US District Court Sides With Taxpayer On Protecting Many Tax Accrual Workpapers

Author:Mr John Hildy and Brian W. Kittle
Profession:Mayer Brown

Keywords: US District Court, taxpayer, tax accrual workpapers, TAWs

On Tuesday, June 4, the US District Court for the District of Minnesota issued its order in Wells Fargo & Co. v. United States, consolidated summons enforcement actions in which the taxpayer claimed that its tax accrual workpapers (TAWs) were privileged and therefore shielded from IRS discovery. The case involves many of the same issues presented in the widely followed Textron litigation.1 In Textron, the documents were held to be non-privileged, but here, the taxpayer prevailed.


During an audit of tax returns for 2007 and 2008, the IRS issued a summons for Wells Fargo's TAW, which consisted principally of its master tax reserve schedules, together with supporting notes and memoranda prepared by the company's in-house accountants acting in consultation with in-house tax counsel. Separately, the IRS issued a summons to KPMG, the company's independent financial statement auditor, seeking production of KPMG's own workpapers and notes. When Wells Fargo asserted that the documents were subject to claims of privilege, the government sought to enforce the summonses in federal district court. The court conducted a four-day hearing and subsequently reviewed all of the contested documents itself.

Circuit Split

The principal issue involved in the case is whether the workpapers of Wells Fargo and KPMG were covered by the work product doctrine, which protects documents prepared "in anticipation of litigation."The various Circuit Courts of Appeal are split on when litigation is anticipated.

The First Circuit, the court that decided the Textron case, has adopted a very restrictive test requiring a party to demonstrate that the document at issue was "prepared for" use in litigation. The Fifth Circuit requires that the "primary motivating purpose" behind the creation of the document was to aid in possible future litigation. Many other circuits apply a more lenient test, which merely requires that the document be prepared "because of" the prospect of litigation. In Wells Fargo, the district court applied the law of the Eighth Circuit, which follows the "because of" test.

The Court's Analysis

The court conducted a thorough review of the company's approach to setting tax reserves under FIN 48 (since recodified as ASC 740) and the role of the in-house tax attorneys in interacting with the company's accountants to (i) identify uncertain tax positions, and (ii) apply FIN 48's...

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