Show me someone who doesn*t think accounting is a creative

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Transcript Show me someone who doesn*t think accounting is a creative

Professional Accounting Research 1


Power Point

• • • •

Introduction to Professional Research Tax Research

PAK chapter 1, pp. 1-1 to 1-7 Ethics Tax Shelters

Coltec, 2006-2 USTC ¶50,389, 454 F3d 1340

Wal Mart, 12/31/2007, NC Superior Court

Research & Accounting

• • • •

need for critical thinking need for judgment

principal-based versus rules-based financial accounting

tax avoidance versus tax evasion too much authoritative literature important to be able to communicate results

Research & CPA Exam

• •

CONTENT AND SKILL SPECIFICATIONS FOR THE UNIFORM CPA EXAMINATION (approved May 15, 2009, effective Jan. 1, 2011) Application of the Body of Knowledge (40-50% of FAR, REG, AUD) including:


– –

judgment synthesis

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evaluation research “Higher-level cognitive skills that require individuals to act or transform knowledge in some fashion. These skills are inextricably intertwined and thus are grouped into this single skill area.”

Research & CPA Exam (con’t)


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Identify the appropriate research question. Identify key search terms for use in performing electronic searches through large volumes of data.

Search through large volumes of electronic data to find required information.

– –

Organize information or data from multiple sources.

Integrate diverse sources of information to reach conclusions or make decisions.

Identify the appropriate authoritative guidance in applicable financial reporting frameworks and auditing standards for the accounting issue being evaluated.

From The Uniform CPA Examination Alert Spring 2009

What is your focus in seeking new ways to assess research skills?

We are now developing research tasks that involve not only searching authoritative literature, but also making use of the findings. At the time CBT was launched in 2004, not all students were being instructed in research skills as part of their curricula. This has now changed. Research courses are available at many institutions. In our national survey of entry level practice last year, we recognized that the time has come to expand the testing of research skills. We are also using content experts to guide us in identifying the ways in which entry-level practitioners are finding and using information. This is leading us to explore research topics outside the scope of authoritative literature. We plan to field-test this type of research task with students in accounting programs. If successfully tested, we could introduce research tasks that rely on alternative databases, exhibits and resources. Our consideration of other sources reflects the recognition that CPAs must often rely on a variety of information and data sources. Some of the resources we have been exploring include Thomas, the Library of Congress record of legislation, the U.S. Tax Court database of tax court rulings, and information databases, such as financial reports submitted to the SEC in XBRL format. No decisions have as yet been made concerning these resources but their use is being explored.

Research Steps

1. identify the relevant facts and issues 2. locate authority and collect the evidence 3. analyze the results and identify the alternatives 4. develop conclusions and recommendations 5. communicate the results and recommendations

Tax Research - Why taxes?

• • •

governments need revenue to support their activities taxes can be a major source of revenue revenue <=> government spending

– –

= balanced budget > surplus

< deficit

What to tax? What rate to use?

• • •

tax base X tax rate = tax tax base

amount to which tax rate is applied

– –

what to include or exclude?

base broadening - more income included tax rate

proportional, progressive or regressive

Criteria used to select a tax structure

• •

Adam Smith - 18th century

– – – –

equality convenience certainty economy factors influencing current tax structure


– – –

social equity political

Tax Formula

Income(broadly conceived) Less: Exclusions Gross Income Less: Deductions for AGI Adjusted Gross Income (AGI) Deductions from AGI: Less: > of itemized deductions or standard deduction Less: Personal & dependency exemptions Taxable Income $x,xxx (x,xxx) $x,xxx (x,xxx) $x,xxx (x,xxx) (x,xxx) ______ $x,xxx

Elements of Tax Practice

Tax Practice for a CPA

Tax Compliance

preparing tax returns

Tax Research

attempting to answer tax questions

Tax Planning

arranging ones affairs to optimize tax liabilities

Tax Litigation

generally handled by lawyers

Tax Research by CPAs

• •

“unauthorized practice of law”

sometimes difficult to determine a CPA should probably not provide the following types of general legal services

expressing a legal opinion on any nontax matter

drafting wills and trust instruments

drafting contracts

drafting incorporation papers

drafting partnership agreements

Tax Planning

• • • •

Consider social, economic, and business goals as well as tax motives Tax avoidance

the legal minimization of tax liabilities and one goal of tax planning Tax evasion

the illegal minimization of tax liabilities and can lead to fines and jail Abusive tax avoidance

a transaction, or series of transactions, created for the sole purpose of avoiding taxes. Unlike other tax avoidance, abusive tax avoidance often uses “multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.” (IRS)

Tax Planning


• •

open transactions

transaction not yet completed so modifications can be made prior to completing closed transactions

transaction already completed so have to plan within the constraints of what is already done

also already filed transaction that is being audited

Show me someone who doesn’t think accounting is a creative profession and I will show you someone who does their own taxes.

Over and over again, courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible.

Judge Learned Hand

The difference between tax avoidance and tax evasion is the thickness of a prison wall.

Denis Healy, a former British Chancellor

Ethics for Tax Professionals

• • •

IRS Circular 230

all who practice before the IRS

more later in semester Sarbanes-Oxley and Taxation

more later in semester American Institute of Certified Public Accountants (AICPA) Code of Professional Conduct & Statements of Standards for Tax Service

– –

for CPAs who are members of the AICPA also states have ethics guidelines

more later in semester

Ethics More Generally

• •


Is a little tax evasion ok?

• •

a continuum of interpretations some examples

not reporting a small amount of income from working


babysitting & lawn mowing

not paying Use Tax to North Carolina


North Carolina Individual Income Tax Return line 17


see example Social Responsibility

– –

good for society is reincorporating in a tax haven country unpatriotic?

Stanley Tool

moving jobs out of the U.S.

V F Corporation – 95% of products come from non US sources

30 North American Manufacturing plants closed

Tax Shelters

• • •

estimated that $10 billion of taxes evaded annually by improper or questionable tax programs Large CPA firms (and others) sell to clients

“tax investment strategy” (KPMG) or tax products When does tax planning become a tax shelter?

IRS provides a specific definition of when an activity is a tax shelter and therefore has disclosure requirements

more generally when does an activity violate ethical standards of conduct

abusive tax shelter

no economic substance


no business purpose


see Coltec and Wal Mart

substance over form


sham transactions

Tax Shelters & Large CPA firms

• • • •

Arthur Andersen & Enron

881 offshore subsidiaries to shelter income Ernst & Young

helped Sprint executives shelter income from stock options KPMG & First Union

helped client shelter income from selling a mall in Asheville, NC KPMG fine & settlement

Cracking Down on Tax Shelters

• •

Reporting Requirements & Penalties

enacted in the American Jobs Creation Act of 2004 Reportable Transactions

transactions the IRS has identified as having potential for tax avoidance or evasion

broader than what might be considered a tax shelter

report on Form 8886

include (detailed definitions not required):

listed transactions (on IRS website)

• • • • •

confidential transactions transactions with contractual protection loss transactions transactions with significant book-tax differences transactions involving brief asset holding period

• •

Cracking Down on Tax Shelters Material Advisors

provides material aid, assistance, or advice wrt organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction

derives gross income, directly or indirectly, in excess of specified threshold from activity

threshold = $50,000 when provided to individuals

threshold = $250,000 in all other cases if Material Advisor

provide a return identifying and describing reportable transaction

From 8918

penalty for not complying

$50,000 for reportable transaction that is not a listed transaction

> of $200,000 or 50% of gross income for listed transaction

also must maintain a list of advisees and the list make available to the IRS

penalty of $10,000 / day starts 21 days after list requested

lawyers and accountants arguing privilege applies

Cracking Down on Tax Shelters


penalty for failure to include reportable transaction information with return

reportable transaction that is not a listed transaction

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$10,000 for individuals $50,000 for all others

listed transaction

– –

$100,000 for individuals $200,000 for all others

additional penalty if understatement of tax related to reportable transactions

• •

penalty is 20% of understatement penalty increases to 30% if transaction not disclosed (as required)

Tax Planning & Research



Power Point)

• • •

Research Process

5 or 6 steps Example of memo posted on Blackboard PAK

corporate ch. 1, pp. 1-2 to 1-6

Appendix A

Research Steps






Identify the relevant facts and issues Locate authority and collect the evidence Analyze the results and identify the alternatives Develop conclusions and recommendations Communicate the results and recommendations 1.






Determine the facts Identify the issues Locate applicable authority Evaluate authorities Analyze the facts in terms of applicable authority Communicate conclusions and recommendations

Step 1 – Identify Relevant Facts & Issues

What is client’s factual situation?


learning what to ask

ask more questions as research process progresses (iterative process)

both tax and nontax considerations

Step 1 – Identify Relevant Facts & Issues (con’t)

Based on the facts, what are the important questions that need to be answered?

a broad question may lead to several narrower questions

fact versus law issues

diamond necklace as gift or compensation

Gifts are excluded from taxable income (sec. 102)

Compensation for services are taxable (sec. 61)

dependency example


For Electronic Research

1. State the Issue as a Question 2. Identify the Keywords

important to the question

unique enough to narrow search 3. Construct a Research Query

using connectors (Boolean)

using wildcards

exact phrase


A self-employed attorney incurs substantial business-related travel expenses during the year. If she buys airline tickets in advance and stays over a Saturday night, she can often receive a substantial savings on airfare. Usually, an extra day of meals and lodging is less costly than buying the more expense airline ticket. In the current year, she has spent $4,000 in extra Saturday night expenses to save $12,000 in airfare.

Example (con’t)

Are the additional travel costs (primarily meals and lodging) of staying over a Saturday night in order to save substantial amounts on the business airfare deductible?

key words

– – – – –

travel meals and lodging Saturday airfare deductible

• •

Step 2 – Locate Authority & Collect Evidence

primary authority


– –

administrative judicial secondary authority

tax commentary

provided as part of electronic resources

tax journals


Primary vs Precedent

• •

primary authority defined

“An element of the Federal tax law that was issued by Congress, the Treasury or Internal Revenue Service, or a Federal court, and thus carries greater precedential weight than elements of the tax law issued by other parties.”

there are some primary authorities that provide no precedential value Small Cases Division decisions (cited as T.C. Summary Opinions) cannot be used as precedents when dealing with the IRS.

