TEI Nebraska Chapter

Legislative Review and Outlookand Schedule UTP

Marc J. GersonMaria O. Jones

February 15, 2011

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Agenda

• The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

• Impact of the Mid-Term Elections on Tax Legislation

• Impact of Congressional Budget Rules

• Potential Tax Legislative Agenda for 2011

• Tax Reform

• Schedule UTP: Completing the Form and Implications for Audits

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The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

• Individual Tax Provisions 2-year extension (through 2012) of the Bush tax cuts for

all taxpayers 2-year extension (through 2012) of the reduced 15%

capital gains and dividends rates 2-year AMT “patch” (through 2011) 2-year estate tax regime (through 2012)

$5M exemption per person / $10M exemption per couple35% top tax rateApplies to 2010, although taxpayer can elect no estate tax

and carryover basis

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The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

• Corporate Tax Provisions 2-year extension of bonus depreciation

2011 – 100%, 2012 – 50%

2-year extension (through 2011) of the “extenders” package (R&D credit, 15-year depreciation for certain improvements, environmental remediation expensing, CFC look-through rule, active financing exception, etc.)

Importantly – NO REVENUE OFFSETS

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Impact of the Mid-Term Elections on Tax Legislation

• Mid-Term Election Results U.S. Senate

111th Congress – 59 Democrats / 41 Republicans112th Congress – 53 Democrats / 47 Republicans

6 seat pickup for the Republicans

U.S. House of Representatives111th Congress – 255 Democrats / 178 Republicans112th Congress – 242 Republicans / 193 Democrats

60+ seat pickup for the Republicans

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Impact of the Mid-Term Elections on Tax Legislation

• U.S. Senate Legislation must obtain cloture (60 votes)

Legislation must retain moderate Senate Democrats (e.g., Ben Nelson) and attract moderate Senate Republicans (e.g., Snowe)

Need to negotiate with House Republicans Senator Hatch becomes Ranking Member of SFC 3 new SFC members (Coburn (R-OK), Thune (R-SD), Cardin (D-

MD))

• U.S. House of Representatives Republicans assume control of the House Representative Camp assumes Chair of W&M 10 new Republican W&M members (including Adrian Smith (NE,

3rd))

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Impact of Congressional Budget Rules

• Senate – “Pay-As-You-Go” Rule Same as in the 111th Congress New spending or tax cuts may not add to the federal deficit Therefore, increases in spending and reductions in taxes must be

“paid for” through spending cuts or tax increases Rule can be waived in certain circumstances

• House – “Cut-As-You-Go” Rule Major Change from the 111th Congress New spending must be paid for with spending cuts (i.e., not tax

increases) New tax cuts need not be paid for at all In sum, tax increases are not to be used as “pay fors”

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Potential Tax Legislative Agenda for 2011

• May be rather modest Budget deficit concerns Divided government Fundamental disagreement on financing of tax relief Lack of “must pass” legislation given the items

addressed by the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010

Focus on longer-term tax reform may temper more incremental tax measures

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Potential Tax Legislative Agenda for 2011

• Potential Items Incremental repeal of health care reform provisions

Expanded Form 1099 information reporting (Sen. Johanns)

Delay of 3% government contractor withholding Extension of the “extenders” package prior to expiration

at the end of the year Additional “stimulus” measures Technical corrections

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Tax Reform

• Recognized Need for Fundamental Tax Reform Increasingly complex for taxpayers to comply with (and

the IRS to administer) the Code Temporary nature of significant portions of the Code Increased revenue pressure associated with the budget

deficit and projected spending increases in Social Security, Medicare and Medicaid

Competitive pressure to lower the U.S. statutory corporate tax rate

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Tax Reform

• Progress in Advancing the Debate in 2010 The Bipartisan Tax Fairness and Simplification Act of 2010 (Wyden/Gregg)

(February 2010) President’s Economic Recovery Advisory Board Report on Tax Reform

Options (August 2010) The National Commission on Fiscal Responsibility and Reform Report

(December 2010)

• Focus on “base broadening” to lower the corporate rate How much can the corporate rate be reduced? What deductions/credits/preference items are used to finance the rate

reduction?

• Scope of Potential Tax Reform Is corporate tax reform a net corporate tax reduction, revenue neutral or

used as a financing source for deficit reduction? Is corporate tax reform addressed on a stand-alone basis?

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Tax Reform

• Political environment (i.e., pending 2012 Presidential election) makes a true tax reform effort difficult in 2011 and 2012

• Tax reform will need to be a priority of the Administration Administration has made tax reform a mechanism for outreach to

the corporate community Mention during the State of the Union Address FY2012 budget?

