UPDATE 1-U.S. Supreme Court upholds IRS power in tax case

* Decision lets lower-court ruling stand

* Lower court set new test for IRS document bid
(Recasts; adds byline, context, attorney comments)

By Kim Dixon

WASHINGTON, May 24 (BestGrowthStock) – The U.S. Supreme Court let
stand an appeals court decision upholding the power of tax
authorities to demand legal work papers from corporations.

The lower court ruled in favor of an Internal Revenue
Service bid for legal papers from corporate jet maker Textron
Inc (TXT.N: ). The company, which argued that the papers should
be privileged, appealed to the Supreme Court.

Companies argued that the lower-court ruling has the
potential to give the IRS unfettered access to legal advice
given to the companies. They also worried that the ruling could
be applied in cases beyond taxes, such as product safety
cases.

Textron withheld documents from the IRS, including a
spreadsheet compiled by its lawyers listing items of potential
dispute with the agency and the company’s odds of prevailing in
the dispute.

The U.S. Court of Appeals for the First Circuit, in its
ruling against Textron, set a new test, under which every party
in commercial litigation whose opponents file financial
statements with contingent liabilities for litigation will be
able to obtain documents detailing such exposure, according to
Douglas Stransky, an attorney at Sullivan and Worchester in
Boston who represents corporate clients.

“The First Circuit’s decision has eviscerated the work
product protection that exists to protect exactly the type of
attorney analysis that was present in this case,” he said.
“It’s surprising that the Supreme Court did not recognize
this.”

Related to the issue, the IRS has proposed mandating that
companies estimate and list maximum federal tax liability
associated with “uncertain” tax positions — those that
companies believe could be challenged by tax authorities.

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(Reporting by Kim Dixon, editing by Gerald E. McCormick and
John Wallace)

UPDATE 1-U.S. Supreme Court upholds IRS power in tax case