“substantial authority”

IRC § 6662 requires for tax positions taken


– – – – – – – – – –

proposed, temporary and final regulations court cases administrative pronouncements tax treaties committee reports (for congressional intent) private letter rulings technical advice memoranda actions on decision general counsel memoranda other items published by IRS in Internal Revenue


Primary vs Precedent vs Substantial Authority

substantial authority

IRC § 6662 imposes a penalty on substantial understatements of tax except where the taxpayer has “substantial authority” for the position taken on the return.

the Regulations for § 6662 specify the sources of “substantial authority”

might include items that do not provide precedent

Letter Rulings are a source of substantial authority but do not provide precedent to anyone except the taxpayer issued to

For Electronic Research

4. Select a Database and Execute the Search 5. Interpret and Refine the Search

Step 3 – Analyze the Results & Identify Alternatives

• • •

may result in going back to facts, issues and / or authority Determine that the authority appropriate

Surface features vs structural relation within primary authority sources have different weight

different precedential value

some have no precedential value

Small Cases Division Decisions

Letter Rulings


to taxpayer issued to only

“Best” Authority

Surface feature – asset generating expense Surface feature - expense Authority A Dog Client’s scenario Authority B Dog Elevator Dog Food Dog Food Electricity

“Best” Authority (con’t)

Surface feature – asset generating expense Surface feature - expense Healthy taxpayer with no sensory loss Dog Client is blind Dog Dog Food Dog Food Taxpayer with heart disease Elevator Electricity

“Best” Authority (con’t)

Surface feature – asset type Surface feature expense Structural relation Healthy TP with no sensory loss Dog Dog Food Transfer appropriate?

Blind taxpayer Dog Dog Food TP with heart disease Elevator Electricity Asset used for pleasure NO Asset used to mitigate medical condition YES Asset used to mitigate medical condition Example courtesy of Anne Magro, George Mason University

Step 4 – Develop Conclusions & Recommendations

• • •

might have some unresolved issues might present alternatives

especially if dealing with open transaction

pros and cons of each alternative

risks associated with alternatives have to consider client’s preferences

Step 5 – Communicate the Results & Recommendations

• •

written and oral

can vary in degree of formality

how uncertain is the outcome?

tax research memo

Example on Blackboard

Example PAK, p. A-6

IRS Web Site

• •

IRS publications and Tax Forms & Instructions

• • •

Tax Planning & Research (3 rd Power Point)

Constitutional & Legislative Sources & Writing a Memo

Review of History of U.S. Taxation

PAK, Individual Ch. 1, pp. 1-2 to 1-3 Statutory Sources

PAK, Corporate Ch. 1, pp. 1-7 to 1-9

– – –

U.S. Constitution The Legislative Process Internal Revenue Code

Reading the IRC

Tax Treaties Writing

tax memo examples

History of U.S. Taxation

• • • • •

1861 - 65 Civil War 1894 Congress imposed an income tax

Supreme Court – unconstitutional (Pollock 1895) 1909 corporate income tax Feb. 3, 1913 16th amendment ratified

– – –

1st returns due 3-1-14 rates from 2% to 6% 6% applied to >$500,000 1939 6% of U.S. population subject to tax

Revenue Acts from 1913 to 1939 codified as IRC of 1939

History of U.S. Taxation (con’t)

• • • • •

1941 - 45 World War II

by 1945 74% of U.S. population subject to tax (mass tax)

1943 pay-as-you-go tax system 1950 - 63 top marginal tax rate 90 - 91%

dropped to 70% and then 50% … 1988 - 90 top marginal tax rate 28% 1993 - 2000 top marginal tax rate 39.6% 2001 - 2004 top marginal tax rate drops from 39.1% to 35%

U.S. Constitution

16 th Amendment The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among several States, and without regard to any census or enumeration.

Legislative Process

The Legislative Process

• • • • • • • • • • • • – • •

see example

The Legislative Process

every bill passed has a public law number

P.L. congressional session # - bill #

congressional session # based on 2 year time periods

– –

2007-08 is the 110 th Congressional Session 2009-10 is the 111 th Congressional Session

P.L. 110-28 – Small Business and Work Opportunity Tax Act of 2007

P.L. 110-343 - The Emergency Economic Stabilization Act of 2008

Internal Revenue Code

Revenue Acts from 1913 to 1939 codified as IRC of 1939

followed by IRC of 1954 & IRC of 1986

Title 26 of the United States Code

LII: U.S. Code: Home

• • •

Internal Revenue Code (con’t)

Subtitles (A – I + J & K)

A, Income Taxes Chapters (1 – 98 + 99 & 100)

some numbers are skipped

1-6, 11-14, 21-25, etc.

continuous through all subtitles

Subtitle A, Income Taxes – Chapters 1 – 6

Chapter 1, Normal Taxes and Surcharges Subchapters (capital letters)

not all chapters have

– –

start over at A for each chapter Subtitle A, Income Taxes, Chapter 1, Normal Taxes and Surcharges, Subchapters A – X (no R)

some subchapters associated with the subject covered

C corporations in Subchapter C


Internal Revenue Code (con’t)

• • •

Parts (upper case Roman numeral)

not all subchapters have

– –

start over at I for each subchapter some numbers are skipped Subparts (capital letters)

not all parts have (fairly few) Sections (1 – 9602 + 9701 – 9833)

– –

continuous in Title 26 (not repeated) some numbers are skipped

tax research generally focuses on code section

IRC Section

• • • • • • •

subsection (lower case letters – a , b, c, etc.) paragraphs (numerical – 1, 2, 3, etc.) subparagraphs (upper case (capital) letters – A, B, C, etc.) clauses (lower case Roman numerals – i, ii, iii, etc.) subclauses (upper case Roman numerals – I, II, III, etc.) use parentheses for each division other than section

Section 6662(d)(2)(C)(ii)(I) an exception

See Section 212

Reading the IRC

• • •

complex sentence structures

– – –

long sentences a number of clauses wordiness word usage

some words are used in the IRC but would not generally be used in other writing

• •

use of legalese

Legalese SEC, “A Plain English Handbook, …” (ch. 2, pp. 30-35) an example - §183

Section 183

• • •

activity is not engaged in for profit

hobby gross income derived from such activity for the taxable year exceeds the deductions


net income breeding, training, showing, or racing of horses

involves horses

10 common pitfalls in interpreting the code 1. Determine the limitations and exceptions to a provision. Do not permit the language of the Code Section to carry greater or lesser weight than was intended. 2. Just because a Section fails to mention an item does not necessarily mean that the item is excluded.

3. Read definitional clauses carefully.

Small Business Corp. - § 1244 versus § 1361

10 common pitfalls (con’t) 4. Do not overlook small words such as and and or. There is a world of difference between these two words.

see examples 5. Read the Code Section completely; do not jump to conclusions.

special rules, exceptions, definitions, etc. are often in another part of the section

10 common pitfalls (con’t) 6. Watch out for cross-referenced and related

provisions, since many Sections of the Code are interrelated.

See section 183 7. At times Congress is not careful when reconciling new Code provisions with existing Sections. Conflicts among sections, therefore, do arise.

8. Be alert for hidden definitions; terms in a particular Code Section may be defined in the same section or in a separate Section.

10 common pitfalls (con’t) 9. Some answers may not be found in the Code; therefore, a researcher may have to consult the Regulations and/or judicial decisions.

10. Take careful note of measuring words such as less than 50 percent, more than 50 percent, and at least 50 percent.

Journal of Business Strategy, 1972

Tax Treaties

• • •

between the U.S. and other countries

President enters into after receiving advice & consent of the Senate

> 60 countries may allow some income tax exemptions IRS Publication 901, U.S. Tax Treaties

– –

Income other than Personal Service Income Personal Service Income

professors, teachers, and researchers

students and apprentices

wages and pensions paid by foreign government

Writing a Tax Memo

• •

see examples Structure for this Class (can be different)


summarize information provided

briefly, succinctly


state as a question


one to two sentences (no authority cited)


discussion and analyze the authority that supports the conclusion

combine applicable law and analysis from the PAK example

• •

Writing a Tax Memo (con’t)

Cite code section in good form

IRC § 265(a)(2)

– –

IRC Section 265(a)(2) IRC Sec. 265(a)(2)

can eliminate IRC from any of the above citations

Either include as part of the sentence

“IRC § 989(a) has three requirements …”

Or include a parenthetical reference at the end of the sentence

The three requirements are … (IRC § 989(a)) Writing tips

do not use 1 st

use 3 rd person (“I” is not allowed) person

write formally

no slang, clichés, or jargon

keep direct quotes from IRC to a minimum

– –

no 1 sentence paragraphs (other than issue and conclusion statement) use spelling and grammar check

also proofread by reading your writing aloud

beware of autocorrect issues in Microsoft

Administrative & Judicial Sources

• • •

PAK, Corp. Ch. 1, pp. 1-8 to 1-21 Administrative Sources


– – –

Revenue Rulings Revenue Procedures Letter Rulings

Other IRS Pronouncements Judicial Sources

Federal Court System

Case Briefs


• •

precedent (pres' e dent)


law definition

a legal decision or other authoritative material that furnishes an example for deciding the treatment of future similar or analogous situations precedential (pres


e den' shel)


of the nature of or constituting a precedent

The Department of the Treasury

• •

administers the tax laws of the United States

Secretary of the Treasury is a member of the President’s Cabinet

Timothy Geithner Internal Revenue Service (IRS) is bureau within Treasury

See Treasury Organizational Chart

headed by the Commissioner of Internal Revenue

Douglas Shulman


interpretation of the IRC

Legislative Regulations

Congress specifies in the IRC that Regulations will provide details

an example

essentially the same authority as IRC

highest precedential value of any IRS pronouncement

General Regulations

issued under general authority granted the IRS

an example



• •

Proposed Regulations

– –

at least 30 days prior to final

• •

interest parties can comment on can be much longer process – example §162(m)

bill passed 8/6/93


rules effective 1/1/94

– – –

regulations 1 st proposed 12/20/93 modifications proposed 12/2/94 adopted 12/19/95 “do not have the effect of law” Final Regulations

issued after proposed regulations



• •

Temporary Regulations

– – –

not subject to public comment effective immediately expire 3 years after issuance

But if not replaced by final regulations continue to use

– –

provide immediate guidance considered the same authority as final regulations until replaced by final regulations

for example 1.469-5 versus 1.469-5T rare to challenge the authority of the Regulations

“improper exercise of IRS power” or “overly broad application of a rule”



Citing Regulations

type of regulation

• •

1. for Income Tax 20. for estate, 25. for gift, 31. for employment & 301. for procedural

– –

code section that regulation relates to number, paragraph, subparagraph

number is consecutive within Reg. §

– –

starting with 0 or 1 but does not necessarily related to subsections in code

– –

Reg. § 1.262-1(b)(2) add a T when temporary

Revenue Rulings

2 nd to Regulations in authority of administrative sources

addresses a specific factual situation

issue, facts, law and analysis & holding

useful for fact situations that are similar


Rev. Rul. year – number

• •

Internal Revenue Bulletin (IRB) Cumulative Bulletin (CB)

