Petition for Writ of Certiorari — Textron Inc. v. United States
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08 750 ODE 24 7p
No. ORRICE OF-THNG-CLERK
Jn the Supreme Court of the Gnited States
TEXTRON INC. AND SUBSIDIARIES, PETITIONER
v.
UNITED STATES OF AMERICA
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
PETITION FOR A WRIT OF CERTIORARI
JOHN A. TARANTINO KANNON K. SHANMUGAM
PATRICIA K. ROCHA Counsel of Record
NICOLE J. DULUDE ANNA-ROSE MATHIESON
ADLER POLLOCK & SHEEHAN GEORGE W. HICKS, JR.
P.C. SARAH F’. TEICH
One Citizens Plaza, 8th Floor ALLISON B. JONES
Providence, RI 02903 WILLIAMS & CONNOLLY LLP
725 Twelfth Street, N.W.
Washington, DC 20005
(202) 484-5000
QUESTION PRESENTED
Whether the work-product privilege in Federal Rule
of Civil Procedure 26(b)(3), which protects documents
that are “prepared in anticipation of litigation or for tri-
al,” is limited to documents that are prepared for use in
litigation.
(T)
CORPORATE DISCLOSURE STATEMENT
Textron Inc. has no perent corporation, and no pub-
licly held company owns 10% or more of Textron’s stock.
(IT)
TABLE OF CONTENTS
Page
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OE scinsecicistssitenisininguleiiinnnnminanaaeiaia 2
Reasons for granting the petition............0sssessssssererrrseeressseneres 11
A. The decision below deepens a circuit
conflict concerning the scope of the work-
IE Si ssirsieinsseninecincaintitnnitdninersntinsnticinimnaiete 12
B. The court of appeals’ decision is erroneous. ..............0+ 20
C. The question presented is an exceptionally
important and recurring one that merits
the Court’s review in this CaS@...........sscssesseersssssseresseess 25
CIN, oi icicccerrasssarebinnecrioiediniccnnemmecunnlnamananeananenn 31
I De bas sisisissisiviceiacnesstinaacnsinictanpeanseiiaminaiiiameaamammaia la
PIE © csccsssisrevisisticczcrimaviscinavcncaniiniainmaeienl 47a
FE eesisstoseissstrinsntisimandaclainaniinteaniniaaasmaanaan 89a
PIE FD scscscvsssssevisosiasinissninntanamunidaasnsanseiammaenmminiaaiael 119a
PIII GE snseivvisestesesnnrisniriidicciapiaiamnamisieaaniaaaads 12la
TABLE OF AUTHORITIES
Cases:
Binks Manufacturing Co. v. National Presto
Industries, Inc., 709 F.2d 1109 (7th Cir. 1983)............. 12
Carcieri v. Salazar, 129 S. Ct. 1058 (2009)... ecceceeeees 21
Commissioner of Revenue v. Comcast Corp.,
901 N.B.2d 1185 (Mass. 2009) ....scsccscrsrsrosssscrrscecevosersesees 17
Delaney, Migdail & Young, Chartered v. IRS,
Ge Fe Cs ly BED wens etcninsasesnissensentosassisesscesesee 26
Department of Interior v. Klamath Water Users
Protective Association, 5382 U.S. 1 (2001)............0.ccceeee 3
FTC v. Grolier, Inc. , 462 U.S. 19 (1988)..........ecsccccecesseeeees 21
Gottlieb v. Wiles, 143 F.R.D. 241 (D. Colo. 1992).............. 16
(IIT)
Cases—continued:
Henderson v. Newport County Regional YMCA,
ns Es sechlarecnciustuanabimsaninna 17
Hickman Vv. Taylor, 329 U.S. 495 (1947) ....ccccscceeceeees passim
In re Grand Jury Subpoena,
357 F.3d 900 (9th Cir. 2004)................. ecco 12, 18, 14, 18
In re Honeywell International, Inc., Securities
Litigation, 230 F.R.D. 293 (S.D.N.Y. 2008) .........ccececee 27
In re Kaiser Aluminum & Chemical Co.,
214 F.3d 586 (5th Cir. 2000), cert. denied,
ERR ete cea cae 15
In re Sealed Case, 146 F.3d 881 (D.C. Cir. 1998)......... 12, 14
Lawrence E. Jaffe Pension Plan v. Household
International, Inc.,
Be Fes BE ats Bits ae sntnccsacicassensttenrsesseceisscenees 27
Maine v. United States Department of Interior,
BS FBG GO CAGE Cae, BED ccc evcccocercesscesccserccsscsevesssossesevene 16
Martin v. Bally’s Park Place Hotel & Casino,
983 F.2d 1252 (3d Cir. 1993) ..............-.--00+ gidincsiaannaiida 12
McEwen v. Digitran Systems, Inc.,
155 F.R.D. 678 (D. Utalh 1994) .....cccccscsccsessrcsssessecsocescenees 16
Mohawk Industries, Inc. v. Carpenter,
RE nC 30
National Union Fire Insurance Co. v. Murray
Sheet Metal Co., 967 F.2d 980 (4th Cir. 1992)............0. 12
NLBB vy. Sears, Roebuck & Co.,
ei ciimantnsabasions 20, 21
Regions Financial Corp. v. United States,
No. 06-895, 2008 WL 2139008
(N.D. Ala. May 8, 2008), appeal dismissed,
No. 08-13866 (11th Cir. Dec. 30, 2008) .................0+ 16, 19
Senate of the Commonwealth of Puerto Rico
ex rel. Judiciary Committee v. United States
Department of Justice,
823 F.2d 574 (D.C. Cir. 1987) ........... Saas ies 14, 20
Simon v. G.D. Searle & Co., 816 F.2d 397 (8th Cir.),
cert. denied, 484 U.S, 917 (1987)......cccccsssssscsssessscesseeees 12
Page
Cases—continued:
Springfield Terminal Railway Co. v. Department of
Transportation, 754 A.2d 353 (Me. 2000).............:ce0e 17
Swidler & Berlin v. United States,
eo ciueuetsunsvenbinieanieidioia 3
Textron Inc. v. Commissioner,
Le 18
Tronitech, Inc. v. NCR Corp.,
108 F.R.D. 655 (S.D. Ind. 1985) ..........cccccssssccssessessseceereee 27
United States Fire Insurance Co. v. Bunge North
America, Inc., 247 F.R.D. 656 (D. Kan. 2007).............. 16
United States v. Adlman,
BIO Fee Be Ge Cire BIMOD csceccrsesescscnsveciscrencecesenen passim
United States v. Arthur Young & Co.,
I os csaccsnsennsissamebdniniadisianntaass 26, 29, 30
United States v. Davis,
636 F.2d 1028 (5th Cir. Unit A Feb. 1981),
cert. denied, 454 U.S. 862 (1981).........c.cccscccssesereesssneees 15
United States v. El Paso Co.,
682 F.2d 530 (5th Cir. 1982), cert. denied, .
ee ie ica ciicsionnacoetnsnilasnlidecicsansiaseesaanis 15, 20
United States v. Hubbell, 530 U.S. 27 (2000) ...............:0000- 3
United States v. Nobles, 422 U.S. 225 (1975) ......ccccccscsseees 22
United States v. Roxworthy,
457 F.3d 590 (6th Cir. 2006)...............cccccsescseseees 12, 18, 19
Upjohn Co. v. United States, 449 U.S. 383 (1981) ............. 22
Statutes and rules:
ES hy ET aS mT Ae ae Ce aT TSS AE 6
Be I aiia ss inasinssi cee consanincapedadeissacdaabieluaueeaatanmame 2
Re EX RONEN TENT passim
Be eo ED vciccccvcscnsssanieosseenaicesstaeansanaacnmiiie 2
Ps ie SEs Fs I iscscsnenensssnsesesstvscstnintesmenasnesamenii 4
2 Rt A ____. ; REE 4, 23
Fed. R. Civ. P. 26(b)(3) advisory committee’s note
PUTT tesidedasntenadinitinannndevsasth senisdbeciepaseetammnauiaamaiasnanaial 23
Page
Miscellaneous:
Stuart J. Bassin, Managing Tax Accrual
Workpapers After ‘Textron,’
Se ee Ny TIT a sacissococscsnesecsnsnnsseqneesssescsesncasevens 29
Nancy T. Bowen, William S. Lee & Robert C.
Morris, Newly Minted ‘For Use in Possible
Litigation’ Test of ‘Textron’ May Have Far-
Reaching Implications for Companies,
TT since scsctsnnntennstessectnomeseneannnenesees 28
Kim Dixon, U.S. IRS Could Seek More in Company
Audits—Official, Reuters, Nov. 19, 2009............000000 26
Amir Efrati, Ruling in Tax-Auditing Case Puts
Corporations on Edge,
Wall St. J., Ata. 20, 2008, at Ad ...ccccrccoccrsrorcerrccscoseccoscece 28
Michelle M. Henkel, ‘Textron’ Eviscerates the 60-
Year-Old Work Product Privilege,
By re I aaa a ccsiancntnesnnspenenecsncccsonsocssees 28
I.R.S. Announcement 2002-63, 2002-2 C.B. 72.......ceccesesesees 5
I.R.S. Notice 2005-13, 2005-1 C.B. 630 ............ceccceeesereseeees 5
Robert Khuzami, Remarks at AICPA Nationa! Con-
ference on Current SEC and PCAOB Develop-
ments (Dec. 8, 2009) <www.sec.gov/news/
speech/2009/spch120809rsk. htm >. .........ccsceeeceseseeeereeees 28
Scott Novick, What In-House Tax Professionals
Should Do in Light of ‘Textron,’ Global Tax Blog
(Aug. 31, 2009) <tinyurl.com/scottnovick > .................. 29
Claudine Pease-Wingenter, Prophetic or Mis-
guided? The Fifth Circuit's (Increasingly) Un-
popular Approach to the Work Product Doctrine,
I aca eatnpnssscsoniocéns 15
Robert W. Pommer III, First Circuit Reverses
Course in Closely Watched Work Product
Case; E'stablishes Broad New Standard
That Could Extend Outside Tax Area,
41 Sec. Reg. & Law Report 2050 (2009) ...............0c0000 29
VII
Page
Miscellaneous—continued:
Charles Alan Wright, Arthur R. Miller & Richard L.
Marcus, Federal Practice and Procedure
(2d ed. 1994 & Supp. 2009)...........:ceceeseeeeseree 13, 23, 26, 28
In the Supreme Court of the Gnited States
No.
TEXTRON INC. AND SUBSIDIARIES, PETITIONER
v.
UNITED STATES OF AMERICA
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
PETITION FOR A WRIT OF CERTIORARI
Textron Inc., together with its subsidiaries, respect-
fully petitions for a writ of certiorari to review the judg-
ment of the United States Court of Appeals for the First
Circuit in this case.
OPINIONS BELOW
The opinion of the en banc court of appeals (App., in-
fra, 1a-46a) is reported at 577 F.3d 21. The opinion of
the court of appeals panel (App., infra, 47a-88a) is re-
ported at 553 F.3d 87. The district court’s order denying
respondent’s petition to enforce administrative summons
(App., 7nfra, 89a-118a) is reported at 507 F. Supp. 2d
138.
JURISDICTION
The judgment of the court of appeals was entered on
August 18, 2009. On October 20, 2009, Justice Breyer
extended the time within which to file a petition for a
writ of certiorari until December 24, 2009. The jurisdic-
tion of this Court is invoked under 28 U.S.C. 1254(1).
RULE INVOLVED
In relevant part, Federal Rule of Civil Procedure
26(b)(3)(A) provides:
Ordinarily, a party may not discover documents and
tangible things that are prepared in anticipation of
litigation or for trial by or for another party or its
representative (including the other party’s attorney,
consultant, surety, indemnitor, insurer, or agent).
STATEMENT
In 2008, the Internal Revenue Service (IRS) com-
menced an audit of petitioner’s tax returns for tax years
1998 to 2001. In connection with that audit, the IRS is-
sued an administrative summons for petitioner’s work-
papers relating to its potential tax liabilities for tax year
2001. Citing, inter alia, the work-product privilege, peti-
tioner withheld certain documents, including a spread-
sheet prepared by petitioner’s lawyers that listed items
on its return whose treatment was uncertain (and, as to
each item, estimated the likelihood of success in the
event of a dispute). The government then filed a petition
to enforce the summons in the United States District
Court for the District of Rhode Island. The district
court denied the petition. App., infra, 89a-118a. A panel
of the court of appeals initially affirmed. /d. at 47a-8&a.
After granting rehearing en banc, however, the court of
appeals reversed. /d. at la-46a.
1. This case presents a substantial circuit conflict on
an issue of immense practical importance: the scope of
the work-product privilege. The Court first recognized
that privilege in Hickman v. Taylor, 329 U.S. 495
(1947).’ In the course of discovery, the plaintiff in Hick-
man had sought materials “secured by an adverse par-
ty’s counsel in the course of preparation for possible liti-
gation after a claim ha[d] arisen.” /d. at 497. Although
the then-recent Federal Rules of Civil Procedure took a
“broad and liberal” approach to discovery, id. at 507, and
by their terms seemingly permitted the plaintiff to ob-
tain the materials in question, see id. at 505-506, the
Court held that the “work product” privilege protected
“written materials obtained or prepared by an adver-
sary’s counsel with an eye toward litigation.” /d. at 511.
The Court explained that the work-product privilege was
justified by historical practice, see id. at 510 n.9, and that
a contrary rule would lead to “[iJnefficiency, unfairness
and sharp practices,” with the result that “the legal pro-
fession would be demoraliz[ed}” and “the interests of the
clients and the cause of justice * * * poorly served,”
id. at 511.
In 1970, the Federal Rules of Civil Procedure were
amended to codify the work-product privilege. Rule
26(b)(3) provides that the work-product privilege covers
“documents and tangible things that are prepared in an-
ticipation of litigation or for trial by or for another party
' Hickman has variously been described as giving rise to a “doc-
trine,” “protection,” or “privilege.” In keeping with the terminology
of the Court’s more recent decisions, we refer here to the “work-
product privilege.” See, eg., Department of Interior v. Klamath
Water Users Protective Ass'n, 582 U.S. 1, 7 (2001); United States v.
Hubbell, 530 U.S. 27, 31 (2000); Swidler & Berlin v. United States,
524 U.S. 399, 402-408 (1998).
or its representative.” The privilege is qualified rather
than absolute: where a party to litigation can show that
it “has substantial need for the materials to prepare its
case and cannot, without undue hardship, obtain their
substantial equivalent by other means,” the party can
obtain production of otherwise protected materials. Fed.
R. Civ. P. 26(b)(3)(A)(ii). +Even upon such a showing,
however, the party may not obtain production of so-
called “opinion work product”: that is, materials that
would “disclos[e] * * * the mental impressions, con-
clusions, opinions, or legal theories of a party’s attorney
or other representative concerning the litigation.” Fed.
R. Civ. P. 26(b)(8)(B). This case concerns the issue of
when a document has been prepared “in anticipation of
litigation,” and is therefore protected by the work-
product privilege, under Rule 26(b)(3).
2. Textron Inc. is a miulti-industry corporation
whose subsidiaries and operating units include such well-
known businesses as Cessna Aircraft and Bell Helicop-
ter. Textron and its subsidiaries file consolidated tax re-
turns; they are collectively the petitioner before this
Court. Because Textron is one of the Nation’s largest
corporations, petitioner’s tax returns are routinely au-
dited; in fact, the IRS has audit staff permanently based
onsite at Textron, and, during the relevant period, had
approximately 20 employees assigned to audit petition-
er’s returns. In 2003, the IRS commenced a scheduled
audit of petitioner’s tax returns for tax years 1998 to
2001. As part of that audit, the IRS issued more than
500 formal requests for information; petitioner produced
“many file cabinets” worth of material in response to
those requests. App., infra, 4a, 90a-91a; C.A. App. 184,
194-195, 227.
In tax year 2001, one of Textron’s subsidiaries had
engaged in several “sale-in, lease-out” transactions in-
volving telecommunications and rail equipment. In 2002,
the IRS adopted a policy under which, where a taxpayer
claims benefits from two or more similar “listed transac-
tions” (ie., transactions whose tax treatment was, in the
IRS's view, open to question), the IRS would seek all of
the taxpayer’s “tax accrual workpapers” (ie., workpa-
pers relating to potential tax liabilities) for the tax year
in question, regardless whether those workpapers per-
tained to the transactions at issue. See I.R.S. An-
nouncement 2002-63, 2002-2 C.B. 72. Although the “sale-
in, lease-out” transactions were not classified as “listed
transactions” at the time Textron’s subsidiary engaged
in them, they were so classified several years later, and
petitioner duly informed the IRS of the transactions.
See I.R.S. Notice 2005-13, 2005-1 C.B. 630; App., infra,
4a, 91a; C.A. App. 252-255.
Based on those transactions, and notwithstanding the
fact that the subsidiary had received legal advice that its
tax treatment of those transactions was appropriate, the
IRS issued a request, followed by an administrative
summons, for petitioner’s 2001 workpapers. In re-
sponse, petitioner expressed its willingness to produce
documents relating to the transactions at issue. But it
withheld other documents relating to its return as a
whole, including, most notably, a spreadsheet prepared
by its in-house lawyers that listed items on its return
whose treatment was uncertain (and, as to each item, es-
timated the likelihood of success in the event of a dis-
pute),? and background memorandums that set out the
legal analysis behind those estimates. By its own admis-
* A redacted version of a comparable spreadsheet from a prior tax
year was introduced as an exhibit in the district court and is repro-
duced in the appendix to this petition at pages 121a to 122a.
sion, the IRS sought those documents in order to obtain
a “roadmap” to petitioner’s tax return, because those
documents would “provid[e] guidance” in reviewing peti-
tioner’s tax return and “disclos[e] unidentified issues.”
