TEI Nebraska Chapter
Legislative Review and Outlook
and Schedule UTP
Marc J. Gerson
Maria O. Jones
February 15, 2011
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 couple
35%
top tax rate
Applies
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 Republicans
112th
Congress – 53 Democrats / 47 Republicans
 6 seat pickup for the Republicans
 U.S. House of Representatives
111th
Congress – 255 Democrats / 178 Republicans
112th
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 (DMD))
• 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 description
Intended
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
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