Tax Blog/Blawg

Just when the Department of Justice must have thought that it could do no wrong in pursuing the workpapers of taxpayers and their auditors, it ran smack into the formidable blockade that is the Court of Appeals for the District of Columbia Circuit.  In United States v. Deloitte LLP et al., No. 09-5171 (D.C. Cir. Jun. 29, 2010), the D.C. Circuit seems to have fired a shot across the bow of both the Department of Justice and the IRS’s brand-new Schedule UTP.  

TaxBlawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation, a past president of the Tax Executives Institute, and a periodic contributor to TaxBlawg.

As the IRS sifts through dozens of comment letters on the proposed disclosure of uncertain tax positions, in-house tax officers have to wonder what's next. Over the last decade, CTO's have been hit with a barrage of new demands and worries. We have seen the rise of FIN 48 (now ASC 740-10), Sarbanes-Oxley and the resulting increased focus on controls, increasingly burdensome quarterly and annual attest firm reviews, listed transactions disclosures, the electronic filing mandate (Everson's legacy), Schedule M-3, and now the still proposed UTP disclosure.

Notwithstanding the new challenges, the number one performance metric used to judge a tax department's performance is still the effective tax rate ("ETR"). CTO's and their staffs continue to be measured by their delivery on the ETR at a time when most at the IRS seem to believe that all tax planning is bad, outside counsel is becoming more cautious, attest firms are insisting to review opinions (thus jeopardizing privilege), budgets and head count have been cut and, oh by the way, "cash is king".

Tax Blawg’s Guest Commentator, David L. Bernard, is the recently retired Vice President of Taxes for Kimberly-Clark Corporation and a past president of the Tax Executives Institute.

It is not too soon for in-house tax professionals to be thinking about how the disclosure of uncertain tax positions (required beginning with 2010 tax returns) will change their lives and perhaps their historical practices.

There are plenty of questions about the new requirement and, not least among them, doubts that it will produce the results the IRS anticipates. The most obvious question is whether the potential over-disclosure of temporary differences and the required disclosure of maximum exposure by issue will bog down the audit process and lead to more unagreed issues going to Appeals or to the courts. Notwithstanding the controversy, tax professionals would be wise to forget arguing about the merits of the new draft requirement and begin thinking about their responses; this is going to happen!

For almost 50 years, lawyers have relied on the “Kovel Rule” to extend the attorney-client privilege to non-testifying accountants or other business experts.   The philosophy behind the rule, so named after the landmark case, United States v. Kovel, 296 F. 2d 918 (2nd. Cir. 1961), is to recognize “the complexities of modern existence [which] prevent attorneys from effectively handling clients' affairs without the help of others . . . .”  Id. at 921.  Without such a rule, disclosure to a third party would constitute a waiver of the attorney-client privilege.

In practice, the ...

Last week, at the TEI Midyear Conference in Washington, LMSB Commissioner Heather Maloy told corporate tax executives attending the conference that “trust” was the key to successfully implementing the new reporting requirements for uncertain tax positions first set forth in Announcement 2010-9.  As reported in the April 14th edition of Tax Notes, 2010 TNT 71-2, Maloy also told the attendees that enhanced transparency through the use of this reporting mechanism would be “mutually beneficial” in terms of improved issue resolution and efficiency.

Last month, I commented ...

The New York Times and Forbes Magazine are reporting on a study by the Transactional Records Access Clearinghouse, a research group affiliated with Syracuse University, which claims to show that the number of audits of corporations reporting assets of $250 million or more has dropped between 2005 and 2009, while audits of smaller companies have increased during that same time.

Believing that the IRS has misallocated its resources, TRAC blames this development on a "perverse quota system" within the IRS.  The IRS, however, disputes the study's findings.  From the NY Times article ...

President Obama's health-care legislation is becoming more of a tax issue on a daily basis.  In addition to the codification of economic substance (discussed here; see also yesterday's TNT story featuring our own Phil Karter) contained in the reconciliation bill, the consequences of the legislation seem to be increasingly a matter of tax, rather than health-care, policy.

Of particular relevance here is the brewing confrontation between Reps. Waxman and Stupak and the companies who have announced substantial hits to their financial statements as a result of provisions in the health-care legislation. In response to these announcements, Reps. Waxman and Stupak have requested that companies provide documentation verifying their assessment of the impact of the legislation and have indicated an intention to hold a hearing to examine the impact of the new law on these companies.  (Presumably, the documentation provided by the companies will be a central basis for whatever questions are directed at the executives who appear at these hearings.)

Without taking a position about the politics of the matter, the dynamics of the request (and any responses to it) may implicate sensitive areas of tax policy and procedure. At this point, Reps. Waxman and Stupak have merely requested that the corporate taxpayers provide information about the impact of the health-care legislation. Suppose, though, that one or more companies decline to produce the requested information.  The perceived costs and benefits of the health-care legislation are likely to be key issues in the upcoming Congressional races this fall.  If the request is declined, and Congressional Democrats fear that their signature achievement is being negatively perceived, would subpoenas to the taxpayers, demanding that they produce the information, come next?

Assuming that scenario, would taxpayers then be obligated to provide the information being sought?  Perhaps more importantly, would Congress be authorized to use that information in a public hearing?

Let's face it: employees are wonderful.  We couldn't do without them.  However, they can be expensive.  Beyond their base compensation, employers must pay federal taxes – in addition to withholding the employee's share of income tax, FICA and Medicare, there is an employer’s share of Medicare and FICA that must deposited regularly.  There's also annual FUTA tax, as well as quarterly state unemployment tax.  And there are benefits, ranging from medical coverage, to vacations, to sick leave, to name just three, that employers must pay.

When business is down, it is natural to try to find ...

Predictably, there has been a good deal of consternation accompanying the release of IRS Announcement 2010-09, which continues the trend away from the Service's traditional "policy of restraint" in seeking to uncover uncertain tax positions.  The first chink in this long-standing policy of restraint was exhibited in Announcement 2002-63, where the Service expanded the circumstances under which it would seek tax accrual workpapers.  Prior to the earlier Announcement, workpaper demands were limited to workpapers relating to listed transactions provided such transactions had been disclosed.  Thereafter, a taxpayer who engaged in more than one listed transaction, whether previously disclosed or not, was subject to a demand to disclose all workpapers.  The IRS's summons enforcement action in Textron relied on Announcement 2002-63 to seek all of the taxpayer's workpapers (arguing that six separate SILO transactions fit within the scope of its new policy).

Announcement 2010-09 goes significantly further in eroding the policy of restraint by placing the onus on the taxpayer to make its own affirmative disclosures of uncertain positions rather than requiring the Service to deduce them from the taxpayer's workpapers.  What has received little attention, however, are the implications of the Service's intention to require the new disclosure form not only for taxpayers who record a reserve in their financial statements for uncertain tax positions, but also taxpayers who "expect[] to litigate the position."