           United States Court of Appeals
                       For the First Circuit


No. 07-2631

                           UNITED STATES,

                       Petitioner, Appellant,

                                 v.

                   TEXTRON INC. AND SUBSIDIARIES,

                       Respondent, Appellee.



            APPEAL FROM THE UNITED STATES DISTRICT COURT
                  FOR THE DISTRICT OF RHODE ISLAND

            [Hon. Ernest C. Torres, U.S. District Judge]


                               Before

                 Torruella, Boudin, Circuit Judges,
                   and Schwarzer,* District Judge.


     Kevin J. O'Connor, with whom Nathan J. Hochman, Assistant
Attorney General, Richard T. Morrison, Deputy Assistant Attorney
General, Gilbert S. Rothenberg, David I. Pincus, Robert W. Metzler,
Judith A. Hagley, Attorneys, Tax Division, Department of Justice,
and Robert Clark Corrente, United States Attorney, was on brief for
appellant.
     John A. Tarantino, with whom Patricia K. Rocha, Adler Pollock
& Sheehan P.C., Arthur L. Bailey, J. Walker Johnson, and Steptoe &
Johnson LLP, was on brief for appellee.
     David M. Brodsky, Robert J. Malionek, Adam J. Goldberg, Latham
& Watkins LLP, Robin S. Conrad, Amar D. Sarwal, Susan Hackett,
Senior Vice President and General Counsel, Attorneys for the
Chamber of Commerce of the United States of America and Association
of Corporate Counsel, as amicus curiae in support of Textron Inc.

*
    Of the Northern District of California, sitting by designation.
     Kevin L. Kenworthy, Alan I. Horowitz, and Miller & Chevalier
Chartered, Attorneys for Financial Executives International, as
amicus curiae in support of Textron Inc.




                        January 21, 2009




                               -2-
            TORRUELLA, Circuit Judge. The question presented by this

appeal is whether the work-product doctrine protects documents

prepared by Textron Inc. for the purpose of calculating tax reserve

liability from production to the IRS pursuant to an investigative

subpoena.     Like other companies, Textron prepares "tax accrual

workpapers"    which,     generally   speaking,      list    the   questionable

positions Textron took on its tax returns, estimate the likelihood

that those positions will not withstand scrutiny, and calculate the

amount of additional tax liability that would result from revision

of those positions.       Textron prepares these estimates so that it

can maintain an adequate reserve fund, properly report its assets

and   liabilities,   and    obtain    independent     certification     of   its

financial statements.        As part of the auditing process, Textron

showed these tax accrual workpapers to Ernst & Young ("E&Y") an

independent auditor.

            This   case    arose   when     the   Internal   Revenue   Service

("IRS"), after noticing potential tax shelter transactions, issued

an administrative summons to Textron pursuant to I.R.C. § 7602

seeking tax accrual workpapers for Textron's 2001 tax returns.

Textron refused to comply and asserted a number of defenses.                 The

IRS sued to enforce the subpoena.            After an evidentiary hearing,

the district court ruled for Textron on its work-product protection

claim, but rejected its other defenses.             The district court also

found that Textron's disclosure to E&Y did not constitute waiver.


                                      -3-
The IRS appeals.    After careful review,1 we affirm in part, vacate

in part, and remand.

                             I.    Background

          The IRS subpoena sought "Tax Accrual Workpapers," defined

as:

          [A]11 accrual and other financial workpapers
          or documents created or assembled by the
          Taxpayer, an accountant for the Taxpayer, or
          the Taxpayer's independent auditor relating to
          any tax reserve for current, deferred, and
          potential or contingent tax liabilities,
          however classified or reported on audited
          financial statements, and to any footnotes
          disclosing reserves or contingent liabilities
          on audited financial statements. They include,
          but are not limited to, any and all analyses,
          computations, opinions, notes, summaries,
          discussions, and other documents relating to
          such reserves and any footnotes.

The subpoena sought all documents in the actual or constructive

possession, custody, or control of Textron or its accountants. The

district court held oral arguments where the government reiterated

that it was seeking tax accrual documents prepared by Textron or

E&Y.   Textron     argued   that   it   had   created   the   documents   in

anticipation of a dispute with the IRS regarding its tax returns.



1
   Textron was joined by amici curiae Committee on Taxation and
Committee   on  Corporate   Reporting   of   Financial   Executives
International, Chamber of Commerce of the United States of America,
and Association of Corporate Counsel. The IRS has submitted two
scholarly articles which we have considered: Dennis J. Ventry, Jr.,
Protecting Abusive Tax Avoidance, 120 Tax Notes 857 (2008); and
Claudine Pease-Wingenter, The Application of the Attorney-Client
Privilege to Tax Accrual Workpapers: The Real Legacy of United
States v. Textron, 8 Houston Bus. & Tax L.J. 337 (2008).

                                    -4-
            The district court then held an evidentiary hearing on

the types of documents included in the definition of "tax accrual

workpapers" and the basis for Textron's work product claim. At the

evidentiary hearing, the IRS's expert witness, Professor Douglas

Carmichael, testified that securities law requires that public

companies obtain a letter from an independent auditor approving the

company's financial statements, and that part of that audit was an

analysis    of   the    company's       reserves      for    covering       tax   loss.

Textron's   former     Director       of   Tax     Reporting,     Roxanne    Cassidy,

countered   that     the      tax    accrual      workpapers      were   created    "to

determine whether Textron was adequately reserved with respect to

any potential disputes or litigations that would happen in the

future." Cassidy and Norman Richter, Textron tax counsel, explained

that the tax accrual workpapers listed positions Textron was taking

on its tax returns that might require that a reserve be set aside.

These   positions      were    then    analyzed      by    Textron   attorneys      who

estimated a percentage likelihood that the position would not

prevail if challenged by the IRS.                Textron calls this the "hazards

of litigation percentage."            The reserve requirement was calculated

by multiplying this percentage times the tax benefit claimed.

            In   response,          Carmichael,      the    IRS    expert     witness,

contended that public companies prepare these papers every year to

comply with securities law regardless of whether they expect

litigation. But, Richter testified that the tax accrual workpapers


                                           -5-
were prepared under the assumption that issues identified would be

challenged by the IRS and would need to be defended.                   He further

testified that if Textron did not anticipate any disputes, the tax

accrual workpapers would be blank. The IRS disagreed, arguing that

some workpapers would nevertheless be necessary to handle deferred

taxes or to justify setting aside no tax reserve.

              It was undisputed that the IRS audits every Textron

return in multi-year cycles.          Testimony also showed that in each

audit cycle hundreds of IRS adjustments to Textron's returns were

simply accepted by Textron.       Where Textron and the IRS do dispute

tax liability, their dispute could be resolved through a conference

with the audit team, by presentation of arguments to the IRS Office

of Appeals, or, ultimately, federal court litigation.                 In seven of

the last eight audit cycles, Textron and the IRS have brought at

least one issue to the IRS Office of Appeals.                 Between 1959 and

present, Textron and the IRS have litigated three disputes in

federal court.        Textron admitted that it expected to concede

several   issues     identified   in    the     workpapers,     and     that   the

percentage     for   those   issues    was    listed   as    "100%."      Textron

explained that those items were due to instances where legal

developments rendered a prior position undefendable.

              IRS agents explained that access to the workpapers would

help   them    navigate   Textron's    4000    page    tax   return    which   was

accompanied by "9 four-drawer file cabinets" of paper.                   The IRS


                                       -6-
witnesses explained that the tax accrual workpapers would help the

IRS understand the substance of a transaction and could help the

IRS identify potential issues with Textron's return.                 An agent

testified that in 2006 the IRS adopted the policy of seeking tax

accrual workpapers when the audit team becomes aware (sometime

through self-reporting) of certain transactions by the taxpayer

which potentially constitute abusive tax shelters.

           As to the waiver issue, the IRS's expert, Carmichael,

testified that companies create these tax accrual workpapers,

knowing that they will be shared with an auditor.               Evidence also

showed that the auditor's code of ethics requires information be

kept confidential unless required to be produced in response to a

subpoena or other legal obligation. Mark Weston, a partner at E&Y,

submitted an affidavit explaining these confidentiality obligations

and   further   stating   that   E&Y    had   not   in   fact   disclosed   any

information regarding Textron's 2001 tax accrual computations. But

the IRS expert opined that auditors ultimately owe an allegiance to

the investing public and have legal obligations of disclosure in

some instances.

