TEI urges FASB to withdraw uncertain tax positions draft.

• Position: Recent Activities

Tax Executives Institute has strongly urged the Financial Accounting Standards Board to withdraw its July 14, 2005, exposure draft on uncertain tax positions. Calling the proposed interpretation FAS 109 unworkable, TEI recommended that the FASB abandon the exposure draft's asset recognition model in favor of retaining and affirming current accounting principles for contingent tax liabilities under FAS 5.

TEI's views were set forth in a letter dated September 12, 2005, from Michael P. Boyle, TEI's International President. Mr. Boyle explained that while supporting the FASB's goals of improving consistency and comparability of financial reporting, TEI does not believe the exposure draft should be adopted. Indeed, because the asset recognition model underlying the FASB's proposed interpretation is fundamentally flawed, the exposure draft would neither represent an improvement over current accounting principles nor produce greater consistency and comparability of financial statements. Under the exposure draft, tax benefits would not be recognized unless they are "probable" of being realized.

TEI's comments explained that, since income taxes are generally self assessed, the primary uncertainty about a tax benefit is whether the taxing authority will assert a sustainable, post-filing claim that an enterprise owes an additional liability. "Unpaid taxes," Mr. Boyle said, "are a liability and challenges by a tax authority to an enterprise's uncertain tax positions are fundamentally about whether an asset (i.e., the amount of cash not paid to the taxing authority) is impaired or an additional liability will be incurred." Application of the exposure draft's asset recognition model, TEI concluded, will be confusing and complex and will not supply meaningful information to readers.

In addition, the threshold determination undergirding the proposed interpretation--that tax positions should not be recognized unless they are probable 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," TEI said. "The requirement that tax benefits must satisfy, in effect, a 'should-prevail' level of confidence for initial recognition ... will systematically overstate tax expense and tax liabilities (or understate tax as sets) in certain periods and create gains in subsequent periods when the statute of limitations expires (or an examination is concluded...