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Reporting Uncertain Tax Positions: Adjusting to the IRS' New Direction

Preparing for Latest Schedule UTP Timetable, Protected Materials Policy and Tax Risk Management

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURS DAY, DECEMBER 2, 2010

Today’s faculty features: Phillip A. Pillar, S hareholder, Greenberg Traurig, Washington, D.C. S cott Balestrier, Tax Partner, BDO USA, Philadelphia Marla Miller S enior Manager BDO USA LLP Philadelphia Marla Miller, S enior Manager, BDO USA, LLP, Philadelphia

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Reporting Uncertain Tax Positions: Adj ti T Th IRS’ N Di ti Adjusting To The IRS’ New Direction Webinar

• Dec. 2, 2010

Phillip Pillar, Greenberg Traurig pillarp@ gtlaw.com S cott Balestrier, BDO US A sbalestrier@ bdo.com Marla Miller, BDO US A mmiller@ bdo.com

Today’s Program

Brief History Of S chedule UTP And IRS Policy Of Restraint [S cot t Balest rier, Phillip Pillar] S lide 6 – S lide 10 Review Of S chedule UTP And Instructions [S cot t Balest rier, Marla Miller] Announcement 2010-76 And IRS Policy Of Restraint S lide 17 – S lide 28 S lide 11– S lide 16 [Phillip Pillar] Managing The Impacts [S cot t Balest rier, Marla Miller] S lide 29 – S lide 30 Issues And Challenges [Phillip Pillar, S cot t Balest rier, Marla Miller] S lide 31 – S lide 32

S B l i BDO USA

BRIEF HISTORY OF SCHEDULE

Scott Balestrier, BDO USA Phillip Pillar, Greenberg Traurig

BRIEF HISTORY OF SCHEDULE UTP AND IRS POLICY OF RESTRAINT

FIN 48/ACS 740 FIN 48/ACS 740

• Historical Perspective

– FAS 5 vs. FIN 48 – Fully implemented Fully implemented

• What did companies focus on in implementation (starting point

for Schedule UTP) for Schedule UTP) – Permanent differences – Temporary differences – Foreign items – State items

7

FIN 48/ACS 740 (Cont.) FIN 48/ACS 740 (Cont.)

• Impact on Schedule UTP

– Disclosures Disclosures – Revisit by audit firms – Calculations

8

IRS Policy On Tax Accrual W k A B i f Hi t Workpapers: A Brief History

• IRS definition of tax accrual workpapers
• IRS can obtain tax accrual workpapers United States v Arthur
• IRS can obtain tax accrual workpapers. United States v. Arthur

Young & Co. (auditor’s workpapers)

• IRS’ pre-2002 policy: Voluntary restraint with procedural

safeguards; “unusual circumstances”

9

IRS Policy On Tax Accrual W k A B i f Hi t (C t ) Workpapers: A Brief History (Cont.)

• IRS’ current policy: IRS will routinely request all tax accrual

workpapers if either: – A so-called “listed transaction” is not properly disclosed on A so called listed transaction is not properly disclosed on a return, or – Tax benefits from multiple listed transactions are claimed

• n the return regardless of whether or not they are
• n the return, regardless of whether or not they are

disclosed. A t 2010 76

• Announcement 2010-76

10 10

Scott Balestrier BDO USA

REVIEW OF SCHEDULE UTP

Scott Balestrier, BDO USA Marla Miller, BDO USA

REVIEW OF SCHEDULE UTP AND INSTRUCTIONS

Who Must File Schedule UTP Who Must File Schedule UTP

• Files one of the following forms:
• Form 1120 (U.S. Corporation Income Tax Return)

( p )

• Form 1120F (U.S. Income Tax Return of a Foreign Corporation)
• Form 1120L (U.S. Life Insurance Company Income Tax Return)
• Form 1120 PC (U.S. Property and Casualty Insurance Company

Income Tax Return)

• Has assets equal to or exceeding:
• $100 million (TY 2010)

$50 illi (TY2012)

• $50 million (TY2012)
• $10 million (TY 2014)
• Issued (or a related party issued) audited financial statements (U.S.

