2008 Tax Conference

1. 2008 Tax Conference

2. Michael Burak – PricewaterhouseCoopers John Hildy – Mayer Brown Rowe & Maw The views expressed in this presentation are not intended as, and should not be relied on, as accounting, auditing, regulatory or tax advice. The outcome of any independent situation depends on the specific facts and circumstances in which the issue arises and on the interpretation of FAS 109 and other relevant literature, laws and regulations in effect at the time.

3. IRS Access to Tax Accrual Workpapers

4. US Audit Environment • FASB FIN 48 (2006) • Provides structure for analyzing uncertain tax positions and, for many filers, increases the level of detail behind tax reserve analyses • PCAOB AS3 (2004) • Audit documentation must be sufficient to allow an experienced auditor, with no prior connection to the audit, to understand conclusions reached • AICPA AU 9326 (revised 2003) • Tax accrual and support are responsibility of client • Where support is based upon an opinion of outside advisor, auditor generally needs access to the opinion, notwithstanding privilege claims

5. IRS Environment • Pressures surrounding • Audit currency • Resources • Tax gap • The IRS has authority to examine any books, records, or papers that may be “relevant” • Arthur Young (1984): US Supreme Court held that tax accrual workpapers (“TAW”) were “highly relevant” to an IRS audit • Tax accrual workpapers (“TAW”) can be an irresistible treasure trove • TAW “Cadre” established within LMSB • 6 hours of mandatory FAS 109 training

6. Fluid IRS “TAW” Policy • IRS historically has followed a self-imposed “policy of restraint” to resist making blanket request for tax accrual workpapers • In 2004, the policy of restraint began to weaken • For “listed” transactions • If taxpayer claims benefits from one disclosed “listed” transaction, requests for TAW for that transaction are mandatory • If taxpayer claims benefits from one undisclosed “listed” transaction, requests for all TAW are mandatory • If taxpayer claims benefits from two or more disclosed “listed” transactions, all TAW may be requested as a discretionary matter • Other transactions: requested in unusual circumstances

7. IRS Definition of “TAW” • IRS’s definition of “TAW” is broad: “those audit workpapers, whether prepared by the taxpayer, the taxpayer’s accountant, or the independent auditor, that relate to the tax reserve for current, deferred and potential or contingent tax liabilities, however classified or reported on audited financial statements, and to footnotes disclosing those tax reserves on audited financial statements. These workpapers reflect an estimate of a company’s contingency analysis, tax cushion analysis, or tax contingency reserve analysis.” IRM 4.10.20.2(2) • Initially, IRS Chief Counsel advised this did not include ETR reconciliation workpapers, but that advice was withdrawn

8. Potential Defenses to Discovery • Attorney-Client Privilege • Section 7525 Tax Advisor Privilege • Work Product Privilege

9. Attorney-Client and 7525 Privileges • Applies to communications between attorney/tax advisor and client intended to be confidential • Communications must be for the purpose of providing legal advice • Even 7525 must involve “lawyer’s work,” since there is no parallel federal accountant privilege (Supreme Court in Arthur Young) • Protects communications, but it does not protect facts • Waiver • Waived on disclosure to any third party, including financial auditors • Waiver to one party generally waives the privilege with respect to all parties • Waivers typically extend to all communications on same subject matter • Even describing the “gist” of communication is a waiver (e.g. “our counsel gave us a favorable opinion on this issue”)

10. Work Product Privilege • Protects materials prepared “in anticipation of litigation or for trial” • Courts interpret the “in anticipation” test differently • First, Second Circuits: protects materials created “because of the prospect of litigation” • Fifth Circuit: protects documents where “primary motivating force was to assist in possible future litigation” • Some Circuits: articulation of the standard is somewhat ambiguous • Waiver • Waived where disclosure is made to an adversary, or where the disclosure makes it more likely that an adversary will obtain document • Cases discussing financial auditors are split: • Textron, American Steamship, Jaffe, Merrill Lynch find no waiver • Medinol, Diasonics find waiver • Waivers generally extend only to the items produced, not other materials

11. Case Study: Textron • Textron was embroiled in a contentious IRS audit • 7 of 8 past audits had gone to Appeals; 3 disputes resulted in litigation • Subsidiary had done 9 listed transactions (SILOs) • IRS issued a summons for TAW of Textron’s consolidated group • “Master” reserve schedules, plus supporting schedules, notes and memos • According to Textron, these TAW were prepared by in-house Tax Department counsel and reflected their advice and legal conclusions on the prospects of prevailing • Textron had shown these TAW to its outside auditor (E&Y), but had not allowed E&Y to keep copies • E&Y had agreed to keep the information confidential • When Textron refused to comply with the summons, IRS brought suit in federal district court in Rhode Island

12. District Court’s Holding • Last August, the district court held that the workpapers were covered by ACP/7525, but these protections had been waived upon disclosure to E&Y • But the court held the documents were protected as work product • Applied controlling First Circuit test: whether the document was acquired “because of” the prospect of litigation.” • Ask: would the document have been prepared in substantially the same form irrespective of the anticipated litigation? • District court held documents were prepared “in anticipation of litigation”, applying a “but for” approach: “If Textron had not anticipated a dispute with the IRS, there would have been no reason for it to establish any reserve or to prepare the workpapers used to calculate the reserve.” • So the holding is that, by definition, all of the tax reserve workpapers for all issues must be “in anticipation”

