J. Richard (Dick) Harvey, Jr. Distinguished Professor of Practice Villanova University School of Law/Graduate Tax Progra

1. Schedule UTP ABA Philadelphia Tax Conference November 14, 2012 J. Richard (Dick) Harvey, Jr.Distinguished Professor of PracticeVillanova University School of Law/Graduate Tax Program

2. Agenda • Overview, including history • Selected concerns during development • Observations thus far

3. Overview of Schedule UTP

4. Overview of Schedule UTP (1 of 2) • Large corporations required to disclose uncertain tax positions (UTP) on Form 1120 • 2010/2011 = assets > $100 million • 2012/2013 = assets > $50 million • 2014 and later = $100 million • Disclosure required when a corporation’s “audited”financial statements 1 either: • Include a “reserve” for a UTP, or • No reserve is recorded but there is a > 50% probability of litigation (referred to as the “expect to litigate” provision) 1 Includes audited financials statements of related parties.

5. Overview of Schedule UTP (2 of 2) • Other disclosure required, includes: • Ranking of the tax position by reserve amount • Major tax positions • Whether the tax position is: • Permanent or temporary • Related to transfer pricing • Tax-exempts and pass-through entities currently exempted: • Thus, tax positions on pass-through entities not identified on pass-through entity’s return. • However, can be disclosed on owner level’s return.

6. History that Led to Sch. UTP • IRS had practical difficulties auditing large corporations: • Other disclosure regimes not working well (e.g., reportable transactions, substantial understatement penalty, and Sch. M-3) • IRS spent substantial time identifying issues • Many issues not identified • Tax Accrual Workpaper (TAW) controversy (e.g., Textron): • IRS wanted to potentially adopt a compromise • Several professionals had suggested a Sch. UTP approach over the years: • However, diversity of practice prior to FIN 48 made it difficult • Fin 48 made it easier to require disclosure of specific issues

7. Selected Concerns During Development of Schedule UTP

8. Selected Taxpayer Concerns • Would IRS automatically propose adjustments for items on Sch. UTP? • Would completing Sch. UTP be time consuming? • Would Sch. UTP be adopted by other jurisdictions?

9. Selected IRS Concerns • Would taxpayers try to avoid disclosure through various means? • Would UTP descriptions be useful? • Should there be a penalty?

10. Observations Thus Far

11. Taxpayer Observations • IRS audit approach • Effort spent completing Sch. UTP • Other

12. IRS Feedback (1 of 2) • 2010 Statistical information as of April 2012: • 1,947 taxpayers filed Schedule UTP: • 21% = Coordinated Industry Case (CIC) taxpayers with 3.1 UTPs per Schedule UTP • 79% = other taxpayers with 1.9 UTPs per Schedule UTP • 4,186 issues in total were disclosed: • 49% of all Schedule UTP returns filed included only one UTP • Top three Code sections disclosed were (i) Secs. 41 (research credit), (ii) 482 (transfer pricing), and (iii) 162 (trade or business expenses) • 25% of all UTPs were international issues

13. IRS Feedback (2 of 2) • Updated figures as of July 13, 2012: • 2,144 taxpayers filed Schedule UTP with 4,766 issues disclosed • Top three Code sections did not change • Ratios described above remained roughly the same • Established teams to analyze Sch. UTP disclosures • Training agents • Not much else

14. Key Question IRS Should be Asking • Are some corporations avoiding UTP disclosure? • If so, how? Possibilities include: • No longer recording reserves: • Truly immaterial reserves • Auditors recording reserves on “net effects” schedule • Using “administrative practice provision” • Arguing “expect to litigate” provision does not apply to highly certain items • Others (e.g., checking box for US sub. Of foreign parents)

15. Contact Information J. Richard (Dick) Harvey, Jr. Distinguished Professor of Practice Villanova University School of Law and Graduate Tax Program 1-610-519-4474 rharvey@law.villanova.edu Recent articles athttp://ssrn.com/author=1542659