Walking the tax tightrope

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Virginia’s new statewide toll violation-enforcement system now is working. The system will allow Smart Tag/E-ZPass users through the tolls faster, and cameras now take photographs of violators’ license plates at several locations. Violators must pay the toll plus a $25 administrative fee.

Wright Express and Networkcar announced a strategic relationship to offer remote vehicle maintenance diagnostics and GPS vehicle location information to their common customers. Networkcar plans to offer a Wright Express co-branded fuel card to its commercial fleet customers, and Wright Express will market hardware, remote vehicle diagnostic services and vehicle location services powered by Networkcar.

Comdata and expensewatch.com formed a technology alliance intended to provide small and mid-sized companies comprehensive tools for end-to-end operating expense management. The partnership, aimed for a mid-2007 launch, tar-gets companies looking to improve expense control, reduce cost and achieve margin improvements.

Fleet One, a provider of fuel cards and fleet-related payment solutions, announced an agreement with VehiCare to accept Fleet One Local fuel cards for fleet maintenance services via VehiCare’s mobile service units.

A commonly accepted accounting practice is that accountants should interpret tax laws in their clients’ favor. But the last thing you’d like to do is advertise your risky tax positions. Essentially, that’s exactly what is called for in some recent interpretations by the Financial Accounting Standards Board in Financial Interpretation Number 48.

It can be extremely difficult for an accountant to find that perfect “sweet spot” in the tax law, where he or she is making certain that a company isn’t missing deductions or overpaying taxes – and not stretching the law too far at the same time. In an effort to close the gap between precise and shaky tax law interpretation, in July 2006 the FASB issued FIN 48.

Any firm that receives an audit, review or full-disclosure compilation in accordance with Generally Accepted Accounting Principles (GAAP) likely will deal with this challenge this spring and during the year. While the interpretation does not apply to the 2006 tax year, controllers and CFOs should start following the guidance now so that as 2007 progresses, they are not caught in a time trap for years ending Dec. 31, 2007 and later.

“[FIN 48] offers new guidelines on how to account for uncertainty in taxes,” says Ray Dyer Jr., managing member for tax with accounting firm Tidwell DeWitt LLC (of which I am a partner). “It was brought about to help account for the unknown taxes that a company may be liable for.”

FIN 48 was created to help interpret the cumbersome language of FAS 109. “The rules of FAS 109 and FIN 48 may be somewhat onerous,” Dyer explains, “but that’s no excuse for ignorance.”

The balancing act
Bobby Cox, the longtime manager of the Atlanta Braves, once said that a third-base coach who never took risks – and never had the occasional runner thrown out at home plate – wasn’t worth keeping. The same is true in the business world; any accountant unwilling to take an occasional risky tax position probably is costing the company money. Notice that I said “risky” and not “irresponsible”; there is a definite difference.

But any time you take a risky tax position, beware of a landmine of worries. Readers of financial statements – such as bankers, lenders and investors – deserve to know to what degree you are taking risks. Consequently, the accounting rule makers think that a certain amount of voluntary disclosure regarding these tax risks should be made, in order for the user of financial statements to know about the potential contingent liability. And if it does come about that a position isn’t above board, you certainly don’t want to look like you were trying to hide it. Honest mistakes are much easier to forgive than deliberate omissions.

Dyer cites three examples of risky tax positions that should be made as public as possible.

* Mergers and acquisitions: “It’s highly likely that the declared assets in a merger or acquisition would be challenged by the IRS,” Dyer says. Since many transportation companies are acquiring and merging, the tax positions as to how the price is allocated can carry a wide range of tax benefits if done aggressively. The IRS will be mightily interested in your price allocation, and how fast you write off acquired assets.

* Trade-in of equipment: “If you do this right,” Dyer says, “this can be a substantial tax write-off, but if you do it wrong, it can be a lethal liability.” Poorly documented or improperly handled like-kind exchanges, including trades, can subject a company to undue tax liability.

*State income tax filing: “Knowing the various state income tax laws, and where to file, is crucial for the trucking company operator,” Dyer says. “This alone can probably make or break a company.” In many multistate industries, the question of domicile or nexus can mean lots of state tax liability.

The learning curve
“FIN 48 offers the first real guidance on FAS 109,” Dyer says. “Anybody whose year started in December 2006 should have already begun working on understanding and addressing this. Tax uncertainties from three or four years prior can come back to haunt you, and it’s a smart move to be prepared for the unexpected. Pretty general advice, I know, but getting stuck in an audit and trying to explain questionable tax accounting practices is a nightmare.”

I would compare tax uncertainties and risky tax positions to being Al Capone’s bookkeeper. It’s dangerous, creative and probably rewarding, all at the same time. For all the clarification that FIN 48 offers, however, the interpretation only deals with income tax issues, and not excise or fuel tax issues. For now, we’ll have to wait until those areas can be addressed through more guidelines.

FIN 48 and FAS 109 are quite complex, but a qualified tax preparer or tax consultant should be able to walk you through what you need to know. If you or your tax department is in the dark on this issue, don’t wait until Uncle Sam or your shareholders are demanding to know why you are having trouble reconciling the tax positions you’ve taken with their results.

Practice Guide on Accounting for Uncertain Tax Positions Under FIN 48, by the American Institute of CPAs. website

“FAS 109: A Primer for Non-Accountants,” by Aaron Schall, as published by The Tax Executive, September 2000. website

“New FASB Accounting Requirement Addressed Uncertainty in Income Taxes,” by Ray Dyer Jr., as published by Tidwell DeWitt. website

Summary of Statement No. 109, as published by The Financial Accounting Standards Board. website

No recession on the way, says ATA economist
While some current economic indicators don’t paint a rosy picture for trucking in the next few months, it’s not as bad as the previous market turndown, according to Bob Costello, chief economist at the American Trucking Associations.

“Is trucking predicting another recession? I don’t think so,” Costello said at the NATSO annual meeting in San Antonio.

While for-hire freight tonnage is down from record highs in 2005, Costello said, year-over-year freight tonnage is not down as much as it was during the most recent recession, which ended in 2003. “We just don’t see the magnitude of factors we had in the last recession,” Costello said. “It just doesn’t show we’re heading into a new recession.”

Tonnage numbers are down in part because of a declining housing market, Costello said. The strong tonnage figures of 2005 were thanks in part to the goods shipped to the Gulf Coast after Hurricane Katrina, he said.
– Randy Grider