.com.

New ABA Letter Urges Support for Federal Legislation to Protect Attorney Client Privilege and Employee Rights

ABA President Karen Mathis sent a new letter to state and local leaders regarding developments on attorney-client privilege issues and urging support for H.R. 3013 and S. 186 through resolutions, letters to Congress, and opinions published in local media.  For more information, see prior posts on the Datakos Blawg under the category of “attorney-client privilege.”  ABA President Letter on Atty Client Privilege (August 2007)