App., infra, 5a, 3la, 91a-93a; Gov't C.A. Br. 7, 19; Gov’t
C.A. Reply Br. 16 n.7.
3. Pursuant to 26 U.S.C. 7604, the government then
filed a petition to enforce the summons in the United
States District Court for the District of Rhode Island.
As is relevant here, petitioner contended that the with-
held documents were protected by the work-product pri-
vilege. In support of that contention, petitioner submit-
ted affidavits regarding the method by which the docu-
ments were prepared, and also presented testimony at
an evidentiary hearing concerning the documents’ pur-
poses. Specifically, the head of petitioner’s tax depart-
ment testified that, although one purpose of the docu-
ments was to assist petitioner’s independent auditor in
reviewing the amount set aside in reserve for potential
tax liabilities in the event of disputes, another purpose
was to guide petitioner in making litigation or settlement
decisions concerning the tax treatment of the specified
items. See C.A. App. 200 (testimony of Norman Rich-
ter).
After the evidentiary hearing, the district court de-
nied the government’s petition. App., infra, 89a-118a.
As is relevant here, the district court held that the doc-
uments at issue were covered by the work-product privi-
lege. Jd. at 105a-110a. The district court noted that, al-
though courts had “applied * * * different tests in de-
termining whether a document was prepared ‘in antici-
pation of litigation,’” 7d. at 107a, “the relevant inquiry is
whether the document was prepared or obtained ‘be-
cause of the prospect of litigation.” /bid. Applying that
standard, the court determined that the documents
“would not have been prepared at all ‘but for’ the fact
that [petitioner] anticipated the possibility of litigation
with the IRS.” Jd. at 108a. The court explained that,
“lilf [petitioner] had not anticipated a dispute with the
IRS, there would have been no reason for it to establish
any reserve or to prepare the workpapers used to calcu-
late the reserve.” Jbid. The court added that, “even if
the workpapers were needed to satisfy [petitioner’s audi-
tor] that [petitioner’s] reserves complied with [generally
accepted accounting principles], that would not alter the
fact that the workpapers were prepared ‘because of an-
ticipated litigation with the IRS.” Jd. at 109a.°
4. The government appealed. A divided panel of the
court of appeals initially affirmed in relevant part, agree-
ing with the district court that the documents at issue
were covered by the work-product privilege. App., infra,
47a-88a. After granting the government’s petition for
rehearing en banc, however, the court of appeals re-
versed by a 3-2 vote. Jd. at la-46a.
a. The en banc court of appeals first noted that, un-
der Federal Rule of Civil Procedure 26(b)(3), the work-
product privilege extends to documents that are “pre-
pared in anticipation of litigation or for trial.” App., in-
fra, 1la. At the same time, the court reasoned that “how
far work product protection extends turns on a balancing
of poicy concerns rather than application of abstract log-
ic.” Jd. at 9a The court of appeals also observed that
“the Supreme Court has not ruled on the issue before us,
* The district court determined that the documents at issue were
also covered by the attorney-client privilege, App., infra, 99a-102a,
but that petitioner had waived that privilege by disclosing the doc-
uments to its auditor, id at 110a-112a. Petitioner did not challenge
the latter determination on appeal.
namely, one in which a document is not in any way pre-
pared ‘for’ litigation but relates to a subject that might or
might not occasion litigation.” Jbid.
Although the court of appeals acknowledged that it
had previously suggested that the relevant inquiry was
whether the documents were prepared “because of” the
prospect of litigation, App., infra, 9a, it ultimately held
that the work-product privilege reached only documents
that were “prepared for use in possible litigation.” Jd. at
lla. In adopting that standard, the court explained that
“{i]t is not enough to trigger work product protection
that the subject matter of a document relates to a subject
that might conceivably be litigated,” zd. at 16a, “(nJor is
it enough that the materials were prepared by lawyers
or represent legal thinking,” 7d. at 17a. The court added,
without elaboration, that “[e]lvery lawyer who tries cases
knows the touch and feel of materials prepared for a cur-
rent or possible * * * lawsuit.” Ibid.
Applying the “for use” standard, the court of appeals
determined that the documents at issue were not cov-
ered by the work-product privilege, reasoning that
“{a]Jny experienced litigator would describe the tax ac-
crual work papers as tax documents and not as case
preparation materials.” App., infra, 15a. The court
noted that one purpose of the documents was to assist
petitioner’s auditor in reviewing the amount set aside in
reserve for potential tax liabilities in the event of dis-
puted, zd. at 1la, and summarily discounted petitioner’s
evidence that another purpose was to guide petitioner in
making litigation or settlement decisions concerning the
tax treatment of the specified items, id. at 14a-15a. The
court concluded that “(t]here is no evidence in this case
that the work papers were prepared for * * * use [in
litigation] or would in fact serve any useful purpose for
[petitioner] in conducting litigation if it arose.” Jd. at
18a-19a. In so concluding, the court conceded that
“Cojther circuits have not passed on tax audit work pa-
pers and some might take a different view.” /d. at 18a.
b. Judge Torruella, joined by Judge Lipez, dis-
sented. App., infra, 21a-46a. He criticized the majority
for “abandon[ing] our ‘because of test”; “ignor[ing] a
tome of precedents from the circuit courts”; “brush[ing]
aside the actual text of Rule 26(b)(3)”; and “contra-
ven{ing| m[any] of the principles underlying the work-
product doctrine.” Jd. at 21a-22a.
At the outset, Judge Torruella noted that, while the
majority had “claim[ed] allegiance” to the court of ap-
peals’ earlier decision applying the “because of” stan-
dard, App., infra, 22a, the majority in fact adopted a nar-
rower standard by concluding that documents must be
prepared “for use” in litigation in order to be protected
by the work-product privilege. Jd. at 23a. He explained
that “no court * * * hasso ruled,” id. at 24a, and that
the “for use” standard could not be reconciled either
with the “because of” standard applied by the majority of
the circuits or even with the narrower standard of the
Fifth Circuit, which turns on whether the “primary pur-
pose” for which the document was prepared was to assist
in future litigation. Jd. at 24a-27a. And as to the majori-
ty’s application of the “for use” standard, Judge Torru-
ella noted that “[l]lower courts deserve more guidance
than a simple reassurance that a bare majority of the en
banc court knows work product when it sees it.” Jd. at
27a.
Judge Torruella then contended that the majority's
“for use” standard was incorrect, primarily because it
was inconsistent with the language of Rule 26(b)(3),
which protects not only documents prepared “for trial”
but also documents prepared “in anticipation of litiga-
tion.” App., infra, 28a. He explained that “the term ‘an-
10
ticipation of litigation’ should not be read out of the rule
by requiring a showing that documents be prepared for
trial.” Jbid. Judge Torruella also contended that this
case “squarely implicated” the policy rationales for the
work-product privilege articulated in Hickman, because
the documents at issue “contain counsel’s ultimate im-
pression of the value of the case” and thus “contain ex-
actly the sort of mental impressions about the case that
Hickman sought to protect.” Jd. at 31a. He added that,
‘Sf attorneys who identify good faith questions and un-
certainties in their clients’ tax returns know that putting
such information in writing will result in discovery by the
IRS, they will be more likely to avoid [doing so], thus
diminishing the quality of representation.” Jd. at 32a.
And he noted that the majority's approach would have
significant ramifications beyond the specific context of
this case, because it would allow parties to access docu-
ments assessing litigation risks more generally. Jd. at
33a-34a.
Judge Torruella next determined that, under the
“because of’ standard, the documents at issue in this
case would be covered by the work-product privilege.
App., 7nfra, 34a-45a. He noted that the district court had
found both that “anticipation of litigation was the ‘but
for’ cause of the documents’ creation,” id. at 36a, and
that the documents were created for a litigation-related
purpose as well as a business purpose, id. at 35a-36a.
Judge Torruella contended that “(t]he majority ma[de]
no effort to reject these factual findings,” id. at 36a, but
instead ignored them as irrelevant “without any finding
of clear error,” id. at 38a. Because the documents “were
not prepared irrespective of the prospect of litigation,”
he reasoned, they would be protected under the correct
standard. /d. at 43a (internal quotation marks omitted).
11
Judge Torruella concluded that the majority’s deci-
sion “throw{s] the law of work-product protection into
disarray,” App., infra, 45a, and “will be viewed as a dan-
gerous aberration in the law of a well-established and
important evidentiary doctrine,” ibid. He added that the
majority’s decision “further[s] the split” in the circuits
concerning the meaning of Rule 26(b)(3), ibid., and that
“(t]he time is ripe for the Supreme Court to intervene
and set the circuits straight on this issue which is essen-
tial to the daily practice of litigators across the country,”
ibid.
5. The court of appeals subsequently granted a stay
pending the filing of a petition for certiorari. App., infra,
119a-120a. In so doing, the court of appeals acknowl-
edged that “the work product privilege finds its origin in
a Supreme Court decision that has not often been revi-
sited by the Court,” zd. at 120a, and that “there is some
difference in the interpretations adopted in different cir-
cuits,” ibid.
REASONS FOR GRANTING THE PETITION
When measured in terms of its practical significance
for civil litigants, this is one of the more important cases
to come before the Court in some time. In the decision
below, the en banc First Circuit adopted an unpreceden-
tedly narrow interpretation of the work-product privi-
lege in Federal Rule of Civil Procedure 26(b)(3), holding
that the privilege is limited to documents that are pre-
pared “for use” in litigation. That holding deepens a
preexisting and longstanding circuit conflict: nine other
courts of appeals have adopted inconsistent (but un-
iformly broader) views of the privilege’s scope. The
First Circuit’s analysis, moreover, was deeply flawed,
because its “for use” standard cannot be reconciled ei-
ther with the language of Rule 26(b)(3) or with the poli-
12
cies underlying the work-product privilege. As the
enormous amount of attention that this case has gar-
nered reflects, the scope of the privilege is a recurring
issue of obvious practical significance, and this case is an
optimal vehicle in which to consider the issue. In sum,
because this case is a compelling candidate for further
review in every respect, certiorari should be granted.
A. The Decision Below Deepens A Circuit Conflict Con-
cerning The Scope Of The Work-Product Privilege
1. As the First Circuit seemingly recognized, see,
e.g., App., infra, 18a, 120a, its decision conflicts with the
decisions of nine other courts of appeals concerning the
scope of the work-product privilege. That conflict war-
rants this Court’s review.
a. Eight courts of appeals have held that, for pur-
poses of determining whether a document was prepared
“in anticipation of litigation” under Rule 26(b)(3), the re-
levant inquiry is whether the document was prepared or
obtained “because of” the prospect of litigation. See, e.g.,
In re Sealed Case, 146 F.3d 881, 884 (D.C. Cir. 1998);
United States v. Adlman, 134 F.3d 1194, 1202-1203 (2d
Cir. 1998); Martin v. Bally’s Park Place Hotel & Casino,
983 F.2d 1252, 1260 (8d Cir. 1993); National Union Fire
Ins. Co. v. Murray Sheet Metal Co., 967 F.2d 980, 984
(4th Cir. 1992); United States v. Roxworthy, 457 F.3d
590, 593 (6th Cir. 2006); Binks Mfg. Co. v. National Pres-
to Indus., Inc., T09 F.2d 1109, 1118-1119 (7th Cir. 1983);
Simon v. G.D. Searle & Co., 816 F.2d 397, 401 (8th Cir.),
cert. denied, 484 U.S. 917 (1987); In re Grand Jury Sub-
poena, 357 F.3d 900, 907 (9th Cir. 2004). That standard
appears to have originated in the leading treatise on civil
procedure, which states that, for purposes of the “in an-
ticipation of litigation” requirement, “the test should be
whether, in light of the nature of the document and the
13
factual situation in the particular case, the document can
fairly be said to have been prepared or obtained because
of the prospect of litigation.” 8 Charles Alan Wright, Ar-
thur R. Miller & Richard L. Marcus, Federal Practice
and Procedure § 2024, at 348 (2d ed. 1994) (Wright &
Miller).
In applying the “because of” standard, courts of ap-
peals have focused on whether the document at issue
would not have been prepared but for the prospect of lit-
igation—or whether the document was prepared for a
litigation-related purpose, even if it was prepared for
another purpose as well. For example, in Adlman—
perhaps the most influential lower-court decision on the
scope of the work-product privilege—the Second Circuit
held that the privilege covered a document that, inter
alia, made “predictions about the likely outcome of liti-
gation” with the IRS that could result from a company’s
planned merger. 134 F.3d at 1195. The court concluded
that, “[w]here a document was created because of antic-
ipated litigation, and would not have been prepared in
substantially similar form but for the prospect of that
litigation, it falls within Rule 26(b)(3).” bid. In so con-
cluding, the court determined that “(t]he fact that [the]
document’s purpose [was] business-related”—viz., to as-
sist the company in deciding whether to proceed with the
merger in the first place—“appears irrelevant to the
question whether it should be protected under Rule
26(b)(3).” Id. at 1200.
Similarly, in Grand Jury Subpoena, the Ninth Cir-
cuit held that the work-product privilege extended to
documents that were created not only to assess a compa-
ny’s potential liability, but also to comply with certain
regulatory requirements. 357 F.3d at 909-910. In adopt-
ing the “because of” standard, the court explained that
the standard “does not consider whether litigation was a
14
primary or secondary motive behind the creation of a
document,” but rather “affords protection” when the
document “would not have been created in substantially
similar form but for the prospect of that litigation.” Jd.
at 908 (quoting Ad/man, 134 F.3d at 1195).
And in Sealed Case, the District of Columbia Circuit
held that certain documents could be privileged despite
the fact that no “specific claim” had arisen at the time
the documents were prepared. 146 F.3d at 882. In the
course of doing so, the court reaffirmed its adoption of
the “because of” standard, reiterating that “the ‘testing
question’ for the work-product privilege” is whether a
document “can fairly be said to have been prepared or
obtained because of the prospect of litigation.” Jd. at 884
(internal quotation marks omitted) (quoting Senate of the
Commonwealth of Puerto Rico ex rel. Judiciary Com-
mittee v. United States Dep't of Justice, 823 F.2d 574,
586 n.42 (D.C. Cir. 1987) (R.B. Ginsburg, J.)). The court
noted that lawyers often prepared documents “prior to
the emergence of specific claims,” such as when lawyers
“consider whether business decisions might result in an-
titrust or securities lawsuits” or “assess the possibility
that new products might give rise to tort actions.” Jd. at
886. The court reasoned that, if the work-product privi-
lege were not available in those situations, lawyers
“would not likely risk taking notes about such matters or
communicating in writing with colleagues, thus severely
limiting their ability to advise clients effectively.” Jbid.
b. Even before the First Circuit’s decision in this
case, there was a longstanding circuit conflict between
the foregoing circuits and the Fifth Circuit, which has
repeatedly held that, for purposes of determining wheth-
er a document was prepared “in anticipation of litiga-
tion” under Rule 26(b)(3), the relevant inquiry is whether
the “primary motivating purpose” for which the docu-
15
ment was prepared was to assist in litigation. United
States v. Davis, 636 F.2d 1028, 1040 (5th Cir. Unit A Feb.
1981), cert. denied, 454 U.S. 862 (1981). Perhaps most
significantly, in United States v. El Paso Co., 682 F.2d
530 (1982), cert. denied, 466 U.S. 944 (1984), the Fifth
Circuit held that the work-product privilege did not cov-
er workpapers like those at issue in this case, on the
ground that, even though the workpapers “forecast{] the
ultimate likelihood of sustaining [the company’s] position
in court,” the “primary motivating force” behind their
preparation was “not to ready [the company] for litiga-
tion over its tax returns,” but rather “to anticipate, for
financial reporting purposes, what the impact of litiga-
tion might be on the company’s tax liability.” 682 F.2d at
543.
Notably, in adopting the “because of” standard, nu-
merous courts have expressly rejected the Fifth Circuit’s
more stringent “primary purpose” standard. See, e.g.,
Adlman, 134 F.3d at 1198-1199 (noting, after citing Da-
vis and El Paso, that “a requirement that documents be
produced primarily or exclusively to assist in litigation in
order to be protected is at odds with the text and the pol-
icies of [Rule 26(b)(3)]”). Commentators have criticized
the Fifth Circuit’s standard as well. See, e.g., Claudine
Pease-Wingenter, Prophetic or Misguided? The Fifth
Circuit’s (Increasingly) Unpopular Approach to the
Work Product Doctrine, 29 Rev. Litig. 121, 161 (2009)
(contending that “[t]he Fifth Circuit’s ‘primary purpose’
test is clearly at odds with the plain meaning of the text
of Rule 26(b)(3) and undercuts the policy goals of the
work product doctrine”). In the face of mounting criti-
cism, however, the Fifth Circuit has adhered to its stan-
dard. See, e.g., In re Kaiser Aluminum & Chem. Co.,
—"
o>
214 F.3d 586, 593 (2000), cert. denied, 532 U.S. 919
(2001).*
c. Although a panel of the First Circuit had pre-
viously suggested that it would follow the prevailing “be-
cause of” standard, see Maine v. United States Dep't of
Interior, 298 F.3d 60, 68 (2002), the en bane First Circuit
took a different approach in this case and held that, for
purposes of determining whether a document was pre-
pared “in anticipation of litigation” under Rule 26(b)(3),
the relevant inquiry was whether the documents were
“prepared for use in possible litigation.” App., infra,
lla. While the First Circuit at one point purported to
reaffirm its earlier decision in Maine, id. at 9a, it did not
otherwise refer to the “because of” standard (on which
the district court and the court of appeals panel had re-
lied, see, e.g., id. at 55a-57a, 107a-108a), but instead re-
peatedly reiterated the novel requirement that a docu-
ment must possess a litigation-related wse in order to be
protected. See, ¢.g., id. at 14a (“could be useful” in litiga-
tion); id. at 15a (“prepared for use in litigation”); id. at
18a (“prepared for potential use in litigation”). And in
applying that standard to the facts of this case, the court
concluded that “[t]here is no evidence in this case that
* The remaining three circuits—the Tenth, Eleventh, and Federal
Circuits—have not addressed the issue. A district court recently
predicted that the Eleventh Circuit would “align itself with the ma-
jority of the other courts of appeal[s] and adopt the ‘because of liti-
gation’ test.” Regions Fin. Corp. v. United States, No. 06-895, 2008
WL 2139008, at *5 (N.D. Ala. May 8, 2008), appeal dismissed, No.
