IRS Denied Peek Behind The Curtain: District Court Protects Wells Fargo’s Tax Accrual Workpapers

In an important taxpayer victory, a Minnesota District Court ruled in favor of Wells Fargo, holding that the measurement and analysis of its uncertain tax positions was protected from disclosure by the work product privilege.

On June 4, 2013, the U.S. District Court for the District of Minnesota ruled that Wells Fargo's measurement of and analysis with respect to its so-called uncertain tax positions, or UTPs, is entitled to work product protection, but that the identification of the types of UTPs is not.

On September 1, 2010, Wells Fargo & Company asked the District Court of Minnesota to quash a summons issued by the Internal Revenue Service (IRS) to Wells Fargo's outside auditor, KPMG LLP, seeking all tax accrual workpapers for tax years ending December 31, 2007, and December 31, 2008 (the KPMG Summons). The KPMG Summons sought ''any and all analyses, computations, opinions, notes, summaries, discussions, and other documents relating to such [tax] reserves and any footnotes.'' On November 1, 2010, the government filed a response seeking to enforce the KPMG Summons and asked the court for an evidentiary hearing. Simultaneously, in a related case, the government asked the court to enforce summonses issued directly to Wells Fargo seeking the same types of documents and corresponding witness testimony. View " Wells Fargo Takes Up Cudgel to Protect Tax Accrual Workpapers" for additional background information regarding the dispute over tax accrual workpapers and the history of the Wells Fargo litigation.

The court consolidated the two cases and held a four-day evidentiary hearing. In addition, the court reviewed the responsive documents in camera.

On June 4, 2013, the court issued its decision. The court first determined that the IRS had a legitimate purpose for issuing the summonses: to verify the accuracy of Wells Fargo's returns. The court was unpersuaded by Wells Fargo's argument that the IRS was motivated to deter or punish Wells Fargo, and that the summonses lacked a legitimate purpose. The court also dismissed concerns that the IRS had violated its published "policy of restraint," which states that the IRS will request tax accrual workpapers only if a taxpayer has claimed the benefits of a listed transaction. The court reasoned that whether or not the IRS violated its policy of restraint was irrelevant in determining whether the summonses lacked a legitimate purpose because "the policy of restraint does not purport to be an...