• At a minimum, there will be significant tax reform discussion in 2011 and 2012 Congressional reaction to tax reform reports SFC hearings/W&M hearings Reintroduction of Wyden bill

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Schedule UTP

• Completing the Form Who Must Report Expect to Litigate Items Multi-Year Issues Ranking of Reserve Items Concise Description

• Implications for Audits Expansion of Policy of Restraint Centralized Processing How will this Change the IRS Exam? Best Practices

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Schedule UTP – Who Must Report

• Required for 2010 tax return for taxpayers that file Forms 1120, 1120F, 1120L or 1120PC

• Assets equal to $100 million in 2010 (sliding scale)

• Taxpayers must report on Schedule UTP if: Tax position taken on its U.S. federal income tax return

for the current year or a prior year, and Company or a related party has recorded a reserve for

that tax position for U.S. federal income tax in audited financial statements, or did not record a reserve because the company expects to litigate the position

• Tax positions taken in years before 2010 will not be reported

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Schedule UTP – Expect to Litigate Items

• Requirement for disclosure of UTPs that taxpayers expect to litigate. Report tax positions for which company did not record a

reserve because it expects to litigate the position. Instructions clarify that items to be reported are those for

which the company has determined that:the probability of settling with the IRS is less than 50%,

and under applicable accounting standards, no reserve was

recorded because the company intends to litigate the tax position and has determined that it is more likely than not to prevail on the merits in litigation.

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Schedule UTP – Multi-Year Issues

• Schedule UTP has two parts Part 1: Tax positions reflected in the current tax year Part 2: Previously unreported tax positions from a prior

year

• Transition Rule Companies are not required to report positions that only

effect tax years prior to the first Schedule UTP Part 2 will not be completed in 2010

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Schedule UTP – Ranking of Reserve Items

• Ranking of reserve items Items for which no reserve has been booked due to

expectation that the issue will be litigated can be assigned any rank, regardless of amount at issue

• Indicate if item constitutes more than 10% of the total reserves for all items disclosed on the Schedule UTP Practice tip: do not rank “expect to litigate” items within

the 10% items

• Indicate transfer pricing positions with a “T” and all other positions with a “G”

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Schedule UTP – Concise Description

• Tax position description not to include rationale Concise description of relevant facts and information to

identify the position and the nature of the issue. Not required to include the rationale for the UTP and the

nature of the uncertainty in the descriptionIntended to mirror disclosures on Form 8275

Description should not include an assessment of the hazards or an analysis of the support for or against the position.

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Schedule UTP – Expansion of Policy of Restraint

• Expanded Policy of Restraint in Announcement 2010-76 IRS expanding its policy of restraint to include “particular

documents that relate to uncertain tax positions and the workpapers that document the completion of Schedule UTP.”

If a company provides a privileged document to an independent auditor as part of an audit of the company’s financial statements, the IRS will not assert during an examination that the taxpayer waived the applicable protection by providing the document to the auditor.

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Schedule UTP – Centralized Processing

• IRS Processing of Schedule UTP Directive states that the IRS will establish a “centralized

process” in LB&I Centralized process is intended to enable LB&I to select

taxpayers and issues for audit, and identify gaps in guidance

 

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Schedule UTP – How will this change the IRS Exam?

• IRS recognizes this as a “Game Changer”

• IRS goal to improve efficiency Intended to provide for early identification of important issues Will the list become the audit plan?

• Will Exam will feel compelled to issue NOPAs for each item listed on Schedule UTP? Exam cannot settle issues based on litigation hazards: must

proposed adjustment or concede 100% of the issue May be hard for Exam to give up issue when the company

has acknowledged risk

LB&I agents to receive training on Schedule UTP

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Schedule UTP – How will this change the IRS Exam?

• Expect to see a push to expand LB&I programs Compliance Assurance Process (CAP) Pre-Filing Agreements (PFA) Fast Track Appeals

• May see new initiatives to push Appeals settlement authority down to the Exam level Settlement Guidelines / Global Offers

• IRS may issue more National Office guidance to address areas of uncertainty

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Schedule UTP – Best Practices

• Companies required to file Schedule UTP should examine procedures for handling issues that will be listed on the schedule

• Prepare for the likely examination of the issue Identify and organize documents Identify key individuals with knowledge Develop legal position and prepare position paper

• Be proactive in the examination of the issues

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Contact Information

For more information, please contact:

Marc J. Gerson

202-626-1475

mgerson@milchev.com

Maria O. Jones

202-626-6057

mjones@milchev.com