Court Orders Firm To Hand Over Confidential Papers To IRS

by Glen Shapiro, LawAndTax-News.com, New York

19 August 2009

The US Internal Revenue Service has been granted the right to access confidential company documents in an ongoing tax shelter case with aeronautical firm Textron.

A US Court of Appeals panel for the First Circuit in Boston ruled 3 to 2 in favor of the IRS, which is seeking access to Textron’s accrual working papers in connection to its alleged use of corporate tax sheltering transactions.

The accrual papers contain the company’s legal analysis of certain transactions, should they be contested by the IRS. The company argues that such documents should remain confidential because to turn them over to the IRS may harm its defense. In January, Textron’s position was upheld by a federal appeals court, but the latest decision overrules that verdict.

According to the panel, the law does not protect from disclosure “documents that are prepared in the ordinary course of business"

“IRS access serves the legitimate, and important, function of detecting and disallowing abusive tax shelters,” the majority verdict said.

The case in question related to Textron's alleged use of sale-in lease-out (SILO) transactions, which help companies create huge depreciation deductions through the purchase of public infrastructure, frequently from a foreign government, and then leasing them back to the public authority. In Textron's case, the company had bought a foreign railroad system and several telephone networks, and leased them back to the sellers.

Until recently, requests for tax-accrual working papers were rare. However, since the US government began its recent crackdown on abusive tax shelters in response to a rise in aggressive corporate tax planning in the 1990s, the IRS has changed its policy to demand working papers in cases involving the 31 transactions it has specifically identified as abusive tax shelters, of which SILO is one. The agency has also argued in the case that it has legal precedent on its side, resulting from a 1984 Supreme Court ruling.

Textron is considering whether to contest the latest ruling.

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