13. District Court’s Holding (cont.) • Moreover, court held disclosure to E&Y did not give rise to waiver of work product privilege • E&Y itself was not an “adversary,” despite its public watch dog role • Nor did the disclosure to E&Y increase likelihood that a true adversary would subsequently obtain the documents • E&Y had given assurances of confidentiality • E&Y was under professional obligations to keep confidential

14. Practical Implications • The district court’s opinion is a great victory for taxpayers • But be cautious…

15. Practical Implications (cont.) • It is, after all, a district court opinion • IRS has appealed to Court of Appeals for the First Circuit • Current status of appeal: • Government opening brief (January 2008) • Textron opening brief (March 2008) • Amicus briefs supporting Textron (April 2008) • Government reply brief (due May 5)

16. Practical Implications (cont.) • Attorney-Client and 7525 arguments are very difficult once disclosure to auditor is made • Textron has not even pursued these arguments in its brief • This is true even if auditor does not keep copies

17. Practical Implications (cont.) • The work product holding was based on the First Circuit’s friendly “because of” test • In a Circuit that follows the less-friendly “primary purpose” test, Textron likely loses • The primary reason to create TAW is to compute and support tax reserve, not to assist in litigation

18. Practical Implications (cont.) • This is the first opinion to extend work product protection to any TAW, much less to all of them as a blanket matter • Government’s brief: • There is no work product protection for documents that are prepared in the ordinary course of business or that would have been prepared in the same form irrespective of litigation • Textron’s brief: • The workpapers were prepared “because of” the potential dispute with the IRS • If there had been no anticipation of litigation, there would be no reserve • The fact that TAW were also used for some secondary business purpose (financial statement audit) does not forfeit protection

19. Practical Implications (cont.) • The district court’s holding that Textron anticipated litigation rests on factual determinations • Is it credible to anticipate litigation on each and every item in your reserve schedule? • Is it true that, just because a taxpayer identifies a tax issue and reserves accordingly, it “anticipates litigation”? • More traditional facts supporting Textron’s claim: • 7 of 8 cycles went to Appeals • 3 went to litigation • 9 listed transactions • 500 IDRs • Are there other consequences of anticipating litigation?

20. Practical Implications (cont.) • The district court’s holding that there was no waiver rests on factual and legal determinations • Facts: • E&Y had agreed to keep materials confidential • E&Y was bound by professional obligations of confidentiality • Legal: • Federal district courts are divided on the issue of whether auditor is an “adversary” • No appellate court has faced this issue

21. Practical Implications (cont.) • The decision does not protect information prepared by outside auditors • Government’s brief points out that its summons also sought workpapers in possession of E&Y • Government wants to make this argument because in Arthur Young, the Supreme Court held tax accrual workpapers created by audit firm were not protected as work product • Textron’s brief: • E&Y workpapers (if any) are irrelevant; we do not control them • IRS really wants the ones prepared by Textron’s attorneys, which E&Y does not possess • Too late to make that argument

22. Questions

23. Income Tax Accounting Update: The Emergence of IFRS

24. IFRS Overview – A Global Revolution More than 100 countries require, permit or are converging to IFRS Countries converging to IFRS with the goal of adoption Countries that require or permit IFRS Countries with no current plan to adopt Source: Economist Intelligence Unit

25. Reasonable timeline for the US transition to IFRS March 2007 SEC roundtable on US GAAP reconciliation for IFRS filers August 2007 SEC concept release on use of IFRS for US companies Between January 2009 and 2010 Potential voluntary application of IFRS permitted for US companies 2009 2007 2011 2013 2015 2008 2010 2012 2014 July 2007 SEC proposal eliminating US GAAP reconciliation for IFRS filers November 2007 Reconciliation eliminated Between January 2013 and 2015 Potential mandatory application of IFRS by US companies

26. Convergence

27. Income Taxes Key Differences and Short Term Convergence

28. Income Taxes Key Differencesand Short Term Convergence

29. Income Taxes Key Differences and Short Term Convergence

30. Income Taxes Key Differences and Short Term Convergence

31. Income Taxes Key Differences and Short Term Convergence

32. Income Taxes Key Differences and Short Term Convergence

33. Income Taxes Key Differences and Short Term Convergence

34. Income Taxes Key Differences and Short Term Convergence

35. Income Taxes Key Differences and Short Term Convergence

36. Income Taxes Key Differences and Short Term Convergence

37. Current areas of divergence in the area of income taxes Income Taxes Key Differences and Short Term Convergence

38. Income Taxes Key Differences and Short Term Convergence

39. Income Taxes Key Differences and Short Term Convergence

40. Income Taxes Key Differences and Short Term Convergence

41. Key Differences Between IFRS and US GAAP

42. Differences Between IFRS and US GAAP – Hot Topics • Revenue Recognition • Inventory Reporting • Business Combinations • Components of Financial Statements • Taxes

43. Inventory Reporting

44. Accounting for Income Taxes IFRS Conversion Focuses on: • Effective tax rate • Cash tax • International taxation • State taxation • Processes and controls

45. Tax Considerations of IFRS • Effective tax rate considerations • Differences in pre tax income under IFRS • Income tax uncertainties • Cash tax considerations • LIFO • Tax accounting methods • Other considerations • Transfer pricing documentation • Share based payments and other compensation matters

46. Tax Considerations of IFRS • State and Local Taxation • Systems, Processes, and Controls • International Tax Considerations • Tax Planning • Measurement Concepts • Financial Statement Impact

47. Questions and Answers <footer>