           Textron countered that it let E&Y look at its tax accrual

workpapers, but did not allow E&Y to retain a copy of them.             Debra

Raymond, a Textron tax manager, averred that she had reviewed E&Y's

files and that E&Y did not in fact retain a copy of Textron's

workpapers.


                                       -7-
          The IRS subpoena also requested any tax-accrual documents

prepared by E&Y regarding Textron.        After the evidentiary hearing,

the district court found that the "tax accrual workpapers" at issue

did not include facts about the issues they identified, and could

be described as follows:

          1. A spreadsheet that contains:
          (a) lists of items on Textron's tax returns,
          which, in the opinion of Textron's counsel,
          involve issues on which the tax laws are
          unclear, and, therefore, may be challenged by
          the IRS;
          (b) estimates by Textron's counsel expressing,
          in percentage terms, their judgments regarding
          Textron's chances of prevailing in any
          litigation over those issues (the "hazards of
          litigation percentages"); and
          (c) the dollar amounts reserved to reflect the
          possibility that Textron might not prevail in
          such litigation (the "tax reserve amounts").

          2. Backup workpapers consisting of the
          previous year's spreadsheet and earlier drafts
          of the spreadsheet together with notes and
          memoranda written by Textron's in-house tax
          attorneys reflecting their opinions as to
          which items should be included on the
          spreadsheet and the hazard of litigation
          percentage that should apply to each item.

United States v. Textron Inc., 507 F. Supp. 2d 138, 142-143 (D.R.I.

2007).   The government objects on appeal that the district court

did not include in this definition any tax accrual workpaper that

E&Y prepared in its audit of Textron.

          The   district   court   then    found   that   the   subpoenaed

documents were relevant, requested for a proper purpose, and were

privileged attorney-client communications.         Id. at 143-48.    But,


                                   -8-
the district court found that the attorney-client privilege was

waived by disclosure to E&Y.   Id. at 151-52.

          As to the work-product protection claim, the district

court credited Textron's testimony that its ultimate purpose in

preparing the tax accrual workpapers was to ensure that it was

"'adequately reserved with respect to any potential disputes or

litigation that would happen in the future.'"       Id. at 143 (quoting

the testimony of Norman Richter). The court found that this desire

to ensure adequate reserves was also prompted, in part, by its wish

to satisfy independent auditors that Textron had properly reported

its financial information. Id. at 150. The court acknowledged the

First Circuit's "because of" test for determining whether documents

were prepared in anticipation of litigation and recognized that

under that test there is no protection for "'documents that are

prepared in the ordinary course of business or that would have been

created   in   essentially   similar   form    irrespective    of   the

litigation.'" Id. (quoting Maine v. United States Dep't of the

Interior, 298 F.3d 60, 70 (1st Cir. 2002)).         The district court

then held that the tax accrual workpapers "would not have been

prepared at all 'but for' the fact that Textron anticipated the

possibility of litigation with the IRS."      Id.   The district court

reasoned that while the papers were used to obtain a favorable

opinion letter from E&Y regarding Textron's reserves, there would

have been no need for such reserves "if Textron had not anticipated


                                -9-
a dispute with the IRS that was likely to result in litigation or

some other adversarial proceeding."               Id.    The IRS appeals the

conclusion that the work-product doctrine protects the tax accrual

workpapers.

            The district court then noted that the standard for

waiver of the work-product protection was different than for

attorney-client     privilege.    Id.        at   152.    The   district   court

concluded that disclosure of Textron's tax accrual workpapers to

E&Y did not effect a waiver since disclosure "did not substantially

increase the IRS's opportunity to obtain the information contained

in them."      Id. at 153.   The district court based its decision on

E&Y's professional confidentiality obligations and the fact that

E&Y averred that it had not actually disclosed the information.

Id.2    The IRS also appeals this conclusion.

            The district court then ruled that the government could

not make the showing needed to overcome work-product protection

since    the    government   sought     Textron's        "mental   impressions,

conclusions, opinions or legal theories."                Id. at 154 (internal

quotations omitted).     The IRS does not appeal this conclusion.




2
   The district court also found that E&Y had promised to keep the
documents confidential. The IRS contends that this fact is not
supported in the record.    As explained infra n.9, we need not
decide this dispute.

                                      -10-
                               II.    Discussion

           Three issues are thus presented for appeal: (1) whether

the   work-product     doctrine      protects   Textron's   workpapers;   (2)

whether   any   such      work-product   protection   was   waived   through

disclosure to E&Y; and (3) whether the district court erred in not

considering the IRS's request for E&Y's workpapers.

           On these evidentiary issues, we "review district court

rulings on questions of law de novo; we review district court fact

findings for clear error; and we review 'discretionary judgments

such as evidentiary rulings' for abuse of discretion."            Cavallaro

v. United States, 284 F.3d 236, 245 (1st Cir. 2002) (quoting United

States v. Mass. Inst. of Tech. ("MIT"), 129 F.3d 681, 683 (1st Cir.

1997)).

           "[T]he party who invokes the privilege bears the burden

of establishing that it applies to the communications at issue and

that it has not been waived."         XYZ Corp. v. United States, 348 F.3d

16, 22 (1st Cir. 2003).

           A.   Work-Product Protection

                     1.    Applicable law

           "[T]he work-product doctrine does apply in tax summons

enforcement proceedings."         Upjohn Co. v. United States, 449 U.S.

383, 386 (1981). The work-product doctrine protects "documents and

tangible things that are prepared in anticipation of litigation or

for trial by or for another party or its representative."            Fed. R.


                                       -11-
Civ. P. 26(b)(3)(A).     In assessing whether a document was prepared

in anticipation of litigation, this circuit uses the "because of"

test.     Maine, 298 F.3d at 68.      Under this test, a document is

protected "if, 'in light of the nature of the document and the

factual situation in the particular case, the document can be

fairly said to have been prepared or obtained because of the

prospect of litigation.'"        Id. at 70 (quoting United States v.

Adlman, 134 F.3d 1194, 1202 (2d Cir. 1998)) (emphasis in original).

It is also our law that, "the 'because of' standard does not

protect   from    disclosure   'documents   that   are   prepared   in   the

ordinary course of business or that would have been created in

essentially similar form irrespective of the litigation.'" Id.

(quoting Adlman, 134 F.3d at 1202).       As discussed below, we hold in

this case that the presence of a business purpose does not defeat

work-product protection.

            The   work-product   doctrine   originates    in   Hickman   v.

Taylor, where the Supreme Court laid out the problems with allowing

the discovery of work product:

            Were such materials open to opposing counsel
            on mere demand, much of what is now put down
            in   writing   would   remain  unwritten.   An
            attorney's thoughts, heretofore inviolate,
            would not be his own. Inefficiency, unfairness
            and sharp practices would inevitably develop
            in the giving of legal advice and in the
            preparation of cases for trial. The effect on
            the legal profession would be demoralizing.
            And the interests of the clients and the cause
            of justice would be poorly served.


                                   -12-
Hickman v. Taylor, 329 U.S. 495, 511 (1947).         The doctrine is

rightly seen as a protection for the adversary system, not simply

the attorney.   Coastal States Gas Corp. v. Department of Energy,

617 F.2d 854, 864 (D.C. Cir. 1980) (noting the doctrine does not

protect all documents prepared by a lawyer and instead "focuses on

the integrity of the adversary trial process itself" (quotation

omitted)).

          The Restatement has offered a definition of litigation in

the work product context:

          "Litigation" includes civil and criminal trial
          proceedings,    as    well   as    adversarial
          proceedings before an administrative agency,
          an arbitration panel or a claims commission,
          and     alternative-dispute-resolution
          proceedings such as mediation or mini-trial.
          It also includes a proceeding such as a grand
          jury   or    a   coroner's   inquiry   or   an
          investigative legislative hearing. In general,
          a proceeding is adversarial when evidence or
          legal argument is presented by parties
          contending against each other with respect to
          legally significant factual issues.

Restatement (Third) of the Law Governing Lawyers § 87 cmt. h

(2000).   "'Adversarialness' is the touchstone of this approach to

the 'litigation' question . . . ."     In re Grand Jury Subpoena, 220

F.R.D. 130, 147 (D. Mass. 2004).