Revenue Procedures

internal practices and procedures

tend to be factual or procedural rules

example – standard mileage rates for 2009

Rev. Proc. 2008-72

example – how to request a letter ruling and other IRS guidance

Rev. Proc. 2009-4

Letter Rulings

Private Letter Rulings (PLRs)

National Office of the IRS issues to a specific taxpayer discussing a proposed transaction

for a fee

$275 - $11,500

– –

issue, facts, law and analysis & holding

IRS’s interpretation

open (proposed) transaction

or tax return not yet filed is “substantial authority” under Reg. § 1.6662 4(d)(3)(iii)

for penalty assessment

for precedential value only provides authority for taxpayer issued to

Letter Rulings


• •

Technical Advice Memoranda (TAMs)

completed transaction

requested from National Office by agent during audit

applies to client being audited only Determination Letters

issued by local district rather than National office

– –

issues that are less controversial more likely to be a completed transaction

Letter Rulings


• • • •

not published by the IRS but made publicly available

added 1976

identifying details eliminated published by tax services Ltr. Rul. 200430031

year (4 digits) ( 2 digit before 2000)

– – –

week (2 digits) number of ruling for week (3 digits) includes PLRs, TAMs, and other IRS Pronouncements

including Field Service Advice, Service Center Advice, …

Other IRS Pronouncements

• • •

acquiescences and nonacquiescences

– – –

response when IRS loses in court will follow or not follow the court example – IRS versus court for vacation home rental

Bolton, 82-2 USTC ¶9699, 694 F2d 556 or McKinney, 83-2 USTC ¶9655 Internal Revenue Bulletin (IRB)

– –

available on-line at IRS issued once a week

Internal Revenue Bulletin

combine into Cumulative Bulletin (CB) Chief Counsel Memoranda

Technical Memorandum, General Counsel’s Memorandum, Action on Decision

Overview of the Legal Process

exhaust administrative review process

within the IRS

• • •

overpayment of tax versus deficiency assessment 1 st trial court then appeals historically burden of proof on taxpayer

in 1998 shifted more to the IRS

Federal Judicial System

Tax Court

• • • •

hears only Federal tax cases

technical tax issues 19 judges based in Washington

– –

trial court locations throughout the country usually one judge per trial

no juries file petition within 90 days of IRS’s mailing of notice and demand for payment

disputed tax liability does not have to be paid

Tax Court


• •



new or unusual points of law


application of existing law

interpretation of facts

can be appealed to Court of Appeals

if the circuits disagree on an issue the Tax Court should follow the decisions in the circuit where the taxpayer is located Small Cases Division

– –

disputed deficiency not > $50,000 informal

• •

legal representation not necessary no written briefs or formal oral arguments

– –

cannot be used as precedent decision final and cannot be appealed

District Courts

• • •

hears all legal issues based on the U.S. Code disputed tax liability must be paid country divided into districts

file in district where taxpayer lives

See Circuit Court Map

case heard by one judge

jury possible

questions of fact only

can be appealed to Court of Appeals

Court of Federal Claims

• • • • •

cases concerning monetary claims

disputed tax liability must be paid 16 judges based in Washington

– –

trial court locations throughout the country no juries not required to follow circuit Court of Appeals decisions can be appealed to Court of Appeals for the Federal Circuit

Court of Appeals

• • • •

usually question of law not fact 13 circuits

– –

11 geographic Washington, D.C.

Court of Appeals for the Federal Circuit each circuit independent and only has to follow Supreme Court decisions typically three-judge panel

no juries

• • • • •

Supreme Court

highest court in U.S.

hears very few tax cases

usually if conflict among Federal circuits or issue of major importance 9 judges hear every case located in Washington, D.C.

file a writ of certiorari to request case to be heard

certiorari is granted

certiorari is denied If Congress disagrees then pass new laws or clarify existing laws

Soliman, 113 SCt 701, 93-1 USTC ¶50,014 – home office deduction under § 280A

1997 Taxpayer Relief Act (PL 105-34) modified § 280A

Cites for Cases

Tax Court


• •

Hillman, D. H., 114 TC 511(2000) (permanent) or Hillman, D. H., 114 TC __, No. 32 (2000) (temporary)


• •

Nicholls, Walter J., 69 TCM 3042 (1995) (CCH) or Nicholls, Walter J., T.C. Memo 1995-291 (general)

Small Cases Division

Fields, Edward M., TC Summary Opinion 2001-35

Cites for Cases (con’t)

• •

District Court

Barber, Lori, 2000-1 USTC ¶ 50,209 (N.D.C.A., 2000) (CCH) or

Barber, Lori, 85 AFTR 2d 2000-879 (RIA) or

Barber, Lori, 85 F.Supp.2d 967 (N.D.C.A., 2000) (West) Court of Federal Claims

Bennett, Courtney, 94-1 USTC ¶ 50,044 (Fed. Cl., 1994) (CCH) or

Bennett, Courtney, 73 AFTR 2d 94-1042 (RIA) or

Bennett, Courtney, 30 Fed. Cl. 396 (1994) (West)

Cites for Cases (con’t)

• •

Court of Appeals

Oxford Capital Corp., 2000-1 USTC ¶ 50,447 (CA-5, 2000) (CCH) or

Oxford Capital Corp., 85 AFTR 2d 2000-1840 (RIA) or

Oxford Capital Corp., 211 F.3d 280 (CA-5, 2000) (West)

F.2d for older cases Supreme Court

Indianapolis Power and Light, 90-1 USTC ¶ 50,007 (USSC, 1990) (CCH) or

Indianapolis Power and Light, 65 AFTR 2d 90-394 (RIA) or

Indianapolis Power and Light, 110 S.Ct. 589 (1990) (West)

Case Briefs

summarize case briefly (1 -2 pages)






Evaluating Law and Rules & Ethics

• • •

Evaluating Sources of Law Citators

CCH & Shepard’s for Supreme Court within LexisNexis Academic Universe Rules and Ethics in Tax Practice

Circular 230 (on Blackboard)

– –

AICPA Code of Professional Conduct Statements on Standards for Tax Services (on Blackboard)

NC Professional Ethics and Conduct

North Carolina Accountancy Rules found in Subchapter 8N – Professional Ethics and Conduct (summary on Blackboard)

Evaluating Sources of Law

administrative sources

Regulations are generally held to be valid by the Courts

Revenue Rulings and Revenue Procedures might be modified or held invalid by the courts

Evaluating Sources of Law


Court Cases

a case should summarize the evolution of the tax law prior to the case

starting with a recent case might give cites to earlier relevant cases

decisions by higher courts carry more weight

District Court & Circuit Court of Appeals opinions in the taxpayer’s circuit carry more weight than ones not

Evaluating Sources of Law


Court Cases (con’t)

Tax Court and Court of Claims decisions are binding on all jurisdictions, unless overturned on appeal

circuits are assigned more weight

2 nd (NY, CT & VT)

9 th (CA, WA, OR, NV, AZ, ID, MT)

federal (Court of Federal Claims)

older cases should be given less weight

§ 183 added for tax years after 12/31/69

Reg. § 1.183-2 adopted 7/12/72

Action on Decision (AOD)



• •

how up to date is your research?


other cases referred to within a court case

cited, followed, criticized, questioned, explained

case appealed

affirmed, reversed, modified, overruled, remanded, vacated

administrative sources

superceded, modified, revoked, withdrawn

• • •


(con’t) citing case

case that makes reference to another case cited case

case that is referenced by another case citator

provides information on citations to cases

may or may not tell you how the cases are related

example Soliman, 113 Sct 701, 93-1 USTC ¶ 50,014

• •


CCH - just a list of cases

– –

RIA – annotation for each case also can link to annotation Shepard’s for Supreme Court within Lexis/Nexis Academic

indicates annotation for each case

“shepardizing the case”


(Legal tab then Shepard’s Citations)

Circular 230

• •

practice before the IRS

consists primarily with representing the client during an audit who may practice


certified public accountants

enrolled agents

pass an IRS exam or worked for the IRS for 5 years

enrolled actuaries

Circular 230


• •

limited practice without enrollment

– – – –

family members employee for employer partner for a partnership, officer for a corporation trustee, receiver, guardian, personal representative, administrator or executor tax return preparers

– – –

signs a return as preparer “limited practice” only before the Examination Division of the IRS

Circular 230


conduct before the IRS

furnish information requested by the agent

unless request is questionable

– –

unrelated to tax return?


do not delay matters unreasonably

Circular 230


• • • •

due diligence

honest with clients

simple errors happen

but at some point an error goes beyond what a reasonable person would expect from a tax preparer contingent & unconscionable fees

contingent fee not allowed on original return

– –

allowed for amended or claim for refund unconscionable fee if too high for complexity of return solicitation & advertising

must not contain false, fraudulent, unduly influencing, coercive, or unfair statements or claims tax return positions

IRC § 6662 – substantial authority

realistic possibility now reasonable belief (2007 change)

1 in 3 likelihood now 1 in 2 likelihood

AICPA Code of Professional Conduct

• •

details are covered in Advanced Auditing

not responsible for here related to tax matters

more restrictive than Circular 230

contingent fee not allowed for original return, amended return, or claim for refund

advertising & solicitation

“creates a false or unjustified expectations of favorable results”

Ryan & Company, America's State & Local Tax Advisors


an example of a firm that is “not a CPA firm”

Statements on Standards for Tax Services

• • • • •

issued by the AICPA

enforceable standards for AICPA members tax return positions

similar to IRS – realistic possibility and substantial authority answers to questions on returns

make reasonable effort to obtain answers certain procedural aspects of preparing returns

can rely on client provided information

unless appears incorrect, incomplete or inconsistent

don’t have to review supporting documentation use of estimates

supplied by taxpayer

– –

appears reasonable certain expenses have more restrictive substantiation requirements

for example, travel & entertainment

Statements on Standards for Tax Services (con’t)

• • •

departure from previous position

allowed unless bound by the IRS as part of audit resolution knowledge of error

return preparation

if significantly effects tax liability

– –

notify client but not the IRS of errors on prior returns ensure error is not repeated in current return

administrative proceedings

request client’s permission to disclose to IRS

withdraw from engagement if client does not agree?

form and content of advice to taxpayers

professional competence

North Carolina

North Carolina State Board of Certified Public Accountant Examiners

NC State Board of Certified Public Accountant Examiners

Professional Ethics & Conduct

• • •

See NC Accountancy Rules Ethics & Conduct all CPAs CPAs using CPA title in offering or rendering products or services

• • •

CPAs performing attest services overlaps substantially with AICPA some examples (available on the website)

– –

Roger William Younts Tracie Wright Cox

Working with the IRS Tax Practice & Administration

• • •

Working with the IRS

– – – – –

Organization of the IRS Taxpayer Rights The Audit Selection Process Examinations The Appeals Process Tax Practice & Administration