GAAP and IFRS) that cover all or a portion of the company’s GAAP and IFRS) that cover all or a portion of the company s

• perations for all or a portion of the company’s tax year
• Has one or more tax positions that must be reported on Schedule

UTP

12

Tax Positions Required T B R t d To Be Reported

• Reporting is required for each U.S. federal income tax position

taken, if the following two conditions are met: – The corporation or a related party has taken a tax position

• n its U.S. federal income tax return for the current year or

a prior tax year, and – Either the corporation or a related party has recorded a reserve with respect to the tax position for U.S. federal income tax in audited financial statements, or the corporation or related party did not record a reserve for that tax position because it expects to litigate the position.

13

Tax Positions Taken On The Return Tax Positions Taken On The Return

• A tax position is based on the unit of account used to prepare

the audited financial statement.

• Defined as a tax position that would result in an adjustment to

a line item on the tax return if the position was not sustained

• If multiple tax positions affect a single line item on the tax

return, you should report each tax position separately on the Schedule UTP Schedule UTP.

14

Schedule UTP Requirements Schedule UTP Requirements

• Primary IRS code section
• Timing codes
• Pass-through entity EIN
• Major tax position
• If size of the tax position is greater than or equal 10% of

p g q the aggregate of all tax positions reported on the schedule

• Size is equal to the amount of the U.S. federal income tax

reserve recorded for that position (excludes expectation to p ( p litigate positions)

• Reserves recorded for multiple tax positions must be

reasonably allocated among those tax positions when y g p determining the size of each tax position.

• Ranking – Instructions vs. Announcement 2010-75
• Transfer pricing or other

15

Transfer pricing or other

Concise Description Concise Description

• Description of the relevant facts affecting the tax treatment of

the position and information that reasonably can be expected the position and information that reasonably can be expected to identify the tax position and the nature of the issue B d / i t t ith i f ti i d F

• Based upon/consistent with information required on Form

8275

• Description should not include:

– An assessment of the hazards of a tax position – The rationale for the UTP or the nature of the uncertainty – An analysis of the support for or against the tax position

16

ANNOUNCEMENT 2010‐76 AND

Phillip Pillar, Greenberg Traurig

7 IRS POLICY OF RESTRAINT

Announcement 2010-76 Announcement 2010 76

• In connection with Schedule UTP, IRS modifies its policy of

restraint.

• If privileged document given to independent auditor for

financial statement audit, privilege is not waived.

• Tax reconciliation workpapers regarding UTP may be

redacted.

18

Announcement 2010-76 (Cont.) Announcement 2010 76 (Cont.)

• Modified policy does not apply if:

– Privilege waived – Unusual circumstances or listed transactions Unusual circumstances or listed transactions

• Privilege waiver?
• IRS policy: Effect on litigation?

19

Privileges In Tax Advice g

• What privileges may protect tax advice?
• What privileges may protect tax advice?

– Attorney-client privilege – Work-product doctrine Work product doctrine – IRC Sect. 7525

• Some common misconceptions about privileges

p p g – What is protected – Who is protected

20 20

“Tax Accrual Workpapers” V “T Ad i ”

• Vs. “Tax Advice”
• Tax advice: Prepared for client by tax advisor in contexts

such as a transaction closing, tax return reporting position, penalty protection, or in anticipation of litigation and governed by Circular 230 standards T l ( dit) k P d b

• Tax accrual (or audit) workpapers: Prepared by company

and reviewed for audited financials (or by auditor) and governed by FASB audit standards

21 21

Tax Advice In Tax A l W k Accrual Workpapers

• Accounting and legal professions may differ as to what

Accounting and legal professions may differ as to what documents must be included in tax accrual workpaper files.