                  2.   Are tax disputes "litigation?"

          The IRS argues that preparation of tax returns is not

meant to be an adversary process, but rather is a self-reporting

regime that relies on the good faith of taxpayers.    The IRS reasons


                                -13-
that it is not seeking to gain unfair litigation advantage but

rather to verify self-assessment in an environment where the

taxpayer holds all the relevant information. Textron responds that

it routinely engages in administrative disputes and even federal

court litigation with the IRS.

           Citing Roxworthy, Textron argues that anticipation of

audit disputes can constitute anticipation of litigation.             United

States v. Roxworthy, 457 F.3d 590, 600-01 (6th Cir. 2006) (finding

memos prepared analyzing legal arguments supporting and opposing

specific   tax   positions   to   be   protected   work   product).       But,

Roxworthy cites another case, Hodges, for the proposition that "a

document prepared 'in anticipation of dealing with the IRS . . .

may well have been prepared in anticipation of an administrative

dispute and this may constitute litigation within the meaning of

Rule 26.'"   Id. at 600 (quoting Hodges, Grant & Kaufmann v. IRS,

768 F.2d 719, 719-22 (5th Cir. 1985)) (emphasis added).               Hodges,

however, was not expressing a holding, but simply remanding to the

district court to consider a work-product claim.          Considering that

Roxworthy dealt with anticipation of litigation with respect to

specific   transactions,     Roxworthy    does   not   establish   that    all

documents prepared analyzing tax returns are protected.            Instead,

Roxworthy holds that documents created to analyze specific areas of

likely dispute may be protected.




                                   -14-
           Nonetheless, after considering the applicable test, we

conclude that, while not all "dealing with the IRS" during an audit

is "litigation," the resolution of disputes through adversary

administrative processes, including proceedings before the IRS

Appeals Board, meets the definition of litigation.                The IRS is

correct that preparation and filing of returns relies on good faith

self-reporting.       But, good-faith disputes regarding the proper

application of tax law also arise during the audit process.            Thus,

though the initial processing of these disputes in the audit

process   may   not    be    adversarial,    the   disputes   themselves   are

essentially adversarial; the subject of these disputes will become

the subject of litigation unless the dispute is resolved.3

                      3.    Were the tax accrual workpapers prepared in
                             anticipation of litigation?

           In addition to the question of whether audit disputes

with the IRS are litigation, we must confront the question of

whether   Textron's         tax   accrual    workpapers   are   prepared    in

anticipation of such disputes.          The district court reasoned that

the business need to cover potential liabilities arose out of the

anticipation of potential disputes, and thus would not occur "but


3
  Thus, we do not hold that filing tax returns or participating in
audits is itself adversarial. Our holding does not and should not
change the essentiality of good faith self-assessment. The IRS
retains many enforcement tools to ensure compliance with that
system. Thus, we do not share in the IRS's negative conclusions
about the policy effects of our judgment, which concerns tax
accrual workpapers, documents which the IRS admits it seeks only in
limited circumstances.

                                      -15-
for" those disputes.          Textron, 507 F. Supp. 2d at 150.              The IRS

argues that the district court's conclusion is factually and

legally wrong.

                              a.   Analysis

             The IRS argues that, as a legal matter, the documents

were not prepared in anticipation of litigation and that the

district court misapplied the "because of" test when it reasoned

that the documents would not have been created "but for" the

prospect of litigation.

             We agree with the district court's finding that one of

the purposes behind the creation of the documents was anticipation

of litigation.         As the district court explained, the need to

estimate the likelihood of success in litigation was a result of

the need to set up a reserve fund to cover tax positions for which

Textron could foresee disputes with the IRS.

             Of course, simple relation to litigation is insufficient

to    trigger   work-product         protection.    Maine,    298    F.3d    at   69.

Further, work-product protection must be assessed in reference to

a    "the   function   that    the    document     serves,"   not    its    content.

Roxworthy, 457 F.3d at 595.           And it is not enough that the preparer

"had the prospect of litigation in mind when it" created the

documents.      Adlman, 134 F.3d at 1204.            Rather, the "because of"

test    "really   turns   on       whether    it   would   have     been    prepared

irrespective of the expected litigation with the IRS."                     Id.


                                        -16-
            But, here, the function of the documents was to analyze

litigation for the purpose of creating and auditing a reserve fund.

It   can   be   fairly    said   that    "'the   driving   force   behind   the

preparation'" of the documents, Roxworthy, 457 F.3d at 595 (quoting

Nat'l Union Fire Ins. Co. v. Murray Sheet Metal Co., 967 F.2d 980,

984 (4th Cir. 1992)), was the need to reserve money in anticipation

of disputes with the IRS.        The district court so found, and we find

no clear error.          See Cavallaro, 284 F.3d at 245 (clear error

standard applied to findings of fact of district court in privilege

case).4    In this way, we read the district court's "but for"



4
   The dissent challenges this factual conclusion of the district
court, but utterly fails to explain why the district court's
acceptance of the testimony of Textron's witnesses was clear error.
Specifically, the district court found that Textron would have no
need to compute reserves if it had not anticipated litigation.
Textron, 507 F. Supp. 2d at 150 (recognizing that though "it may be
accurate to say that the workpapers helped Textron determine what
amount should be reserved to cover any potential tax liabilities,"
anticipation of disputes drove that very need). Contrary to the
dissent's intimations, the district court did find that Textron's
tax accrual workpapers were prepared with dual purposes in mind.
Id. at 143 (finding Textron's "ultimate purpose" in preparing the
workpapers was to ensure Textron was adequately reserved with
respect to disputes or potential litigation, but acknowledging that
the desire to establish adequate reserves "also was prompted, in
part, by its wish to satisfy an independent auditor" and obtain a
clean opinion).    These findings were based on testimony from
Textron's witnesses. The testimony of the government's expert,
cited by the dissent, does not contradict the conclusion that
Textron was motivated by dual purposes, especially considering that
it is not clear that the expert is using the same definition of
"anticipation of litigation" that we adopt. See infra. Thus, the
district court's fact finding was not clearly erroneous. Rather,
it is accurate to say that Textron's tax accrual workpapers would
not have been prepared in a similar form irrespective of the
potential for litigation.

                                        -17-
reasoning as a way of expressing its conclusion that the documents

would not have been prepared irrespective of the prospect of

litigation, but rather were prepared "because of" the risk of

disputes and litigation which gave rise to a need to compute and

report tax reserves.5

           The IRS next argues that the district court found that

the "workpapers helped Textron determine what amount should be

reserved to cover any potential tax liabilities and that the

workpapers were useful in obtaining a 'clean' opinion from E&Y

regarding the adequacy of the reserve amount."             Textron, 507 F.

Supp. 2d at 150.    The IRS argues that this finding legally compels

a ruling that the tax accrual workpapers are not protected, since

documents prepared in the ordinary course of business receive no

protection.     Maine, 298 F.3d at 70.   The IRS further reasons that

since the documents were required to comply with reporting and

securities obligations, the tax accrual workpapers were prepared

pursuant   to    "regulatory   requirements"   and   are    therefore   not

protected.      See Nat'l Union, 967 F.2d at 984.          The IRS reasons

that, as a simple matter of law, Rule 26 does not apply to



5
   The IRS also argues that some form of workpaper would have been
prepared even if no disputes were anticipated in order to justify
setting aside no reserve. But that is not the context in which the
workpapers at issue in this case were created.        Rather, the
evidence shows that these workpapers project the risks of
litigation over specific tax positions and were created in the
context   of   anticipating  disputes   (and  therefore   possible
litigation) over those positions.

                                  -18-
"[m]aterials assembled in the ordinary course of business, or

pursuant to public requirements unrelated to litigation, or for

other nonlitigation purposes."              Fed. R. Civ. P. 26 Notes of

Advisory Committee on 1970 amendments.

             We reject the IRS's contention that the mere presence of

a business or regulatory purpose defeats work-product protection.

To be sure, "there is no work-product immunity for documents

prepared in the regular course of business rather than for purposes

of    the   litigation,"   even        though   "litigation    is    already   in

prospect."      8 Charles Alan Wright, Arthur R. Miller & Richard L.

Marcus, Federal Practice and Procedure, § 2024 (2008) (emphasis

added).     But, it is also true that "'[d]ual purpose' documents

created because of the prospect of litigation are protected even

though they were also prepared for a business purpose."                 Id.;   see

also In re Grand Jury Subpoena, 357 F.3d 900, 907 (9th Cir. 2004)

(adopting Wright and Miller's "because of" test in order to handle

"dual purpose" documents).

