NARUC Staff Subcommittee on Accounting & Finance *connectedthinking FIN 48 Implementation Issues Sal Montalbano Tax Director

NARUC StaffSubcommittee on Accounting & Finance

*connectedthinking

FIN 48 Implementation Issues

Sal MontalbanoTax Director

Slide 2PricewaterhouseCoopers

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.


Legal Opinions & Privilege

Effectively Settled

Disclosure Items

Recognition & Measurement

FERC Order on FIN 48 & Regulatory Considerations

Agenda


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


Legal Opinions & Privilege


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

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

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.)


– 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 (cont.)


– 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


– 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 Settled

FSP FIN 48-1

3 Conditions for Effectively Settled

1. Taxing authority has completed exam including appeals and admin review

2. Taxpayer does not intend to appeal or litigate

3. It is remote that taxing authority would examine or reexamine any aspect of tax position


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

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?


Other Disclosure Issues


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


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


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.)


10. Income Taxes

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

2007 2006Current

Federal $XXXX $YYYYState $AAAA $BBBB

DeferredFederal $CCCC $DDDDState $EEEE $FFFF

Other?Federal $GGGG $HHHHState $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


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

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


FERC Order on FIN 48 & Regulatory Considerations


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

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.


FIN 48 – Implementation Issues

Questions

Documents

NARUC Staff Subcommittee on Accounting & Finance *connectedthinking FIN 48 Implementation Issues Sal Montalbano Tax Director