In a well-reasoned decision, Maine Superior Court Justice Michaela Murphy refused to grant the State Tax Assessor’s motion to compel deposition testimony relating to the taxpayer’s tax accrual (FIN 48) work papers and related documents. State Tax Assessor v. Kraft Foods Group, Inc. et al, BCD-AP-16-02 (Business & Consumer Ct., Jun. 7, 2017, Murphy, J.). Justice Murphy sits on the Business and Consumer Court (a division of the Superior Court), which hears most tax cases in Maine.
Tax accrual work papers - required for financial reporting purposes for publicly traded companies- provide a roadmap for revenue authorities. They constitute the taxpayer's own evaluation of what tax positions it has taken that are uncertain, and how uncertain they are. In 2009, the First Circuit held that tax accrual work papers are NOT protected from discovery under the work product rule. United States v. Textron Inc., 577 F.3d 21 (1st Cir. 2009)(en banc), cert. denied, 560 U.S. 924 (2010).
Judge Torruella filed a dissenting opinion, Textron, 577 F.3d at 32, agreeing with the Second Circuit’s interpretation of the work product rule, described in United States v. Adlman, 134 F.3d 1194 (2d Cir. 1998), that documents prepared “because of” litigation include documents – such as the tax accrual work papers - that were prepared for business purposes that required anticipation of litigation. This is a big issue for larger corporate taxpayers and state tax practitioners, among others, as reflected by amicus briefs filed in support of Textron’s petition for certiorari by Council on State Taxation, Tax Executives Institute, American Bar Association, New England Law Foundation and Association of Corporate Counsel, among others.
The state’s attorneys in Kraft Foods Group urged Justice Murphy to follow Textron. While Maine is within the First Circuit and Maine Court Rules closely resemble the federal rules, Maine courts are not compelled to follow the First Circuit’s interpretation. The taxpayer persuaded Justice Murphy that the approach taken by Judge Torruella and the Second Circuit is more in line with Maine's interpretation of its work product rule and should be followed.
Quoting Judge Torruella’s dissent in Textron, Justice Murphy held that the work product doctrine protects documents addressing “the potential risk of litigation,” even if the documents were prepared in part for other reasons (e.g., business or regulatory purposes).