             Thus, the best reading of the advisory committee's note

is simply that preparation for business or for public requirements

is preparation for a nonlitigation purpose insufficient in itself

to warrant protection. The note states that there is no protection

for    documents   created       for    business,   regulatory,       or   "other

nonlitigation purposes."           This language suggests the note is

considering    business    and    regulatory     purposes     as    nonlitigation


                                        -19-
purposes, but does not suggest that the presence of such a purpose

should somehow override a litigation purpose, should one exist. To

the contrary, the language of the note does not suggest that the

advisory committee was considering the problem of dual purpose

documents.    Thus, we do not read the note as stating that there

should be no protection where a document is prepared because of the

possibility of litigation but also for a business or regulatory

purpose.6

            Like   in   the   case   where   a   company   analyzes   pending

litigation for the purpose of setting aside a reserve, cf. Adlman,


6
   One district court in this circuit has reached an opposite
conclusion. In re Raytheon Sec. Litig., 218 F.R.D. 354, 359 (D.
Mass. 2003) ("However, even when documents were created 'because
of' litigation, documents that are required to be prepared to
comply with the law may not be protected."). This approach refuses
to protect documents prepared because of the possibility of
litigation simply because another possible purpose is present. As
explained infra, such an approach ignores the primary distinction
between the "because of" and the "primary purpose" test.

     The IRS also points to another decision in this circuit where
the district court analyzed opinion letters regarding investment
vehicles alleged to be tax shelters. Fidelity Intern. Currency
Advisor A Fund, L.L.C., ex rel. Tax Matters Partner v. United
States, No. 05-40151, 2008 WL 4809032, at *13 (D. Mass. April 18,
2008). The court found those letters' "purpose was not to analyze
pending or imminent claims; instead, it was to induce the taxpayers
to invest in the strategy (or, put differently, to provide comfort
to those investors, particularly with respect to the possible
imposition of future tax penalties)." Id. But that court did not
hold "dual purpose" documents unprotected. Rather, it essentially
made a factual call, which we do not now judge, that the
possibility of litigation was too remote. Id. As explained, infra
Section II.A.4, in the present case the context surrounding the
creation of the documents, namely the need to estimate reserve
funds, made it reasonable for Textron to foresee and analyze
litigation.

                                     -20-
134 F.3d at 1200 (describing hypothetical examples where work-

product protection applies), here the business purpose derives from

and is inextricably related to anticipating litigation.                 That the

anticipation    of    such    disputes      (and    corresponding      potential

litigation)    also    triggered     certain       business    and    accounting

obligations    does   not    bar   the   protection      of   the    work-product

doctrine.   See id. at 1202 ("Where a document is created because of

the prospect of litigation, analyzing the likely outcome of that

litigation, it does not lose protection under this formulation

merely because it is created in order to assist with a business

decision."); In re Special September 1978 Grand Jury (II), 640 F.2d

49, 61 (7th Cir. 1980) ("We conclude that the materials . . .                  were

indeed prepared in anticipation of litigation, even though they

were prepared as well for the filing of the Board of Elections

reports.").    In arguing against this conclusion, the IRS points to

a Third Circuit case where that court instructed the district court

on remand to assess whether a tax reserve file was prepared to

assist in litigation or to comply with securities requirements.

United States v. Rockwell Int'l, 897 F.2d 1255, 1266 (3d Cir.

1990).    In the present case, however, the district court has

already   conducted    such    analysis     and    has   concluded      that    the

workpapers were created because of both purposes.

            The dissent disagrees with this legal conclusion and

relies primarily on the language in Maine that "the 'because of'


                                     -21-
standard does not protect from disclosure 'documents that are

prepared in the ordinary course of business or that would have been

created    in   essentially   similar   form   irrespective   of   the

litigation.'"    Maine, 298 F.3d at 70 (quoting Adlman, 134 F.3d at

1202).    Based on this language, the dissent charges we are going

against established circuit precedent.         But, for the reasons

described above, it is error to read this "ordinary course of

business" language as implying that all documents prepared with

some business purpose in mind are necessarily unprotected.         The

court in Maine was not confronted with dual purpose documents like

those at issue here.    Rather, that court recited the above quoted

language in the course of holding that there was insufficient

information to see if the documents at issue were prepared for

litigation or rather in the ordinary course of business.           Id.

Thus, Maine's "ordinary course of business" language should not be

read as barring protection for dual purpose documents where one

business purpose is present. This conclusion is all the more clear

when one consider's Adlman's reason for adopting the "because of"

test:

           The issue is less clear, however, as to
           documents which, although prepared because of
           expected litigation, are intended to inform a
           business decision influenced by the prospects
           of the litigation. The formulation applied by
           some courts in determining whether documents
           are protected by work-product privilege is
           whether they are prepared "primarily or
           exclusively to assist in litigation" -- a
           formulation that would potentially exclude

                                 -22-
          documents containing analysis of expected
          litigation, if their primary, ultimate, or
          exclusive purpose is to assist in making the
          business decision. Others ask whether the
          documents were prepared "because of" existing
          or expected litigation -- a formulation that
          would include such documents, despite the fact
          that their purpose is not to "assist in"
          litigation. Because we believe that protection
          of documents of this type is more consistent
          with both the literal terms and the purposes
          of the Rule, we adopt the latter formulation.

Adlman, 134 F.3d at 1197-98, quoted in part in Maine, 298 F.3d at

68.

          Further, a contrary holding would lead to undesirable

results in other cases.    Consider a document prepared to analyze a

specific litigation in order to compute for an auditor how much

must be retained in a litigation reserve fund.          Were we to adopt

the IRS position that documents created to satisfy audit reporting

responsibilities   were   not   protected,   opposing   counsel   in   the

litigation might be able to discover such a memo, effectively

disclosing counsel's ultimate mental impression of the case.            In

fact, in similar circumstances, the Sixth and Second circuits have

suggested that memoranda analyzing a transaction or position to be

protected by the work-product doctrine.        Roxworthy, 457 F.3d at

600; Adlman, 134 F.3d at 1200-04 (remanding for the district court

to apply the correct standard).




                                  -23-
                             b.   Countervailing concerns

            Having explained why application of the work-product

doctrine leads us to the conclusion that Textron's tax accrual

workpapers are protected, we pause to address the IRS's arguments

against such a conclusion.

                                   i.   Arthur Young

            The IRS asserts our decision will run afoul of Supreme

Court precedent.       In Arthur Young, the Court declined to recognize

an   accountant's   work-product        doctrine,       thus   holding   that   tax

accrual workpapers created by an independent auditor were not

protected.     United States v. Arthur Young & Co., 465 U.S. 805, 815-

21   (1984).     The    Court     recognized     that    the   auditor's    papers

necessarily included the taxpayer's own thinking about tax "soft

spots."   Id. at 813.        The Court also rejected some of the fairness

concerns implicated in that case.              Id. at 820 (rejecting argument

that "enforcement of an IRS summons for accountants' tax accrual

workpapers permits the Government to probe the thought processes of

its taxpayer citizens, thereby giving the IRS an unfair advantage

in negotiating and litigating tax controversies").                  Further, the

Court rejected policy concerns that, without a new privilege,

companies would be tempted to withhold information from auditors.

Id. at 818-19 (finding that "[r]esponsible corporate management

would not risk a qualified evaluation of a corporate taxpayer's

financial    posture    to    afford    cover    for    questionable     positions


                                        -24-
reflected    in   a   prior   tax    return"     and    concluding   that   "the

independent auditor's obligation to serve the public interest

assures that the integrity of the securities markets will be

preserved,   without    the   need    for    a   work-product    immunity   for

accountants' tax accrual workpapers").

