Ruling in Tax-Auditing Case Puts Corporations on Edge

According to the Wall Street Journal, a recent tax federal appeals court ruling is causing stress for corporate lawyers across the country. The decision gives the IRS authority to look through documents that have been complied by independent businesses. However, legal experts assert this is a violation of the “word-product doctrine” which shields an individual or business from having to turn over documents created "in anticipation" of litigation.” Check out the WJS story below.

Last week, in a widely anticipated ruling, a federal appeals court in Boston said the IRS could gain access to documents created by a defense-contracting firm to determine whether the company's calculation of its tax liabilities would pass muster during a possible IRS audit. The decision in U.S. v. Textron Inc. reversed a January ruling by a smaller panel of judges on the same court.

To some lawyers who represent corporations, the decision signaled an attack by the courts on the "work-product doctrine," the legal rule that shields an individual or business from having to turn over documents created "in anticipation" of litigation. In its ruling, the First Circuit Court of Appeals said the documents at Textron weren't protected under the doctrine because they weren't prepared specifically "for use" in litigation.

The ruling "eviscerates the work-product doctrine," says Frederick Krebs, president of the Association of Corporate Counsel, an organization for in-house corporate lawyers. He says the ruling, which is binding in federal courts in the Northeast where the First Circuit is based but could influence other courts, will embolden the IRS -- as well as plaintiffs' lawyers who bring shareholder lawsuits -- to seek more such documents from public companies. "If the IRS gets access, [it] can immediately figure out where the client thinks it's weak, what it's willing to pay," he says. The IRS praised the ruling in a statement last week but declined further comment.

U.S. Tax Case Against UBS Grows Wider; Talks to Settle

From The Wall Street Journal:

UBS AG is under legal pressure as U.S. prosecutors expand their investigation into whether the Swiss bank helped tens of thousands of Americans avoid paying taxes, said several people involved in the case.

U.S. tax investigators believe the number of American clients that UBS helped to avoid taxes could be much higher than the previously disclosed estimate of about 17,000, these people said. The people said investigators are also looking into whether other parts of the bank besides the wealth-management unit were involved in helping clients avoid U.S. taxes.

The bank is in a round of talks with the Justice Department to avert a possible felony indictment by admitting to criminal conduct and paying a penalty in the range of $1.2 billion, these people said.

UBS has publicly denied any wrongdoing, and a bank spokesman said the bank "does not comment on...speculative matters." A Justice Department representative also declined to comment.

New UBS Chairman Peter Kurer has indicated that striking a deal with U.S. prosecutors is a top priority. In a Jan. 15 presentation for investors, he said goals for 2009 include a "DOJ settlement" and a "recovery of UBS's reputation."

UBS became the focus of U.S. criminal and civil probes into alleged offshore tax evasion in 2007, when a former UBS executive told U.S. officials that the bank allegedly began telling American customers in 2002 that it wasn't required to disclose their identities to the Internal Revenue Service.

Prosecutors in Florida have indicted one former high-level UBS executive on charges of helping Americans evade taxes and have detained a second executive as a material witness; Bradley Birkenfeld, the former UBS executive who tipped off U.S. officials, has pleaded guilty to the same charge and is helping the IRS and the Justice Department.

In the civil case, the Justice Department and the Internal Revenue Service are discussing whether to ask a federal judge for a new order to force the bank to turn over the names of its American account holders, people involved in the case said.

The IRS obtained a broad civil summons from the U.S. District Court for the Southern District of Florida in July 2008 to request UBS hand over the names of all of its American clients, but the bank has yet to do so. An IRS spokeswoman declined comment. The bank had no comment.

New York Wins Case Against Amazon.com

Last year, Amazon.com sued the state of New York because of a new law requiring out of state businesses to collect sales tax. However, the state’s court recently ruled in favor of New York. Check out the article below from the Associated Press.

New York state won a round in court against Amazon.com over a new law requiring out-of-state online companies to collect sales tax from shoppers in New York.

The law applies to companies that don't have offices in New York, but have at least one person in the state who works as an online agent — someone who links to a Web site and receives commissions for related sales.

A state Supreme Court justice in Manhattan ruled the suit should be dismissed, saying Amazon had no basis for legal action.

Patty Smith, an Amazon spokeswoman, declined comment. The company sued last year, challenging the constitutionality of the legislation. It could still appeal.

The suit argued the change unfairly targets Amazon, is overly broad and vague, and violates the commerce clause of the constitution because it imposes tax-collection obligations on out-of-state entities.

New York state argued that the law closes a "tax loophole."

Businesses with a physical presence in New York already collect the state sales tax on online purchases. The proposed law would apply to companies that have $10,000 or more in New York sales.

Officials estimated the state would gain nearly $50 million in the next two years from the tax. New Yorkers, like residents of many states, are currently on an honor system to report their online spending when they file state tax returns.

Booksellers in New York have long protested the lack of a sales tax on companies like Amazon.

"The state of New York was subsidizing sales on Amazon to the degree of 8 percent," said Oren Teicher, chief operating officer of the American Booksellers Association. "That was unfair. The government ought not ever be in the business of picking favorites among competing businesses."