08-13866 (11th Cir. Dec. 30, 2008). By contrast, several district
courts in the Tenth Circuit have adupted the Fifth Circuit’s “prima-
ry purpose” standard. See, eg., United States Fire Ins. Co. v.
Bunge North America, Inc., 247 F.R.D. 656, 658-659 (D. Kan. 2007);
McEwen v. Digitran Sys., Inc., 155 F.R.D. 678, 682 (D. Utah 1994);
Gottlieb v. Wiles, 143 F.R.D, 241, 253 (D. Colo. 1992).
17
the work papers were prepared for * * * use [in liti-
gation] or would in fact serve any useful purpose for [pe-
titioner] in conducting litigation if it arose.” /d. at 18a-
19a. As the dissent below explained, the First Circuit
thus adopted a standard that is narrower than either the
“because of” standard applied by eight other circuits or
the “primary purpose” standard applied by the Fifth
Circuit, neither of which requires a litigation-related use.
See id. at 23a-27a (opinion of Torruella, J.). The First
Circuit thereby deepened a circuit conflict that merits
this Court’s review.”
2. This case constitutes an ideal vehicle for the
Court to resolve the well-entrenched circuit conflict con-
cerning the scope of the work-product privilege, because
the choice of the appropriate standard would plainly be
dispositive of whether the privilege covers the docu-
ments at issue here.
a. As the district court and the court of appeals pan-
el correctly determined, the documents at issue would be
covered under the “because of” standard. See App., in-
fra, 55a-74a (court of appeals panel); id. at 105a-110a
(district court). To begin with, as the district court
® In addition, numerous States have rules codifying the work-
product privilege in materially identical terms to Federal Rule
26(b)(3), and many state courts of last resort (including courts within
the First Circuit) have applied the “because of” standard in deter-
mining whether a document was prepared “in anticipation of litiga-
tion” under the applicable state rule. See, eg., Commissioner of
Revenue v. Comcast Corp., 901 N.E.2d 1185, 1203-1204 (Mass. 2009);
Springfield Terminal Ry. Co. v. Department of Transp., 764 A.2d
358, 357-358 (Me. 2000); Henderson v. Newport County Regional
YMCA, 966 A.2d 1242, 1247 (R.I. 2009). In many cases, therefore,
the practical effect of the decision below will be to render the availa-
bility of the work-product privilege in the First Circuit dependent
on whether the case is being litigated in federal or state court.
18
found, “it is clear” that the documents “would not have
been prepared at all ‘but for’” the prospect of litigation
with the IRS concerning the specified items from peti-
tioner’s tax return. Jd. at 108a; see, e.g., Adlman, 134
F.3d at 1195. That is true for the simple reason that,
“{ilf [petitioner] had not anticipated a dispute with the
IRS, there would have been no reason for it to establish
any reserve or to prepare the workpapers used to calcu-
late the reserve.” App., infra, 108a. Petitioner, more-
over, presented ample evidence that there was a reason-
able prospect of litigation with the IRS: all but one of its
eight previous audits had resulted in at least some form
of adversarial proceedings, with three resulting in litiga-
tion in federal court (including one proceeding that was
still ongoing at the time the documents at issue were be-
ing prepared). See id. at 109a; Textron Inc. v. Commis-
sioner, 336 F.3d 26, 28-30 (1st Cir. 2003).
In addition, to the extent that courts applying the
“because of” standard have focused more specifically on
whether the documents at issue were prepared for a liti-
gation-related purpose (even if they were prepared for
another purpose as well), see, e.g., Roxworthy, 457 F.3d
at 598-599; Grand Jury Subpoena, 357 F.3d at 907-908, it
is clear that the “because of” standard would still be sa-
tisfied, because petitioner presented uncontroverted tes-
timony to the district court that the documents were
prepared not simply to assist petitioner’s auditor in re-
viewing che amount set aside in reserve for potential tax
liabilities, but also to guide petitioner in making litigation
or settlement decisions concerning the tax treatment of
the specified items. See C.A. App. 200. Although the en
bane majority appeared to discount that testimony in
applying its “for use” standard, see App., infra, 14a, the
district court seemingly credited it in reaching a con-
trary result under the “because of” standard, see, e.g., 2d.
19
at 93a-94a, and the government did not challenge the
credibility of that testimony on appeal, see Gov't C.A. Br.
52 n.16. In sum, because the documents at issue would
not have been prepared but for the prospect of litigation
and were in fact prepared for a litigation-related pur-
pose, they would be covered under the “because of”
standard.
b. Lower-court decisions applying the “because of”
standard confirm that conclusion. At least one district
court has extended work-product protection to similar
decuments under the “because of” standard, reasoning
that, “[wJere it not for anticipated litigation, [the compa-
ny] would not have to worry about contingent liabilities
and would have no need to elicit opinions regarding the
likely results of litigation.” Regions Fin. Corp. v. United
States, No. 06-895, 2008 WL 2139008, at *5-*6 (N.D. Ala.
May 8, 2008), appeal dismissed, No. 08-13866 (11th Cir.
Dec. 30, 2008). And although no court of appeals apply-
ing the “because of” standard has specifically considered
documents provided to a company’s auditor for the pur-
pose of reviewing the amount set aside in reserve for po-
tential tax liabilities, courts of appeals applying that
standard have suggested that the privilege would reach
documents that assess potential tax liabilities, see, e.9.,
Roxworthy, 457 F.3d at 592; Adlman, 134 F.3d at 1196,"
and documents provided to a company’s auditor for the
purpose of reviewing the amount set aside for potential
litigation liabilities more generally, see, ¢.g., Adlman,
134 F.3d at 1200. Because the documents at issue here
do not meaningfully differ from the documents discussed
* The government contended below that the Sixth Circuit’s deci-
sion in Roxworthy was “incorrect{].” Gov't C.A. Reply Br. 48 n.19.
20
in those cases, they would surely be covered under the
“because of” standard applied by the majority of circuits.
By contrast, the only lower courts to hold that docu-
ments of the type at issue here would not be subject to
the work-product privilege are the en banc First Circuit,
applying its newly minted “for use” standard, and the
Fifth Circuit, applying its distinct “primary purpose”
standard. See El Paso, 682 F.2d at 542-544. The choice
of the appropriate standard would therefore be disposi-
tive of whether the documents at issue are covered by
the privilege—and, for that reason, this case constitutes
a suitable vehicle for resolution of the circuit conflict on
the privilege’s scope.
B. The Court Of Appeals’ Decision Is Erroneous
The en banc First Circuit erred in holding that the
work-product privilege in Federal Rule of Civil Proce-
dure 26(b)(3) is limited to documents that are prepared
for use in litigation.
1. Most importantly, the First Circuit’s novel “for
use” standard cannot be reconciled with the plain lan-
guage of Rule 26(b)(8). By its terms, that provision
reaches not only documents prepared “for trial,” but also
documents prepared “in anticipation of litigation”: we.,
documents prepared “in contemplation of litigation.”
Senate of the Commonwealth of Puerto Rico, 823 F.2d at
586 (emphasis added) (quoting NLRB v. Sears, Roebuck
& Co., 421 U.S. 182, 154 (1975)). The First Circuit’s
standard, however, seemingly writes the “broader cate-
gory” of documents prepared “in anticipation of litiga-
tion” out of the rule altogether, because a document that
is prepared for use in litigation would presumably always
qualify as a document prepared “for trial.” Ad/man, 134
F.3d at 1198; see zbid. (noting that, “[i]f the drafters of
the Rule intended to limit its protection to documents
21
made to assist in preparation for litigation, this would
have been adequately conveyed by the phrase ‘prepared
* * * for trial’”) (second alteration in original). The
First Circuit’s interpretation would therefore apparently
contravene the familiar canon of construction that a
court should “give effect, if possible, to every word [the
provision] used.” Carcieri v. Salazar, 129 S. Ct. 1058,
1066 (2009) (citation omitted). And even if some inde-
pendent meaning could be attributed to the phrase “in
anticipation of litigation,” the First Circuit’s “for use”
standard would at best engraft a substantial limitation
on the scope of the work-product privilege that is no-
where to be found in the language of Rule 26(b)(3)—as
the en banc majority implicitly acknowledged. See App.,
infra, 16a; Adiman, 134 F.3d at 1198 (noting that “[n]o-
where does Rule 26(b)(3) state that a document must
have been prepared to aid in the conduct of litigation in
order to constitute work product”).’
7 In adopting the “for use” standard, the First Circuit cited two of
this Court’s decisions, neither of which is apposite. The First Cir-
cuit first quoted FTC v. Grolier, Inc., 462 U.S. 19 (1983), for the
proposition that “the literal language of [Rule 26(b)(3)] protects ma-
terials prepared for any litigation or trial as long as they were pre-
pared by or for a party to the subsequent litigation.” App., infra,
16a (emphasis in First Circuit’s opinion) (quoting Grolier, 462 U.S.
at 25). In Grolier, however, the Court was addressing only the dis-
crete question whether the work-product privilege “extended
beyond the litigation for which the documents at issue were pre-
pared,” 462 U.S. at 24—as the original emphasis in the Court’s opi-
nion makes clear. See zd. at 25 (stating that “the literal language of
[Rule 26(b)(3)) protects materials prepared for any litigation or trial
as long as they were prepared by or for a party to the subsequent
litigation”). The First Circuit also cited Sears. App., infra, 17a.
That opinion, however, stands only for the proposition that docu-
ments prepared “in contemplation of” litigation “fall squarely” with
the definition of protected work product—a proposition that is more
22
2. The First Cireuit’s standard is irreconcilable not
only with the language of Rule 26(b)(3), but also with the
policies animating the work-product privilege. In first
recognizing the privilege in Hickman, this Court ex-
plained that the privilege was necessary because “it is
essential that a lawyer work with a certain degree of pri-
vacy, free from unnecessary intrusion by opposing par-
ties and their counsel.” 329 U.S. at 510. And the Court
expressed a particular solicitude for an attorney’s
“thoughts,” “mental impressions,” and “personal be-
liefs,” which, the Court noted, had previously been
viewed as “inviolate.” Jd. at 511, 512. Notwithstanding
the government’s contention that the work-product privi-
lege “hamper [s] the search for the truth,” Gov't C.A. Re-
ply Br. 4, this Court has repeatedly reaffirmed the
“strong public polic[ies]” underlying the privilege, e.g.,
United States v. Nobles, 422 U.S. 225, 236 (1975) (inter-
nal quotation marks omitted), and those policies were
“substantially incorporated” in Rule 26(b)(3), Upjohn Co.
v. United States, 449 U.S. 383, 398 (1981).
The First Circuit’s standard would strip protection
from documents embodying an attorney’s opinion as to
the “likelihood of success in litigation,” Adlman, 134
F.3d at 1200—documents that most directly implicate
the policies underlying the work-product privilege (and
therefore lie at the “core” of the privilege). See Nobles,
422 U.S. at 238; ef. Hickman, 329 U.S. at 516 (Jackson,
J., concurring) (explaining that “[dJiscovery was hardly
intended to enable a learned profession to perform its
functions * * * on wits borrowed from the adver-
consistent with other circuits’ “because of” standard than with the
First Circuit’s “for use” standard. See p. 20, supra.
23
sary”). If such documents are not covered by the privi-
lege, it would have a chilling effect on lawyers, who
would be loath to commit their opinions to paper if the
resulting documents were “open{] to the free scrutiny” of
the IRS and other litigants. Hickman, 329 U.S. at 514.
An approach that permitted discovery of such documents
would therefore lead to the “inefficiency” of which
Hickman warned, with the result that “the legal profes-
sion would be demoraliz[ed}” and “the interests of the
clients and the cause of justice * * * poorly served.”
Id. at 511.
3. In support of its “for use” standard, the First Cir-
cuit cited an advisory committee note to Rule 26(b)(3),
which indicates that “[mJaterials assembled in the ordi-
nary course of business, or pursuant to public require-
ments unrelated to litigation, or for other nonlitigation
purposes” are not protected by the privilege. Fed. R.
Civ. P. 26(b)(3) advisory committee’s note (1970). That
note, however, speaks only to situations in which a doc-
ument has only a non-litigation-related purpose—not, as
here, a non-litigation-related purpose and a litigation-
related purpose as well. See, e.g., 8 Wright & Miller
§ 2024, at 346 (citing the advisory committee note for the
proposition that, “even though litigation is already in
prospect, there is no work-product immunity for docu-
ments prepared in the regular course of business rather
than for purposes of litigation”) (emphasis added); id. at
198 (Supp. 2009) (adding that “‘{djual purpose’ docu-
® Indeed, the government has not disputed in this case that, if the
documents at issue are subject to the privilege in the first place,
they would qualify as “opinion work product” and would therefore
be protected from disclosure even upon a showing of substantial
necessity. See Fed. R. Civ. P. 26(b)(3)(B).
24
ments created because of the prospect of litigation are
protected even though they were also prepared for a
business purpose”). As the dissent below noted, a con-
trary understanding of the advisory committee note
would create an atextual exception to Rule 26(b)(8), by
excluding documents that would otherwise fall within the
scope of the rule whenever the documents possessed an
additional purpose beyond a litigation-related purpose.
See App., infra, 42a-43a (opinion of Torruella, J.).°
In sum, there is no valid justification for the First
Circuit’s novel limitation on the scope of the work-
product privilege. This Court should grant review in or-
der to eliminate the circuit conflict and correct the First
Circuit’s seriously flawed approach.
® Before the First Circuit, the government argued that the docu-
ments at issue should not be covered by the work-product privilege
because petitioner was legally required to generate them. See Gov't
C.A. Supp. Br. 24. The First Circuit did not rely on that argument,
and for good reason. That is because, at most, the law “requires
that [petitioner] prepare audited financial statements reporting total
reserves based on contingent tax liabilities” and does not “require
the form and detail of the documents prepared here.” App., infra,
32a (Torruella, J., dissenting). To be sure, petitioner prepared the
documents for the purpose, inter alia, of assisting petitioner’s audi-
tor in reviewing the amount set aside in reserve for potential tax
liabilities (and thus in performing its obligation to review petition-
er’s financial statements for compliance with generally accepted ac-
counting principles). The salient point, however, is that, but for the
prospect of litigation with the IRS, petitioner would not have needed
to prepare the documents at all. See, e.g., C.A. App. 200 (testimony
of Norman Richter) (explaining that, if petitioner had not antic-
ipated litigation with the IRS, the documents “would be blank” and
“[w]e would have nothing there”).
25
C. The Question Presented Is An Exceptionally Impor-
tant And Recurring One That Merits The Court’s Re-
view In This Case
Finally, the question presented in this case is an ex-
ceptionally important one because it concerns the scope
of the work-product privilege—an issue that is “essential
to the daily practice of litigators across the country.”
App., infra, 45a (Torruella, J., dissenting). If the First
Circuit’s unprecedented interpretation of the work-
product privilege is allowed to stand, it will have pro-
found consequences for civil litigants in a variety of dif-
ferent contexts.
1. As a preliminary matter, the factual context in
which this case arises—ze., whether the work-product
privilege extends to documents assessing risks in tax lit-
igation for the purpose, inter alia, of assisting a compa-
ny’s auditor in reviewing the amount set aside in re-
serve—is important in its own right. Because of the size
and complexity of their operations, publicly held compa-
nies inevitably find themselves taking positions on their
tax returns that fall into “gray areas” as to which there is
legal uncertainty (because the relevant statutory or reg-
ulatory language is unclear and the IRS has provided no
guidance on point). For that reason, virtually all publicly
held companies generate so-called “tax accrual workpa-
pers” in some form. If a company is required to disclose
such documents to the IRS, it will give the IRS a “blue-
print” to the company’s thinking in preparing its tax re-
turn (as the en banc majority acknowledged, see App.,
infra, 20a); indeed, the IRS has freely admitted that it
sought the documents at issue here for that reason. See
pp. 5-6, swpra. But that kind of disclosure would contra-
vene the fundamental principle, established in Hickman,
that a party is not entitled to an opposing attorney’s “as-
sessment of * * * legal vulnerabilities in order to
26
make sure it does not miss anything in crafting its legal
case.” Delaney, Migdail & Young, Chartered v. IRS, 826
F.2d 124, 127 (D.C. Cir. 1987).
Not surprisingly, the decision below has already em-
boldened the IRS—which, before 2002, had only rarely
sought workpapers from taxpayers, see C.A. App. 238;
United States v. Arthur Young & Co., 465 U.S. 805, 820-
821 (1984)—to declare that it will aggressively pursue
such workpapers in future. See Kim Dixon, U.S. IRS
Could Seek More in Company Audits—Official, Reu-
ters, Nov. 19, 2009 (quoting comments by William Wil-
kins, IRS Chief Counsel). And because disclosure to an
adverse party waives the work-product privilege, see 8
Wright & Miller § 2024, at 369, a company that is re-
quired to disclose its workpapers to the IRS will likely be
obligated to turn over those workpapers to state taxation
authorities (even if a state court would construe the pri-
vilege more broadly, see p. 17, n.5, swpra) and even to
private litigants, thereby compounding the consequences
of the First Circuit’s approach.