• ABA Task Force Report and Recommendation to the ABA

House of Delegates on Audit Issues, Aug. 8, 2006. g g – Calls on federal regulators and the accounting and legal professions to make clear “what information auditors need, and more importantly do not need, for the proper d t f th dit” conduct of the audit”

• AU Sect. 9326

– If client’s accrual is based on opinion, auditor should

• btain “notwithstanding concerns regarding attorney-

client or other forms of privilege.” – Alternatives: Redacted or modified opinion or client

22 22

summary

Waiver: Use Caution

• Privileges may be waived intentionally or inadvertently.

g y y y

• Subject matter waiver: Disclosure of “gist” of opinion to

accountant waived only the part of opinion actually

• disclosed. Long-Term Capital Holdings v. United States,

2003 U S Dist LEXIS 7826 (DC CT 2003) 2003 U.S. Dist. LEXIS 7826 (DC CT 2003).

• Limited waiver: Proffer to U.S. attorney did not waive

privilege to undisclosed communications. In re Grand Jury Proceedings, 350 F. 3d 299 (2d Cir. 2003).

• Disclosure to non-opponent?
• Disclosure of privileged tax advice to outside auditor may

waive attorney-client privilege. United States v. El Paso Co 682 F 2d 530 (5th Cir 1982) Contra United States v Co., 682 F.2d 530 (5th Cir. 1982). Contra United States v. Deloitte LLP, 610 F.3d 129 (D.C. Cir. 2010)

23 23

United States V. Textron, Inc.

104 AFTR 2d 2009-5719 (1st Cir 2009) vacating en 104 AFTR 2d 2009-5719 (1st Cir. 2009) vacating en banc 103 AFTR 2d 2009-509 (1st Cir. 2009).

• IRS seeks all of taxpayer’s tax accrual workpapers and its

auditors tax accrual workpapers under its policy re: tax shelters

• History

– District Court: Holds for taxpayer on work product doctrine – Appellate Court: Initially affirms (2 to 1) but remands: waiver? IRS asks for rehearing – IRS asks for rehearing – Appellate Court en banc: Vacates and reverses (3 to 2)

24 24

United States v. Textron, Inc. (Cont.)

104 AFTR 2d 2009-5719 (1st Cir 2009) vacating en banc 104 AFTR 2d 2009 5719 (1st Cir. 2009) vacating en banc 103 AFTR 2d 2009-509 (1st Cir. 2009).

• En banc opinion

No work product doctrine protection – No work product doctrine protection – Must be “prepared for use in” litigation – Prepared primarily for financial statements and y required by auditor – Follows Adlman & Maine (“but for” test) or sets new standard?

25 25

United States v. Textron, Inc. (Cont.)

104 AFTR 2d 2009-5719 (1st Cir 2009) vacating en banc 104 AFTR 2d 2009 5719 (1st Cir. 2009) vacating en banc 103 AFTR 2d 2009-509 (1st Cir. 2009).

• Dissenting opinion

– Adlman & Maine (“but for” test) not followed – New higher standard (even higher than El Paso Co ) – New, higher standard (even higher than El Paso Co.) – Not limited to tax litigation reserves – “Tax shelter” effect on court – Supreme Court review urged

• Petition for certiorari to Supreme Court denied

26 26

United States v. Deloitte, LLP

610 F 3d 129 (D C Cir 2010) 610 F.3d 129 (D.C. Cir. 2010)

• Government sought documents in a tax refund case
• Government sought documents in a tax refund case
• Deloitte: Work product privilege over:

– Tax opinion from outside counsel, and – Legal and tax analysis provided by in-house counsel

• Government: Waiver
• Government also challenged privilege over a document
• Government also challenged privilege over a document

prepared by Deloitte that contained recordings of the thoughts and impressions of Dow attorneys

27 27

United States v. Deloitte, LLP (Cont.)

