Section of Taxation Publications

VOL. 61
NO. 2

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Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

Lawyers Versus Auditors: Disclosure to Auditors and Potential
Waiver of Work-Product Privilege in United States v. Textron

Andrew Golodny*


In 2002, the Service modified its traditional policy of restraint in seeking tax accrual workpapers relating to corporate taxpayers’ potential tax liabilities on audited financial statements. This was an expansion of the Service’s previous policy under which workpapers were only requested in “unusual circumstances.” However, to curb “abusive tax avoidance transactions,” the Service’s new policy is to request tax accrual workpapers in the course of examining any return that claims a tax benefit arising out of a listed transaction.

United States v. Textron was the first case to test the Service’s new procedures in court against a taxpayer’s claim of privilege. In Textron, the district court held Textron’s tax accrual workpapers were privileged under the work-product doctrine, and thus did not have to be turned over to the Service. The court also held that while the workpapers were likewise protected by the attorney-client and tax practitioner privileges, Textron waived those privileges when it provided the workpapers to its auditor, Ernst and Young (E & Y). However, the court held that the work-product privilege was not waived by giving the workpapers to E & Y. This dealt the Service at least a temporary setback in its revised policy of requesting companies’ tax accrual workpapers in connection with listed transactions.

Textron raises important issues concerning waiver of corporate taxpayers’ work product during an audit. There are important policy ramifications at stake in cases like Textron, which affect both auditors and corporate tax counsel. Since the recent wave of corporate accounting scandals, auditors are being held to stricter standards. As such, auditors are inclined to request ever larger numbers of documents from corporations, including potentially privileged information like tax workpapers. These requests create a dilemma for corporations. They must disclose documents to auditors to meet their financial reporting requirements. But if they do disclose, corporations risk waiving privilege for any document they turn over to their third party auditors. Textron represents a growing trend among courts that hold work-product privilege is not waived when a company shares its tax workpapers with its auditor.

This Note examines these larger policy issues in light of the Textron decision. Part I provides some background on the work-product doctrine and the two main tests that courts use to analyze whether documents fall under the privilege. Part II summarizes the Textron litigation and the district court’s opinion. Part III discusses the Textron decision’s ramifications for the work-product doctrine in light of financial auditors’ obligations in today’s regulatory environment. This Note argues that the Textron decision reached the correct result, particularly regarding the nonwaiver of the work-product privilege. Deciding that disclosure to an auditor waives the work-product privilege would have negative repercussions on financial reporting and corporate governance.


Published by the
American Bar Association Section of Taxation
in Collaboration with the
Georgetown University Law Center


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