– –

Taxpayer Penalties Penalties on Return Preparers

– –

Interest Statutes of Limitations PAK, Corporations Chapter 15, Administrative Procedures

IRS Facts & Figures

• • • •

almost 134 million individual returns (2006)

– – –

60.2% efile (TY 2006) 59.6% paid preparers (TY 2005) 102 million refunds (TY 2005) business returns

– – –

over 2.4 million C corporation returns (2006) over 3.5 million S corporation returns (2004) over 2.7 million Partnership returns (2005) over 31 million employment tax returns (2006) over 1.2 million other (gift, estate & excise) (2006)

IRS Facts & Figures

• • •

99,000 employees (FY 2004) budget

– –

10.811 billion FY 2006 (actual) 10.960 billion FY 2007 (proposed) collect almost 2 trillion (net – after refund) (2005)

– – –

880 billion from individual income tax (44.0%) 273 billion from corporate income tax (13.7%) 766 billion from employment taxes (38.3%)

755 billion social security & medicare

– –

25 billion from estate and gift (1.2%) 55 billion from excise taxes (2.8%)

IRS National Office


Deputy Commissioner for Services & Enforcement

Operating Divisions

wage and investment


approximately 116 million taxpayers

small business and self employed


approximately 45 million small businesses & self-employed

large and mid-size businesses


corporations with assets >$10 million

tax-exempt & government entities

• •

Criminal Investigation Office of Professional Responsibility

– – –

National Taxpayer Advocate Appeals Deputy Commissioner for Operations Support

agency wide shared services

Organization of the IRS

• • • • • •

National Office in DC IRS Service Centers

– –

8 service centers serve IRS regions process & mathematical verification of returns

where you mail your tax return IRS Data Center – Detroit National Computer Center – Martinsburg, WV other Computing centers & Processing Centers Customer Service Centers

telephone & electronic contact

Taxpayer Advocate

• •

National & Local taxpayer-intervention system

taxpayer representative with the IRS

Taxpayer Assistance Order (TAO)

to suspend, delay, or stop actions

taxpayer is suffering or about to suffer a significant hardship due to IRS’s administrative handling of situation

might involve levy of property or collection activities

Taxpayer Advocate (con’t)

report annually to Congress

2009 issued

Most Serious Problems

at least 20 required

21 in 2009

Legislative Recommendations

11 in 2009

Most Litigated Issues

top 10 litigated

Taxpayer Rights

• •

Taxpayer Bill of Rights

– –

evolved from 1988 to 1998 current version was part of the IRS Restructuring and Reform Act of 1998

in response to abusive behavior by IRS agents Taxpayers are guaranteed

rights to representation before the IRS

attorney, CPA, or other authorized representative

– –

recordings of proceedings an IRS explanation of its position relative to a pertinent disagreement

why is IRS requesting information, how will they use it & what might happen if requested information withheld

must separately notify both spouses of tax deficiencies, audits, appeals, etc.

Tax Gap

• • • •

based on tax year 2001 $1,767 billion paid voluntarily and timely

voluntary compliance rate of 83.7% estimated at 345 billion

16.3% noncompliance rate difference between what should be paid and what is actually paid

– – –

underreporting – $285 billion (82.6%) nonfiling - $27 billion (7.8%) underpayment $33.5 billion (9.7%)

• • •

Audit Selection Process

system of voluntary compliance

but do collect substantial revenue through withholding

almost 85% of the returns have some amount of wages (2004)

$4,921,806,344,000 income from salaries & wages

$ 394,285,849,000 income from taxable pensions & annuities

– –

$ 315,993,163,000 income from partnerships & S corps.

$ 247,217,288,000 income from trade or business threat of audit increases compliance audit rate fairly low

audit rate for all returns was 1.0% for returns filed in 2006

6.2% of individuals with Schedule C with gross receipts from $100,000 to $200,000

• •

16.8% of large corporations with ≥10 million in assets 19.9% of estate returns with ≥$5 million in value

but use statistical models and computer technology to maximum audit effectiveness

Audit Selection Process


Preliminary Review

simple and obvious errors

IRS Automatic Data Processing (ADP) Program

• •

computer matching W-2s, 1099s, etc.

mathematical / clerical error program

send taxpayer a corrected tax computation and request payment (or adjust refund)

unallowable items program

corrections at this stage are not an examination (not an audit)

no administrative or judicial appeals process

Audit Selection Process


Selection of Returns for Examination

Discriminant Function Program

discriminant function formula (DIF)

– –

assigns numeric weight to return items each return assigned a mathematical score


higher DIF score => higher probability of audit

Taxpayer Compliance Measurement Program

investigating type & number of errors in representative sample of returns

– –

TCMP audits are very detailed 1995 – stopped due to budget constraints

used to develop DIF formula

Audit Selection Process


Selection of Returns for Examination

National Research Program (NRP)

• •

snapshot of compliance from 2002 to 2004

approximately 50,000 returns annually reviewed and examined

but use existing audit data

IRS uses NRP data to update DIF formula

Audit Selection Process


Selection of Returns for Examination (con’t)

Other Selection Methods

information from informants


linked to another return being audited

– –

partners & partnerships shareholder & closely-held corporations

level of income or gross receipts

higher => greater probability of audit

filed an amended return

economic reality audit

– – –

relationship of income and deductions variance in self-employment income significant increases or decreases in items

Audit Selection Process


Selection of Returns for Examination (con’t)

Chances of Audit

• • • • • •

tax shelter losses home office deduction cash-oriented business business losses prior audit adjustments itemized deductions too high in relation to income

% Using Itemized Deductions (2002) If itemizing % (avg. $) deducting: AGI (000s) all <15 15-30 30-50 50-100 100-199 ≥200 % (avg.$ per) itemizing 35.0% $19,293 4.9% $12,771 16.9% $12,239 39.6% $13,096 70.9% $16,777 91.5% $25,768 93.8% $65,923 medical 18.7% $6,083 63.7% $7,400 45.3% $5,890 25.1% $4,994 11.7% $5,672 4.5% $10,969 1.5% $28,305 taxes 98.2% $6,674 90.6% $2,237 94.9% $2,327 98.1% $3,187 99.1% $5,173 99.6% $9,785 99.7% $35,815 interest charitable 82.3% $9,150 60.0% $7,043 68.8% $6,453 80.1% $6,850 86.9% $8,364 87.5% $11,825 84.1% $21,998 88.7% $3,372 72.8% $1,423 80.7% $1,890 84.2% $2,006 91.1% $2,530 95.5% $3,875 96.7% $17,354

Examinations (audit)

Correspondence (≈ 71%)

by mail or telephone

one or two items questioned

often requiring support for one or more itemized deductions

medical, taxes, interest, charitable, miscellaneous

verify income, deduction or credit item

provide receipts, cancelled checks, etc.

if more complicated then thought to be then might be moved to office or field audit

allowed administrative & judicial appeal



Office (≈ 9%)

– –

conducted at an IRS district office questioning one or more items

• •

listed in audit notification letter bring support for questioned items

might come to you if support is difficult to bring in

usually only used for individual income tax returns without business income including:

dependency exemption

• • •

income from tips, rents & royalties deductions for travel & entertainment casualty and theft losses



Field (≈ 21%)

issues more complex

usually business returns

– –

corporations individuals with more substantial Schedule C income

– –

complete review of return

also overall business usually at taxpayer’s offices

• •

could be at taxpayer’s representative might use a team of auditors

Coordinated Examination Program

large corporations



Dealing with an Auditor

review the strengths & weakness of the return before working with the auditors

– –

courteous, professional, cooperative, & responsive provide adequate work accommodations

• • •

don’t allow too much access to offices & employees don’t volunteer information don’t allow auditor to browse through information not requested

– –

communications should be in writing resolution

some issues might be resolved in the field

remaining issues carryover to next phase

• •


(con’t) Conclusion of Examination

proposed adjustments

Revenue Agent’s Report (RAR)

– –

can agree to adjustments and sign off at this time if don’t agree

probably meet with group supervisor or appeals agent to attempt resolution Thirty-Day Letter

received if proposed adjustments not resolved

– – –

formal notification of proposed adjustments informs about rights to appeal 30 days to request a conference with a appeals officer

orally if proposed tax adjustment & penalties ≤$2,500

written if >$2,500

a formal protest if >$10,000

facts, issues, authority

if taxpayer does not respond within 30 days then 90 day letter



File a Protest or Go Straight to Court?

Advantages to Protest/Appeals Process

possibly settle without costly litigation

can still litigate

• •

further delay for paying tax liability more insight into government’s position & more time to develop support for taxpayer’s position

might be able to later recover some costs later

– –

government’s case is largely unjustified all administrative remedies were pursued

Advantages to Bypassing Appeals

government cannot raise new issues

taxpayer appears confident of position

faster conclusion

• • •

The Appeals Process

Appeals Conference

informal proceeding

appeals officer allowed to use judgment

negotiated settlement

might “split or trade issues”

can refuse to settle on certain issues Ninety-Day Letter

statutory notice of deficiency

– –

90 days to file a petition with the U.S. Tax Court after 90 days can only contest if tax assessment paid

file claim for refund

claim denied by IRS

file refund suit in district court or Court of Claims

might have one more meeting with appeals officer and IRS attorney in court IRS is more likely to succeed than taxpayer


audit revenue agent’s report (RAR) proposed adjustments discussed 30 day letter appeals conference 90 day letter

Taxpayer Penalties

Civil versus Criminal


monetary fine


“preponderance of the evidence” (>50% certainty)

“clear & convincing” (tax & some other tort claims)


criminal process

same process for nontax criminal defendants


no unreasonable search & seizures, no double jeopardy, right to a speedy trial, right to the assistance of counsel, etc.

