TEI files comments on uncertain tax positions: September 12, 2005.

On September 12, 2005, TEI President Michael P. Boyle submitted a letter urging the Financial Accounting Standards Board to withdraw an Exposure Draft of a proposed Interpretation of Statement of Financial Accounting Standards No. 109. TEI's comments were submitted under the aegis of TEI's Financial Accounting Task Force, whose chair is Neil D. Traubenberg of Sun Microsystems, Inc. In addition to Mr. Traubenberg, contributing substantially to the development of the Task Force's comments were: Michael J. Nesbitt of Paychex, Inc., James P. Higgins of FPL Group, Inc., James B. Haas of Fifth Third Bank, Sharon Gray of Intel Corporation, Thomas J. Wcisel of McDonald's Corporation, Julianne V. Maggio of GE Capital Corporation, Donald J. Rath of Chiron Corporation, Michael D. Fryt of FEDEX, Gregory R. Gilbert of Sun Microsystems, and Donald N. Adler. Also contributing to the development of the initial draft of the Task Force's comments was former member James R. Browne, now of Strasburger & Price LLP.

As President of Tax Executives Institute, I hereby submit the following comments on the Financial Accounting Standard Board's Exposure Draft of a Proposed Interpretation on Accounting for Uncertain Tax Positions, Reference No. 1215-001. The proposed Interpretation was issued on July 14, 2005, to clarify when the tax benefits of uncertain tax positions should be recognized in the financial statements of an issuer.

TEI shares the FASB's interest in maintaining the integrity and vitality of the financial reporting system of which the provision for taxes, at the federal, state, and local levels in the United States, and for foreign levies as well, is a material part. TEI also supports the FASB's goal of achieving greater comparability of financial statements and consistency in the measurement and reporting of tax expense, liabilities, and assets. Finally, we support the efforts of the FASB to ensure that the issuers' financial statements, taken as a whole, faithfully present the issuers' tax positions and provide the most useful information to investors.

TEI Background

Tax Executives Institute is the preeminent global association of corporate tax executives. Our more than 5,400 members are accountants, attorneys, and other business professionals employed by approximately 2,800 of the leading companies in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to the development and implementation of sound tax policy and to promoting the uniform and equitable enforcement of the tax laws. The Institute is proud of its record of working with congressional committees, government agencies, and other policy-making bodies (including the Public Company Accounting Oversight Board and the Securities and Exchange Commission) to minimize the cost and burden of tax administration and compliance to the mutual benefit of the government, business, and ultimately the public. We also support efforts to ensure that companies fairly present their financial position in financial statements prepared for investors and in documents filed with the SEC.

TEI members are responsible for conducting the tax affairs of their companies and ensuring their compliance with the tax laws. Thus, members deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on a daily basis. All or nearly all the companies represented by our members issue financial statements that are governed by the FASB's pronouncements and most are SEC registrants. In addition, they are subject to scrutiny by the IRS and various other agencies in the United States and foreign jurisdictions on a continual basis.

As a professional association of in-house tax executives, TEI offers a different perspective on the issues from other organizations. TEI's members work directly for corporations that routinely enter into business transactions requiring an analysis of their tax benefits and burdens. These companies have professional staffs dedicated to ensuring compliance with the tax law while minimizing their tax liability. TEI members and their staffs are responsible for ensuring the quality, reliability, and documentation of their companies' internal controls for the proper financial accounting and reporting of tax expense, tax assets, and tax liabilities under section 404 of the Sarbanes-Oxley Act.

Hence, we believe that the diversity, background, and professional training of TEI's members place us in a uniquely qualified position from which to comment on the Board's exposure draft on the recognition and measurement of uncertain tax positions. Along with the government and the investing public, our members have the most at stake in trying to craft a financial reporting system that fairly presents the results of company operations and is as administrable and efficient as possible. We are pleased to submit the following comments.

Summary of TEI's Comments and Recommendations

The proposed Interpretation, which would substantially modify FAS 109, (1) provides a theoretical approach for the consistent determination and reporting of income tax liabilities, assets, and expense relating to uncertain tax positions. While supporting the FASB's general goals, TEI does not believe the proposed Interpretation should be adopted. Indeed, because the asset recognition model is fundamentally flawed, we believe the proposed Interpretation would neither represent an improvement over current accounting principles nor produce greater consistency and comparability of financial statements.

In addition, the dual standard for recognition and derecognition of tax benefits--and the corresponding resources required to document whether an enterprise satisfies the dual recognition standards--will impose substantial implementation and ongoing costs on financial statement issuers without enhancing the reliability of the financial statements. As important, the threshold determination undergirding the proposed Interpretation--that tax positions should not be recognized unless they are "probable" (as defined in the proposed Interpretation) of being sustained on audit based solely on the technical merits of the position--is at odds with pragmatic, prudent tax judgments that financial statements should reflect. Hence, TEI agrees with the views expressed by the Board members who said that the proposed Interpretation would (a) be unduly complex, (b) prove difficult to apply in practice, and (c) result in systematic overstatement of tax liabilities. (2)

TEI believes that the FASB's goal of improving consistency in the recognition and measurement of tax benefits of uncertain tax positions can be achieved through the adoption of an approach based on current accounting principles governing contingent liabilities, including taxes, under FAS 5. (3) Thus, TEI recommends that the proposed Interpretation be withdrawn and that the FASB consider the recommendations and comments below for improving perceived deficiencies in current accounting principles. Alternatively, in the event the FAS 5 approach is not retained, we offer several recommendations for improving the proposed Interpretation's asset recognition model.

Finally, if an asset recognition model is adopted, the effective date should be substantially delayed until the later of six months following release of the Interpretation or years ending after December 15, 2006. Analyzing and computing the cumulative effect of the accounting change to implement the far-reaching effects of a fundamental change in the recognition of all tax positions as well as making the necessary process control changes to comply with the documentation and testing requirements of section 404 of the Sarbanes-Oxley Act will require substantial time and resources for all companies, especially those operating on a global basis.

TEI's principal concerns about and comments upon the proposed Interpretation are addressed in the body of this letter. Responses to the 11 issues identified in the notice to recipients of the Exposure Draft are set forth in the Appendix.

Accounting for Tax Positions Should Reflect Pragmatic Tax Judgments

Given the complexity and ambiguity inhering in federal, state, and foreign tax rules, as well as companies' obligation to legitimately minimize costs, disputes with tax authorities about reported liabilities are routine. Whereas the specific issues will vary by enterprise and tax jurisdiction, the effect on the financial statement tax accrual process is the same:

In-house tax advisers make an assessment--an informed but ultimately subjective judgment--of the nature of the issues and the scope and degree of potential and actual controversies with applicable tax authorities about the proper interpretation of the law. The judgment reflects a careful analysis of--

* the strengths and weaknesses of an enterprise's internal control, tax compliance and financial statement reporting processes;

* the soundness of the enterprise's tax treatment of routine and unusual transactions;

* the merits of the legal authorities supporting the enterprise's position on identified transactions or issues (as well as the absence of comprehensive guidance on many issues); and

* where a dispute is likely, the negotiation and litigation strategies the enterprise can employ to resolve an issue.

Based on our members' experience in managing federal, state, and foreign tax audits and resolving disputes, TEI disagrees with the proposed Interpretation's presumption that a taxing authority will examine all tax positions, assert a claim, and disallow every tax position that is not supported at a "probable" level of confidence. There are many tax positions --including positions supported by substantial authority or higher levels of confidence--that do not warrant scrutiny by taxing authorities or are unlikely to be reviewed. Nonetheless, nearly all large companies assume that material tax positions or significant...