2. The practical significance of the First Circuit’s
approach, however, sweeps far beyond the particular
context of this case. The First Circuit’s “for use” stan-
dard is in no way cabined to that context—nor could it
iogically be, as the government seemingly recognized at
oral argument below. See C.A. En Banc Tr. 4-5, 16
Tronically, in Delaney, the IRS argued that the work-product
privilege covered documents it had prepared to analyze the legal
vulnerability of a particular auditing method, and the District of Co-
lumbia Circuit agreed. See 826 F.2d at 126-128; cf. C_A. Panel Tr. 20
(Sept. 5, 2008) (stating that the government “spend[s] a lot more
time defending our documents from requests on the grounds of
work product than we do * * * seek[{ing] them [from other par-
ties]”).
27
(June 2, 2009) (conceding that the “work product test”
adopted by the court “will apply” both “to the IRS” and
“to everyone else,” including “outside the tax realm”).
Under the First Circuit’s standard, work-product
protection would no longer extend to any documents
prepared by counsel that assess the risks of ongoing or
potential litigation, because such documents could not
meaningfully be said to have been prepared “for use” in
litigation. For example, the work-product privilege
would not cover a document that a company prepares in
order to inform a potential merger partner of the litiga-
tion risks that the company faces—risks that the partner
would assume in the event the merger is consummated.
See, e.g., Adlman, 134 F.3d at 1195. Nor would it cover
so-called “audit response letters”: that is, letters rou-
tinely prepared by outside counsel at their corporate
clients’ request assessing pending or threatened litiga-
tion against the company for the purpose of assisting the
company’s auditor in performing its duties. See, e.g.,
Lawrence E. Jaffe Pension Plan v. Household Int'l, Inc.,
237 F.R.D. 176, 179-181 (N.D. Ill. 2006) (holding that
work-product privilege covers audit response letters); Jn
re Honeyweii Int'l, Inc., Sec. Litig., 230 F.R.D. 298, 300
(S.D.N.Y. 2068) (same); Tronitech, Inc. v. NCR Corp.,
108 F.R.D. 655, 656 (S.D. Ind. 1985) (same)."’ In those
and other similar contexts, the documents at issue con-
tain information that would be enormously valuable to
adverse parties in litigation, and the work-product privi-
lege would provide the only potential source of protec-
"' The government conceded below that, if the documents at issue
in this case were not protected by the work-product privilege, audit
response letters would not be protected either. See C.A. En Banc
Tr. 19 (June 2, 2009).
28
tion against disclosure (because the attorney-client privi-
lege is waived by disclosure to any third party, even a
potential merger partner or auditor). See 8 Wright &
Miller § 2024, at 367-368.”
Perhaps for that reason, the First Circuit’s decision
has received an enormous amount of attention from the
news media and commentators—and, belying the First
Circuit’s belief that “[n]o one with experience of law
suits” would reach a contrary conclusion, App., infra,
17a, the decision has also been greeted with widespread
consternation by practitioners. See, e.g., Nancy T. Bo-
wen, William S. Lee & Robert C. Morris, Newly Minted
‘For Use in Possible Litigation’ Test of ‘Textron’ May
Have Far-Reaching Implications for Companies, 78
U.S.L.W. 2199, 2199 (2009) (stating that the decision be-
low is “highly controversial”; “may have far-reaching
implications, particularly for publicly traded companies”;
and “adds further uncertainty to [an] already confused
legal arena”); Amir Efrati, Ruling in Tax-Auditing Case
Puts Corporations on Edge, Wall St. J., Aug. 20, 2009, at
A9 (suggesting that the decision below “is causing law-
yers for big companies some sleepless nights” and has
been seen as “signal{ing] an attack by the courts on the
‘work-product doctrine’”); Michelle M. Henkel, ‘T'extron’
Eviscerates the 60-Year-Old Work Product Privilege,
125 Tax Notes 237, 237 (2009) (contending that, “[ble-
cause of the widespread impact of [the decision below],
In fact, relying on the decision below, the Director of the SEC’s
Division of Enforcement recently made the unqualified assertion
that “audit documentation * * * relied on by an auditor in con-
nection with an audit report” is not covered by the work-product
privilege. See Robert Khuzami, Remarks at AICPA National Con-
ference on Current SEC and PCAOB Developments (Dec. 8, 2009)
<www.sec.gov/news/specch/2009/spch120809rsk.htm >.
29
the entire legal profession and all corporations should be
in a state of disbelief”).
In addition, in the wake of the First Circuit’s deci-
sion, practitioners have already begun recommending
that companies take steps to avoid the disclosure to ad-
verse parties of their litigation risk assessments. See,
e.g., Scott Novick, What In-House Tax Professionals
Should Do in Light of ‘Textron,’ Global Tax Blog (Aug.
31, 2009) <tinyurl.com/scottnovick> (contending that
“tax departments can and should * * * [l}imit[{] tax
accrual work papers to numerical analysis with minimal
supporting narrative”); Robert W. Pommer III, First
Circuit Reverses Course in Closely Watched Work
Product Case; Establishes Broad New Standard That
Could Extend Outside Tax Area, 41 Sec. Reg. & Law
Report 2050, 2053 (2009) (recommending that companies
“exercise greater caution when sharing documents with
the[ir] outside auditors”); cf. Stuart J. Bassin, Managing
Tax Accrual Workpapers After ‘Textron,’ 123 Tax Notes
571, 580 (2009) (suggesting, while this case was still
pending below, that the drafters of workpapers “should
choose their words carefully”). Those recommendations
amply support the prediction that the First Circuit’s de-
cision will have a broad chilling effect if it is allowed to
stand.
3. Although issues concerning the applicability of
the work-product privilege arise in courts around the
Nation on a daily basis, this Court has not directly ad-
dressed the scope of the privilege since its decision more
than sixty years ago in Hickman. See App., infra,
120a.° But notwithstanding the frequent recurrence in
% In Arthur Young, the Court refused to recognize an “accoun-
tant work-product privilege” for workpapers generated by a compa-
30
lower courts of issues concerning the privilege, if the
Court does not grant review in this case, it is far from
clear when the Court will have the opportunity to do so
again. In ordinary civil litigation, a party that wishes to
appeal a determination that a document is not covered
by the work-product privilege may not be able to do so
immediately, cf. Mohawk Indus., Inc. v. Carpenter, No.
08-678 (Dec. 8, 2009), slip op. 9-10 (explaining options for
appeal of denial of attorney-client privilege), and, even if
it can, the party will have to bear the expense of litigat-
ing what is an inherently collateral issue all the way to
this Court.
At all events, there is simply no reason for the Court
to wait to address the scope of the work-product privi-
lege. Ten circuits have now spoken on the issue, taking
three different (and irreconcilable) positions on the privi-
lege’s scope. This case, moreover, is an optimal vehicle
for consideration of that issue. As the dissent below ob-
served, “[t]he time is ripe for the Supreme Court to in-
tervene and set the circuits straight.” App., infra, 45a
(opinion of Torruella, J.). The Court should grant review
in this extraordinarily important case and correct the
First Circuit’s excessively narrow interpretation of the
work-product privilege.
ny’s auditor. See 465 U.S. at 815-821. In some respects, this case
presents the flipside of the issue in Arthur Young, because it in-
volves workpapers generated by the company’s own lawyers.
3]
CONCLUSION
The petition for a writ of certiorari should be
granted.
Respectfully submitted.
JOHN A. TARANTINO
PATRICIA K. ROCHA
NICOLE J. DULUDE
ADLER POLLOCK & SHEEHAN
P.C,
One Citizens Plaza, 8th Floor
Providence, RI 029038
DECEMBER 2009
KANNON K. SHANMUGAM
ANNA-ROSE MATHIESON
GEORGE W. HICKS, JR.
SARAH F’. TEICH
ALLISON B, JONES
WILLIAMS & CONNOLLY LLP
725 Twelfth Street, N.W.
Washington, DC 20005
(202) 434-5000
APPENDIX
APPENDIX A
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 07-2631
UNITED STATES OF AMERICA, Petitioner,
Appellant,
v.
TEXTRON INC. AND SUBSIDIARIES, Respondent,
Appellee.
August 13, 2009
Before: LYNCH, Chief Judge, TORRUELLA,
BOUDIN, LIPEZ and HOWARD, Circuit Judges.
BOUDIN, Circuit Judge.
The question for the en banc court is whether the at-
torney work product doctrine shields from an IRS sum-
mons “tax accrual work papers” prepared by lawyers
and others in Textron’s Tax Department to support Tex-
tron’s calculation of tax reserves for its audited corpo-
rate financial statements. Textron is a major aerospace
and defense conglomerate, with well over a hundred sub-
sidiaries, whose consolidated tax return is audited by the
IRS on a regular basis. To understand the dispute, some
(la)
2a
background is required concerning financial statements,
contingent tax reserves and tax audit work papers.
As a publicly traded corporation, Textron is required
by federal securities law to have public financial state-
ments certified by an independent auditor. See 15 U.S.C.
§§ 781, 78m (2006); 17 C.F.R. § 210 et seg. (2009). To pre-
pare such financial statements, Textron must calculate
reserves to be entered on the company books to account
for contingent tax liabilities. Such liabilities, which affect
the portrayal of assets and earnings, include estimates of
potential liability if the IRS decides to challenge debata-
ble positions taken by the taxpayer in its return.
The calculation of such reserves entails preparing
work papers describing Textron’s potential liabilities for
further taxes; these underpin the tax reserve entries in
its financial statement and explain the figures chosen to
the independent auditor who certifies that statement as
correct. By examining the work papers the accountant
discharges its own duty to determine “the adequacy and
reasonableness of the corporation’s reserve account for
contingent tax liabilities.” United States v. Arthur
Young & Co., 465 U.S. 805, 812 (1984) (rejecting claim of
accountant work product privilege protecting such work
papers).' The work papers are thus one step in a process
whose outcome is a certified financial statement for the
company.
The procedural requirement that auditors examine tax accrual
work papers is based on a combination of Statement on Auditing
Standards No. 96, Audit Documentation (2002), superseded by Au-
diting Standards No. 3, Audit Documentation (2004); Statement on
Auditing Standards No. 326, Evidential Matter (1980); and Auditing
Interpretation No. 9326, Evidential Matter: Auditing Interpreta-
tions of Section 326 (2003).
3a
In Textron’s case, its Tax Department lists items in
the tax return that, if identified and challenged by the
IRS, could result in additional taxes being assessed. The
final spreadsheets list each debatable item, including in.
each instance the dollar amount subject to possible dis-
pute and a percentage estimate of the IRS’ chances of
success. Multiplying the amount by the percentage fixes
the reserve entered on the books for that item. The
spreadsheets reflecting these calculations may be sup-
ported by backup emails or notes.
A company’s published financial statements do not
normally identify the specific tax items on the return
that may be debatable but incorporate or reflect only the
total reserve figure. As the Supreme Court explained in
Arthur Young, tax accrual work papers provide a re-
source for the IRS, if the IRS can get access to them, by
“pinpoint[ing] the ‘soft spots’ on a corporation’s tax re-
turn by highlighting those areas in which the corporate
taxpayer has taken a position that may, at some later
date, require the payment of additional taxes” and pro-
viding “an item-by-item analysis of the corporation’s po-
tential exposure to additional liability.” 465 U.S. at 813.
The IRS does not automatically request tax accrual
work papers from taxpayers; rather, in the wake of
Enron and other corporate scandals, the IRS began to
seek companies’ tax accrual work papers only where it
concluded that the taxpayer had engaged in certain
listed transactions “that [are] the same as or substantial-
ly similar to one of the types of transactions that the
{IRS] has determined to be a tax avoidance transaction.”
4a
26 C.F.R. § 1.6011-4(b)(2) (2009). Only a limited number
of transactions are so designated.”
The present case began with a 2003 IRS audit of Tex-
tron’s corporate income tax liability for the years 1998-
2001. In reviewing Textron’s 2001 return, the IRS de-
termined that a Textron subsidiary—Textron Financial
Corp. (“Textron Financial”)—had engaged in nine listed
transactions. In each of the nine instances, Textron Fi-
nancial had purchased equipment from a foreign utility
or transit operator and leased it back to the seller on the
same day. Although such transactions can be legitimate,
the IRS determined that they were sale-in, lease-out
(“SILO”) transactions, which are listed as a potential tax
shelter subject to abuse by taxpayers.
SILOs allow tax-exempt or tax-indifferent organiza-
tions—for example, a tax-exempt charity or a city-owned
transit authority—to transfer depreciation and interest
deductions, from which they cannct benefit, to other tax-
payers who use them to shelter income from tax. Where
the only motive of a sale and lease back is tax avoidance,
it can be disregarded by the IRS and taxes assessed on
the wrongly sheltered income.®
2 A current list of such transaction types, amounting to less than
three dozen, appears at Internal Revenue Service, Recognized Ab-
usive and Listed Transactions-LMSB Tier I Issues, http:/Avww.irs.
gov/businesses/corporations/article/0,id=120633,00.htm] (visited July
7, 2009).
* See AWG Leasing Trust v. United States, 592 F. Supp. 2d 953,
958 (N.D. Ohio 2008) (upholding denial of depreciation and interest
deductions for SILO transaction); I.R.S. Notice 2005-13, 2005-9
I.R.B. 630 (Feb. 11, 2005); Shvedov, Tax Implications of SILOs,
QTEs, and Other Leasing Transactions with Tax-Exempt Entities
10-12, CRS Report for Congress (Nov. 30, 2004).
5a
Textron had shown the spreadsheets to its outside
accountant, Ernst & Young, but refused to show them to
the IRS. The IRS issued an administrative summons
pursuant to 26 U.S.C. § 7602 (2006), which allows the
IRS, in determining the accuracy of any return, to “ex-
amine any books, papers, records, or other data which
may be relevant or material to ‘such inquiry.” /d.
§ 7602(a)(1). According to IRS policy, where the taxpay-
er claims benefits from only a single listed transaction,
the IRS seeks only the workpapers for that transaction;
but where (as in Textron’s case) the taxpayer claims
benefits from multiple listed transactions, the IRS seeks
all of the workpapers for the tax year in question. I.R.S.
Announcement 2002-63, 2002-27 I.R.B. 72 (July 8, 2002).
The summons also sought related work papers created
by Ernst & Young in determining the adequacy of Tex-
tron’s reserves that Textron might possess or could ob-
tain. Textron again refused.
The IRS brought an enforcement action in federal
district court in Rhode Island. See 26 U.S.C. § 7604(a)
(2006). Textron challenged the summons as lacking legi-
timate purpose and also asserted, as bars to the demand,
the attorney-client and tax practitioner privileges and
the qualified privilege available for litigation materials
under the work product doctrine. The IRS contested all
of the privilege claims. Both the IRS and Textron filed
affidavits and, in addition, the district court heard wit-
nesses from both sides.‘
* Textron’s evidence came from Norman Richter, chief tax coun-
sel and manager of Textron’s Tax Department; Roxanne Cassidy,
director of tax reporting; Edward Andrews, director of tax audits;
Debra Raymond, vice president, taxes, of Textron Financial; and
Mark Weston, a partner in Ernst & Young. IRS evidence was pro-
vided by Internal Revenve Agent Edward Vasconcellos; Professor
6a
Textron agreed that it usually settled disputes with
the IRS through negotiation or concession or at worst
through the formal IRS administrative process; but it
testified that sometimes it had litigated disputed tax is-
sues in federal court. Its evidence also showed that the
estimates for tax reserves and the supporting work pa-
pers were generated within its Tax Department but that
tax lawyers in that department were centrally involved
in their preparation and that Textron Financial also used
an outside counsel to advise it on tax reserve require-
ments.
Textron described generically the contents of the
work papers in question: these included (1) summary
spreadsheets showing for each disputable item the
amount in controversy, estimated probability of a suc-
cessful challenge by the IRS, and resulting reserve
amounts; and (2) back up e-mail and notes. In some in-
stances the spreadsheet entries estimated the probabili-
ty of IRS success at 100 percent. Textron said that the
spreadsheets had been shown to and discussed with its
independent auditor but physically retained by Textron.
Neither side disputed that the immediate purpose of
the work papers was to establish and support the tax re-
serve figures for the audited financial statements. Tex-
tron’s evidence was to the effect that litigation over spe-
cific items was always a possibility; the IRS did not deny
that in certain cases litigation could result although it
said that this was often unlikely. Whether Textron’s evi-
Douglas Carmichael, former chief auditor of the regulatory body for
auditors of public companies (the Public Company Accounting Over-
sight Board); and Gary Kane, an IRS expert on tax accrual work
papers.
Ta
dence is materially different than that of the IRS re-
mains to be considered.
Ultimately, the district court denied the petition for
enforcement. United States v. Textron Inc., 507 F. Supp.
2d 138, 150, 155 (D.R.I. 2007). The court agreed with the
IRS that the agency had a legitimate purpose for seek-
ing the work papers. Jd. at 145. It also ruled that insofar
as the Textron-prepared work papers might otherwise
be protected by attorney-client privilege, or the counter-
part tax practitioner privilege for non-lawyers engaged
in tax practice, see 26 U.S.C. § 7525 (2006), those privi-
leges had been waived when Textron disclosed the work
papers’ content to Ernst & Young. /d. at 152.
However, the district court concluded that the papers
were protected by the work product privilege, which de-
rived from Hickman v. Taylor, 329 U.S. 495 (1947), and
is now embodied in Rule 26(b)(3) of the Federal Rules of
Civil Procedure. This privilege, the district court held,
had not been waived by disclosure of the work papers to
the accountant. Textron, 507 F. Supp. 2d at 152-53. The
district court’s decision that the work papers were pro-
tected work product involved both a description of fac-
tual premises and a legal interpretation of applicable
doctrine.
The district court first said (paraphrasing a Textron
witness) the work papers were prepared to assure that
Textron was “adequately reserved with respect to any
potential disputes or litigation” over its returns; the
court also said that, by fair inference, the work papers
served “to satisfy an independent auditor that Textron’s
reserve for contingent liabilities satisfied the require-
ments of generally accepted accounting principles
(GAAP) so that a ‘clean’ opinion would be given” for Tex-
8a
tron financial statements. Textron, 507 F. Supp. 2d at
143.