– –

constitutional guarantees evidence – “beyond a shadow of any reasonable doubt” (98-99% certainty)

usually includes prison

can be liable under both

Taxpayer Penalties - Civil

• • •

ad valorem penalties

based on % of the delinquent tax assessable penalties

flat $ amount imposed when violation is

without reasonable cause

the result of negligence or intentional disregard

through a willful disobedience or outright fraud

Taxpayer Penalties – Civil


• •

reasonable cause (some examples)

reliance on advice of competent tax professional

– – – – – –

mailed with insufficient postage or to wrong address death or serious illness of taxpayer or immediate family destruction of business, residence or records by casualty IRS did not provide necessary assistance or information unavoidable absence by the taxpayer unavoidable inability to obtain necessary tax records not reasonable cause (some examples)

lack money to pay

– – –

ill or injured but not incapacitated taxpayer in jail taxpayer alleges ignorance

Taxpayer Penalties – Civil


failure to file a tax return

due to willful neglect

assumed unless reasonable cause shown

5% of the tax for each month

using calendar months & any fraction of a month is a full month

• •

maximum 25% if within 60 days, minimum is lesser of $100 or tax due

if fraudulent failure then 15% / month for a maximum of 75%

Taxpayer Penalties – Civil


failure to pay tax

unless reasonable cause shown

assumed if granted an automatic filing extension when tax due < 10% of total tax

See Form 4868

– –

tax shown on filed return an assessed deficiency

• •

if not paid within 10 days of notice or not paid within 21 days when tax due < $100,000

0.5% of the tax for each month

using calendar months & any fraction of a month is a full month

• •

maximum 25% reduce failure to file by failure to pay when both apply

Taxpayer Penalties – Civil


failure to pay tax

a simple example

Samantha files her income tax return 65 days after the due date of the return without obtaining an extension from the IRS. Along with the return, she remits a check for $10,000, which is the balance of the tax she owes. Disregarding the interest element, what are Samantha’s total penalties for failure to file and failure to pay?

Taxpayer Penalties – Civil

(con’t) accuracy-related penalty

20% of the tax deficiency related to:

negligence or disregard of applicable tax law

“negligence” – failure to make reasonable attempt to comply

“disregard” – careless, reckless, or intentional disregard

• • • • •

substantial understatement of tax substantial valuation overstatement substantial overstatement of pension liabilities substantial understatement of estate & gift tax valuation “substantial” definition varies by category



noncash charitable (valuation) - 200% or more of actual value


income tax – 10% or $5,000 ($10,000 for a C corporation)

have not shown reasonable cause or good-faith effort to comply

“substantial authority” under §6662

Taxpayer Penalties – Civil


civil fraud

portion of underpayment is attributable to fraud

penalty is 75% of the underpayment that is attributable to fraud

but most other penalties will not be applied simultaneously

fraud not specifically defined in code & regs

judicial decisions have developed definition

– – –

actual, intentional wrongdoing done without “bad or evil purpose” willfulness – a voluntary, intentional violation of a know legal duty

• •

Taxpayer Penalties – Civil (con’t) “Fraudulent intent is rarely established by direct evidence. As a consequence, courts have inferred fraudulent intent from various kinds of circumstantial evidence.” (Unger, TC Memo 2000-267, 80 TCM 276)

– – – – –


two sets of books

false accounting entries

– – – – –

destroying books or records dealing in cash concealing assets or sources of income consistently understating income or overstating deductions purposely avoiding preparing business records failure to file tax returns implausible or inconsistent explanations of behavior failure to cooperate with tax authorities engaging in illegal activities attempting to conceal illegal activities

Taxpayer Penalties – Civil


civil fraud (con’t)

Unger, TC Memo 2000-267, 80 TCM 276

issues are:

(1) Whether petitioner had unreported taxable income during the years at issue, and

(2) whether petitioner is liable for additions to tax for fraud (section 6653(b)) and fraudulent failure to file (section 6651(f)).

illustrates use of the net worth method

– –

allowed under § 446(b) burden of proof on taxpayer to prove that it is “arbitrary and excessive”

Taxpayer Penalties - Criminal

criminal legal process

– –

punishment can include prison time IRS held to a greater burden of proof

usually reserved for more flagrant offenses

willful conduct

“a voluntary, intentional violation of a known legal duty” (Valenti, 121 F3rd 327)

law imposes a duty, taxpayer knows of the duty, and voluntarily and intentionally violated that duty


details of offenses, penalties & imprisonment potential not required

Valenti, 97-2 USTC ¶50,629, 121 F3d 327

Penalties on Return Preparers

• •

income tax return preparer (ITRP)

prepares for compensation

all or a substantial portion of a tax return or

not substantial if


the portion prepared involves an amount < $2,000 or


<$100,000 and also <20% of the gross income (or AGI for individual)

claim for refund

self-employed, employer or employee

penalties might be different return preparation

can include tax advisors, planners, software designers, and consultants

even if only reviewing or instructing

Preparer Disclosure Penalties

• • • • • •

give taxpayer a complete copy of the return when presented for signature sign return as preparer provide preparer’s ID # on return retain copies of all returns prepared

or list of taxpayers and their ID numbers for 3 years retain list of all preparers who have worked in the past 12 months maximum penalty of $25,000 per calendar year

Preparer Conduct Penalties

civil & criminal

– –

endorsing or negotiating a refund check (civil) understatements due to unrealistic positions (civil)

realistic possibility requires a 1 in 3 likelihood that the position will be upheld

willful understatement (civil)

willful, reckless or intentional disregard

aiding and abetting understatement (civil)

aiding & assisting in preparation of false return (criminal fraud)

disclosure or use of information by return preparers (civil & criminal – knowingly & recklessly)

tax shelters promoters (civil)


on underpayments & overpayments

for underpayment interest calculated from last date to pay tax (i.e. unextended due date) to date actually paid

compounded daily

for overpayment

IRS has 45 days from unextended due date or filing date of return (whichever is later) before interest required to be paid

IRS does not have authority to forgive payment of interest

interest is charged on some penalties

Interest rate updated quarterly

noncorporate overpayments and underpayments

short-term rate + 3%

as of Jan 1, 2010 (same since April 1, 2009) rate is:

short-term rate = 1%

4% for noncorporate over and under

use same rate for underpayments & overpayments for noncorporate as of January 1, 1999

corporate overpayments

short-term rate + 2%

as of Jan. 1, 2010 rate is 3%

corporate overpayments >$10,000 receive short-term rate + 0.5% (1.5%)

corporate underpayments

short term rate + 3%

as of Jan. 1, 2010 rate is 4%

large corporations underpayments are 2% higher (6% for Jan. 1)

rates and rules for application of rates have changed over the years

Statutes of Limitations

• •

time period to assess tax, file for refund, or select for audit

generally 3 years from unextended due date or filing date (whichever is later) for assessment or audit selection

• •

6 years if income omitted is >25% of gross income reported not filed then time period never expires

generally 2 years from when tax paid for refund IRS will request an extension to complete audit or appeals process

– –

taxpayer does not have to agree to but not agreeing could lead IRS assessing a deficiency prematurely

Tax Planning

Tax Planning

Economics of Tax Planning, Avoidance, and Evasion

– –

Tax Rate Terminology Tax Planning

Economics of Tax Planning

Tax planning helps a client look to the future

goals & how to get there

can allow for creativity

but avoid tax evasion and abusive tax avoidance

make appropriate comparisons

2 or more alternatives in the current time period versus

an alternative today compared to an alternative in the future versus

2 or more alternatives starting today and projecting into the future

Economics of Tax Planning

taxes are an additional cost of doing business or of wealth accumulation

from an economics perspective wealth maximization is our primary goal

reduce the net present value of the tax liability

Time Value of Money


tables, calculator or Excel

» »

inputs (N, I, PV, FV, PMT) examples


what interest rate?

but also have to consider goals other than tax minimization

Economics of Tax Planning (con’t)

• • • •

trade off costs and benefits

don’t want costs > benefits income taxes paid do not reduce future taxable income (not a deduction) before tax and after tax cost

ATC = after-tax cost

– – –

BTC = before-tax cost MTR = marginal tax rate ATC = BTC (1 – MTR) an example

Tax Rate Terminology

• • •

tax base X tax rate = tax liability tax base

amount to which tax rate is applied

– –

what to include or exclude?

base broadening – more included types of tax rate structures


same rate applies to all levels of tax base


tax rate increases as the tax base grows larger


tax rate decreases as the tax base grows larger

• •

Tax Rate Terminology (con’t) distribution of taxes in an economic analysis


the fraction (or %) of income paid in taxes is the same for all levels of income


the fraction (or %) of income paid in taxes increases in income


the fraction (or %) of income paid in taxes decreases in income tax incidence is the study of tax burdens

who bears the weight of a tax?

T = burden of tax on individual

• •

I = income of individual

T / I = effective tax rate

when higher for rich than poor then progressive

when higher for poor than rich then regressive “For instance, a cigarette tax is usually viewed as regressive, since the fraction of a poor individual’s income that is spent on tobacco is higher than the fraction spent by a rich individual.” (Stiglitz, Economics of the Public Sector, 1988)

Tax Rate Terminology (con’t)

• •

marginal tax rate

tax rate on next dollar of taxable income average tax rate

tax / tax base


use income after exemptions, exclusions, and deductions (taxable income for individual income tax)


use income before exemptions, exclusions, and deductions (gross income for individual income tax)

Tax Planning EDUCATION trusts for minors special investments RETIREMENT qualified plans nonqualified plans distributions plans & vehicles ESTATE asset management distributions & control INCOME TAX timing tax entity exclusions & deductions income classification special taxes withholding interest & penalties INVESTMENT risks & rewards control purchases / sales asset allocation regulations CASH budgeting finance RISK insurance security

Tax Planning


Avoiding Income Recognition

seek economic income that is not recognized for tax purposes

• •

municipal bonds (state & local obligations) invest in assets that appreciate in value rather than generate income

borrow against appreciated assets rather than sell the asset and pay tax on the gain

but will be paying interest on the debt

receive nontaxable fringe benefits rather than taxable compensation

Tax Planning


• •

Postponing Income Recognition

present value of $1 paid next year is lower than present value of $1 paid this year

delaying income, delays taxes, & allows investing taxes saved in alternatives

time the selling assets Changing Tax Jurisdictions

changing location of taxable activities to lower taxes

• • •

state, local, & foreign location decision individual deciding where to live business deciding where to locate

Tax Planning


• •

Controlling Classification of Income

ordinary, investment, & passive

capital gains taxed at lower rates

but capital loss might not be deductible when generated

• •

dividends now taxed at lower rate passive loss might not be deductible when incurred Spreading Income Among Related Taxpayers

– – –

family members closely-held business entities must transfer the assets generating the income

cannot assign your income to another person or entity

Retirement Planning

• •

in your 20s

decrease spending & increase savings

– –

put savings on autopilot live beneath your means

start saving for retirement in your 30s

– – – –

concentrate on your career have a family (if you plan to) set goals save as much as possible

Retirement Planning

• • •

in your 40s

continue to save

– –

monitor your investments refine your retirement plan

– –

invest in a rental / vacation home start organize what you will do in retirement in your 50s

review your real estate

– – – –

stay with stocks for retirement assets do a benefits check stop supporting grown children devise a tax strategy based on Business Week, Annual Retirement Guide, July 9 &16, 2007

Financial Research (8


Power Point)

• •

Introduction to Financial Research Authoritative Financial Literature


“Facts About FASB”

pdf file posted on Blackboard



GASB (not covered)

Research Steps






Identify the relevant facts and issues Locate authority and collect the evidence Analyze the results and identify the alternatives Develop conclusions and recommendations Communicate the results and recommendations 1.






