1. U.S. Tax Risks Trends James Wall J. H. Cohn LLP

2. 2 Circular 230 Notice Any tax advice given herein is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (i) avoiding penalties or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. 1

3. 3 Uncertain Tax Positions: General Comments FIN 48 is a FASB Interpretation to FAS 109 Provides Guidance on…. – Recognizing – Derecognizing – Measuring and – Classifying …tax effects of Uncertain Tax Positions Prohibits recognizing tax benefits unless tax position is “more-likely-than-not” being sustained 2

4. 4 Uncertain Tax Positions: General Comments “An uncertain tax position is defined as some level of uncertainty of the sustainability of a particular tax position taken by a company. FIN 48 will require a more-likely-than-not level of confidence before reflecting a tax benefit in an entity’s financial statements” 3

5. 5 Uncertain Tax Positions FASB Issues Interpretation No. 48, Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006 FASB later voted to defer the effective date for nonpublic entities that have not already implemented FIN 48 to fiscal years beginning after December 15, 2007 4

6. 6 Uncertain Tax Positions Applies to all tax positions within the scope of Statement 109. A tax position is a filing position that an enterprise has taken or expects to take on its tax return. –A tax deduction is the most common type of tax position –A decision to not file a tax return –An allocation or shift of income between jurisdictions –The characterization of income, or a decision to exclude reporting taxable income, in a tax return –A decision to classify a transaction, entity, or other position in a tax return as tax exempt 5

7. 7 Circular 230 - Covered Opinion Listed transaction Principal purpose transaction Significant purpose transaction if: –Reliance opinion –Marketed opinion –Subject to conditions of confidentiality –Subject to contractual protection 6

8. 8 AICPA Standards & Circular 230 AICPA “Tax Planning Guidance” Opinion standards: establish relevant facts, consider reasonableness of assumptions and representations, apply pertinent authorities, consider business purposes/economic substance 7

9. 9 Tax Transparency - AJCA Penalties and Disclosure Newly enacted penalties under §6707A for failure to disclose reportable transactions Increased §6662A accuracy-related penalty –Disqualified opinion –Disqualified advisor –Material advisor 8

10. 10 Judicial Doctrines - Business Purpose Sham transaction Sham entity/partnership Substance vs. form Conduit Partnership anti- abuse (§701 Regs.) §269 Step transaction Circular cash flow Debt vs. equity 9

11. 11 Section 6011 Reportable Transactions Final regulations effective for transactions entered into on or after January 1, 2003 Listed transactions Confidential transactions Contractual protection (Rev. Proc. 2004- 65) §165 losses (Rev. Proc. 2004-66) Brief asset holding period (Rev. Proc. 2004-68) 10

12. 12 Listed Transactions Any transaction identified by the IRS as a tax avoidance transaction and transactions that are “substantially similar” “Substantially similar” standard met where the same or similar types of tax consequences are expected and transaction is either factually similar or based on the same or similar tax strategy “Substantially similar” standard must be broadly construed in favor of disclosure –Listed transactions involve federal income, estate, gift, employment, pension, or exempt organizations excise taxes –State-level listed transactions (California) 11

13. 13 Penalty Discussion Must discuss with clients and include in advice the client’s potential exposure to penalties and certain disclosure obligations New preparer penalties effective for tax returns prepared after May, 2007 –Must be reasonable belief that the tax treatment of the position would “more likely than not” be sustained on its merits –Taxpayer still has the old “realistic possibility” standard 12

14. 14 Penalty Discussion cont’d Accuracy-related penalty for reportable transactions - §6662A –Applies to understatements related to listed transaction or other reportable transactions if a significant purpose is the avoidance or evasion of federal income tax –Does not provide means of avoiding penalty due to level of comfort or through disclosure –May be avoided with reasonable cause and good faith Failure to disclose reportable transaction - §6707A –Authority to rescind vested with Commissioner 13

15. 15 Section 482 Has Been Part of the Tax Code for Decades, So Why Has Transfer Pricing Become So Important? It has become a financial statement issue in light of Sarbanes-Oxley and increased focus on tax provisions Increased IRS scrutiny –More than one-half of the dollar amount of adjustments to multi-national companies incomes in recent years have been related to transfer pricing issues –On September 11, 2006 GlaxoSmithKline settled a transfer pricing dispute with the IRS and paid $3.4 billion. Buyers of businesses routinely request transfer pricing documentation as part of their tax due diligence More jurisdictions are developing similar documentation and penalty rules –GE Canadian affiliate protests largest transfer pricing case (U.S.$ 129.4 million) in Tax Court of Canada (August 2007) –At least 35 countries now have documentation requirements - UK, Canada, Germany, Japan, Australia FIN 48 - transfer pricing is a position that you need MLTN authority for Preparer penalties 14