By Phil Karter
Predictably, there has been a good deal of consternation accompanying the release of IRS Announcement 2010-09, which continues the trend away from the Service’s traditional “policy of restraint” in seeking to uncover uncertain tax positions. The first chink in this long-standing policy of restraint was exhibited in Announcement 2002-63, where the Service expanded the circumstances under which it would seek tax accrual workpapers. Prior to the earlier Announcement, workpaper demands were limited to workpapers relating to listed transactions provided such transactions had been disclosed. Thereafter, a taxpayer who engaged in more than one listed transaction, whether previously disclosed or not, was subject to a demand to disclose all workpapers. The IRS’s summons enforcement action in Textron relied on Announcement 2002-63 to seek all of the taxpayer’s workpapers (arguing that six separate SILO transactions fit within the scope of its new policy).
Announcement 2010-09 goes significantly further in eroding the policy of restraint by placing the onus on the taxpayer to make its own affirmative disclosures of uncertain positions rather than requiring the Service to deduce them from the taxpayer’s workpapers. What has received little attention, however, are the implications of the Service’s intention to require the new disclosure form not only for taxpayers who record a reserve in their financial statements for uncertain tax positions, but also taxpayers who “expect to litigate the position.”
Although not expressly stated in the Announcement, particularly on the heels of the work product fight in Textron v. U.S., there is ample reason to anticipate future government challenges to taxpayer claims of work product protection in the case of taxpayers who do not file the new disclosure form (even where not required to establish a tax reserve under FIN 48 or otherwise) and thereafter wind up in litigation. Because the work product doctrine protects only those documents prepared in anticipation of litigation, future discovery disputes regarding this issue, on the heels of the Announcement, seem inevitable. Carried to its logical extension, the fight over work product protection could theoretically encompass any position by a taxpayer, no matter how legally sound, that ends up in litigation because of a government challenge. Although this may seem nonsensical on its face, consider once again that the definition of “uncertain tax positions” in the Announcement includes “any position related to the determination of any United States federal income tax liability for which a taxpayer or a related entity has not recorded a tax reserve because (i) the taxpayer expects to litigate the position . . . .” [Emhasis added.]
What is the lesson to be drawn? Simply this: Announcement 2010-09 may be the Service’s next bulwark against efforts to avoid disclosure based on the work product doctrine. In essence, the Announcement appears to be a veiled attempt to convert the work product doctrine in tax disputes into an objective test where taxpayers who fail to disclose details about tax positions, regardless of their legitimacy, may be barred from claiming work product protection. The government ultimately may lose the war in Textron, but the subliminal message of Announcement 2010-09 is that it intends to draw other arrows from its quiver.