FEI: Committee on Taxation : Comment Letters

Uncertain Tax Positions and IRS' Policy of Restraint - Apr 2010

FEI is evaluating the IRS proposal (Announcement 2010-9) regarding proposed new disclosures relating to uncertain tax positions and the IRS’ policy of restraint. The proposal will have a broad effect on corporate tax payers. Accordingly, several of FEI’s committees that work on tax and accounting issues are working together to respond to the Service’s request for comments on the Announcement. The due date for submissions is June 1, 2010.

On April 19, 2010, the IRS released the draft schedule to report uncertain tax positions (UTP), Announcement 2010-30, which includes supporting documentation regarding Announcement 2010-9, as part of the IRS initiative to require certain business taxpayers to report uncertain tax positions on their returns. Taxpayers with uncertain tax positions and assets of $10 million or more will be required to file Schedule UTP beginning with the 2010 tax year if they filed audited financial statements.

FEI’s COT & CCR filed an amicus curiae “friend of the court” brief (US v. Textron) - Apr 2010

Financial Executives International (FEI) filed an amicus curiae "friend of the court" brief with the Supreme Court of the United States in support of a petition for review of the U.S. vs. Textron case. FEI urged the Supreme Court to hear arguments in this significant case which concerns whether a public company can withhold from disclosure to the IRS tax accrual work papers that reflect the company's candid self-assessment of litigation hazards, and has been vocal on this issue during the course of this case. The outcome of this case has broad implications beyond the tax field and affects every public company.

The petition filed on January 27, 2010, was submitted jointly by FEI's Committee on Taxation (COT) and Committee on Corporate Reporting (CCR.) The Committees maintain that a 2007 lower court decision in favor of Textron appropriately balances the competing interests of the IRS, the investing public, and the fairness considerations that protect attorney work product. This appropriate balancing should permit companies to share candid assessments of potential litigation claims with their outside auditors, for example, without fear that such information would be accessible by competitors or adversaries. Unfortunately, the lower court decision was reversed by the en banc court of appeals and, accordingly, the Supreme Court is now being asked to weigh in on the issue.

The Supreme Court is expected to act upon the Textron petition early this spring

A timeline of the case, along with FEI's actions are as follows:

April 4, 2008 – FEI's Tax Committee and Committee on Corporate Reporting filed an amicus curiae brief in the U.S. Court of Appeals for the First Circuit in support of the District Court's decision.

January 21, 2009 – A panel of the U.S. Circuit Court of Appeals for the First Circuit issued its ruling, which affirmed the District Court's holding that Textron's internal tax accrual work papers are privileged material.

March 25, 2009 – The First Circuit granted a motion for rehearing en banc and vacated the court's earlier opinion affirming the lower court.

August 13, 2009 – The full First Circuit, by a 3-2 vote, held that Textron's tax accrual work papers are not protected work product.

December 24, 2009 – Textron filed a petition for certiorari seeking Supreme Court review of the First Circuit's decision.

January 27, 2010 – FEI's Tax Committee and Committee on Corporate Reporting file amicus curiae brief with the Supreme Court of the United States in support of a petition for review of the case.

April 13, 2010 – Federal government filed a brief in the Textron case in opposition to the taxpayer's request for review by the U.S. Supreme Court.

* The Supreme Court will announce if it will hear the case in late spring 2010.

Committee on Taxation Issues - Apr 2010
- Maintain Current U.S. Tax Rules Relating to Foreign Business Income Until Fundamental Tax Reform
- Any proposal that would significantly change the current mitigating elements of our international tax rules (including deferral, active finance, check the box regulations and the foreign tax credit) should be carefully reviewed because these policies help American businesses compete with companies from other countries.

- Current international tax rules have been enacted over time in an attempt to keep worldwide American companies on a nearly level playing field where both U.S. and foreign-owned companies pay the same local foreign country tax rate.

- Changing the current tax code on a piecemeal basis would put U.S. companies at a greater disadvantage relative to foreign competitors in foreign markets that operate under more flexible tax rules (e.g., territorial tax system.) U.S. companies would owe current U.S. tax in addition to the local foreign country tax, even after a U.S foreign tax credit, because U.S. corporate tax rates are the second highest in the industrialized world.
- Corporate Tax Rates
- A significant reduction in the corporate income tax rate is needed for the U.S. to remain competitive in the global marketplace and to promote continued U.S. economic growth and job creation.

- The U.S. corporate income tax rate is higher than the rates in all other OECD countries (save Japan, which is considering rate reductions.)

- The high U.S. tax rate creates a long-term competitive disadvantage for U.S. based businesses. High corporate tax rates make domestic investment less attractive and create a disincentive for companies to perform high- profit activities in the U.S.
- Preserve Last-In, First Out (LIFO) Accounting
- The repeal of LIFO as a method of inventory accounting would have a detrimental effect on businesses in many different industries.

- LIFO repeal would cause businesses to restate the carrying value of their inventories, thus recording illusory profits on their books, when no economic activity has occurred that would justify recording any profits.
- Multi-year Extension of the Strengthened R&D Tax Credit
- Technological developments are an important component of economic growth, productivity and high paying jobs.

- Tax reform provides a historic opportunity to make permanent the research and development (R&D) tax credit. It spurs innovation and economic growth and creates high-wage American jobs.

- A permanent extension of the strengthened credit would enhance its incentive value by providing certainty that would permit companies to factor it into their long-range project planning. Specifically, it is imperative that Congress acts to strengthen the simplified credit by extending and increasing the new alternative simplified credit rate from 14% to 20%.
- Repeal the Three Percent Tax Withholding Law That Applies to Government Contractors
- In 2005, the Tax Increase Prevention and Reconciliation Act was a vehicle for a revenue raising provision to mandate that federal, state, and local governments withhold 3% from payments for goods and services provided by all government contracts. This unprecedented withholding mandate would include Medicare payments, Farm payments, and some grants. The legislation that was signed into law by President Bush on May 17, 2006, was initially set to become effective on January 1, 2011. However, the American Recovery and Reinvestment Act, more commonly knows as the “Stimulus,” delayed the implementation for one year making the new effective date January 1, 2012.

- The withholding requirement will be very expensive to implement. The Department of Defense (DoD) estimated the cost to implement this for the DoD alone at $17 billion (not counting the cost to contractors that would be passed through as part of overheard), as compared to a revenue score of $10B over 10 years for repeal.

- This requirement represents a disproportionate response to the small portion of the “tax gap” attributable to government contractors, and policymakers should support repeal.