Then, in its discussion of legal doctrine, the district
court stated:
As the IRS correctly observes, the work
product privilege does not apply to “doc-
uments that are prepared in the ordinary
course of business or that would have been
created in essentially similar form irres-
pective of the litigation.”” Maine, 298 F.3d
at 70 (quoting [United States v. Adlman,
134 F.3d 1194, 1202 (2d Cir. 1998)]). How-
ever, it is clear that the opinions of Tex-
tron’s counsel and accountants regarding
items that might be challenged by the IRS,
their estimated hazards of litigation per-
centages and their calculation of tax re-
serve amounts would not have been pre-
pared at all “but for” the fact that Textron
anticipated the possibility of litigation with
the IRS .... Thus, while it may be accu-
rate to say that the workpapers helped
Textron determine what amount should be
reserved to cover any potential tax liabili-
ties and that the workpapers were useful
in obtaining a “clean” opinion from E&Y
regarding the adequacy of the reserve
amount, there would have been no need to
create a reserve in the first place, if Tex-
tron had not anticipated a dispute with the
IRS that was likely to result in litigation or
some other adversarial proceeding.
Textron, 507 F. Supp. 2d at 150.
9a
The court concluded that the work papers were
therefore prepared “because of” the prospect of litiga-
tion, Textron, 507 F. Supp. 2d at 150, a phrase used in
Maine v. United States Dep't of Interior, 298 F.3d 60, 68
(1st Cir. 2002). The court rejected the IRS’ reliance on a
Fifth Circuit decision rejecting work product protection
for tax accrual work papers on the ground that the Fifth
Circuit followed a different “primary purpose” test for
work protect. Textron, 507 F. Supp. 2d at 150 (discussing
United States v. El Paso Co., 682 F.2d 530, 548 (5th Cir.
1982), cert. denied, 466 U.S. 944 (1984)).
On appeal, a divided panel upheld the district court’s
decision. The en banc court then granted the govern-
ment’s petition for rehearing en banc, vacated the panel
decision, and obtained additional briefs from the parties
and interested amici. We now conclude that under our
own prior Maine precedent—which we reaffirm en
banc—the Textron work papers were independently re-
quired by statutory and audit requirements and that the
work product privilege does not apply.
The case presents two difficulties. One, which can
rea‘lily be dispelled, stems from the mutability of lan-
guage used in the governing rules and a confusion be-
tween issues of fact and issues of legal characterization.
The other problem is more basic: how far work product
protection extends turns on @ balancing of policy con-
cerns rather than application of abstract logic; here, two
circuits have addressed tax accrual work papers in the
work product context, but, apart from whatever light is
cast by Arthur Young, the Supreme Court has not ruled
on the issue before us, namely, one in which a document
is not in any way prepared “for” litigation but relates to a
subject that might or might not occasion litigation
10a
In origin, the work product privilege derives from the
Supreme Court’s decision in Hickman v. Taylor, 329
U.S. at 510-11, and focused at the outset on the materials
that lawyers typically prepare for the purpose of litigat-
ing cases. Hickman v. Taylor concerned ongoing litiga-
tion in which one side filed interrogatories seeking from
opposing counsel memoranda recording witness inter-
views that the latter had conducted after receiving notice
of possible claims. Often such material and other items
designed for use at trial (e.g., draft briefs, outlines of
cross examination) are not obtained from or shared with
clients and are unprotected by the traditional attorney-
client privilege.
Hickman v. Taylor addressed “the extent to which a
party may inquire into oral and written statements of
witnesses, or other information, secured by an adverse
party’s counsel in the course of preparation for possible
litigation after a claim has arisen.” 329 US. at 497. The
Court cited a privilege in English courts protecting
[a]ll documents which are called into exis-
tence for the purpose-but not necessarily
the sole purpose-of assisting the deponent
or his legal advisers in any actual or antic-
ipated litigation .... Reports... if made in
the ordinary course of routine, are not pri-
vileged....
Id. at 510 n. 9.
This history led the Court to practical considerations:
Proper preparation of a client’s case de-
mands that he assemble information, sift
what he considers to be the relevant from
the irrelevant facts, prepare his legal theo-
ries and plan his strategy without undue
lla
and needless interference . . . . This work is
reflected, of course, in interviews, state-
ments, memoranda, correspondence,
briefs, mental impressions, personal be-
liefs, and countless other tangible and in-
tangible ways—aptly though roughly
termed .. . as the “work product of the
lawyer.”
Td. at 511.
On this basis the Court declared that the interrogato-
ries, which sought witness interviews conducted by op-
ponent counsel in preparation for litigation, were pro-
tected by < qualified privilege. See id. at 511-12. When in
1970 the Supreme Court through the rule-making
process codified the work product privilege in Rule
26(b)(3), it described the privilege as extending to docu-
ments and other tangible things that “are prepared in
anticipation of litigation or for trial.” This phrase, as il-
luminated by Hickman v. Taylor’s reasoning, is the one
to be applied in this case.
Turning back to the present case, the IRS is unques-
tionably right that the immediate motive of Textron in
preparing the tax accrual work papers was to fix the
amount of the tax reserve on Textron’s books and to ob-
tain a clean financial opinion from its auditor. And Tex-
tron may be correct that unless the IRS might dispute
an item in the return, no reserve for that item might be
necessary, so perhaps some of the items might be liti-
gated. But in saying that Textron wanted to be “ade-
quately reserved,” the district judge did not say that the
work papers were prepared for use in possible litiga-
tion—only that the reserves would cover liabilities that
might be determined in litigation. If the judge had made
12a
a “for use” finding—which he did not—that finding
would have been clearly erroneous.
That the purpose of the work papers was to make
book entries, prepare financial statements and obtain a
clean audit cannot be disputed. This was the testimony of
IRS expert and former Chief Auditor of the Public Com-
pany Accounting Oversight Board Douglas Carmichael:
Q. ... Would you please explain what tax
accrual workpapers are?
A... . Tax accrual workpapers really in-
clude all the support for the tax assets and
liabilities shown in the financial statements
A. Well, from the company’s perspective,
they’re created because, for example, for a
public company, the key officers of the
company sign a certification saying that
those financial statements are fairly pre-
sented, and they need support for that.
From the auditor’s perspective, it’s the
same thing, the auditor needs to record in
the workpapers what the auditor did to
comply with generally accepted auditing
standards. So the workpapers are the
principal support for the auditor’s opinion.
Q. And why do public companies prepare
financial statements?
A. Usually, to meet requirements for rais-
ing capital. If they’re a public company,
they need to file annual financial state-
ments on a form 10K with the SEC and
quarterly information on a 10Q.
13a
The Textron witnesses, while using the word “litiga-
tion” as often as possible in their testimony, said the
same thing. Textron’s testimony differed from that of the
IRS expert only in its further assertion that, without the
possibility of litigation, no tax reserves or audit papers
would have been necessary. For example, Roxanne Cas-
sidy, Textron’s director of tax reporting, testified as fol-
lows:
Q. . . . [W)hat was Textron’s purpose in
preparing those tax reserve papers?
A. The purpose primarily was to determine
whether Textron was adequately reserved
with respect to any potential disputes or
litigations that would happen in the future.
We would need to ensure that we were
adequately reserved in the current year on
Textron’s financial statements.
Q. And as a publicly traded company, is
Textron required to file its financial state-
ments with the Securities and Exchange
Commission?
A. Yes.
Q. And do those financial statements in-
clude tax reserves?
BR, TOBeces
Q. And in having its tax reserves audited
by an independent auditor, must Textron
be able to support the determinations it
l4a
has made regarding the adequacy of its tax
reserves with some type of evidence?
A. Yes, the support needs to be to the sa-
tisfaction of the auditors.
As the IRS expert stated, even if litigation were “re-
mote,” the company would still have to prepare work pa-
pers to support its judgment. Textron’s own witness ac-
knowledged that it would “have to include in its .. . tax
accrual work papers any new transactions that the com-
pany entered into that year that there might be some tax
exposure on” regardless of whether it anticipated likely
litigation. Judged by Textron’s own experience, most—
certainly those with high percentage estimates of IRS
success—would never be litigated.
To complete the story, we note one suggestion by one
Textron witness that, if litigation did occur, the work pa-
pers could be useful to Textron in that litigation.’ This
assertion was not supported by any detailed explanation,
was not adopted by the district judge and is more than
dubious: the main aim of audit work papers is to estimate
the amount potentially in dispute and the percentage
chance of winning or losing. Even an academic supporter
of Textron’s legal position conceded that “it is doubtful
that tax accrual workpapers, which typically just identify
and quantify vulnerable return positions, would be useful
in the litigation anticipated with respect to those posi
° Textron Vice President of Taxes Norman Richter said that Tex-
tron would still prepare tax accrual workpapers absent GAAP re-
quirements “[bjecause it guides us—it’s—the analysis is still—it
would guide us in making litigation and settlement decisions later in
the process.” This assertion was not contained in Richter’s affidavit,
which instead said that Textron prepared the work papers “to comp-
ly with GAAP” as required for reporting taxes to the SEC, and was
not supported by detail or explanation in the record.
15a
tions.” Pease-Wingenter, The Application of the Attor-
ney-Client Privilege to Tax Accrual Workpapers: The
Real Legacy of United States v. Textron, 8 Houston Bus.
& Tax L.J. 337, 346 (2008).
Any experienced litigator would describe the tax ac-
crual work papers as tax documents and not as case
preparation materials. Whether work product protection
should apply to such documents is 4 legal question in-
formed by the language of rules and Supreme Court doc-
trine, direct precedent, and policy judgments. The first
of these sources—Supreme Court doctrine and the word-
ing of the rules—is helpful to the IRS; direct circuit
precedent and the underlying policy of the doctrine and
other prudential considerations are more helpful still.
Legal commentators can be found on each side; the most
persuasive of them favors the IRS.°
From the outset, the focus of work product protection
has been on materials prepared for use in litigation,
whether the litigation was underway or merely antic-
ipated. Thus, Hickman v. Taylor addressed “the extent
to which a party may inquire into oral and written
statements of witnesses, or other information, secured
by an adverse party’s counsel in the course of prepara-
tion for possible litigation after a claim has arisen.” 329
USS. at 497 (emphasis added). Similarly, the English pri-
vilege, invoked by Hickman v. Taylor, privileged “doc-
uments which are called into existence for the purpose—
but not necessarily the sole purpose—of assisting the
® See Ventry, Protecting Abusive Tax Avoidance, 120 Tax Notes
857, 870-83 (2008); Johnson, The Work Product Doctrine and Tax
Accrual Workpapers, 124 Tax Notes 155, 160-68 (2009). The Pease-
Wingenter article, supra, identifies many weaknesses in the Textron
argument, id. at 343-48, although Pease now says her own ultimate
view favors Textron.
l6a
deponent or his legal advisers in any actual or antic-
ipated litigation.” Id. at 510 n. 9 (emphasis added) (in-
ternal] quotation marks omitted).
The phrase used in the codified rule—“prepared in
anticipation of litigation or for trial” did not, in the refer-
ence to anticipation, mean prepared for some purpose
other than litigation: it meant only that the work might
be done for litigation but in advance of its institution.
The English precedent, doubtless the source of the lan-
guage in Rule 26, specified the purpose “of assisting the
deponent or his legal advisers in any actual or antic-
ipated litigation . . . .” The Advisory Committee’s Note
cited with approval a decision denying work product pro-
tection to a driver’s accident report, made pursuant to
Interstate Commerce Commission rules, even though it
might well have become the subject of litigation. Fed. R.
Civ. P. 26 advisory committee’s note (1970).’
It is not enough to trigger work product protection
that the swhject matter of a document relates to a subject
that might conceivably be litigated. Rather, as the Su-
preme Court explained, “the literal language of [Rule
26(b)(3)] protects materials prepared for any litigation or
trial as long as they were prepared by or for a party to
the subsequent litigation.” Federal Trade Commission v.
Grolier Inc., 462 U.S. 19, 25 (1988) (emphasis added).
” Goosman. v. A. Duie Pyle, Inc., 320 F.2d 45 (4th Cir. 1963). In
Goosman, the Fourth Circuit denied work product protection to
reports a truck driver made to the lessee and owner of the truck
following an accident. The court explained that the reports “were
made in the ordinary course of business under ICC regulations and
do not represent the lawyer’s work product within the holding in
Hickman: v. Taylor.” Id. at 52. See also, e.g., Calabro v. Stone, 225
F.R.D. 96, 99 (E.D.N.Y. 2004); Jn re Raytheon Securities Litiga-
tion, 218 F.R.D. 354, 359 (D. Mass. 2003).
17a
This distinction is well established in the case law. See,
e.g.. NLRB v. Sears, Roebuck & Co., 421 U.S. 132, 138
(1975).3
' Nor is it enough that the materials were prepared by
lawyers or represent legal thinking. Much corporate ma-
terial prepared in law offices or reviewed by lawyers falls
in that vast category. It is only work done in anticipation
of or for trial that is protected. Even if prepared by law-
yers and reflecting legal thinking, “{mJaterials assem-
bled in the ordinary course of business, or pursuant to
public requirements unrelated to litigation, or for other
nonlitigation purposes are not under the qualified im-
munity provided by this subdivision.” Fed. R. Civ. P. 26
advisory committee’s note (1970). Accord Hickman v.
Taylor, 329 U.S. at 510 n. 9 (quoting English precedent
that “[rJeports . . . if made in the ordinary course of rou-
tine, are not privileged”),
Every lawyer who tries cases knows the touch and
feel of materials prepared for a current or possible (z.¢.,
“fn anticipation of”) law suit. They are the very materials
catalogued in Hickman v. Taylor and the English
precedent with which the decision began. No one with
experience of law suits would talk about tax accrual work
papers in those terms. A set of tax reserve figures, calcu-
lated for purposes of accurately stating a company’s fi-
nancial figures, has in ordinary parlance only that pur-
8 Accord United States v. Roxworthy, 457 F.3d 590, 595 (6th Cir.
2006) (Nevertheless, the key issue in determining whether a docu-
ment should be withheld is the function that the document serves.”);
Coastal States Gas Corp. v. Dep't of Energy, 617 F.2d 854, 858 (D.C.
Cir. 1980) (same); Church of Scientology Int'l v. IRS, 845 F. Supp.
714, 723 (C.D. Cal. 1993) (“The Ninth Circuit test focuses on the
function of a document as part of the deliberative process rather
than on the contents of the document.”).
18a
pose: to support a financial statement and the indepen-
dent audit of it.
Focusing next on direct precedent, work product pro-
tection for tax audit work papers has been squarely ad-
dressed only in two circuits: this one and the Fifth. In
Maine, we said that work product protection does not
extend to “documents that are prepared in the ordinary
course of business or that would have been created in
essentially similar form irrespective of the litigation.”
Maine, 298 F.3d at 70 (quoting United States v. Adlman,
134 F.3d 1194, 1202 (2d Cir. 1998)) (internal quotation
marks omitted). Maine applies straightforwardly to Tex-
tron’s tax audit work papers—which were prepared in
the ordinary course of business—and it supports the IRS
position.
Similarly, the Fifth Circuit in #1 Paso denied protec-
tion for the work papers because the court recognized
that the company in question was conducting the rele-
vant analysis because of a need to “bring its financial
books into conformity with generally accepted auditing
principles.” 682 F.2d at 543. The Fifth Circuit, which
employs a “primary purpose” test, feund that the work
papers’ “sole function” was to back up financial state-
ments. /d. at 543-44. Here, too, the only purpose of Tex-
tron’s papers was to prepare financial statements.
Other circuits have not passed on tax audit work pa-
pers and some might take a different view. But many of
the debatable cases affording work product protection
involve documents unquestionably prepared for potential
use in litigation if and when it should arise.’ There is no
* See, ¢.g., Delaney, Migdail & Young, Chartered v. IRS, 826 F 2d
124, 127 (D.C. Cir. 1987) (protection for “attorneys’ assessment of
... legal vulnerabilities in order to make sure it does not miss any-
19a
evidence in this case that the work papers were prepared
for such a use or would in fact serve any useful purpose
for Textron in conducting litigation if it arose.
Finally, the underlying prudential considerations
squarely support the IRS’ position in this case, and such
considerations have special force because Hickman v.
Taylor was the child of such considerations, as the quo-
tations above make clear. The privilege aimed centrally
at protecting the litigation process, Coastal States Gas
Corp. v. Department of Energy, 617 F.2d 854, 864 (D.C.
Cir. 1980), specifically, work done by counsel to help him
or her in litigating a case. It is not a privilege designed
to help the lawyer prepare corporate documents or other
materials prepared in the ordinary course of business.
Where the rationale for a rule stops, so ordinarily does
the rule.
Nor is there present here the concern that Hickman
v. Taylor stressed about discouraging sound preparation
for a law suit. That danger may exist in other kinds of
cases, but it cannot be present where, as here, there is in
substance a legal obligation to prepare such papers: the
tax audit work papers not only have a different purpose
but have to be prepared by exchange-listed companies to
comply with the securities laws and accounting principles
for certified financial statements. Arthur Young made
this point in refusing to create an accountant’s work
product privilege for tax audit papers:
[T]he auditor is ethically and professional-
ly obligated to ascertain for himself as far
as possible whether the corporation’s con-
thing in crafting its legal case”); see also In re Sealed Case, 146 F.3d
881, 885 (D.C. Cir. 1998) (protection for documents to “protect the
client from future litigation about a particular transaction”).
20a
tingent tax liabilities have been accurately
stated. . . . Responsible corporate man-
agement would not risk a qualified evalua-
tion of a corporate taxpayer’s financial
posture to afford cover for questionable
positions reflected in a prior tax return.
