ABA Members Seek Withdrawal of Proposals to Require Reporting of Uncertain Tax Positions

On behalf of the American Bar Association (ABA), I write to express our concerns regarding the proposals contained in IRS Announcement 2010-9, 2010-7 I.R.B. 408, Announcement 2010-17, 2010-13 I.R.B. 515, and Announcement 2010-30, 2010-19 I.R.B. 668 (collectively, the Announcements). The Announcements would require disclosure of uncertain tax positions through the required filing of Schedule UTP by certain business taxpayers.

The ABA is the largest voluntary professional membership organization and the leading organization of legal professionals in the United States. The ABA's membership of nearly 400,000 spans all 50 states and other jurisdictions and includes attorneys engaged in legal matters in various settings. The ABA is dedicated to the rule of law, the efficient administration of justice and the preservation of fundamental legal rights. These comments, representing the views of the ABA, are in addition to the May 28, 2010 comments that are being submitted by the ABA Section of Taxation later today, which reflect the views of the Section only.

We are concerned that the disclosure proposals set forth in the Announcements, by requiring identification of specific uncertain tax positions and elaboration of the taxpayer's views and assessments of those positions, will undermine the protections afforded by the attorney-client privilege and attorney work product doctrine, as well as the related 26 U.S.C. section 7525 tax practitioner's privilege. (The comments in this letter, however, are limited to the protections afforded to advice and work product of attorneys.) These privileges and protections are of fundamental importance to our legal system and are designed to ensure access to effective legal advice and representation, which in turn promotes legal compliance. As Justice Jackson stated in his concurrence in Hickman v. Taylor, 329 U.S. 495, 510 (1947):

For all these reasons, the ABA urges the Service to withdraw the disclosure proposals in the Announcements and instead rely on existing methods of obtaining information.

We note the Service's reliance in the Announcements on United States v. Arthur Young, 465 U.S. 805 (1984), as a justification for requesting information on uncertain tax positions. We believe that reliance is misplaced. Arthur Young in fact stands for the proposition that tax information that might be useful to the Service in administering the tax laws is subject to these important privileges and protections. Arthur Young at p. 816 (taxpayer information "is subject to the traditional privileges and limitations"). The decision in Arthur Young in favor of the Service goes to the question whether tax information prepared by and in the possession of the taxpayer's auditors was subject to the protections. Because of the important policy considerations surrounding effective tax administration, the Court declined to judicially create an auditor privilege, but its decision in no way impinged upon the privilege protection available to the taxpayer.

The Announcements also cite FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109, now codified as FASB ASC 740-10 (FIN 48), as justification for requesting the information on uncertain tax positions on the basis that taxpayers already are subject to a requirement to disclose their uncertain tax positions. This reliance on FIN 48 is also misplaced. FIN 48 requires taxpayers to disclose in their financial statements prepared in accordance with U.S. generally accepted accounting principles their aggregate uncertain tax positions and to include an annual tabular reconciliation, again in the aggregate, of changes in that accounting item. This aggregation principle is made clear in the illustrative disclosure in paragraph A33 of FIN 48 and in FASB's explanation in paragraph B64 that the requirement is not prejudicial because "requiring disclosures at the aggregate level does not reveal information about individual tax positions." This aggregated disclosure is far different than the detailed disclosure the Service proposes to require, which clearly would be prejudicial to the taxpayer's position. Moreover, apart from the issue of aggregation, the disclosures required by the Announcements would exceed those called for under FIN 48.

In conclusion, for the reasons stated above, we urge the Service to withdraw the disclosure proposals set forth in the Announcements because, among other reasons, they are inimical to the fundamental protections afforded by the attorney-client privilege, the 26 U.S.C. section 7525 tax practitioner's privilege, and the attorney work product doctrine.

Thank you for considering the views of the ABA on these important issues. If you have any questions regarding the ABA's position, please contact me at (202) 662-1765 or Stanley Keller, Chair of the ABA Task Force on Attorney-Client Privilege's Audit Subcommittee, at (617) 239-0217.