Determine the facts Identify the issues Locate applicable authority Evaluate authorities Analyze the facts in terms of applicable authority Communicate conclusions and recommendations

From The Uniform CPA Examination Alert Spring 2009

What is your focus in seeking new ways to assess research skills?

We are now developing research tasks that involve not only searching authoritative literature, but also making use of the findings. At the time CBT was launched in 2004, not all students were being instructed in research skills as part of their curricula. This has now changed. Research courses are available at many institutions. In our national survey of entry level practice last year, we recognized that the time has come to expand the testing of research skills. We are also using content experts to guide us in identifying the ways in which entry-level practitioners are finding and using information. This is leading us to explore research topics outside the scope of authoritative literature. We plan to field-test this type of research task with students in accounting programs. If successfully tested, we could introduce research tasks that rely on alternative databases, exhibits and resources. Our consideration of other sources reflects the recognition that CPAs must often rely on a variety of information and data sources. Some of the resources we have been exploring include Thomas, the Library of Congress record of legislation, the U.S. Tax Court database of tax court rulings, and information databases, such as financial reports submitted to the SEC in XBRL format. No decisions have as yet been made concerning these resources but their use is being explored.

CPA Exam Changes

• •

effective January 1, 2011 for Financial Accounting and Reporting (FAR)

– –


“identify and understand the differences” between U.S. GAAP and IFRs “research relevant professional literature”

FASB Accounting Standards Codification

• •

will continue to use current financial research database through end of 2010 “The exam may not use the most current version of Literature. You are to use the version provided to answer the research question.”

General Accepted Accounting Principles (GAAP)

American Institute of Certified Public Accounting (AICPA)

the Committee on Accounting Procedure (CAP)

1936 – 1959

issued Accounting Research Bulletins (ARB)

the Accounting Principles Board (APB)

• •

1959 – 1973 issued Opinions (APB) and Statements (APS)

Pronouncements of these two predecessors remain in force unless amended or superceded by the FASB

GAAP (con’t)

Financial Accounting Standards Board (FASB)

1973 – present

private sector organization for establishing financial accounting and reporting standards

– –

recognized as authoritative by SEC and AICPA Statements of Financial Accounting Standards (SFAS or FAS)

also Statements of Financial Accounting Concepts (SFAC or CON), Interpretations (FIN), Technical Bulletins (FTB), Implementation Guides (Q&A), FASB Staff Positions (FSP), etc.

now the codification

The Organization

• •

Financial Accounting Standards Board (FASB)

5 members as of July 1, 2008

• •

sever prior connections (firms, universities, etc.) previously 7 members

appointed for 5 year term (allowed 2 terms)

terms staggered (1 term expires every year) Financial Accounting Standards Advisory Council (FASAC)

consults with FASB on technical issue, project priorities, etc.

• •

more than 30 members annually conduct a survey concerning the priorities of the FASB

The Organization (con’t) Financial Accounting Foundation (FAF)

14-18 trustees (changed to flexible size in 2008)

from 8 constituent organizations and


– –

selects members of the FASB and its advisory council responsible for the oversight, administration and finances of the FASB and FASAC

FASB funding now comes from accounting support fees

authorized by the Sarbanes-Oxley Act of 2002

See FASB Audited Financial Statements

See FAF annual report

also established

Emerging Issues Task Force (EITF)

formed 1984

issue Consensus Positions

Governmental Accounting Standards Board (GASB)

established 1984

FASB's codification and retrieval database project

approved Sept. 2004

– –

verification phase began January 15, 2008 became a single source of authority on July 1, 2009

FASB’s Standard Setting

• • • •

“open, orderly process for standard setting” identify topics for technical agenda

– – – –

input from constituencies FASAC survey EITF technical inquiries on issue open decision-making meetings

– –

observers do not participate also broadcast on FASB website public exposure drafts for FASB statements and interpretations

comments within the exposure period

minimum of 30 days (can be longer)

Statements of Financial Accounting Standards (FASs)

• • •

statements generally include:

introduction (or objective)

– – – –

background information basis for conclusion opinion or standard effective date (and transition if necessary)

illustrations of applications

– –

disclosure required amendments to existing pronouncements cite paragraph number(s) when referring to statements FAS 157 as an example


• • • •

timely financial reporting guidance

within the framework of existing authoritative literature membership drawn from constituencies

currently 15 members

also chief accountant of the SEC can attend and speak but not vote consensus opinion indicates to the FASB that no further action is required

no more than 3 voting members attending the meeting object

ratified by FASB meetings are public and comments are requested



• •

issuing 10 to 46 per year

EITF YR - # some are used frequently

example EITF 95-22

“Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement”


FASB’s website

• • • • • •

FASB Pronouncements Exposure Documents Comment Letters EITF Codification of GAAP


The Accounting Standards Executive Committee (AcSEC)

Statements of Positions (SOPs)

AICPA’s position on issues under the FASB’s consideration

Practice Bulletins

Securities & Exchange Commission (SEC)

• •

has statutory authority to establish financial accounting and reporting standards for publicly held companies under the Securities Exchange Act of 1934

chooses to rely on the FASB to promulgate standards (mostly)

but may have changed in recent years

any SEC’s requirements are above the GAAP hierarchy Staff Accounting Bulletins (SAB)

“… reflect the Commission staff's views regarding accounting related disclosure practices. They represent interpretations and policies followed by the Division of Corporation Finance and the Office of the Chief Accountant in administering the disclosure requirements of the federal securities laws.”

– –

also codification of staff accounting bulletins into topics Revenue Recognition is a major area

SAB 101 & SAB 104 & Topic 13

U.S. Securities and Exchange Commission (Home Page)

Authoritative Financial Literature

• • •

Hierarchy of GAAP previously laid out by the AICPA in SAS No. 69 Statement of Financial Accounting Standards No. 162 issued May 2008

“The Hierarchy of Generally Accepted Accounting Principles” Statement of Financial Accounting Standards No. 168 issued June 2009

replaces FAS 162 and makes the FASB Accounting Standards Codification the only authoritative source for GAAP

New Financial Authority

• • •

FASB Accounting Standards Codification (ASC)

became authoritative U.S. GAAP on July 1, 2009 access provided by school basic view also available for free

Codification of GAAP

issue of standards overload

goal is to simplify and codify accounting standards

currently 20 sources of GAAP with over 2000 documents

create a single, authoritative codification of US GAAP

replacing authoritative literature issued by FASB, AICPA, EITF, and SEC

result in 2 levels of GAAP

authoritative and non-authoritative


Levels A through D of the GAAP Hierarchy


except Level D Practice

Included in Codification

• • • • • • •

The Codification includes the following literature issued by various standard setters that apply to all entities (other than governmental entities): Financial Accounting Standards Board (FASB)

Statements (FAS)

– – – – –

Interpretations (FIN) Technical Bulletins (FTB) Staff Positions (FSP) Staff Implementation Guides (Q&A) Statement No. 138 Examples Emerging Issues Task Force (EITF)

– –

Abstracts Topic D Derivative Implementation Group (DIG) Issues Accounting Principles Board (APB) Opinions Accounting Research Bulletins (ARB) Accounting Interpretations (AIN) American Institute of Certified Public Accountants (AICPA)

Statements of Position (SOP)

– –

Audit and Accounting Guides (AAG)—only incremental accounting guidance Practice Bulletins (PB), including the Notices to Practitioners elevated to Practice Bulletin status by Practice Bulletin 1

Technical Inquiry Service (TIS)—only for Software Revenue Recognition

Included in Codification (con’t)

Standards issued by the SEC

• •

Regulation S-X (SX) Financial Reporting Releases (FRR)/Accounting Series Releases (ASR)

• •

Interpretive Releases (IR) SEC Staff guidance in

Staff Accounting Bulletins (SAB)

EITF Topic D and SEC Staff Observer comments.

Codification Indexing


– – – – – – – –

presentation (200s) assets (300s) liabilities (400s) equity (500s) revenue (600s) expenses (700s) broad transactions (800s) industry (900s)

Codification Indexing

• • •


XXX is Topic # starting at 100

– – –

YY is Subtopic # starting at 10 ZZ is Section # starting at 00 PP is Paragraph # starting at 1

also subparagraph


• •

sometimes mentioned but don’t seem to be incorporated into current version exist but not numbered?

maintaining consistent section #s throughout

similar to sections used for international accounting Section preceded by “S” when it is SEC content

section 99 used for SEC Materials that are essentially intact from original source

• • • • • • • • • • • • • • • •

Codification Indexing

XXX-YY-00 Status XXX-YY-05 Overview and Background XXX-YY-10 Objectives XXX-YY-15 Scope and Scope Exceptions XXX-YY-20 Topical Definitions—Glossary XXX-YY-25 Recognition XXX-YY-30 Initial Measurement XXX-YY-35 Subsequent Measurement XXX-YY-40 Derecognition XXX-YY-45 Other Presentation Matters XXX-YY-50 Disclosure XXX-YY-55 Implementation Guidance and Illustrations XXX-YY-60 Relationships XXX-YY-65 Transition and Open Effective Date Information XXX-YY-70 Links to Grandfathered Material XXX-YY-75 XBRL Definitions


• •

new authority will be incorporated as approved will be issued in similar format to how currently issued

but with appendix of codification updating instructions

will be issued a number to track when it was approved



sequential number for the year (01, 02, etc.)

