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NARUC Staff Subcommittee on Accounting & Finance. FIN 48 Implementation Issues Sal Montalbano Tax Director. PwC. *connectedthinking. Administrative—Circular 230.

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fin 48 implementation issues sal montalbano tax director

NARUC StaffSubcommittee on Accounting & Finance

FIN 48 Implementation Issues

Sal Montalbano

Tax Director

PwC

*connectedthinking

administrative circular 230
Administrative—Circular 230
  • This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.
slide3
Legal Opinions & Privilege

Effectively Settled

Disclosure Items

Recognition & Measurement

FERC Order on FIN 48 & Regulatory Considerations

Agenda

key elements of fin 48
Key Elements of FIN 48
  • Consistent Approach to Uncertain Tax Positions
  • Two Step Process
  • Disclosures
  • Processes
  • Applies only to income taxes
  • Effective FY Beginning After December 15, 2006
irs policy of restraint
IRS Policy of Restraint
  • Historically, tax accrual workpapers have been subject to the IRS’ policy of restraint (IRM section 4.10.20.2(2))
  • IRS modified policy for listed transactions (Ann. 2002-63)
  • Office of Chief Counsel announced it will consider FIN 48 workpapers to be tax accrual workpapers (AM 2007-0012)
  • Permanent Subcommittee on Investigations letter and questionnaire asking about foreign entities and FIN 48 compliance
    • Is this end around on policy of restraint?
auditor support for fin 48 items
Auditor Support for FIN 48 Items
  • PCAOB AU Section 339 requires that audit documentation must contain sufficient information to enable an experienced auditor, having no previous connection with the engagement, to understand the results of auditing procedures performed and results reached
    • Does auditor need tax opinions if they do not exist?
    • If opinion exists, is the auditor bound to view it?
textron case
Textron Case
  • United States v. Textron, CA No. 06-198T (D.R.I. Aug. 29, 2007)
    • Textron entered into 9 SILOs
    • SILO is listed transaction, so IRS issued blanket summons for all of Textron’s tax accrual workpapers
    • Textron refused to turn over spreadsheet and back up that discussed tax reserves and “hazards of litigation”
    • Textron argued documents protected by attorney-client privilege, work product doctrine and IRC Section 7525 tax practitioner privilege
textron case cont
Textron Case (cont.)
  • United States v. Textron, CA No. 06-198T (D.R.I. Aug. 29, 2007)
    • District Court in Rhode Island refused to uphold IRS summons
    • Court found that attorney client privilege and tax practitioner privilege were waived when Textron shared spreadsheet with auditor
    • Court upheld work product doctrine despite disclosure to auditor
    • Court found that workpapers were prepared in anticipation of litigation—workpapers would not have been prepared but for the fact that Textron anticipated litigation
textron case cont1
Textron Case (cont.)
  • United States v. Textron, CA No. 06-198T (D.R.I. Aug. 29, 2007)
    • IRS to appeal
    • Chief Counsel Korb says IRS does not believe work product doctrine should apply to accrual workpapers
    • Impact on FIN 48 documentation?
textron case best practice issues
Textron Case – Best Practice Issues
  • United States v. Textron, CA No. 06-198T (D.R.I. Aug. 29, 2007)
    • Do you need written documentation from auditors that they will maintain confidentiality? (Section 301 of AICPA Code of Ethics)
    • Do you need production of documents by counsel, including FIN 48 workpapers?
    • Do you need a history of litigation on a given issue to assert work product doctrine?
effectively settled
Effectively Settled
  • What are the consequences?
    • Full FIN 48 liability with a closed audit and signed 870 but issue not examined.
    • Full FIN 48 liability with issue through audit and appeals and 870-AD signed.
    • LIFE audit in place and UTP outside the scope.
effectively settled1
Effectively Settled
  • FSP FIN 48-1

3 Conditions for Effectively Settled

    • Taxing authority has completed exam including appeals and admin review
    • Taxpayer does not intend to appeal or litigate
    • It is remote that taxing authority would examine or reexamine any aspect of tax position
effectively settled issues
Effectively Settled -- Issues
  • Can answer be different depending on whether benefits initially recognized or not?
  • Can you have different impact between recognition and measurement?
  • Does an issue either have to have the statute of limitations expire or be examined to be effectively settled?
effectively settled disclosure issues
Effectively Settled – Disclosure Issues
  • 12 month projection of change in UTBs
      • Reasonably possible that total UTBs will significantly increase or decrease within 12 months of reporting date
      • How detailed is disclosure?
      • What does “reasonably possible” mean?
      • What does “significantly increase or decrease” mean?
disclosure basics
Disclosure Basics
  • Requirements of tabular rollforward at year end
    • On gross basis
    • Excludes interest
  • Description of tax years that remain subject to exam by major tax jurisdiction
slide19
SEC comment letters on paragraph 21(d) disclosures—need to provide even if no change anticipated

SEC comment letters on contractual obligations relating to FIN 48 (Instruction 7 to Item 303(b) of Regulation S-K)

Statute of limitations disclosure

What does “major tax jurisdiction” mean?

Disclosure -- Issues

slide20
How does disclosure work if you acquire trade or business and seller indemnifies you?

How are FIN 48 expense accounts classified in tax footnote (current versus deferred versus other)?

Interaction of UTBs with NOLs and valuation allowance analysis

When would you disclose the statute of limitations will expire when the disclosure may keep it from expiring?

Disclosure -- Issues (cont.)

slide21
10. Income Taxes

The components of Utility’s income tax provision are as follows for the years ended December 31:

2007 2006

Current

Federal $XXXX $YYYY

State $AAAA $BBBB

Deferred

Federal $CCCC $DDDD

State $EEEE $FFFF

Other?

Federal $GGGG $HHHH

State $JJJJ $KKKK

______ ______

Total income tax provision $GGGG $HHHH

Where does FIN 48 tax expense get reported in the year end tax footnote?

Disclosure -- Footnote Issue

recognition measurement background
Recognition & Measurement-Background
  • Recognition—Must be at “more likely than not” level to recognize any tax benefit
  • Measurement–Largest amount of tax benefit that is greater than 50 percent likely of being realized on ultimate settlement with a taxing authority that has full knowledge of all relevant information.
  • Application of recognition standard to temporary differences?
recognition measurement issues
Recognition & Measurement -- Issues
  • Specific Issues—How do you build support?
    • New capitalization method under 263A
    • Many state tax issues (nexus, sourcing of electricity sales, RTO membership, etc.)
    • Repairs
    • Pending accounting method changes
slide26
FERC
  • FIN 48 Accounting Guidance issued May 25, 2007
  • FAQ’s
    • UTP’s for Temporary Differences should remain in Accumulated Deferred Income Tax accounts
    • Interest is interest (a/c 431)
    • Penalties are penalties (a/c 426.3)
  • FERC Guidance on FIN 48 Does Not affect Rates or Billings. Only Financial Reporting.
regulatory considerations
Regulatory Considerations
  • UTP’s replacing ADIT for differences subject to normalization could be used to satisfy normalization Provisions
  • Flow through items that are UTP’s may affect amount of flow-through (if the regulator embraces FIN 48).
  • UTP’s for temporary differences will require interest accruals. As such, UTP’s do not represent “interest free loans.” Could affect decision to deduct UTP’s from rate base
  • Interest on UTP’s can be either reflected as interest or included in income tax expense. Regulatory impacts should be considered with point above.