465 U.S. at 818-19; see also Johnson, supra, at 160-61.
Textron apparently thinks it is “unfair” for the gov-
ernment to have access to its spreadsheets, but tax col-
lection is not a game. Unuerpaying taxes threatens the
essential public interest in revenue collection. If a blue-
print to Textron’s possible improper deductions can be
found in Textron’s files, it is properly available to the
government wnless privileged. Virtually all discovery
against a party aims at securing information that may
assist an opponent in uncovering the truth. Unprivileged
IRS information is equally subject to discovery.”
The practical problems confronting the IRS in disco-
vering under-reporting of corporate taxes, which is likely
endemic, are serious. Textron’s return is massive—
constituting more than 4,000 pages—and the IRS re-
quested the work papers only after finding a specific
type of transaction that had been shown to be abused by
taxpayers. It is because the collection of revenues is es-
sential to government that administrative discovery,
along with many other comparatively unusual tools, are
furnished to the IRS.
” See Abel Inv. Co. v. United States, 53 F.R.D. 485, 488 (D. Neb.
1971) (holding that IRS documents created during an audit were not
protected work product, despite containing attorneys’ mental im-
pression and legal theories, because an IRS audit is not litigation).
2la
As Bentham explained, all] privileges limit access to
the truth in aid of other objectives, 8 Wigmore, Evidence
§ 2291 (McNaughton Rev. 1961), but virtually all privi-
leges are restricted—eithe~ (as here) by definition or (in
many cases) through explicit exceptions—by countervail-
ing limitations. The Fifth Amendment privilege against
self-incrimination is qualified, among other doctrines, by
the required records exception, see Grosso v. United
States, 390 U.S. 62, 67-68 (1968), and the attorney client
privilege, along with other limitations, by the crime-
fraud exception, see Clark v. United States, 289 U.S. 1,
15 (1933).
To sum up, the work product privilege is aimed at
protecting work done for litigation, not in preparing fi-
nancial statements. Textron’s work papers were pre-
pared to support financial filings and gain auditor ap-
proval; the compulsion of the securities laws and auditing
requirements assure that they will be carefully prepared,
in their present form, even though not protected; and
IRS access serves the legitimate, and important, func-
tion of detecting and disallowing abusive tax shelters.
The judgment of the district court is vacated and the
case is remanded for further proceedings consistent with
this decision.
It 1s 80 ordered.
TORRUELLA, Circuit Judge, with whom LIPEZ,
Circuit Judge, joins, dissenting.
To assist the IRS in its quest to compel taxpayers to
reveal their own assessments of their tax returns, the
majority abandons our “because of” test, which asks
whether ““in light of the nature of the document and the
factual situation in the particular case, the document can
be fairly said to have been prepared or obtained because
22a
of the prospect of litigation.” Maine v. United States
Dep't of the Interior, 298 F.3d 60, 68 (1st Cir. 2002) (em-
phasis in original) (quoting United States v. Adlman, 134
F.3d 1194, 1202 (2d Cir. 1998)). The majority purports to
follow this test, but never even cites it. Rather, in its
place, the majority imposes a “prepared for” test, asking
if the documents were “prepared for use in possible liti-
gation.” Maj. Op. at 13. This test is an even narrower va-
riant of the widely rejected “primary motivating pur-
pose” test used in the Fifth Circuit and specifically repu-
diated by this court. In adopting its test, the majority
ignores a tome of precedents from the circuit courts and
contravenes much of the principles underlying the work-
product doctrine. It also brushes aside the actual text of
Rule 26(b)(3), which “[nJowhere . . . state[s] that a docu-
ment must have been prepared to aid in the conduct of
litigation in order to constitute work product.” Adlman,
134 F.3d at 1198. Further, the majority misrepresents
and ignores the findings of the district court. All while
purporting to do just the opposite of what it actually
does.
I. The Majority Quietly Rejects Circuit Precedent
The majority claims allegiance to our prior decision
in Maine, 298 F.3d at 70. Specifically, the majority seizes
upon a single line from that decision: “the ‘because of
standard does not protect from disclosure ‘documents
that are prepared in the ordinary course of business or
that would have been created in essentially similar form
irrespective of the litigation.” Jd. (quoting Adlman, 134
F.3d at 1202). This qualification is important to be sure,
and I will address it infra, Section III.B.2. But I must
start by addressing the rest of the Maine decision, which
the majority is careful to ignore.
23a
In that decision, Maine sought documents prepared
by the Department of the Interior regarding its decision,
made during pending related litigation, to classify sal-
mon as a protected species. 7d. at 64. The district court
found some of these administrative documents unpro-
tected as the Department had not shown that litigation
preparation was “the primary motivating factor for the
preparation of the documents.” Jd. at 66-67. This formu-
lation of the test for “anticipation of litigation” was based
on the Fifth Circuit rule that the work-product doctrine
did not protect documents that were “not primarily mo-
tivated to assist in future litigation.” United States v. El
Paso, 682 F.2d 530, 542-43 (5th Cir. 1982) (emphasis
added) (citing United States v. Davis, 636 F.2d 1028,
1040 (5th Cir. 1981)). On appeal in Maine, we specifically
repudiated this test and adopted the broader “because
of’ test, which had been thoughtfully and carefully ex-
plained by Judge Leval in the Second Circuit decision in
Adlman, 134 F.3d at 1202-03. See Maine, 298 F.3d at 68
(“In light of the decisions of the Supreme Court, we
therefore agree with the formulation of the work-product
rule adopted in Adiman and by five other courts of ap-
peals.”).
In the present case, the majority purports to follow
Maine, but really conducts a new analysis of the history
of the work-product doctrine and concludes that docu-
ments must be “prepared for any litigation or trial.”
Maj. Op. at 18 (emphasis in original) (quoting F'7C v.
Grolier Inc., 462 U.S. 19, 25 (1983)). Similarly, at another
point, the majority suggests that documents must be “for
use” in litigation in order to be protected. Jd. at 13.
Grolier did not establish such a test and the majority can
24a
point to no court that has so ruled.” Rather, the majority
of circuit courts, led by the Second Circuit’s decision in
Adlman, have rejected such a rule.
Adlman’s articulation of the “because of” test is fatal
to the majority’s position. In that case, Judge Leval dis-
cussed the application of the work-product doctrine “to a
litigation analysis prepared by a party or its representa-
tive in order to inform a business decision which turns on
the party’s assessment of the iikely outcome of litigation
expected to result from the transaction.” Adlman, 134
F.3d at 1197. In other words, Adiman asked whether the
work-product doctrine applies where a dual purpose ex-
ists for preparing the legal analysis, that is, where the
dual purpose of anticipating litigation and a business
" To support its conclusion, the majority commits a plain logical
error. The majority states that work-product protection must not be
judged solely on its subject matter, but rather whether the docu-
ments’s purpose is for use in litigation. In support of this proposi-
tion, the majority cites a number of cases that propound the uncon-
troversial proposition that a document must be judged according to
its purpose, not solely its content. Maj. Op. at 18 n.8. But those cases
do not establish the majority’s rule that the documents’ purpose
must be limited to use in litigation. Rather, one of the cases the
majority cites adopts the test that the document must have been
created “because of” litigation, which, as Adlman describes, is anti-
thetical to the majority’s new requirement. l/nited States v. Rox-
worthy, 457 F.3d 590, 593-94 (6th Cir. 2006) (adopting Adiman’s
“because of” test). Another of the majority’s citations is from the
D.C. Circuit, which has also since adopted the “because of” test. Se-
nate of Puerto Rico v. United States Dep't of Justice, 823 F.2d 574,
587 n.42 (D.C. Cir. 1987). The final decision cited by the majority,
from the Northern District of California, deals with the deliberative
process privilege, not the work-product doctrine. Church of Scien-
tology Int'l v. IRS, 845 >. Supp. 714, 723 (C.D. Cal. 1993). In any
event, the Ninth Circuit also applies the “because of” test. Jn re
Grand Jury Subpoena, 357 F.3d 900, 907-08 (9th Cir. 2004) (praising
and following Adiman).
25a
purpose co-exist. To answer that question, the Adlman
court examined and rejected the “primary purpose” test
adopted by the Fifth Circuit in El Paso, 682 F.2d at 542-
43, which only grants work-product immunity to work-
papers prepared “primarily motivated to assist in future
litigation over the return,” id. at 543:
[Protection] is less clear, however, as to
documents which, although prepared be-
cause of expected litigation, are intended
to inform a business decision influenced by
the prospects of the litigation. The formu-
lation applied by some courts in determin-
ing whether documents are protected by
work-product privilege is whether they are
prepared “primarily or exclusively to assist
in litigation”—a formulation that would po-
tentially exclude documents containing
analysis of expected litigation, if their pri-
mary, ultimate, or exclusive purpose is to
assist in making the business decision.
Others ask whether the documents were
prepared “because of” existing or expected
litigation—a formulation that would in-
clude such documents, despite the fact that
their purpose is not to “assist in” litigation.
Because we believe that protection of doc-
uments of this type is more consistent with
both the literal terms and the purposes of
the Rule, we adopt the latter formulation.
Adiman, 134 F.3d at 1197-98, quoted in part in Maine,
298 F.3d at 68. And if it needs to be spelled out any more
clearly, Adiman makes it explicitly clear that the broad-
er “because of” formulation is not limited to documents
prepared for use in litigation:
26a
We believe that a requirement that docu-
ments be produced primarily or exclusively
to assist in litigation in order to be pro-
tected is at odds with the text and the poli-
cies of the Rule. Nowhere does Rule
26(b)(3) state that a document must have
been prepared to aid in the conduct of liti-
gation in order to constitute work product,
much less primarily or exclusively to aid
in litigation. Preparing a document “in an-
ticipation of litigation” is sufficient.
The text of Rule 26(b)(3) does not limit its
protection to materials prepared to assist
at trial. To the contrary, the text of the
Rule clearly sweeps more broadly. It ex-
pressly states that work-product privilege
applies not only to documents “prepared
... for trial” but also to those prepared “in
anticipation of litigation.” If the drafters of
the Rule intended to limit its protection to
documents made to assist in preparation
for litigation, this would have been ade-
quately conveyed by the phrase “prepared
... for trial.” The fact that documents pre-
pared “in anticipation of litigation” were
also included confirms that the drafters
considered this to be a different, and
broader category. Nothing in the Rule
states or suggests that documents pre-
pared “in anticipation of litigation” with
the purpose of assisting in the making of a
business decision do not fall within its
scope.
27a
Id. at 1198-99 (emphasis and alterations in original). Ra-
ther than confront this language, the majority resorts to
simplistic generalizations. Using its novel “prepared for”
test, the majority unhelpfully explains that “(elvery law-
yer who tries cases knows the touch and feel of materials
prepared for a current or possible . . . law suit.” Maj. Op.
at 19. Once the majority ignores decades of «controlling
precedent, the matter becomes so clear that “({n]o one
with experience of law suits” could disagree. /d.
I need say little else; the majority’s new “prepared
for” rule is blatantly contrary to Adlman, a leading case
interpreting the work-product doctrine that we specifi-
cally adopted in Maine. The majority’s opinion is simply
stunning in its failure to even acknowledge this language
and its suggestion that it is respecting rather than over-
ruling Maine.
Il. The Majority Announces a Bad Rule
The majority acts as if it is left to this court to draw a
line from Hickman to the present case. In so doing, the
majority ignores a host of cases which grapple with
tough work product questions that go beyond the stuff
that “[e]very lawyer who tries cases” would know is work
product. Lower courts deserve more guidance than a
simple reassurance that a bare majority of the en banc
court knows work product when it sees it.’* Of course,
2 This test is reminiscent of Justice Stewart’s famously unhelpful
test for identifying obscenity:
[C}rimina] laws in this area are constitutionally limited to
hard-core pornography. I shall not today attempt further
to define the kinds of material I understand to be em-
braced within that shorthand description; and perhaps I
could never succeed in intelligibly doing so. But I know it
28a
since this is an en banc proceeding, the majority is free
to create a new rule for the circuit—though it would be
better if it admitted that it was doing so. But our new
circuit rule is not even a good rule.
First, as Judge Leval observed in Adiman, a “pre-
pared for” requirement is not consistent with the plain
language of Federal Rule of Civil Procedure 26, which
provides protection for documents “prepared in anticipa-
tion of litigation or for trial.” Fed. R. Civ. P. 26(b)(3)(A)
(emphasis added); see also Adlman, 134 F.3d at 1198-99.
There is no reason to believe that “anticipation of litiga-
tion” was meant as a synonym for “for trial.” Claudine
Pease-Wingenter, Prophetic or Misguided? The Fifth
Circuit’s (Increasingly) Unpopular Approach to the
Work Product Doctrine, 29 Rev. Litig. (forthcoming
2009) (analyzing and rejecting many of the arguments
advanced by the majority in favor of a narrow construc-
tion of the phrase “anticipation of litigation”). Since the
terms are not synonymous, the term “anticipation of liti-
gation” should not be read out of the rule by requiring a
showing that documents be prepared for trial. See Car-
cieri v. Salazar, 129 S. Ct. 1058, 1066 (2009) (discussing
the basic principle that statutes should be construed to
give effect to each word).
Second, though the majority goes into some depth
describing the foundational case of Hickman v. Taylor,
329 U.S. 495 (1947), it misses the fundamental concern of
that decision with protecting an attorney’s “privacy, free
from unnecessary intrusion by opposing parties and
their counsel.” Jd. at 510. Without such privacy, litigants
when I see it, and the motion picture involved in this case
is not that.
Jacobellis v. Ohio, 378 U.S. 184, 197 (1964) (Stewart, J., concurring).
29a
would seek unfair advantage by free-riding off another’s
work, thus reducing lawyers’ ability to write down their
thoughts:
Were the attorney's work accessible to an
adversary, the Hickman court cautioned,
“much of what is now put down in writing
would remain unwritten” for fear that the
attorney’s work would redound to the ben-
efit of the opposing party. Legal advice
might be marred by “inefficiency, unfair-
ness and sharp practices,” and the “effect
on the legal profession would be demoraliz-
ing.” Neither the interests of clients nor
the cause of justice would be served, the
court observed, if work product were free-
ly discoverable.
Adlman, 134 F.3d at 1197 (quoting Hickman, 329 U.S. at
511) (citations omitted). The majority posits that these
rationales do not apply to documents containing a law-
yer’s legal analysis of a potential litigation, if that analy-
sis was prepared for a business purpose. Maj. Op. at 21.
This is both unpersuasive and directly contrary to the
policy analysis in Adlman, which we adopted in Maine.
Adlman identified an example of a protected document:
A business entity prepares financial state-
ments to assist its executives, stockhold-
ers, prospective investors, business part-
ners, and others in evaluating future
courses of action. Financia] statements in-
clude reserves for projected litigation. The
company’s independent auditor requests a
memorandum prepared by the company’s
attorneys estimating the likelihood of suc-
cess in litigation and an accompanying
30a
analysis of the company’s legal strategies
and options to assist it in estimating what
should be reserved for litigation losses.
Id. at 1200. Discussing this example, the court concluded
that in this scenario “the company involved would re-
quire legal analysis that falls squarely within Hickman’s
area of primary concern—analysis that candidly dis-
cusses the attorney’s litigation strategies, appraisal of
likelihood of success, and perhaps the feasibility of rea-
sonable settlement.” Jd. Further, there is “no basis for
adopting a test under which an attorney’s assessment of
the likely outcome of litigation is freely available to his
litigation adversary merely because the document was
created for a business purpose rather than for litigation
assistance.” Jd. In other words,
[iJn addition to the plain language of the
Rule, the policies underlying the work-
product doctrine suggest strongly that
work-product protection should not be de-
nied to a document that analyzes expected
litigation merely because it is prepared to
assist in a business decision. Framing the
inquiry as whether the primary or exclu-
sive purpose of the document was to assist
in litigation threatens to deny protection to
documents that implicate key concerns un-
derlying the work-product doctrine.
Id. at 1199; see also Roxworthy, 457 F.3d at 595 (stating
“the IRS would appear to obtain an unfair advantage by
gaining access to KPMQ’s detailed legal analysis of the
strengths and weaknesses of [the taxpayer’s] position.
This factor weighs in favor of recognizing the documents
as privileged.”).
dla
The majority offers no response to this sound policy
analysis and no reason to doubt that inefficiency and
“sharp practices” will result from its new rule allowing
discovery of such dual purpose documents, which contain
confidential assessments of litigation strategies and
chances. Instead of addressing these concerns, the ma-
jority’s policy analysis relies instead on case-specific ra-
tionales—namely the need to assist the IRS in its diffi-
cult task of reviewing Textron’s complex return. See
Maj. Op. at 22-23. Such outcome determinative reasoning
is plainly unacceptable. Thus, properly framed, it is clear
that the rationales underlying the work-product doctrine
apply to documents prepared in anticipation of litigation,
even if they are not also for use at trial.* ~
And these policy rationales are squarely implicated in
this case. First, Textron’s litigation hazard percentages
contain exactly the sort of mental impressions about the
case that Hickman sought to protect. In fact, these per-
centages contain counsel’s ultimate impression of the
value of the case. Revealing such impressions would have
clear free-riding consequences. With this information,
the IRS will be able to immediately identify weak spots
and know exactly how much Textron should be willing to
spend to settle each item. Indeed, the IRS explicitly ad-
mits that this is its purpose in seeking the documents.
8 Perhaps because of these very same concerns about privacy
and fairness, the IRS itself argued for the protection of its docu-
ments prepared for the dual purposes of helping the IRS under-
stand the litigation risks-that might result if the IRS made the ad-
ministrative decision to adopt a new program. Delaney, Migdail &
Young, Chartered v. IRS, 826 F.2d 124 (D.C. Cir. 1987). This point
was also noted by the Ad/man court when it observed that “the IRS
successfully argued against the very position it here advocates.”
Adlman, 134 F.3d at 1201.