            Following this precedent, we have recognized that "the

doctrine of construing the [attorney-client] privilege narrowly

. . . has particular force in the context of IRS investigations

given the 'congressional policy choice in favor of disclosure of

all information relevant to a legitimate IRS inquiry.'" Cavallaro,

284 F.3d at 245-46 (quoting Arthur Young, 465 U.S. at 816). But

unlike the Court in Arthur Young, we are not now confronted with

the question of whether to recognize a new privilege.                Here, the

doctrinal decision we face is whether to afford protection to

documents created because of both business and litigation -- a

question not presented in Arthur Young.7               Since this question has



7
   The IRS also suggests that the Supreme Court was comfortable
with discovery of taxpayer tax accrual workpapers because it
"affirmatively encouraged the IRS's seeking tax-accrual workpapers
from the company prior to pursuing such workpapers from the
auditor." IRS Reply Brief at 22-23 (citing Arthur Young, 465 U.S.
at 820-21 & n.17). But the cited provisions of Arthur Young do not
consider the question of work-product protection, and do not
endorse any particular method, but rather simply take note that the
IRS "has demonstrated administrative sensitivity" by adopting a
policy to "take all reasonable means to secure the information from
the corporation itself before issuing a summons to the independent
auditor."    Arthur Young, 465 U.S. at 21 n.17.       Whether such
"reasonable means" can include summons of a taxpayer's own tax
accrual workpapers was not considered by the Supreme Court.

                                      -25-
broader implications, the Supreme Court's policy judgment that a

new privilege is not necessary for the accurate preparation of

accountants' tax accrual workpapers is not controlling.               Further,

our prior analysis of this issue does not rely on the policy

considerations rejected in Arthur Young.                 That case is not an

obstacle   to       our   conclusion    that    protection   of   dual-purpose

documents is consistent with the purpose and doctrine of the work-

product doctrine.

                                  ii.    El Paso

           Because of a contrary outcome in a Fifth Circuit case,

the IRS argues that our decision will create a circuit split.                See

United States v. El Paso Co., 682 F.2d 530, 542 (5th Cir. 1982),

cert. denied, 466 U.S. 94 (1984).              In El Paso, the Fifth Circuit

found   that    a    company's   own    tax    accrual   workpapers   were   not

protected as they were created for purposes of complying with

securities law:

           In sum, we believe that the tax pool analysis
           does not contemplate litigation in the sense
           required to bring it within the work product
           doctrine. The tax pool analysis concocts
           theories about the results of possible
           litigation; such analyses are not designed to
           prepare   a   specific  case   for  trial   or
           negotiation. Their sole function, from all
           that appears in the record, is to back up a
           figure on a financial balance sheet. Written
           ultimately to comply with SEC regulations, the
           tax pool analysis carries much more the aura
           of daily business than it does of courtroom
           combat. We hold, therefore, that the tax pool
           analysis    and  backup  memoranda   are   not
           protected work product materials.

                                        -26-
Id. at 543-44.     However, in El Paso the Fifth Circuit applied a

different definition of the work-product doctrine, asking whether

the "primary motivating purpose behind the creation of the document

was to aid in possible future litigation."         Id. at 542 (internal

quotation marks omitted).      Thus, the result here does not create a

circuit split with El Paso, but is merely the application of an

existing   split   in    the   definition   of   the   "anticipation     of

litigation."   It is precisely in these "dual purpose" situations

that the "because of" test used in this circuit distinguishes

itself from the "primary purpose" test used in the Fifth Circuit.

Maine, 298 F.3d at 68 (citing Adlman for the proposition that the

primary purpose test "is at odds with the text and the policies of

Rule 26 because nothing in it suggests that documents prepared for

dual purposes of litigation and business or agency decisions do not

fall within its scope").       Thus, unlike the Fifth Circuit, we need

not assess whether the tax accrual workpapers carry more of one

aura than another.      We need only conclude that since the analysis

was undertaken "because of" the anticipation of litigation, work-

product protection applies.

                                iii.   Factual argument

           Since some tax positions in the accrual papers carry a

100 percent chance of failing, the IRS argues, as a factual matter,

that Textron could not have been anticipating litigation.              But,

Textron explained that those entries were the result of identifying


                                   -27-
positions that were incorrect as a result of subsequent legal

developments.    The IRS also argues that most disputes are resolved

informally.     But the fact that most disputes are resolved before

litigation commences does not mean that analysis of those disputes

could not have been in anticipation of "the prospect of litigation"

over those disputes.      To the contrary, assessing the likelihood

that a tax position will not withstand scrutiny necessarily entails

analysis which anticipates how litigation of that position would be

resolved.

                   4.    Has   Textron  adequately   identified the
                         specific litigation for which the workpapers
                         were prepared?

            Adlman and Roxworthy, cases we relied on above, are also

not directly on point as they involved documents analyzing the

consequences of a specific litigation or specific transaction. The

IRS argues that this distinction is controlling, that to protect

Textron's tax accrual workpapers is in effect to afford a "blanket"

protection -- a work-product doctrine that is so broad it will

"swallow" the attorney-client privilege.         It is true that we have

required    proponents   of   a   work-product    protection   claim   to

"'identify the litigation for which the document was created . . .

and explain why the work-product privilege applies to all portions

of the document.'"       Maine, 298 F.3d at 69 (quoting Church of

Scientology Int'l v. United States Dep't of Justice, 30 F.3d 224,

237 (1st Cir. 1994)).         These "identification and explanation


                                  -28-
requirements are not to be given a hypertechnical construction,"

but "they can neither be brushed aside nor satisfied by vague

generalities."     Id.

           Here, Textron has met its burden.                      The tax accrual

workpapers identify and numerically evaluate a number of tax

positions Textron took on its 2001 returns.                  As described above,

Textron has shown that its analysis of each position was prepared

by anticipating the possibility of litigation with the IRS arising

over a dispute regarding that position.                    Thus, the tax accrual

workpapers     identify    specific       positions,        and    the     litigation

projections were created in anticipation of disputes and possible

litigation over those positions.8

           The    IRS    again     argues      that   Textron      could    not    have

consistently     had    specific      litigation      in   mind    since    most   tax

disputes were resolved before litigation and since Textron could

not reasonably intend to litigate every challenged position.                       But

these facts do not change our analysis.                    As the district court

found,   the   spreadsheet       at    issue    assessed     the    likelihood       of

succeeding in litigation over each specific position.                      Thus, the



8
   The IRS posits that some entries in the tax accrual workpapers
may refer to reserves held for deferred taxes over which no
litigation is to be expected. That some reserves may not be based
on disputes does not change our conclusion regarding computation of
reserves that are based on potential disputes. Further, the IRS
has not requested that we order the production of only the papers
regarding deferred tax reserves, which in any event, would not
appear to be relevant to assisting the IRS.

                                        -29-
function served by creating this analysis is to assess what funds

must be set aside in anticipation of litigation over each of the

positions identified.    That Textron might ultimately decide not to

dispute a specific position does not contradict the conclusion that

when it estimated its litigation success, it was anticipating

specific litigation.

            Again, we note that a contrary result would lead to an

undesirable result.       If we were only to afford work product

protection over documents of this sort by requiring a showing, as

the   IRS   suggests,   that   there   was   some   specific   quantum   of

expectation that the position at issue would mature into full-

fledged litigation, we would essentially be offering protection

only to the cantankerous and combative taxpayer who intends to

thoroughly litigate every position.

            Precedent does suggest that a party claiming work-product

protection must "'have had a subjective belief that litigation was

a real possibility, and that belief must have been objectively

reasonable.'"    Roxworthy, 457 F.3d at 594 (quoting In re Sealed

Case, 146 F.3d 881, 888 (D.C. Cir. 1998)).            The district court

found that, considering its history, it was reasonable for Textron

to conclude that litigation with the IRS was likely.           We see the

matter differently but reach the same result.

            In the context of these facts, we do not think that a

history of litigation with the IRS should be the deciding factor.


                                  -30-
A company with a history of challenging the IRS creates these

documents "because of" the same reason as another company without

such a history: the possibility of a dispute compels them to

anticipate litigation so as to prepare and assess their tax reserve

funds.   In this case, the anticipation of litigation coupled with

securities and reporting requirements forced Textron to analyze and

project its likelihood of success in litigation. Thus, Textron was

effectively forced to operate under the hypothetical belief that

litigation    would    occur.      For   this    reason,    regardless   of   its

specific history with the IRS, it was objectively reasonable for

Textron to forecast litigation.

             The IRS argues that this holding will "immunize nearly

every document generated by lawyers because clients can always be

said to be aware of possible litigation."               The IRS worries that

work-product protection would "encompass essentially all legal

advice," since any lawyer analyzing the risks inherent in a legal

transaction    or     position    will   be     able   to   gain   work-product

protection by saying that the analysis was prepared in anticipation

of litigation regarding that transaction or position. We disagree.