( C C ) 610 F.3d 129 (D.C. Cir. 2010)

• Scope of work product privilege: Who creates vs what is
• Scope of work product privilege: Who creates vs. what is

created

• Waiver of privilege: Disclosure to Deloitte

N t i i t t ith th i t f – Not inconsistent with the maintenance of secrecy – Auditor found not to be adverse or a conduit to adverse party – Reasonable expectation of confidentiality

• Compare with Textron
• Announcement 2010-76

28 28

S B l i BDO USA

MANAGING THE IMPACTS

Scott Balestrier, BDO USA Marla Miller, BDO USA

MANAGING THE IMPACTS

Managing The Impact Managing The Impact

• Risk management

– Accounting method changes – PLRs – Pre-filing agreements Pre filing agreements – Transfer pricing studies I f t k h ld

• Inform stakeholders
• Manage IRS exams
• Approach to completing the form

30

Phillip Pillar, Greenberg Traurig Scott Balestrier, BDO USA

ISSUES AND CHALLENGES

Marla Miller, BDO USA

Issues And Challenges Issues And Challenges

• Imposition of penalties
• IRS use of UTP
• State adoption

I f ti h ith f i t

• Information exchange with foreign governments
• Effect on IRS audit
• Impact on tax planning

32

About Your Presenters About Your Presenters

• Phillip A. Pillar, Esq.

Shareholder Greenberg Traurig LLP pillarp@gtlaw com pillarp@gtlaw.com 215.988.7817 & 202.331.3108

• Phillip Pillar's practice concentrates on representing and advising

clients in federal, state and international tax issues before tax th iti d t Phil h l l d i f authorities and courts. Phil has also counseled many companies, from Fortune 1000 to privately held, on managing their tax risk. He is experienced in the fields of tax compliance and tax transparency, how tax issues in transactions and structures may be scrutinized. Recently, Phil has counseled clients and addressed tax professionals on the ff t f t t i t di l d FIN 48 d t effects of greater transparency in tax disclosures under FIN 48 and tax reporting rules changes like new Schedule UTP.

• Prior to joining Greenberg Traurig, Phil was a Director of Tax

Controversy and Risk Management Services Practice at Ernst & Young y g g and a senior litigator (Special Trial Attorney) in the Office of the Chief Counsel, IRS.

33

About Your Presenters About Your Presenters

• W. Scott Balestrier

Tax Partner/Office Business Line Leader sbalestrier@bdo.com 215.636.5503

• Scott has 20 years of experience providing tax services for clients in a

variety of industries He has assisted clients in providing tax planning and consultation in the areas of International tax, State and local tax, accounting for income taxes as well as mergers and acquisitions He has also lead for income taxes, as well as mergers and acquisitions. He has also lead teams that assisted many public retailers with the implementation of FIN 48.

• Scott has also served as the industry leader for the retail industry for a Big

Four accounting firm.

• Professional Affiliations

American Institute of Certified Public Accountants Pennsylvania Institute of Certified Public Accountants Pennsylvania Institute of Certified Public Accountants

• Education

B.S., Business Administration, Kutztown University

34

About Your Presenters About Your Presenters

• Marla Miller
• Sr. Tax Manager

mmiller@bdo.com 215.636.5520 215.636.5520

• Marla has more than twenty years of experience in both the public and private

sectors, practicing in the areas of federal, and state and local tax. She has been involved in all aspects of the income tax function, including FIN 48, FAS 109 and the ta compliance f nction Marla has handled federal and state ta 109, and the tax compliance function. Marla has handled federal and state tax examinations, including IRS Joint Committee and appeals cases.

• Professional Affiliations

American Institute of Certified Public Accountants American Institute of Certified Public Accountants Pennsylvania Bar Association

• Education

B.S.B.A., Accounting, Shippensburg University M.B.A., Shippensburg University J.D., The Dickinson School of Law LL M The Dickinson School of Law

35

LL.M. The Dickinson School of Law

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