SEPTEMBER 27, 2010 TAX CONTROVERSY UPDATE New IRS Schedule UTP On September 24, 2010, the IRS released the final version of Schedule UTP, Uncertain Tax Position Statement. Beginning with the 2010 tax year, each corporate taxpayer that issues or is included in an audited financial statement and has assets in excess of $100 million will be required to file the new Schedule UTP with the corporation’s Form 1120, 1120-F, 1120-L or 1120-PC. For corporations with assets between $50 million and $100 million, the filing obligation will commence with the 2012 tax year. For corporations with assets between $10 million and $50 million, the filing obligation will commence with the 2014 tax year. The IRS is still considering whether to extend the filing obligations to other entities, such as partnerships and tax-exempt organizations. The final version revises a draft Schedule UTP released in April, 2010. The final Schedule UTP requires unprecedented disclosure of most uncertain tax positions reflected on the corporation’s tax return, including: • a brief description of the position, including a description of the relevant facts affecting the tax treatment of the position and other information necessary to apprise the IRS of the nature of the tax position; • a designation of a position as a “Major Tax Position” if the tax reserve for the uncertain position is at least 10% of the total tax reserve for all positions disclosed on the Schedule UTP; • a ranking of the uncertain tax positions by the amount of tax reserve taken by the corporation (although the amount of tax reserve is not required to be disclosed); and • a classification of the issue as a permanent or temporary adjustment to the corporation’s income. The final version of the Schedule UTP made several significant taxpayer-favorable modifications from the draft Schedule UTP released on April 19, 2010, including: • phasing in the effective date for smaller corporations; • eliminating disclosure of the maximum potential tax exposure arising from each position; • eliminating disclosure of the taxpayer’s rationale for taking the uncertain tax position; and • eliminating disclosure of positions for which no reserves were recorded on the corporation’s financial statements based upon the IRS’s administrative policy not to contest the position during an examination. We believe that the new Schedule UTP, and the corresponding transparency initiatives by the IRS, require a fundamental shift in the way a corporate taxpayer approaches an IRS audit. In our view, it is now prudent for a corporate taxpayer to begin preparing its defense of any issue disclosed to the IRS on Schedule UTP prior to the This Sidley update has been prepared by Sidley Austin LLP for informational purposes only and does not constitute legal advice. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. Attorney Advertising - For purposes of compliance with New York State Bar rules, our headquarters are Sidley Austin LLP, 787 Seventh Avenue, New York, NY 10019, 212.839.5300 and One South Dearborn, Chicago, IL 60603, 312.853.7000. Prior results do not guarantee a similar outcome. TAX CONTROVERSY UPDATE Page 2 commencement of the relevant IRS audit. We believe that the IRS will thoroughly audit most, if not all, of the positions that are disclosed on the Schedule UTP. In the new environment of transparency, we believe that outside tax controversy counsel can add significant value in four particular ways: • analyzing the corporation’s tax position from the perspective of a lawyer with experience in resolving tax issues at the administrative level as well as in litigating issues in court; • protecting the corporation’s various privileges, especially in light of the Supreme Court’s recent denial of the certiorari petition by Textron; • compiling, organizing and preserving the factual basis for the corporation’s disclosed uncertain tax positions; and • organizing the facts and law in a persuasive manner for presentation to the IRS during the inevitable audit of the corporation’s disclosed uncertain tax position. It is anticipated that state and local jurisdictions will use the Schedule UTP in their audits and that some jurisdictions may adopt parallel disclosure requirements for specific state and local issues. If you would like more information about the Tax Controversy Practice Group or have any questions related to the above update, please contact the Sidley Austin LLP lawyer you usually work with. The Tax Controversy Practice of Sidley Austin LLP Our tax controversy lawyers are heavily focused on IRS examinations and IRS Appeals-level work, including the various alternative dispute resolution tools that the IRS makes available to taxpayers. We believe that by helping clients to proactively prepare for audit there is a higher likelihood of resolving disputes at the earliest possible stage and on favorable terms. If an issue cannot be resolved at the informal level of the IRS, we have the capability and experience to litigate the dispute in the most favorable trial court (the United States Tax Court, the United States Court of Federal Claims or the client’s local U.S. District Court) and on appeal. In addition, we have a functionally integrated state and local tax controversy practice. Our state and local tax controversy lawyers are experienced in addressing the follow-on issues that may arise from a federal income tax audit. 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