winston & strawn llp © 2008 charlotte chicago geneva london los angeles moscow new york newark...

Winston & Strawn LLP © 2008

CHARLOTTE CHICAGO GENEVA LONDON LOS ANGELES MOSCOW

NEW YORK NEWARK PARIS SAN FRANCISCO WASHINGTON, D.C.

AGA/INGAA Taxation Committee MeetingMontreal, Quebec

Alex ZakupowskyCounsel's Report

June 28, 2010


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Bill Wilkins, Chief Counsel – IRSUncertain Tax Positions

• Why would the IRS choose to spend time finding these issues or risk not finding them when the issues are there for the asking and not protected by any privilege?

• Issues should be decided on the merits and not on how well they can be hidden.

• The Service is not requiring disclosure of risk assessment on the schedule and still won't pursue historic documents, such as backup memoranda and tax opinions.

• If such historic documents fall under an information document request, the taxpayer still has the ability to withhold them by asserting they are part of its tax accrual workpapers, and subject to the IRS policy of restraint.


And, more recently - -

• In spite of all the comments on Announcement 2010-30, IRS is pushing ahead on UTP

• Increase compliance assurance program (CAP)

• More coordinated published guidance on issues

• The Tiered Issue Process has caused unintended consequences

• Time taken to get answers

• Quality of positions

• Industry or issue focused

• New reporting or withholding requirements

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Are the UTP rules administrable?

• Problem with definition of UTP –

• Recorded reserve

• No recorded reserve because expectation is successful litigation

• No recorded reserve because of past IRS administrative practice

• Reserves include both current and deferred tax accounts

• Change a tax account on the balance sheet and you have changed a "reserve."

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What is not an uncertain tax position?

• What questions do you ask?

• Why do you think you are entitled to take a deduction?

• Why do you think you are entitled to exclude an item from income?

• What answers do you get (or give)?

• "It is the law." What does this mean if not –

• the IRS will not challenge it, or

• if challenged and litigated you will prevail?

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Like Pornography --

"I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description; and perhaps I could never succeed in intelligibly doing so. But I know it when I see it . . ."

Justice Potter Stewart concurring opinion in Jacobellis v. Ohio, 378 U.S. 184 (1964)

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IRS Balancing

• Point

• Resources and costs

• Open disclosures by taxpayers

• Need for quicker guidance

• Technical decisions

• Counter-point

• Imposing new burdens on taxpayers

• Policy of restraint

• Quality of guidance

• Management decisions

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IRS Reorganization

• More centralization and coordination of issues

• What does this mean?

• Early cases will decide approach

• More balancing of views in the IRS

• More controversy?

– IRS will have more resources (80/20 rule)

– One size fits all

• Who will decide?

• Evolution from tax professionals to professional managers

– Look at the most recent commissioners

– Look who gets promoted

• Can the culture be changed?8


In the words of . . .

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LIFO Repeal

• H.R. 3970 – Tax Reduction and Reform Act of 2007

• Proposed by Rep. Charles Rangel – Chairman of Ways and Means Committee

• No Congressional action

• Included in President Obama's budget proposal for 2010

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General Requirements

• Taxpayers must adjust inventory values

• Effective for taxable years beginning after December 31, 2011

• Change in method of accounting:

• Taxpayer initiated change

• Made with consent of the Secretary

• Eight-year pick up of positive adjustments

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Potential Impact of LIFO Repeal

• Loss of tax deferral

• Decreased cash flow

• Impact on customers –

• Increase in tax over eight years for section 481 adjustment

• If gas prices are increasing, FIFO or WAC will be lower than LIFO – customer pays for price of gas which is a benefit

• Annual tax cost remains the same - Inventory stated at more recent cost, but no additional income because the price of gas is a pass-through

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What taxpayers can do?

• Fight it

• Determine best acceptable inventory valuation method

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Industry Issue Resolution - Repairs

• Goal - The goal is for the IRS to publish guidance on which pipelines and distribution companies may rely, without challenge by the IRS

• Form of guidance expected –

• Initially an Industry Director's Directive

• Later published authority that is binding on the IRS

• Timeline

• Start – Est. December 2010

• Finish – Est. March 31, 2011



Scope

• Pipelines (Transmission) and Gas Distribution

• Linear assets (e.g., miles of pipe)

• Other T&D Property (e.g., compressor stations)

• Gathering lines and storage facilities

• Define unit of property

• Define repair

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• Stakeholders

• Taxpayers

• Role of accounting firms and other outside advisors

• Need for balance

• Time is short

• Precedents will exist

• IRS makes final decision

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• The process

• Understand the facts

• What have companies done?

• What can companies do?

• Develop a proposal with the IRS that covers as many companies as possible

• Need not cover all

• Collaborative

• Desire to be as objective as possible

– Our interest

– IRS interest

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Dealing with variations in methods.

• Companies have set up systems that vary in significant respects

• We are attempting to get guidance that will accommodate as many as possible

• Forming a consensus view is important

• We need your input

• To be continued . . .

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QUESTIONS?

Thank you!

Alex Zakupowsky

Winston & Strawn LLP

1700 K Street, NW

Washington, DC 20006

202-282-5772

[email protected]

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