As we have just explained, in the case of tax accrual workpapers,

the   dual    purposes    --     financial      reporting    and   anticipating

litigation    --    are   necessarily     intertwined;       the   function   of

preparing adequate financial reports inherently requires Textron to

anticipate and analyze litigation.            The anticipation of litigation


                                     -31-
may be similarly intertwined in other cases.             See, e.g., Delaney,

Migdail & Young, Chartered v. IRS, 826 F.2d 124, 127 (D.C. Cir.

1987) (distinguishing case law requiring a "specific claim" to

uphold a claim of work-product protection to certain IRS memoranda

analyzing potential legal vulnerabilities).              But in many cases,

there will not be an obvious objectively reasonable need to foresee

litigation.9    Of course, each case will depend on its facts.           See,

e.g., Adlman, 134 F.3d at 1204 (remanding for further fact finding

applying the correct standard).               But, in the present case, we

conclude   that   Textron's     need    to    consider   the   possibility   of

litigation     with   respect   to   each     disputed   position   adequately

satisfies this requirement.


9
    For example, the IRS argues that protecting Textron's tax
accrual papers would lead to protection of documents prepared by a
bank to estimate loan failure rates. We disagree. A loan may fail
for all sorts of reasons. Tax positions would ultimately succeed
or fall based on their legal merit, assessed through litigation.
In this case, the combination of the possibility of litigation and
reporting requirements required Textron to anticipate litigation.
Legal analysis of other transactions and positions may not entail
such specific consideration of litigation.

     The IRS also fears our holding will somehow lead companies to
use lawyers to conduct performance reviews, then seek work-product
protection for such documents. We think such a hypothetical is
distinguishable. In such a case, the employer may be evaluating
the employee's performance for business purposes, regardless of the
possibility of litigation.      Here, Textron evaluates its tax
positions for business purposes precisely because of the
possibility those positions will be challenged in litigation.
Thus, the business context makes it reasonable for Textron to
anticipate and foresee litigation.     While such a question is a
factual matter for another case, it seems less likely that the
function of employee evaluations would similarly make it reasonable
for an employer to anticipate litigation.

                                       -32-
          B.     Waiver of Work-Product Protection

          Unlike        attorney-client         privilege,        "work    product

protection is provided against 'adversaries,' so only disclosing

material in a way inconsistent with keeping it from an adversary

waives   work    product     protection."          MIT,     129    F.3d   at   687.

Specifically, "disclosure to an adversary, real or potential,

forfeits work product protection." Id.

          We     must   decide     whether    Textron     waived     work-product

protection by showing its tax accrual workpapers to E&Y, its

independent     auditor.     A   number    of    district    court    cases    have

concluded that disclosure to independent auditors does not waive

work-product     protection.        See,     e.g.,   Regions       Fin.   Corp.   &

Subsidiaries v. United States, No. 06-00895, 2008 U.S. Dist. LEXIS

41940, at *27-28 (N.D. Ala. May 8, 2008); Lawrence E. Jaffe Pension

Plan v. Household Int'l, Inc., 237 F.R.D. 176, 183 (N.D. Ill. 2006)

("Disclosing     documents    to    an   auditor     does    not    substantially

increase the opportunity for potential adversaries to obtain the

information."); Merrill Lynch & Co. v. Allegheny Energy, Inc., 229

F.R.D. 441, 448 (S.D.N.Y. 2004) ("A business and its auditor can

and should be aligned insofar as they both seek to prevent, detect,

and root out corporate fraud.").             But see Medinol v. Boston Sci.

Corp., 214 F.R.D. 113, 116-17 (S.D.N.Y. 2002) ("Boston Scientific

and its outside auditor Ernst & Young did not share 'common

interests' in litigation, and disclosures to Ernst & Young as


                                      -33-
independent auditors did not therefore serve the privacy interests

that the work product doctrine was intended to protect.").        It is

undisputed that Textron and E&Y were not actual adversaries.        The

IRS argues by analogy to MIT that they were potential adversaries.

In MIT, we found work-product privilege waived when MIT disclosed

documents to a Defense Department auditing agency.         128 F.3d at

687. The audit agency was reviewing MIT's expense submissions. Id.

We found MIT and the agency to be potential adversaries as, "MIT

doubtless hoped that there would be no actual controversy between

it and the Department of Defense, but the potential for dispute and

even litigation was certainly there."       Id.

          The    facts   here   are   different.   While   the   Defense

Department auditing agency was reviewing expenses to determine if

it would challenge those expenses, E&Y was not auditing Textron in

order to identify disputes it would have with Textron, but rather,

to decide if it could issue a letter certifying Textron's financial

statements.     This is a cooperative not adversarial relationship.

See Jaffe Pension Plan, 237 F.R.D. at 183 ("[T]he fact that an

independent auditor must remain independent from the company it

audits does not establish that the auditor also has an adversarial

relationship with the client as contemplated by the work product

doctrine.").    While it is possible to imagine circumstances where

E&Y's professional obligations could cause E&Y and Textron to come

into conflict on some legal question, the IRS can point to no


                                  -34-
"conceivable scenario in which E & Y would file a lawsuit against

[Textron] because of something E & Y learned from [Textron's]

disclosures."    Regions, 2008 U.S. Dist. LEXIS 41940, at * 27-28

(citing MIT and the district court's opinion in this case to

conclude that there was no waiver in similar circumstances).

Whereas MIT's disclosure to the Defense Department auditing agency

had the potential to directly trigger a dispute with that agency,

no such potential adversity existed here.

           Disclosure to a conduit to a potential adversary can also

waive   work-product    protection.         Raytheon,   218    F.R.D.    at   360

(collecting cases).     In other words, waiver occurs upon disclosure

to a third party that "substantially increased the opportunities

for potential adversaries to obtain the information." 8 Wright,

Miller,   &   Marcus,   supra,   §    2024    (2008).         Though    E&Y   has

professional confidentiality obligations limiting disclosure, the

IRS argues that it may be required to turn documents over to the

SEC and may, in some circumstances, have a duty to disclose

information to protect stockholders. See Arthur Young, 465 U.S. at

817-18 ("The independent public accountant performing this special

function owes ultimate allegiance to the corporation's creditors

and stockholders, as well as to the investing public.").

           The IRS also argues that E&Y may be required to disclose

this information in response to a valid subpoena. At first glance,

this argument seems circular: a subpoena would only be valid if the


                                     -35-
protection did not survive.     But, on further examination, the

question is more complicated.   The record establishes that E&Y did

not retain a copy of Textron's tax accrual workpapers.     Thus, at

first we would see little likelihood that E&Y would have to

disclose those papers.   But, E&Y used those papers, together with

its own expertise, in preparing its own assessment of Textron's

reserve tax liability.    Therefore, the only remaining documents

which could be subjected to a risk of discovery are E&Y's own

assessments, which incorporate Textron's analysis.

          Though we hold Textron's tax accrual workpapers are

protected, Arthur Young suggests that E&Y's workpapers may be

discoverable.   465 U.S. at 815-821.10   In fact, as we find infra,

Textron itself may be required to produce E&Y's workpapers on

remand.

          Since E&Y's workpapers may be discoverable, the question

we must ask is whether disclosure of those workpapers substantially

increased the risk that the contents of Textron's workpapers would

be disclosed to an adversary. As the Supreme Court has recognized,

independent auditors "obtain and assess the opinions, speculations,

and projections of management with regard to unclear, aggressive,

or questionable tax positions that may have been taken on prior tax


10
     Though the parties debate the extent of confidentiality
agreements and expectations of privacy between Textron and E&Y, we
find such expectations irrelevant here, since a bilateral
confidentiality agreement regarding Textron's workpapers would not
defeat a valid IRS subpoena for E&Y's workpapers.

                                -36-
returns."     Arthur Young, 465 U.S. at 812.       Further the auditor's

workpapers "may document the auditor's interviews with corporate

personnel." Id. (emphasis added).          Thus, disclosure of E&Y's

workpapers might reveal Textron's own analysis. On the other hand,

E&Y's affiant, Weston, suggested that E&Y "did not rely solely upon

the conclusions of [Textron's] tax counsel" but instead "applied

its own professional knowledge and judgment." Because the district

court did not address the question of whether the IRS can gain

discovery of E&Y's tax workpapers through a subpoena to Textron, it

made no factual findings regarding the actual contents of E&Y's

workpapers or the extent to which disclosure of such workpapers

would   effectively     constitute    disclosure     of   Textron's   own

assessment.      Rather than rely on vague language suggesting what

might be in E&Y's workpapers, we think that this is a question the

district court must develop on remand through in camera inspection,

if feasible, or through testimony.

