The Tax Workpapers Conundrum – Will “Justice” Kagan Accept What Solicitor General Kagan Opposed?

By Phil Karter

In Tuesday’s confirmation hearings for Supreme Court nominee Elena Kagan, one topic on which there appeared to be agreement between the nominee and the panel was concern about the dwindling number of cases heard by the High Court. In response to questioning from Senator Arlen Specter, Kagan had no explanation for the precipitous decline in the Court’s docket over the last 20 years, but agreed that it has led to an increase in unresolved conflicts among the circuit courts on “vital national issues.”

Quite naturally, those of us in the tax field like to think of our livelihoods as involving “vital national issues,” so perhaps we take it a little personally when the Supreme Court appears to hold a different perspective. The Court certainly surprised many tax professionals in May by declining to hear the Textron case, which presented one of the most prominent “hot-button” tax issues to come along in years. What perfect irony (and timing) it was then on the heels of Kagan’s congressional testimony for the issuance of a decision by the D.C. Circuit the same day in United States v. Deloitte LLP et al., No. 09-5171, that once again accentuated the differing views of the circuit courts on an issue of considerable importance to tax professionals. Accentuating the split in the circuits on the legal standard for work product protection certainly was a central focus of the many briefs filed by the petitioner and amici curiae in Textron. Although this apparently failed to impress the Supreme Court enough to hear the case, the D.C. Circuit in Deloitte appeared similarly unimpressed with the First Circuit’s reasoning in Textron, actually pointing to the “strong argument” contained in the dissenting opinion issued in that case.

What is apparent from the D.C. Circuit’s decision is that the controversy over the scope of work product protection for tax workpapers does not appear likely to go away. Given that the decision favored taxpayers this time around, perhaps a certiorari petition filed by the Solicitor General (to whom greater judicial deference has historically been accorded) will finally bring the split among the circuits on this issue front and center before the Supreme Court.

Of course, before jumping the gun, it seems certain that the government will seek an en banc review of the D.C. Circuit’s decision, as it did so successfully in Textron. There are also two other factors worth considering in forecasting what might be next. First, as pointed out in a thoughtful article by Nancy C. Staudt, “Agenda Setting In Supreme Court Tax Cases: Lessons From The Blackmun Papers,” 52 Buff. L. Rev. 889 (2004), the IRS does not have to accept the result of lower court decision as precedent, and can simply “nonacquiesce” where it disagrees with that result. Hence the government can re-litigate the same issue over and over should it choose to do so, notwithstanding the financial toll this can impose on tax litigants having the misfortune of serving as the government’s second or third “bite of the apple.”

Second, although logic suggests that it serves neither taxpayers’ nor the government’s interests to perpetuate the uncertainty over how to apply the work product doctrine in the case of tax workpapers, there is an argument to be made that uncertainty works as a powerful deterrent. Although you won’t likely find any government officials formally endorsing that statement, it may serve to at least partially explain why the Solicitor General opposed Textron’s petition notwithstanding the continuing split in the circuits on such an important issue. Ironically, the government’s brief opposing certiorari was signed by none other than Elena Kagan. Perhaps “Justice” Kagan will hold a different viewpoint the next time around.

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