32a
Second, as argued to us by amici, the Chamber of
Commerce of the United States and the Association of
Corporate Counsel, if attorneys who identify good faith
questions and uncertainties in their clients’ tax returns
know that putting such information in writing will result
in discovery by the IRS, they will be more likely to avoid
putting it in writing, thus diminishing the quality of re-
presentation. The majority dismisses such concerns,
concluding that tax accrual workpapers are required by
law. Maj. Op. at 21. But the majority fails to cite the
record for this conclusion, likely because the majority is
simply wrong. As the majority opinion earlier admits,
Maj. Op. at 2-3, the law only requires that Textron pre-
pare audited financial statements reporting total re-
serves based on contingent tax liabilities. Accounting
standards require some evidential support before such
statements can be certified, but do not explicitly require
the form and detail of the documents prepared here by
Textron’s attorneys with respect to each potentially chal-
lenged tax item. See also Michelle M. Henkel, Textron:
The Debate Continues as to Whether Auditor Transpa-
rency Waives the Work Product Privilege, 50 Tax Man-
agement Memorandum 251, 260 (2009) (distinguishing
auditor’s workpapers and corporate workpapers and ex-
plaining that the latter are not mandatory but serve to
evaluate a company’s litigation risks). Rather, all that
must be actually reported is the final tax reserve liability
amount. Thus, as amici worry, the majority’s new rule
will have ramifications that will affect the form and detail
of documents attorneys prepare when working to con-
vince auditors of the soundness of a corporation’s re-
serves.
These concerns are even more clearly implicated in
this case because the majority’s decision will remove
protection for Textron’s “backup materials” as well as its
30a
actual workpapers. The district court found that these
materials included “notes and memoranda written by
Textron’s in-house tax attorneys reflecting their opinions
as to which items should be included on the spreadsheet
and the hazard of litigation percentage that should apply
to each item.” United States v. Textron Inc., 507 F.
Supp. 2d 138, 143 (D.R.I. 2007). Thus, these documents
thus go beyond the numbers used to compute a total re-
serve. Rather, they explain the legal rationale underpin-
ning Textron’s views of its litigation chances. The major-
ity fails to acknowledge this subtlety, explain why it
views such documents as required by regulatory rules,
or explain why such mental impressions should go un-
protected. Exposing such documentation to discovery is
a significant expansion of the IRS’s power and will likely
reveal information far beyond the basic numbers that the
IRS could discover through production of Textron’s au-
ditor’s workpapers.
But more important are the ramifications beyond this
case and beyond even the case of tax accrual workpapers
in general. The scope of the work-product doctrine
should not depend on what party is asserting it. Rather,
the rule announced in this case will, if applied fairly, have
wide ramifications that the majority fails to address.
For example, as the IRS explicitly conceded at oral
argument, under the majority’s rule one party in a litiga-
tion will be able to discover an opposing party’s analysis
of the business risks of the instant litigation, including
the amount of money set aside in a litigation reserve
fund, created in accordance with similar requirements as
Textron’s tax reserve fund. Though this consequence
was a major concern of the argument in this case, the
majority does not even consider this “sharp practice,”
which its new rule will surely permit.
34a
And there are plenty more examples. Under the ma-
jority’s rule, there is no protection for the kind of docu-
ments at issue in Adlman, namely “documents analyzing
anticipated litigation, but prepared to assist in a business
decision rather than to assist in the conduct of the litiga-
tion.” 134 F.3d at 1201-02. Nearly every major business
decision by a public company has a legal dimension that
will require such analysis. Corporate attorneys prepar-
ing such analyses should now be aware that their work
product is not protected in this circuit.
III. The Workpapers Are Protected Under the Right
Test
Applying the “because of” test thoughtfully adopted
in Adlman and Maine, the majority should have con-
cluded that Textron’s workpapers are protected by the
work-product doctrine. The proper starting point in
reaching this legal conclusion should be the factual find-
ings of the district court, which held an evidentiary hear-
ing to understand the nature of the documents sought
here by the IRS.
A. Factual findings
After considering affidavits and testimony, the dis-
trict court found that the tax accrual workpapers are:
1. Aspreadsheet that contains:
(a) lists of items on Textron’s tax returns,
which, in the opinion of Textron’s counsel,
involve issues on which the tax laws are
unclear, and, therefore, may be challenged
by the IRS;
(b) estimates by Textron’s counsel express-
ing, in percentage terms, their judgments
regarding Textron’s chances of prevailing
35a
in any litigation over those issues (the
“hazards of litigation percentages”); anc
(c) the dollar amounts reserved to reflect
the possibility that Textron might not pre-
vail in such litigation (the “tax reserve
amounts”).
Textron, 507 F. Supp. 2d at 142-143 (emphasis added).
These workpapers do not contain any facts about the
transactions that concerned the IRS. Jd. at 143.
The district court also found, “[als stated by Norman
Richter, Vice President of Taxes at Textron and Rox-
anne Cassidy, Director, Tax Reporting at Textron, Tex-
tron’s ultimate purpose in preparing the tax accrual
workpapers was to ensure that Textron was ‘adequately
reserved with respect to any potential disputes or litiga-
tion that would happen in the future.” Jd. at 143. Fur-
ther, “there would have been no need to create a reserve
in the first place, if Textron had not anticipated a dispute
with the IRS that was likely to result in litigation or
some other adversarial proceeding.” Jd. at 150.
In addition to recognizing these litigation purposes,
the district court also recognized the dual purposes driv-
ing the creation of these documents and found that the
workpapers’ creation “also was prompted, in part” by the
need to satisfy Textron’s auditors and get a “clean” opi-
nion letter. Jd. at 143. The district court later clarified:
Thus, while it may be accurate to say that
the workpapers helped Textron determine
what amount should be reserved to cover
any potential tax liabilities and that the
workpapers were useful in obtaining a
“clean” opinion from [the auditor] regard-
ing the adequacy of the reserve amount,
36a
there would have been no need to create a
reserve in the first place, if Textron had
not anticipated a dispute with the IRS that
was likely to result in litigation or some
other adversarial proceeding.
Id. at 150. Relatedly, the district court found that antici-
pation of litigation was the “but for” cause of the docu-
ments’ creation. /d. Thus, the district court clearly found
two purposes leading to the creation of the workpapers.
The majority makes no effort to reject these factual
findings, but simply recharacterizes the facts as suits its
purposes. For example, the majority declares, without
reference to the district court’s more nuanced findings,
that the “the IRS is unquestionably right that the imme-
diate motive of Textron in preparing the tax accrual
work papers was to fix the amount of the tax reserve on
Textron’s books and to obtain a clean financial opinion
from its auditor.” Maj. Op. at 12-13. At another point, the
majority boldly pronounces, “the only purpose of Tex-
tron’s papers was to prepare financial statements.” Jd. at
20. Of course, as explained above, the district court’s fac-
tual findings about Textron’s “ultimate purpose” were
directly contrary to these pronouncements. Discarding a
district court’s factual finding on causation without any
demonstration of clear error is not within this court’s
proper appellate function. See Fed. R. Civ. P. 52(a)
(“Findings of fact, whether based on oral or other evi-
dence, mus* not be set aside unless clearly erroneous,
and the revie"ving court must give due regard to the trial
court’s opportunity to judge the witnesses’ credibility.”);
see also Constructora Maza, Inc. v. Banco de Ponce, 616
F.2d 573, 576 (1st Cir. 1980) (noting that clear error re-
view applies even when “much of the evidence is docu-
37a
mentary and the challenged findings are factual infe-
rences drawn from undisputed facts”).
Instead, the majority exalts in the fact that the dis-
trict court made no finding that the documents were “for
use in possible litigation.” Maj. Op. at 13. That proposi-
tion is true. But, as described above, “for use” (i.e. “pre-
pared for”) is not and has never been the law of this cir-
cuit.
The majority does suggest that the documents busi-
ness purpose “cannot be disputed.” Jd. This is also un-
controversial. The district court found both a litigation
and a business purpose. But, in straining to ignore the
documents’ litigation purposes, the majority proceeds to
rely heavily on the IRS’s expert. In so doing, the majori-
ty makes no effort to explain why the district court
should have been required to adopt the view that the
workpapers existed only for a non-litigation purpose.
The majority claims that Textron’s witnesses agreed
with the IRS expert, but the majority fails to reconcile
this proclamation with the competing view of Textron’s
witnesses, which the district court explicitly relied upon
in its factual findings regarding Textron’s “ultimate pur-
pose.” Textron, 507 F. Supp. 2d at 143. This is another
corruption of the proper role of an appellate court. See
Anderson v. Besserier City, 470 U.S. 564, 574 (1985)
(“Where there are twe permissible views of the evidence,
the factfinder’s choice between them cannot be clearly
erroneous. ”’).
The majority does suggest that the district court’s
findings regarding the cause of the workpapers’ creation
was only stated in its legal analysis section. Maj. Op. at 9.
But the actual purpose of the documents’ creators, or, in
the words of the district court, “but-for” causation, is a
38a
factual issue, and the majority makes no effort to explain
why such issue should be reviewed as a legal conclusion.
The majority also proclaims, without record support,
that “[a]ny experienced litigator would describe the tax
accrual work papers as tax documents and not as case
preparation materials.” Maj. Op. at 15. As described
above, this conclusion reverses, without any finding of
clear error, the district court’s factual findings. Further,
this language dangerously suggests that this court can,
from its general knowledge, offer an expert opinion as to
how such documents are always seen by “experienced
litigators.” Another of the many errors of this approach
is revealed by reference to undisputed record testimony.
Namely, the majority's assumption that tax accrual
workpapers are a uniform class from corporation to cor-
poration is simply wrong. When the district court care-
fully and specifically defined what documents were ac-
tually at issue in this case, it explained that “there is no
immutable definition of the term ‘tax accrual papers,”
and that their content varies from case to case, Textron,
507 F. Supp. 2d at 142, a conclusion that is consonant
with the testimony of the government’s expert. Jd. at 142
n.2. Thus, even were it not our rule that we defer to the
district court’s factfinding, such a rule would make good
sense in handling the wide range of workpapers likely to
confront district courts in the future as the IRS increa-
singly seeks their discovery.
Even if we looked at the purpose of tax accrual work-
papers as a general matter, the district court’s conclu-
sion that Textron’s anticipation of litigation drove its re-
porting obligations is not so outrageous as to leave us
with a firm conviction of error. Rather, other courts re-
viewing similar kinds of documents have reached similar
conclusions. Regions Fin. Corp. & Subsidiaries v. Unit-
39a
ed States, No. 2:06-CV-00895-RDP, 2008 WL 2139008, at
*6 (N.D. Ala. May 8, 2008) (concluding, in examining
another company’s workpapers that “[wJere it not for
anticipated litigation, Regions would not have to worry
about contingent liabilities and would have no need to
elicit opinions regarding the likely results of litigation”);
Comm’r of Revenue v. Comcast Corp., 453 Mass. 298, 901
N.E.2d 1185, 1191, 1205 (2009) (affirming a finding of
work-product protection for a business memorandum
analyzing the “pros and cons of the various planning op-
portunities and the attendant litigation risks” since the
author “had ‘the prospect of litigation in mind when it
directed the preparation of the memorandum” and
would not have been prepared irrespective of that litiga-
tion (quoting Adlman, 134 F.3d at 1204)).
B. Analysis
This court should accept the district court’s factual
conclusion that Textron created these documents for the
purpose of assessing its chances of prevailing in potential
litigation over its tax return in order to assess risks and
reserve funds. Under these facts, work-product protec-
tion should apply.
1. The “because of” test
First, the majority does not develop any analysis con-
testing the proposition that disputes with the IRS in an
audit can constitute litigation, within the meaning of
Fed. R. Civ. P. 26(b)(8)(A). Indeed, such a conclusion is
clear. For these purposes, the touchstone of “litigation”
is that it is adversarial. See Restatement (Third) of the
Law Governing Lawyers § 87 emt. h (2000). Though the
initial stages of a tax audit may not be adversarial, the
disputes themselves are essentially adversarial; the sub-
40a
ject of these disputes will become the subject of litigation
unless the dispute is resolved.
Applying the “because of” test as articulated in Adl-
man and Maine, the workpapers are protected. Under
these precedents, a document is protected if, “in light of
the nature of the document and the factual situation in
the particular case, the document can be fairly said to
have been prepared or obtained because of the prospect
of litigation.” Maine, 298 F.3d at 68 (emphasis in origi-
nal) (quoting Adlman, 134 F.3d at 1202). The “because
of” test “really turns on whether [the document] would
have been prepared irrespective of the expected litiga-
tion with the IRS.” Adlman, 134 F.3d at 1204. As the dis-
trict court found, the driving force behind the prepara-
tion of the documents was the need to reserve money in
anticipation of disputes with the IRS. Textron, 507 F.
Supp. 2d at 143. Though other business needs also con-
tributed to Textron’s need to create the documents,
those needs depended on Textron’s anticipating litigation
with the IRS. In other words, without the anticipation of
litigation, there would be no need to estimate a reserve
to fund payment of tax disputes. Jd. at 150. In this way,
the dual purposes leading to the documents’ creation
were intertwined, and work-product protection should
apply. See Jn re Grand Jury Subpoena, 357 F.3d at 910
(“The documents are entitled to work product protection
because, taking into account the facts surrounding their
creation, their litigation purpose so permeates any non-
litigation purpose that the two purposes cannot be dis-
cretely separated from the factual nexus as a whole.”);
see also Andrew Golodny, Note: Lawyers versus Audi-
tors: Disclosure to Auditors and Potential Waiver of
Work-Product Privilege in United States v. Textron, 61
Tax Law. 621, 629 (2008) (“As a commentator noted, ‘in
the case of tax contingency reserves, the prospect of fu-
4la
ture litigation and the business need for the documents
are so intertwined that the prospect of future litigation
itself creates the business need for the document.”
(quoting Terrence G. Perris, Court Applies Work Prod-
uct Privilege to Tax Accrual Workpapers, 80 Prac. Tax.
Strategies 4 (2008))).
The majority simply refuses to accept the district
court’s finding that the documents would not exist but
for Textron’s need to anticipate litigation. This rejection
is essential to the majority’s erroneous conclusion. Ac-
cepting the district court’s findings regarding purpose
compels a finding of work-product protection, since the
precedents are clear that under the “because of” test,
dual purpose documents are protected. In fact, that is
one of the very reasons some courts have adopted the
test. 8 Charles Alan Wright, Arthur R. Miller & Richard
L. Marcus, Federal Practice and Procedure, § 2024
(2d ed. 2009) (“Dual purpose’ documents created be-
cause of the prospect of litigation are protected even
though they were also prepared for a business pur-
pose.”); see also Roxworthy, 457 F.3d at 598-99
(“[Djocuments do not lose their work product privilege
‘merely because [they were] created in order to assist
with a business decision,’ unless the documents ‘would
have been created in essentially similar form irrespective
of the litigation.” (quoting Adlman, 134 F.3d at 1202));
In re Grand Jury Subpoena, 357 F.3d at 907 (adopting
Wright and Miller’s “because of” test in order to handle
“dual purpose” documents); Maine, 298 F.3d at 68
(adopting Adiman after recounting the distinction be-
tween the “because of” test and the “primary purpose”
test in their handling of dual purpose documents); Adl-
man, 134 F.3d at 1197-98, 1202 (“Where a document is
created because of the prospect of litigation, analyzing
the likely outcome of that litigation, it does not lose pro-
42a
tection under this formulation merely because it is
created in order to assist with a business decision.”); Jn
re Special Sept. 1978 Grand Jury (Il), 640 F.2d 49, 61
(7th Cir. 1980) (“We conclude that the materials . . . were
indeed prepared in anticipation of litigation, even though
they were prepared as well for the filing of the Board of
Elections reports.”).
2. The exception to the “because of” test
The majority reads too much into one sentence from
Maine and Adiman. Specifically, it is true that “the ‘be-
cause of’ standard does not protect from disclosure ‘doc-
uments that are prepared in the ordinary course of busi-
ness or that would have been created in essentially simi-
lar form irrespective of the litigation.’”” Maine, 298 F.3d
at 70 (quoting Adiman, 134 F.3d at 1202). This proviso
relates to the advisory notes to the rule, which excludes
from protection “[mJaterials assembled in the ordinary
course of business, or pursuant to public requirements
unrelated to litigation, or for other nonlitigation purpos-
es.” Fed. R. Civ. P. 26 advisory committee’s note (1970).
Understood in light of the fact that the “because of” test
unequivocally protects “dual purpose” documents, this
proviso does not strip protection for dual purpose docu-
ments that have one business or regulatory purpose. Ra-
ther, the best reading of the advisory committee’s note is
simply that preparation for business or for public re-
quirements is preparation for a nonlitigation purpose in-
sufficient in itself to warrant protection. The note states
that there is no protection for documents created for
business, regulatory, or “other nonlitigation purposes.”
This language suggests the note is considering business
and regulatory purposes as nonlitigation purposes, but
does not suggest that the presence of such a purpose
should somehow override a litigation purpose, should one
43a
exist. Thus, correctly formulated, this exception should
be understood as simply clarifying the rule that dual
purpose documents are protected, though “there is no
work-product immunity for documents prepared in the
regular course of business rather than for purposes of
the litigation.” Wright & Miller, supra, § 2024 (emphasis
added); see also Roxworthy, 457 F.3d at 599 (“{A] docu-
ment can be created for both use in the ordinary course
of business and in anticipation of litigation without losing
its work-product privilege.”). Under the majority’s in-
terpretation, the exception swallows the rule protecting
dual purpose documents.
So understood, the exception does not control this
case. After citing this exception, the district court con-
cluded that the documents were not created irrespective
of litigation because Textron would not have prepared
the documents but for the anticipation of litigation. Tez-
tron, 507 F. Supp. 2d at 150. The majority makes no ef-
fort to label this finding clearly erroneous. To the con-
trary, the finding is correct. The tax accrual workpapers
identify specific tax line items, and then anticipate the
likelihood that litization over those items will result in
Textron having to pay the IRS more money. That Tex-
tron will not ultimately litigate each position does not
change the fact that when it prepared the documents,
Textron was acting to anticipate and analyze the conse-
quences of possible litigation, just like the memorandum
example in Adlman, 134 F.3d at 1200. The documents
would not be the same at all had Textron not anticipated
litigation. So, under the “because of” test, as applied in
Adiman and the many circuit courts that have followed
it, these documents were not prepared “irrespective” of
the prospect of litigation. They should be protected.