            C.   E&Y's Workpapers

            The IRS's subpoena also sought tax accrual workpapers

prepared by E&Y that were within the possession, custody, or

control of Textron or its accountants.      The district court did not

include such workpapers in its definition of the documents sought

and so did not rule on their discoverability.       The IRS asserts that

such failure to rule is error.




                                    -37-
             Textron argues that this omission is the fault of the

IRS.   When convening the evidentiary hearing, the district court

called on the parties to present evidence on the question of

"[w]hat specific types of documents are included in the 'Tax

Accrual Workpapers' and 'backup' documentation" sought by the

summons.      But the evidence at the evidentiary hearing simply

concerned Textron's workpapers, and the IRS did not bring up E&Y's

workpapers.        Textron thus argues that the IRS should not be

permitted to now challenge the scope of the district court's

construction of the summons.        We disagree.

             The summons explicitly sought these documents and the

record indicates that the government reiterated its request in its

briefing     and   at   the   initial    oral    arguments    held   before   the

evidentiary hearing was scheduled.              The district court was fairly

put on notice of this request, and in fact, when discussing the

applicability of I.R.C. § 7525, stated at the oral arguments, "I

think you've made your case as far as the Ernst & Young papers."

That   the   evidentiary      hearing    focused     on    developing   evidence

regarding the nature of Textron's tax accrual workpapers does not

show that the IRS had abandoned its clearly made request for E&Y's

workpapers.        In   other   words,     since     the   IRS   "squarely    and

distinctly" requested E&Y's workpapers, and the district court was

on notice of the issue, the argument is not waived.                     Cf. B&T

Masonry Constr. Co. v. Pub. Serv. Mut. Ins. Co., 382 F.3d 36, 40


                                        -38-
(1st Cir. 2004) ("To preserve a point for appeal, some developed

argumentation must be put forward in the nisi prius court -- and a

veiled reference to a legal theory is not enough to satisfy this

requirement.").

           Turning to the merits, as noted above, Arthur Young

suggests such documents are not protected and Textron has not

argued otherwise.       Textron also does not meaningfully dispute the

government's prima facie showing of relevance.               Instead, Textron

contends that we may nevertheless affirm the district court because

Textron,   the   only    defendant    in    this   action,    does   not    have

possession, custody, or control of these documents.

           In the normal discovery context, "so long as the party

has the legal right or ability to obtain the documents from another

source upon demand, that party is deemed to have control."                 Mercy

Catholic Med. Ctr. v. Thompson, 380 F.3d 142, 160 (3d Cir. 2004);

see also 8A Wright, Miller, & Marcus, supra, § 2210 ("Inspection

can be had if the party to whom the request is made has the legal

right to obtain the document, even though in fact it has no

copy.").   Textron has provided us with no argument why that test

should not apply in the IRS subpoena context.

           Textron argues that its witness testified that Textron

could not access the documents.        But Textron mischaracterizes the

record. Textron's witness simply testified that E&Y did not give

Textron its workpapers, not that Textron could not obtain copies of


                                     -39-
the documents upon request.     Thus Textron has no evidence showing

that it did not have the ability to demand the documents.          Textron

argues that R.I. Gen. Laws § 5-3.1-22 establishes an independent

auditor owns its own workpapers. But, again, it does not establish

that Textron does not have the ability or contractual right to

request the documents.

          The IRS has some evidence to suggest that Textron may

have had the right to demand E&Y's workpapers.      Raymond, a Textron

witness, stated that she had reviewed E&Y's files to confirm that

E&Y did not retain Textron's workpapers.     The IRS argues that this

shows Textron has the right to obtain the documents.               Textron

argues it shows only a right to temporary access.          We need not

parse this testimony, since even adopting Textron's interpretation,

we could not affirm on this basis.         Textron has the burden of

showing a lack of control and has produced no evidence to meet this

burden.   United States v. Lawn Builders of New England, 856 F.2d

388, 392 (1st Cir. 1988) ("'Once the district court has reason to

believe that the requested documents exist, the burden then shifts

to the summonee to show that he is not in possession of them.'"

(quoting United States v. Freedom Church, 613 F.2d 316, 322 (1st

Cir. 1979))).   Thus, we remand for the district court to determine

the   factual   question   of   whether   Textron   can   obtain     E&Y's

workpapers.




                                 -40-
                           III.   Conclusion

          For the foregoing reasons, we affirm the district court's

determination that Textron's tax accrual workpapers are protected,

affirm that Textron and E&Y were not potential adversaries, but

vacate the ultimate determination that work-product protection was

not waived, and remand for the district court to reassess, in a

manner consistent with this opinion, the question of whether

disclosure   of   E&Y's   workpapers   would   reveal   the   information

contained in Textron's own workpapers.         On remand the district

court should also assess the discoverability of E&Y's workpapers by

determining whether Textron has the legal right or ability to

obtain these documents.

          Affirmed in part, Vacated in part, and Remanded.
          No Costs are imposed.




             -Concurring and Dissenting Opinion Follows-




                                  -41-
            BOUDIN, Circuit Judge, concurring in part and dissenting

in part.    The central issue is whether Textron's tax-accrual work

papers are protected from IRS summons because they are attorney

work product.     Any lawyer might be unnerved to find that his

potential adversary could obtain the lawyer's own estimate of his

chances of success.       But under our own precedent and consistent

with other circuits, tax-accrual work papers are not protected

because they are prepared for reasons independent of the need to

prepare for or conduct litigation.

            Federal     securities        laws    require    publicly   traded

corporations    like    Textron     to    have   their   financial   statements

certified by an independent auditor.             See 15 U.S.C. §§ 78l, 78m; 17

C.F.R. § 210 et seq.      Key to the audit is evaluating "the adequacy

and    reasonableness    of   the    corporation's       reserve   account   for

contingent tax liabilities."         United States v. Arthur Young & Co.,

465 U.S. 805, 812 (1983).           Tax accrual work papers aid by inter

alia

            pinpoint[ing]   the    'soft   spots'   on   a
            corporation's tax return by highlighting those
            areas in which the corporate taxpayer has
            taken a position that may, at some later date,
            require the payment of additional taxes" [and
            also include] "an item-by-item analysis of the
            corporation's potential exposure to additional
            liability.

Id. at 813.

            In the wake of Enron and other corporate scandals, the

IRS began to seek taxpayers' tax-accrual work papers for certain

                                         -42-
transactions "that [are] the same as or substantially similar to

one   of   the   types   of   transactions    that    the   [IRS]    .   .   .   has

determined to be a tax avoidance transaction."                     Treas. Reg. §

1.6011-4(b)(2) (2002) (codified at 26 C.F.R. § 1.6011-4(b)(2)).

Here, the IRS' request for Textron's tax accrual work papers was

made after an IRS team found that Textron had entered into nine

separate "Sale-In, Lease-Out" ("SILO") transactions.11

            A qualified privilege exists for attorney work product,

but the phrase does not mean any and all work by an attorney that

happens    to    refer   to   litigation;    it    means    work   connected      to

preparing for or managing litigation.             Hickman v. Taylor, 329 U.S.

495, 510-12 & n.9 (1947).        The attorney-client privilege is not in

any way confined to advice given for use in litigation, Mead Data

Central, Inc. v. U.S. Dep't. of the Air Force, 566 F.2d 242, 252-53

(D.C. Cir. 1977), but the latter privilege was held to be waived by

Textron and is not at issue on this appeal.

            In our circuit and in others, documents are said to be

created "in anticipation of litigation," and thus eligible for work

product protection if, "in light of the nature of the document and

the factual situation in the particular case, the document can be



11
   SILO transactions are "a combination of a sale of an asset by
a tax-exempt entity" followed by a "lease back to the same entity."
Shvedov, Tax Implications of SILOs, QTEs, and Other Leasing
Transactions with Tax-Exempt Entities 1, CRS Report for Congress
(Nov. 30, 2004). These transactions benefit private entities by
allowing them to "deduct depreciation" and "interest." Id. at 10.

