Letter to FASB on meaning of "effectively settled" : on March 28, 2007, TEI President David L. Bernard submitted comments on behalf of Tax Executives Institute to the Financial Accounting Standards Board, relating to the FASB Staff Position No. FIN 48-a. The FSP amends FIN 48 on accounting for uncertainty in income taxes

Tax Executive, The, March-April, 2007

On February 27, 2007, the Financial Accounting Standards Board issued for public comment a proposed amendment to FIN 48 on Accounting for Uncertainty in Income Taxes. The proposed FASB Staff Position No. FIN 48-a would provide guidance on how an enterprise should determine whether a tax position is effectively settled for purposes of recognizing a previously unrecognized tax benefit. On behalf of Tax Executives Institute, I am pleased to submit the following comments.

Tax Executives Institute is the preeminent association of corporate tax executives in the world. Our more than 6,900 members are accountants, attorneys, and other business professionals employed by approximately 3,000 of the leading companies in the United States, Canada, Europe, and Asia. TEI represents a cross-section of the business community, and is dedicated to the development and implementation of sound tax policy and to promoting the uniform and equitable enforcement of the tax laws. The Institute is proud of its record of working with congressional committees, government agencies, and other policy-making bodies (including the Financial Accounting Standard Board and Public Company Accounting Oversight Board) to minimize the cost and burden of tax administration and compliance to the mutual benefit of the government, business, and ultimately the public. TEI supports efforts to ensure that companies fairly present their financial position in financial statements prepared for investors and in documents filed with the Securities and Exchange Commission.

TEI members are responsible for conducting the tax affairs of their companies, ensuring compliance with the tax laws, and properly reporting the effect of tax positions on their financial statements. Thus, members deal with the tax code in all its complexity, as well as with the Internal Revenue Service and other tax administrators, on a daily basis. Nearly all of the companies represented by our members issue financial statements that are governed by the FASB's pronouncements and most are SEC registrants. In addition, they are subject to scrutiny by the IRS and various other agencies in the United States and foreign jurisdictions on a continual basis.

Background

The FASB staff received inquiries on whether it is appropriate for an enterprise to recognize a previously unrecognized tax benefit when the only factor that has changed since determining that no benefit should be recognized is the completion of an examination by a taxing authority. On February 27, 2007, the Board directed the FASB staff to issue for public comment Proposed FASB Staff Position No. FIN 48-a, which would amend Interpretation 48 to clarify that a tax position can be effectively settled upon examination by a taxing authority. The principal changes to FIN 48 are an amendment to Paragraph 10, especially the addition of paragraphs 10A-10C, and the addition of illustrative examples of effective settlement in new paragraph A 34. Other amendments conform FIN 48's language with the proposed FSP. The changes are proposed to be effective upon the initial adoption of Interpretation 48. FIN 48 is effective for financial statements issued for fiscal years beginning after December 15, 2006.

A. Paragraph 5 of the FSP and Amended

Paragraph 10A of Interpretation 48 Under Paragraph 5 of the FSP and Paragraph 10A of the Amendments to Interpretation 48, a tax position shall be considered effectively settled through examination when all of the following conditions have been satisfied:

a. The taxing authority has completed its examination procedures including all appeals and administrative reviews that the taxing authority is required or expected to perform for the tax position.

b. The enterprise does not intend to appeal or litigate any aspect of the tax position for the completed examination.

c. Based on the taxing authority's widely understood policy, the enterprise considers it highly unlikely that the taxing authority would subsequently examine or reexamine any aspect of the tax position included in the completed examination, presuming the taxing authority has full knowledge of all relevant information. (Emphasis added.)

In the tax years under examination, a tax position does not need to be specifically reviewed or examined by the taxing authority to be considered effectively settled. If the taxing authority has specifically examined a tax position during the examination process, an enterprise shall consider this information in assessing the likelihood that the taxing authority subsequently would reexamine that tax position for the completed examination.

1. Highly Unlikely. Neither U.S. accounting literature nor U.S. tax law uses the phrase highly unlikely in an authoritative sense. TEI interprets the phrase to mean that the probability of a subsequent examination or reexamination is "remote" in the FAS 5 sense of the term or that the circumstances under which a taxing authority will reexamine a return are circumscribed and rare. Under FAS 5, remote is defined as the "chance of the future event or events occurring is slight." We believe this definition is consistent with the FSP. Thus, TEI recommends that the FSP be clarified either by substituting "remote" for "highly unlikely" or by defining the phrase "highly unlikely."