Search Options

• • • •


area, topic, etc.

knowing codification section knowing current authority and using cross referencing tool

very helpful while transitioning master glossary

terms are linkable

some terms previously defined in a standard are now defined in the glossary

acceptable citation “ASC glossary”

Search Options (con’t)


advance search allows all terms, any terms, “exact phrase” and within ___ words

Boolean search allows AND, OR, NOT, “exact phrase”

terms must be capitalized

Narrow by

• •

related term area


FASB ASC {Codification reference}, for example:

FASB ASC 310 to reference the Receivables Topic

FASB ASC 310-10 to reference the Overall Subtopic of Topic 310

FASB ASC 310-10-15 to reference the Scope Section of Subtopic 310-10

FASB ASC 310-10-15-2 to reference paragraph 2 of Section 310-10-15

Old GAAP Hierarchy

• •

SEC requirements are above the GAAP hierarchy for public companies Hierarchy of GAAP (level of authority)

category (a)

• • •

Statements of Financial Accounting Standards (SFAS or FAS) FASB Interpretations (FIN) FASB Statement 133 Implementation Issues

• •

FASB Staff Positions AICPAs Accounting Principal Board Opinions (APBs)

that are not superseded by actions of the FASB

AICPAs Accounting Research Bulletins (ARBs)

that are not superseded by actions of the FASB

Old GAAP Hierarchy (con’t)

Hierarchy of GAAP (level of authority)

category (b)

• •

FASB Technical Bulletins (FTB) AICPA Industry Audit and Accounting Guides

if cleared by the FASB

AICPA Statements of Position (SOPs)

if cleared by the FASB

Old GAAP Hierarchy (con’t)

Hierarchy of GAAP (level of authority)

category (c)

Consensus Positions of the FASB Emerging Issues Task Force (EITF)

Topics discussed in Appendix D of EITF Abstracts (EITF D-Topics)

AICPA (AcSEC) Practice Bulletins

if cleared by the FASB

Old GAAP Hierarchy (con’t)

Hierarchy of GAAP (level of authority)

category (d)

• • •

AICPA Accounting Interpretations (AIN) FASB Implementation Guides (Q&A) AICPA Industry Audit and Accounting Guides

if not cleared by the FASB

• •

AICPA Statements of Position (SOPs)

if not cleared by the FASB “practices that are widely recognized and prevalent”

Old GAAP Hierarchy (con’t)

Hierarchy of GAAP (level of authority)

1 st category (a) then (b)-(d) with (b) higher than (c), etc.

if not (a)-(d) then other literature including:

Statements of Financial Accounting Concepts (SFAC)

• •

AICPA Issues Papers International Financial Reporting Standards (IFRSs)

• •

AICPA Technical Practice Aids other items (not required)

Prior Authoritative Financial Literature

Original Pronouncements

Accounting Research Bulletins (ARB)

No. 43 to 51

44, 47, 48, 49 & 50 are superseded

Accounting Principal Board Opinions (APB)

No. 1 to 31

1, 3, 5, 7, 8, 11, 15, 16, 17, 19, 20, 24, 27, 31 are superseded

AICPA Accounting Interpretations (AIN)

are interpretations of specific ARBs & APBs

Prior Authoritative Financial


Original Pronouncements (con’t)

Accounting Principal Board Statements (APS)

• •

No. 1 to 4 almost entirely rescinded by AICPA Statements of Position (SOP)

Accounting Terminology Bulletins (ATB)

No. 1 to 4 (1953 - 1957)

Prior Authoritative Financial


Original Pronouncements (con’t)

Statements of Financial Accounting Standards (FAS)

No. 1 to 163

– –

some superseded


be certain to check status will now issue statements with “R” designation for revised rather than renumber


FAS 123R & FAS 132R

FASB Interpretations (FIN)

No. 1 to 48

interpretations of specific statements

Prior Authoritative Financial


Original Pronouncements (con’t)

FASB Technical Bulletins (FTB)

• •

number – YR - # very few in recent years

Statements of Financial Accounting Concepts (CON)

No. 1 – 7

No. 6 replaced No. 3


• • • • • •

international standards

IASB Who we are and what we do

FASB & international convergence US GAAP reconciliation requirement SEC Roadmap

No IFRS Requirement Until 2015 or Later Under

New SEC Timeline, Journal of Accountancy some differences challenges

International Standards

• • • •

IASB – International Accounting Standards Board IFRS - International Financial Reporting Standards (No. 1-8)

prior to 2001 it was the International Accounting Standards Committee and they issues International Accounting Standards (IAS) (No. 1- 41, some superseded) IFRIC – International Financial Reporting Interpretations (No. 1-12, some superseded)

previous SIC (No. 1-32, some superseded) 4A53-9972 AD95BD28E0B5/0/WhoWeAreJanuary20102.pdf

Global Use of IFRS

• • • •

over 100 (113) countries now require or permit use of IFRS

including European Union (EU), Israel, Australia, South Africa, Singapore, Hong Kong & New Zealand

EU adopted in 2005

mandatory for all listed companies 2010

Brazil 2011

Canada, India, Japan & Korea

Global Use of IFRS (con’t)

but countries have separate endorsement processes and will change aspects of IFRSs

“as-endorsed” or “as-adopted” versions

EU requires “compliance with "IFRSs as adopted by the EU." Currently, the EU has adopted all IFRSs, though one aspect of IAS 39 was modified.”

Role of IFRS in the capital markets

Market capitalization of exchange listed companies using IFRS

EU, Australia and Israel – 26% of global market capitalization

With Brazil and Canada pending – increases to approximately 31%

FASB & international convergence

• •

Norwalk Agreement in 2002 Memorandum of Understanding between IASB and FASB in 2006

sets specific milestones to reach by 2008

Completion of major joint projects by June 2011

joint projects


US GAAP reconciliation requirement

• • •

foreign private issuers (FPIs)

international companies registered with the SEC

Filing 20-Fs

could file financial statements under US GAAP, local GAAP or IFRS

reconciliation to US GAAP required stopped requiring reconciliation if reporting using IFRS

rule amendments approved by SEC as of Nov. 15, 2007 (effective for years ending after Nov. 15, 2007) Financial Accounting Foundation (FAF) provided an 18 page response on Nov. 7, 2007

US GAAP reconciliation requirement – FAF response

• •

need for “U.S. public companies transition to an improved version of international accounting standards” 4 main points

investors better served by 1 global standard setter

• •

“high quality” standards a two-GAAP system (US GAAP & IFRS) adds complexity

FAF, SEC & others need to create a transition plan

currently developing some joint standards

US GAAP reconciliation requirement – FAF response

4 main points (con’t)

international cooperation needed

funding IASB

independent, sustainable global standard-setting organization


also global interpretive body

local variations of IFRS should be eliminated

eliminate separate review and endorsement procedures

these 2 points are key to US GAAP converging with IFRS

remove the requirement to reconcile only if committed to transition

now passed without commitment

propose transitioning via an improve-and-adopt program

SEC Roadmap

• • • •

November 14, 2008 issued proposed roadmap

90 day comment period

• •

Due Feb. 19, 2009 Extended to April 20, 2009 Use of IFRS by US Issuers 08/s72708.shtml

SEC Roadmap – timeline (old)

• • • •

15 December 2009 (fiscal years ending after)

early adoption by eligible US issuers (limited early use) 15 December 2014 (fiscal years ending after)

mandatory adoption by large accelerated filers 15 December 2015 (fiscal years ending after)

mandatory adoption by accelerated filers 15 December 2016 (fiscal years ending after)

mandatory adoption by non-accelerated filers

SEC Roadmap (con’t)

delayed further consideration for 9 months while SEC focused on financial crisis

several comments in October 2009 concerning renewed focus on IFRS

SEC Roadmap (con’t)

February 24, 2010 SEC open meeting to discuss

2015 at the earliest

with a 2011 vote

not pursuing early adoption option

at this time

The statement directs the SEC staff to develop the plan with the following issues in mind:

• • • • • •

Determining whether IFRS is sufficiently developed and consistent in application for use as the single set of accounting standards in the U.S. reporting system.

Ensuring that accounting standards are set by an independent standard setter and for the benefit of investors.

Investor understanding and education regarding IFRS and how it differs from U.S. GAAP.

Understanding whether U.S. laws or regulations, outside of the securities laws and regulatory reporting, would be affected by a change in accounting standards.

Understanding the impact on companies both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations and litigation contingencies.

Determining whether the people who prepare and audit financial statements are sufficiently prepared, through education and experience, to convert to IFRS.

Proposed Roadmap – milestones (old)

• •

Improvements in accounting standards Accountability and funding of IASC Foundation

Improvement in Interactive Data (XBRL) for IFRS reporting

Education and training

• • • •

Proposal for limited early use of IFRS –

trans ition (old)

For fiscal year ending on or after 15 December 2009 Starts with annual report on Form 10-K (not interim reports, registration statements, or proxy statements) Proposal is for three years of audited financial statements in accordance with IFRS in first filing Requests comment on an alternative: three years of US GAAP financials and two years of IFRS in the year of adoption

Proposal for limited early use of IFRS –

eligibility criteria (old)

• •

If the US issuer is among the 20 largest companies globally within the industry, and the industry is an “IFRS industry,” then the US issuer would be eligible Issuer must make a submission to SEC, providing its analysis

IFRS (including jurisdictional versions) used by companies in the top 20

– –

Timing of analysis SEC staff “letter of no objection” – good for three years

• • • •

some differences - IFRS

principal based versus rule based

more judgment

US GAAP is more prescriptive with rules addressing specific transactions historical cost versus fair value

intangible assets, PPE & investment property may be revalued to fair value

derivatives, biological assets & certain securities are revalued to fair value no extraordinary items on income statement LIFO is prohibited

US Steel Example

IFRS vs GAAP - leases

ABC enters into an arrangement to lease equipment to XYZ over a 7 year term. The lease term does not stipulate title transfer to XYZ at the end of the lease term, nor does it contain a bargain purchase option. The estimated useful life of the equipment is 10 years. The present value of the future minimum lease payments is 89.9% of the fair market value of the equipment at the lease inception. How should ABC and XYZ account for the lease in GAAP financial statements and IFRS financial statements?

A. Financing B. Operating C. It depends

IAS 17 – Leases - Summary

• •

The classification of leases adopted in this Standard is based on the extent to which risks and rewards incidental to ownership of a leased asset lie with the lessor or the lessee. A lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership. A lease is classified as an operating lease if it does not transfer substantially all the risks and rewards incidental to ownership.

some differences – IFRS (con’t)

“high level” convergence in some areas

Theory is the same

But can still have differences in specific application

Sale of Goods IFRS vs. U.S. GAAP

• • • • •

IAS 18 Probable future economic benefits Revenue can be measured reliably Costs can be measured reliably Significant risks and rewards of ownership transferred Do not retain managerial involvement to degree of ownership nor retain effective control

• • • •

SAB 104 Persuasive evidence of an arrangement Collectibility reasonably assured Price fixed or determinable Delivery occurred/services rendered

Revenue Recognition – Multiple Element Deliverables

• • •

IAS 18, para. 13 requires separation of elements

Generally using relative fair value IAS 18, para. 19 requires full recognition of revenue with accrual of costs Little guidance on distinction. Generally, would have same conclusion as U.S. GAAP that arrangement is multiple element arrangement

Unlike U.S. GAAP, no equivalent to EITF 00-21 to determine whether to separate or how to allocate arrangement consideration to units of accounting

Revenue Recognition – Multiple Element Deliverables


IAS 18 consistent with U.S. GAAP general revenue recognition guidance (SAB 104). However, U.S. GAAP has industry or transaction-specific guidance resulting in differences. Additionally, guidance on multiple-element arrangements different. Additional issues to consider:

Right of return

• •

Consignment sales Barter transactions

Agent vs. principal

compare BP and Exxon / Mobil

What needs to be addressed?

• • • • •

education and certification auditing and audit standards litigation environment regulatory and contractual requirements should it be applied to nonpublic and not for-profit entities?