                                     -43-
fairly said to have been prepared or obtained because of the

prospect of litigation." Maine v. U.S. Dep't. of the Interior, 298

F.3d 60, 68 (1st Cir. 2002) (quoting United States v. Adlman, 134

F.3d 1194, 1202 (2d Cir. 1998)) (internal quotation marks omitted).

The "because of" phrase, standing alone, does not answer the

question what happens if the document is created to satisfy some

requirement imposed independently of the need to litigate, but our

precedent squarely answers the question.

            We have held that work-product protection does not extend

to "documents that are prepared in the ordinary course of business

or   that   would   have   been   created    in   essentially   similar   form

irrespective of the litigation."            Maine, 298 F.3d at 70 (quoting

Adlman, 134 F.3d at 1202) (internal quotation marks omitted). This

caveat applies "even though litigation is already in prospect,"

Adlman, 134 F.3d at 1202 (citing 8 Wright, Miller & Cooper, Federal

Practice and Procedure § 2024, at 346 (3d ed. 1998)), and even if

"the documents aid in the preparation of litigation."             Maine, 298

F.3d at 70.

            The district court held that the work papers "would not

have been prepared 'but for' the fact that Textron anticipated the

possibility of litigation with the IRS" and that if "Textron had

not anticipated a dispute with the IRS, there would have been no

reason for it to establish any reserve or to prepare the work

papers used to calculate the reserve."            U.S. v. Textron Inc., 507


                                     -44-
F. Supp. 2d 138, 150 (D.R.I. 2007).           But this misreads Maine: Maine

holds that it is not the subject matter discussed in the materials

that controls but whether documents are prepared "in the ordinary

course of business" or were otherwise independently required, which

are   both   the   case   with   tax   accrual    work   papers   mandated   by

accounting requirements.

             The decisions in other circuits bear out this legal

interpretation. In Adlman itself, the company in question had "the

prospect of litigation [with the IRS] in mind" when it asked for

the preparation of a memorandum studying the tax implications of a

contemplated restructuring; nonetheless, the Second Circuit allowed

that if the memorandum would have been prepared in a similar form

without expected litigation with the IRS, then it was not created

"because of" litigation.          Adlman, 134 F.3d at 1203-04; accord

United States v. Roxworthy, 457 F.3d 590, 598-99 (6th Cir. 2006).12

             Conversely, in cases finding documents to be protected,

it is because the documents were created in order to be useful in

litigation. See, e.g., Delaney, Migdail & Young, Chartered v. IRS,

826 F.2d 124, 127 (D.C. Cir. 1987) (protection for "attorneys'


12
   See also In re Royal Ahold N.V. Sec. & ERISA Litig., 230 F.R.D.
433, 435 (D. Md. 2005) (no protection for notes and memoranda
detailing witness interviews where "principal reason" for documents
was "to satisfy the requirement of . . . outside accountants");
Fidelity Int'l Currency Advisor A Fund, LLC v. United States, No.
05-40151-FDS, 2008 WL 4809032, at *12-14 (D. Mass. Apr. 18, 2008)
(no protection for opinion letters analyzing "likely tax
consequences" of certain transactions where purpose was "to induce
the taxpayers to invest in the strategy").

                                       -45-
assessment of . . . legal vulnerabilities in order to make sure it

does not miss anything in crafting its legal case") (emphasis

added); see also In re Sealed Case, 146 F.3d 881, 885 (D.C. Cir.

1998) (protection for documents to "protect the client from future

litigation about a particular transaction").

           To the extent the panel majority rests on the district

court's legal interpretation, that interpretation is simply at odds

with our decision in Maine and with Adlman on which Maine relied.

Nor can the district court's outcome be defended by treating the

district   court's   decision   as    a   factual   finding   that   in   this

instance Textron prepared these documents both to satisfy the

accounting requirements and for possible use in litigation.               This

is not what the district court found and, given the legal rule

adopted in Maine and Adlman, it would not matter if it had so

found.

           The government offered compelling evidence that the sole

reason for the creation of Textron's estimates of risk with respect

to individual tax positions was to prepare the reserve figures for

the company books and statements and to satisfy the auditors that

the reserves were adequate.      No contrary evidence was offered by

Textron.   The district court made no contrary finding and any such

finding would have been clearly erroneous. The government's expert

witness--the former chief auditor of the Public Company Accounting

Oversight Board--testified:


                                     -46-
          Q: Does a public company prepare tax accrual
          work    papers  only   when   it   anticipates
          litigation over the issues identified in the
          work papers?
          A: No. They have to prepare them to support
          the    representations   in    the   financial
          statements.
          Q: So if a public company believes the chances
          of litigation over the issues in the work
          papers are remote, it would still prepare
          those work papers?
          A: Yes. because they'd have to be able to
          support that judgment [to the independent
          auditor].
          Q: And would those work papers be prepared in
          the same form as work papers involving issues
          for which the company actually anticipates
          litigation?
          A: Certainly, the basics would be the same....
                  ...
          Q: Would the tax accrual work papers ever be
          blank?
          A: I can't think of a circumstance where they
          would, no.

          Textron's own witness acknowledged that it would "have to

include in its . . . tax accrual work papers any new transactions

that the company entered into that year that there might be some

tax exposure on" regardless of whether it anticipated litigation

with the IRS. Textron offered no testimony purporting to show that

its lawyers had any intention of utilizing its assessment in the

conduct of any litigation that might ensue (although it did offer

speculation as to how such documents might conceivably be helpful),

and such a use is not even arguably the driving purpose behind the

document's creation.

          The only circuit precedent that directly involves tax

accrual work papers held that they were not protected attorney work

                               -47-
product.    United States v. El Paso Co., 682 F.2d 530, 543 (5th Cir.

1982) (noting that in tax accrual work papers legal analysis is

only a "means to a business end").13               The Fifth Circuit looked to

the primary purpose of the documents in deciding whether they were

created "in anticipation of litigation"; but the "because of" test,

as construed in Maine, is certainly no more protective here because

it denies protection so long as the papers would have been prepared

regardless of litigation.

            The   government's         position    is   also    supported       by    two

scholarly articles that analyzed, and roundly condemned, the lower

court's    decision.           Pease-Wingenter,      The      Application       of    the

Attorney-Client Privilege to Tax Accrual Workpapers: The Real

Legacy of United States v. Textron, 8 Hous. Bus. & Tax L.J. 337

(2008); Ventry, Protecting Abusive Tax Avoidance, 120 Tax Notes 857

(2008).    Without endorsing everything in the articles, it is fair

to say that they make scholarly mince-meat of Textron's position.

            In    most    matters      of   privilege,       there    is    a   certain

arbitrariness     as     to    where   to   draw    the      line    or,   to   put    it

differently, even the most sacrosanct of privileges represents a

sacrifice   of    other       interests--usually,       as    Bentham      classically



13
   El Paso denied protection for the work papers because the court
recognized that the company in question was conducting the relevant
analysis because of a need to "bring its financial books into
conformity with generally accepted auditing principles." Id. at
543. And, it saw the need to satisfy independent auditors as being
"compelled by the securities laws." Id.

                                         -48-
explained, the interest of truth.         8 Wigmore, Evidence § 2291

(McNaughton Rev. 1961).      Here, the matter is not open to a panel

for re-examination on policy grounds, but no one should think that

the policy arguments are all on one side.

            Precisely because the work papers in this instance are

required by the financial statement obligations and accounting

rules, there is little risk of the chilling effect so often paraded

in privilege cases. The Supreme Court in rejecting an accountant's

privilege for the preparation of tax accrual work papers pointed

out that large companies effectively have to comply with the

accounting requirements and would do so with or without a privilege

for the accountant.     Arthur Young, 465 U.S. at 818-19.

            And, while it may seem one-sided to give the government

Textron's blue print to weaknesses in Textron's tax returns, the

return     is   massive--constituting    more   than   4000   pages;    the

government has an important interest in collecting taxes that are

owed; and its inquiries into work papers were focused on a specific

type of transaction that had been shown to be open to abuse.             So

context should be kept in mind before shedding too many tears for

Textron.

            In all events, it is important for us to adhere to the

existing rules of the road.      Parties can generally adjust their

behavior so long as they know what privilege rules apply.              Here,

the governing rubric in Maine (First Circuit) and Adlman (Second


                                  -49-
Circuit) and a precise precedent in El Paso (Fifth Circuit) govern

this case.   An en banc court could change the rule; a panel

majority cannot.




                              -50-