3. Arthur Young and El Paso do not control
Neither the Supreme Court’s decision in United
States v. Arthur Young & Co., 465 U.S. 805 (1984), nor
the Fifth Circuit’s decision in El Paso, 682 F.2d at 530,
support a different result.
In Arthur Young, the Court declined to recognize an
accountant’s work-product doctrine, thus holding that
tax accrual workpapers created by an independent audi-
tor were not protected. Arthur Young, 465 U.S. at 815-
21. But unlike the Court in Arthur Young, we are not
now confronted with the question of whether to recog-
nize a new privilege. Here, the doctrinal decision we face
is how to apply existing worl-product doctrine to the
present facts, in other words whether the “because of”
test protects dual purpose documents, as the Maine and
Adlman courts so held. This question was not at all pre-
sented in Arthur Young.
On the other hand, El Paso is clearly factually on
point—there the Fifth circuit rejected work-product pro-
tection for similar tex accrual workpapers. Hl Paso, 682
F.2d at 542. But, as explained above, that court applied a
different definition of the work-product doctrine, asking
whether the “primary motivating purpose behind the
creation of the document was to aid in possible future
litigation.” Jd. at 542-44 (concluding that the document
should not be protected as it “carries much more the au-
ra of daily business than it does of courtroom combat”).
Finding Textron’s workpapers protected would not
create a circuit split, but be merely an application of a
widely acknowledged existing difference between our
law and the law of the Fifth Circuit. It is precisely in
these “dual purpose” situations that the “because of” test
used in this circuit is meant to distinguish itself from the
“primary purpose” test used in the Fifth Circuit. Maine,
45a
298 F.3d at 68 (citing Adlman for the proposition that
the primary purpose test “is at odds with the text and
the policies of Rule 26 because nothing in it suggests that
documents prepared for dual purposes of litigation and
business or agency decisions do not fall within its
scope”). Thus, unlike the Fifth Circuit, we need not as-
sess whether the tax accrual workpapers carry more of
one “aura” than another.
IV. Conclusion
The majority’s decision may please the IRS and some
tax scholars who understandably see discovery of tax ac-
crual workpapers as an important tool in combating
fraud. But this decision will be viewed as a dangerous
aberration in the law of a well-established and important
evidentiary doctrine. Whatever else one may think about
this case, the majority’s assertion that it is following
Maine is plainly erroneous. Rather, the majority’s “pre-
pared for” tes: is directly contrary to Adlman, a decision
we explicitly adopted in Maine.
In straining to craft a rule favorable to the IRS as a
matter of tax law, the majority has thrown the law of
work-product protection into disarray. Circuits have al-
ready split interpreting the meaning of “anticipation of
litigation,” between the “primary purpose” and “because
of” tests. Now this court has proceeded to further the
split by purporting to apply the “because of” test while
rejecting that test’s protection for dual purpose docu-
ments. In reality, the majority applied a new test that
requires that documents be actually “prepared for” use
in litigation. The time is ripe for the Supreme Court to
intervene anc set the circuits straight on this issue which
is essential to the daily practice of litigators across the
country.
46a
The correct test is that spelled out in Adlman, and
adopted by most circuit courts. Applying that test to the
facts actually found by the district court, these tax ac-
crual workpapers should be protected. For these rea-
sons, I respectfully dissent.
47a
APPENDIX B
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
No. 07-2631
UNITED STATES OF AMERICA, Petitioner,
Appellant,
Vv.
TEXTRON INC. AND SUBSIDIARIES, Respondent,
Appellee.
January 21, 2009
Before TORRUELLA, BOUDIN, Circuit Judges,
and SCHWARZER,’ District Judge.
TORRUELLA, Circuit Judge.
The question presented by this appeal is whether the
work-product doctrine protects documents prepared by
Textron Inc. for the purpose of calculating tax reserve
liability from production to the IRS pursuant to an inves-
tigative subpoena. Like other companies, Textron pre-
pares “tax accrual workpapers” which, generally speak-
ing, list the questionable positions Textron took on its
“Of the Northern District of California, sitting by designation.
48a
tax returns, estimate the likelihood that those positions
will not withstand scrutiny, and calculate the amount of
additional tax liability that would result from revision of
those positions. Textron prepares these estimates so that
it can maintain an adequate reserve fund, properly re-
port its assets and liabilities, and obtain independent cer-
tification of its financial statements. As part of the audit-
ing process, Textron showed these tax accrual workpa-
pers to Ernst & Young (“E&Y”) an independent auditor.
This case arose when the Internal Revenue Service
(“IRS”), after noticing potential tax shelter transactions,
issued an administrative summons to Textron pursuant
to I.R.C. § 7602 seeking tax accrual workpapers for Tex-
tron’s 2001 tax returns. Textron refused to comply and
asserted a number of defenses. The IRS sued to enforce
the subpoena. After an evidentiary hearing, the district
court ruled for Textron on its work-product protection
claim, but rejected its other defenses. The district court
also found that Textron’s disclosure to E&Y did not con-
stitute waiver. The IRS appeals. After careful review,’
we affirm in part, vacate in part, and remand.
I. Background
The IRS subpoena sought “Tax Accrual Workpa-
pers,” defined as:
1 Textron was joined by amici curiae Committee on Taxation and
Committee on Corporate Reporting of Financial Executives Inter-
national, Chamber of Commerce of the United States of America,
and Association of Corporate Counsel. The IRS has submitted two
scholarly articles which we have considered: Dennis J. Ventry, Jr.,
Protecting Abusive Tax Avoidance, 120 Tax Notes 857 (2008); and
Claudine Pease-Wingenter, The Application of the Attorney-Client
Privilege to Tax Accrual Workpapers: The Real Legacy of United
States v. Textron, 8 Houston Bus. & Tax L.J. 337 (2008).
49a
[AJll accrual and other financial workpa-
pers or documents created or assembled
by the Taxpayer, an accountant for the
Taxpayer, or the Taxpayer’s independent
auditor relating to any tax reserve for cur-
rent, deferred, and potential or contingent
tax liabilities, however classified or re-
ported on audited financial statements, and
to any footnotes disclosing reserves or con-
tingent liabilities on audited financial
statements. They include, but are not li-
mited to, any and all analyses, computa-
tions, opinions, notes, summaries, discus-
sions, and other documents relating to
such reserves and any footnotes.
The subpoena sought all documents in the actual or con-
structive possession, custody, or control of Textron or its
accountants. The district court held oral arguments
where the government reiterated that it was seeking tax
accrua] documents prepared by Textron or E&Y. Tex-
tron argued that it had created the documents in antici-
pation of a dispute with the IRS regarding its tax re-
turns.
The district court then held an evidentiary hearing on
the types of documents included in the definition of “tax
accrual workpapers” and the basis for Textron’s work
product claim. At the evidentiary hearing, the IRS’s ex-
pert witness, Professor Douglas Carmichael, testified
that securities law requires that public companies obtain
a letter from an independent auditor approving the com-
pany’s financial statements, and that part of that audit
was an ana.ysis of the company’s reserves for covering
tax loss. Textron’s former Director of Tax Reporting,
Roxanne Cassidy, countered that the tax accrual work-
50a
papers were created “to determine whether Textron was
adequately reserved with respect to any potential dis-
putes or litigations that would happen in the future.”
Cassidy and Norman Richter, Textron tax counsel, ex-
plained that the tax accrual workpapers listed positions
Textron was taking on its tax returns that might require
that a reserve be set aside. These positions were then
analyzed by Textron attorneys who estimated a percen-
tage likelihood that the position would not prevail if chal-
lenged by the IRS. Textron calls this the “hazards of liti-
gation percentage.” The reserve requirement was calcu-
lated by multiplying this percentage times the tax bene-
fit claimed.
In response, Carmichael, the IRS expert witness,
contended that public companies prepare these papers
every year to comply with securities law regardless of
whether they expect litigation. But, Richter testified that
the tax accrual workpapers were prepared under the as-
sumption that issues identified would be challenged by
the IRS and would need to be defended. He further testi-
fied that if Textron did not anticipate any disputes, the
tax accrual workpapers would be blank. The IRS disa-
greed, arguing that some workpapers would neverthe-
less be necessary to handle deferred taxes or to justify
setting aside no tax reserve.
It was undisputed that the IRS audits every Textron
return in multi-year cycles. Testimony also showed that
in each audit cycle hundreds of IRS adjustments to Tex-
tron’s returns were simply accepted by Textron. Where
Textron and the IRS do dispute tax liability, their dis-
pute could be resolved through a conference with the au-
dit team, by presentation of arguments to the IRS Office
of Appeals, or, ultimately, federal court litigation. In sev-
en of the last eight audit cycles, Textron and the IRS
5la
have brought at least one issue to the IRS Office of Ap-
peals. Between 1959 and present, Textron and the IRS
have litigated three disputes in federal court. Textron
admitted that it expected to concede several issues iden-
tified in the workpapers, and that the percentage for
those issues was listed as “100%.” Textron explained that
those items were due to instances where legal develop-
ments rendered a prior position undefendable.
IRS agents explained that access to the workpapers
would help them navigate Textron’s 4000 page tax return
which was accompanied by “9 four-drawer file cabinets”
of paper. The IRS witnesses explained that the tax ac-
crual workpapers would help the [RS understand the
substance of a transaction and could help the IRS identi-
fy potential issues with Textron’s return. An agent testi-
fied that in 2006 the IRS adopted the policy of seeking
tax accrual workpapers when the audit team becomes
aware (sometime through self-reporting) of certain
transactions by the taxpayer which potentially constitute
abusive tax shelters.
As to the waiver issue, the IRS’s expert, Carmichael,
testified that companies create these tax accrual work-
papers, knowing that they will be shared with an auditor.
Evidence also showed that the auditor’s code of ethics
requires information be kept confidential unless required
to be produced in response to a subpoena or other legal
obligation. Mark Weston, a partner at E&Y, submitted
an affidavit explaining these confidenuiaiity obligations
and further stating that E&Y had not in fact disclosed
any information regarding Textron’s 2001 tax accrual
computations. But the IRS expert opined that auditors
ultimately owe an allegiance to the investing public and
have legal obligations of disclosure in some instances.
52a
Textron countered that it let E&Y look at its tax ac-
crual workpapers, but did not allow E&Y to retain a copy
of them. Debra Raymond, a Textron tax manager,
averred that she had reviewed E&Y’s files and that E&Y
did not in fact retain a copy of Textron’s workpapers.
The IRS subpoena also requested any tax-accrual
documents prepared by E&Y regarding Textron. After
the evidentiary hearing, the district court found that the
“tax accrual workpapers” at issue did not include facts
about the issues they identified, and could be described
as follows:
1. Aspreadsheet that contains:
(a) lists of items on Textron’s tax returns,
which, in the opinion of Textron’s counsel,
involve issues on which the tax laws are
unclear, and, therefore, may be challenged
by the IRS;
(b) estimates by Textron’s counsel express-
ing, in percentage terms, their judgments
regarding Textron’s chances of prevailing
in any litigation over those issues (the “ha-
zards of litigation percentages”); and
(c) the dollar amounts reserved to reflect
the possibility that Textron might not pre-
vail in such litigation (the “tax reserve
amounts”).
2. Backup workpapers consisting of the
previous year’s spreadsheet and earlier
drafts of the spreadsheet together with
notes and memoranda written by Textron’s
in-house tax attorneys reflecting their opi-
nions as to which items should be included
on the spreadsheet and the hazard of liti-
58a
gation percentage that should apply to
each item.
United States v. Textron Inc., 507 F. Supp. 2d 138, 142-
143 (D.R.1. 2007). The government objects on appeal that
the district court did not include in this definition any tax
accrual workpaper that E&Y prepared in its audit of
Textron.
The district court then found that the subpoenaed
documents were relevant, requested for a proper pur-
pose, and were privileged attorney-client communica-
tions. Jd. at 143-48. But, the district court found that the
attorney-client privilege was waived by disclosure to
E&Y. /d. at 151-62.
As to the work-product protection claim, the district
court credited Textron’s testimony that its ultimate pur-
pose in preparing the tax accrual workpapers was to en-
sure that it was “adequately reserved with respect to
any potential disputes or litigation that would happen in
the future.” Jd. at 143 (quoting the testimony of Norman
Richter). The court found that this desire to ensure ade-
quate reserves was also prompted, in part, by its wish to
satisfy independent auditors that Textron had properly
reported its financial information. Jd. at 150. The court
acknowledged the First Circuit’s “because of” test for
determining whether documents were prepared in antic-
ipation of litigation and recognized that under that test
there is no protection for “documents that are prepared
in the ordinary course of business or that would have
been created in essentially similar form irrespective of
the litigation.” /d. (quoting Maine v. United States Dep't
of the Interior, 298 F.3d 60, 70 (1st Cir. 2002)). The dis-.
trict court then held that the tax accrual workpapers
“would not have been prepared at all ‘but for’ the fact
that Textron anticipated the possibility of litigation with
64a
the IRS.” /d. The district court reasoned that while the
papers were used to obtain a favorable opinion letter
from E&Y regarding Textron’s reserves, there would
have been no need for such reserves “if Textron had not
anticipated a dispute with the IRS that was likely to re-
sult in litigation or some other adversarial proceeding.”
Id. The IRS appeals the conclusion that the work-
product doctrine protects the tax accrual workpapers.
The district court then noted that the standard for
waiver of the work-product protection was different than
for attorney-client privilege. /d. at 152. The district court
concluded that disclosure of Textron’s tax accrual work-
papers to E&Y did not effect a waiver since disclosure
“did not substantially increase the IRS’s opportunity to
obtain the information contained in them.” /d. at 153.
The district court based its decision on E&Y’s profes-
sional confidentiality obligations and the fact that E&Y
averred that it had not actually disclosed the informa-
tion. Jd.’ The IRS also appeals this conclusion.
The district court then ruled that the government
could not make the showing needed to overcome work-
product protection since the government sought Tex-
tron’s “mental impressions, conclusions, opinions or legal
theories.” /d. at 154 (internal quotations omitted). The
IRS does not appeal this conclusion.
* The district court also found that E&Y had promised to keep the
documents confidential. The IRS contends that this fact is not sup-
ported in the record. As explained infra n.10, we need not decide this
dispute.
Il. Discussion
Three issues are thus presented for appeal: (1)
whether the work-product doctrine protects Textron’s
workpapers; (2) whether any such work-product protec-
tion was waived through disclosure to E&Y; and (3)
whether the district court erred in not considering the
IRS’s request for E& Y's workpapers.
On these evidentiary issues, we “review district court
rulings on questions of law de novo; we review district
court fact findings for clear error; and we review ‘discre-
tionary judgments such as evidentiary rulings’ for abuse
of discretion.” Cavallaro v. United States, 284 F.3d 236,
245 (1st Cir. 2002) (quoting United States v. Mass. Inst.
of Tech. (“MIT”), 129 F.3d 681, 683 (1st Cir. 1997)).
‘(Tjhe party who invokes the privilege bears the
burden of establishing that it applies to the communica-
tions at issue and that it has not been waived.” XYZ
Corp. v. United States, 348 F.3d 16, 22 (1st Cir. 2008).
A. Work-Product Protection
1. Applicable law
“(The work-product doctrine does apply in tax sum-
mons enforcement proceedings.” Upjohn Co. v. United
States, 449 U.S. 383, 386 (1981). The work-product doc-
trine protects “documents and tangible things that are
prepared in anticipation of litigation or for trial by or for
another party or its representative.” Fed. R. Civ. P.
26(b)(3)(A). In assessing whether a document was pre-
pared in anticipation of litigation, this circuit uses the
“because of” test. Maine, 298 F.3d at 68. Under this test,
a document is protected “if, ‘in light of the nature of the
document and the factual situation in the particular case,
the document can be fairly said to have been prepared or
56a
obtained because of the prospect of litigation.” /d. at 70
(quoting United States v. Adlman, 134 F.3d 1194, 1202
(2d Cir. 1998)) (emphasis in original). It is also our law
that, “the ‘because of’ standard does not protect from
disclosure ‘documents that are prepared in the ordinary
course of business or that would have been created in
essentially similar form irrespective of the litigation.”
Id. (quoting Adlman, 134 F.3d at 1202). As discussed be-
low, we hold in this case that the presence of a business
purpose does not defeat work-product protection.
The work-product doctrine originates in Hickman v.
Taylor, where the Supreme Court laid out the problems
with allowing the discovery of work product:
Were such materials open to opposing
counsel on mere demand, much of what is
now put down in writing would remain un-
written. An attorney’s thoughts, heretofore
inviolate, would not be his own. Inefficien-
cy, unfairness and sharp practices would
inevitably develop in the giving of legal ad-
vice and in the preparation of cases for tri-
al. The effect on the legal profession would
be demoralizing. And the interests of the
clients and the cause of justice would be
poorly served.
Hickman v. Taylor, 329 U.S. 495, 511 (1947). The doc-
trine is rightly seen as a protection for the adversary
system, not simply the attorney. Coastal States Gas
Corp. v. Department of Energy, 617 F.2d 854, 864 (D.C.
Cir. 1980) (noting the doctrine does not protect all docu-
ments prepared by a lawyer and instead “focuses on the
integrity of the adversary trial process itself” (quotation
omitted)).
57a
The Restatement has offered a definition of litigation
in the work product context:
“Litigation” includes civil and criminal trial
proceedings, as well as adversarial pro-
ceedings before an administrative agency,
an arbitration pane
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