SEC accounting and disclosure requirements

SEC Reporting

10 th Power Point

• •

Securities and Exchange Commission (SEC) Reporting


Annual reports to security holders


Definitive Proxy Statement



– – –

10-Q Forms 3, 4 & 5 20F examples


• •

independent regulatory agency of the government

established to regulate the disclosure of financial information for publicly traded companies

Securities Act of 1933

Securities Exchange Act of 1934 regulating companies that issue public equity or public debt (public securities)

before issuing securities to the public

prospectus required & Form S-1 or S-3

after issuing then require 10-Ks, 10-Qs, etc.


• • • •

filed annually large accelerated filer

public float of at least $700 million

dollar amount of equity securities held by the public accelerated filers

– – –

public float of at least $75 million but not $700 million has been subject to the SEC’s periodic reporting requirements for at least 12 months and has filed one annual report; and is not eligible to use SEC’s small business reporting forms.

non-accelerated filer

10-K (con’t)

when file?

for large accelerated filers

75 days

for years ending before December 15, 2006

60 days

for years ending on or after December 15, 2006

for accelerated filers

75 days

all others 90 days after end of fiscal year

March 31 for calendar yearend

10-K (con’t)

Included Items

Items might be incorporated by referenced to another document (annual report or proxy)

Part I

Item 1. Business.

history & description of business, recent developments, principal products and services, major industry segments

• • •

Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties.

locations and general descriptions of plants and other physical properties

Item 3. Legal Proceedings.

describe pending legal proceedings

Item 4. Submission of Matters to a Vote of Security Holders.

describe matters submitted for voting

10-K (con’t)

Included Items (con’t)

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

identify the market(s) where common stock traded, including number of shares, frequency of trading, and amount of dividends

also in annual report

Item 6. Selected Financial Data.

five-year summary of major financial information (net sales, income (loss), EPS, total assets, cash dividends, long term obligations, etc.)

also in annual report

10-K (con’t)

Included Items (con’t)

Part II (con’t)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation (MD&A).

discussion of liquidity, capital resources, results of operations, and impact of inflation

also in annual report

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

– – –

interest rate, exchange rate, commodity price, etc.

might be part of MD&A also in annual report

10-K (con’t)

Included Items (con’t)

Part II

Item 8. Financial Statements and Supplementary Data.

also in annual report

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Internal Control over Financial Reporting


disclosure controls and procedures


CEO and CFO conclusion

Item 9B. Other Information.

4 th quarter 8-K items

10-K (con’t)

Included Items (con’t)

Part III

Item 10. Directors and Executive Officers of the Registrant

– –

names, ages, and positions of directors and officers also in proxy

Item 11. Executive Compensation.

salaries, stock options, and other benefits for corporate officers and selected others

also in proxy

Item 12. Security Ownership of Certain Beneficial Owners and Management

list of beneficial owners and management owners of corporate securities

also in proxy

• •

10-K (con’t)

Included Items (con’t)

Part III (con’t)

Item 13. Certain Relationships and Related Transactions.

description of transactions with managers and related parties, and for certain other business relationships

also in proxy

Item 14. Principal Accounting Fees and Services.

– – –

audit fees, audit-related fees, tax fees & all other fees disclose audit committee pre-approval policies and procedures also in proxy

Part IV

Item 15. Exhibits, Financial Statements Schedule.

Signatures Certification of Principal Executive Officer & Principal Financial Officer

Annual Report to Shareholders (ARS)

• •

Provided annually to shareholders prior to annual shareholders’ meeting Not required to be filed with SEC

but filed (at least in part) because it includes information required in 10-K

also generally available on a company’s web site

version with photos, graphs, etc.

ARS (con’t)

Usually includes:

– – –

letter from chief executive officer summary financial data results of operations

• •

might be by divisions, product areas, etc.

want to make company look good

not regulated by SEC

financial information (regulated)

• • • • •

Management Discussion & Analysis (MD&A) Report of Independent Auditors Financial Statements Notes to Financial Statements corporate information

ARS (con’t)

Notes to Financial Statements

always include:

Significant Accounting Policies

if applicable (common disclosures):

• • • • • •

investments inventories leases property, plant & equipment (PPE) intangible assets goodwill

ARS (con’t) Notes to Financial Statements

if applicable (common disclosures):

• • • • • • • • • •

long term debt short term borrowings, accrued liabilities & other liabilities income taxes earnings per share stock-based awards (or compensation) equity relate disclosures employee & retirement benefits commitments & contingencies business segments

by product or by geographic quarterly financial data (unaudited)

ARS (con’t)

Notes to Financial Statements

also include if applicable (less common):

• • • • • •

derivative financial instruments impairment or restructuring business combination acquisitions discontinued operations subsequent event

Definitive Proxy Statement (Proxy)

SEC’s form DEF 14A

required under §14(a) of the Securities Exchange Act of 1934

issued to shareholders prior to annual shareholders meeting

might also be required to approve a merger or acquisition (DEFM14A)

includes information related to items to be voted on and other required disclosures

Proxy (con’t)

Board of Directors

vote for members up for election


staggered multiple year terms


all members serve 1 year terms & are reelected every year

brief biography of directors and executive officers

independence determined

committees can include:


audit committee financial experts

• • • •

compensation nominating & governance finance (less likely) executive (less likely)

– –

directors compensation corporate governance disclosures

• • •

Proxy (con’t)

Vote on Compensation Plans


– – –

stock options restricted stock long-term incentive plans (LTIP) Executive Compensation

compensation for the CEO and the next 4 highest paid executives

tables summarizing

salary, bonus, other annual compensation, stock option awards, restricted stock awards, LTIP payoffs & all other compensation

long term incentive awards details also provided

compensation committee report Competition

provide a comparison performance graph

Proxy (con’t)

• • • •


who owns 5% or more

how much is owned by the officers and directors (management) Related Party Transactions Auditors

vote to ratify

fees paid to auditors

audit fees

• • •

audit-related fees tax fees other fees

audit committee approval of services Shareholders’ Proposals


• • • • •

a company example an example of an Annual Report for year ended an example of a 10-K an example of a proxy for the shareholders’ meeting

• •


update rules effective August 23, 2004

item numbers were different prior to issuance of these rules for what events required?

Section 1 - Registrant’s Business and Operations

Item 1.01 Entry into a Material Definitive Agreement

• •

Item 1.02 Termination of a Material Definitive Agreement Item 1.03 Bankruptcy or Receivership

Section 2 – Financial Information

Item 2.01 Completion of Acquisition or Disposition of Assets

• •

Item 2.02 Results of Operations and Financial Condition Item 2.03 Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet of a Registrant

Item 2.04 Triggering Events That Accelerate or Increase a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet

Item 2.05 Cost Associated With Exit or Disposal Activities

See FAS No. 146

Item 2.06 Material Impairments

8-K (con’t)

for what events required? (con’t)

Section 3 – Securities and Trading Markets

• • •

Item 3.01 Notice of Delisting Item 3.02Unregistered Sales of Equity Securities Item 3.03 Material Modification to Rights of Security Holders

Section 4 – Matters Related to Accountants and Financial Statements

Item 4.01 Changes in Registrant’s Certifying Accountant

Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit Report or Completed Interim Review

8-K (con’t)

for what events required? (con’t)

Section 5 – Corporate Governance and Management

• •

Item 5.01 Changes in Control of Registrant Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers

Item 5.03 Amendment to Articles of Incorporation or Bylaws; Changes in Fiscal Year

• •

Item 5.04 Temporary Suspension of Trading Under Registrant’s Employee Benefits Plans Item 5.05 Amendments to the Registrant’s Code of Ethics, or Waiver of a Provision of the Code of Ethics

8-K (con’t)

for what events required? (con’t)

Section 6 – not yet used

Section 7 – Regulation FD

Item 7.01 Regulation FD Disclosure

Fair Disclosure

if information is released to one public group (for example stock analysts) then it has to be released to all of the public

Section 8 – Other Events

Item 8.01 Other Events

Section 9 – Financial Statements and Exhibits

Item 9.01 Financial Statements and Exhibits


file quarterly

reviewed not audited

for large accelerated and accelerated filers

40 days

all others 45 days after end of quarter


Excerpt from Regulation S-X Article 10— Interim Financial Statements Reg. § 210.10-01.

(d) Interim review by independent public accountant. Prior to filing, interim financial statements included in quarterly reports on Form 10-Q must be reviewed by an independent public accountant using professional standards and procedures for conducting such reviews, as established by generally accepted auditing standards, as may be modified or supplemented by the Commission. If, in any filing, the company states that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements.


• • • •

Part I - Financial Information

Item 1 - financial statements (reviewed but unaudited)

including notes to financial statements

– – –

Item 2 - MD&A Item 3 - quantitative & qualitative disclosure about market risk Item 4 - controls & procedures Part II – Other Information

Item 1 – Legal Proceedings

– – – – –

Item 2 - unregistered sales of equity securities and use of proceeds Item 3 – defaults upon senior securities Item 4 - submissions of matters to security holders Item 5 - other events Item 6 – exhibits Signatures CEO & CFO certifications

Forms 3, 4 & 5

ownership of corporate insiders

officers, directors and beneficial owners of more than 10%

Form 3

Initial Statement of Beneficial Ownership

also if no ownership but became officer or director

Form 4

Statement of Changes of Beneficial Ownership

Form 5

Annual Statement of Changes in Beneficial Ownership


an example of an 8-K

an example of a 10-Q for quarter ended

an example of a Form 4


• •

filed by foreign private issuers (FPIs)

issue American Depositary Receipts (ADRs) items included

Item 1 Identify of Directors, Senior Management and Advisors

– – – – – – – – – –

Item 2 Offer Statistics and Expected Timetable Item 3 Key Information Item 4 Information on the Company Item 4A Unresolved Staff Comments Item 5 Operating and Financial Review and Prospects Item 6 Directors, Senior Management and Employees Item 7 Major Shareholders and Related Party Transactions Item 8 Financial Information Item 9 The Offer and Listing Item 10 Additional Information


• • – – – – –

items (continued)

Item 11 Quantitative and Qualitative Disclosures about Market Risk

– – –

Item 12 Description of securities other than equity securities Item 13 Defaults, Dividend Arrearages and Delinquencies Item 14 Material Modifications to the Rights of Security Holders and Use of Proceeds Item 15 Controls and Procedures Item 16A Audit Committee Financial Expert Item 16B Code of Ethics Item 16C Principal Accountant Fees and Services Item 16D Exemptions from the Listing Standards for Audit Committees

Item 16E Purchases of Equity Securities by the Issuer and Affiliated Purchases

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Item 17 & 18 Financial Statements Item 19 Exhibits an example