TaxConnections


 
 

A View of The IRS Through Corporate Insider Eyes – Corporate Tax Audit Survival – Part 6



Reference Cliff Jernigan's eBook Corporate Tax Audit SurvivalThis is Part [6] of a series of a Chapter in the eBook “Corporate Tax Audit Survival – A View of The IRS Through Corporate Insider Eyes” by Cliff Jernigan.

You can download the entire eBook here.

Sample From Chapter 4: “I am From Mars”

Because of my experiences in the private sector, I sometimes had difficulty fitting into the IRS fabric.

One example of this involved the high-profile debate about whether stock options should be expensed for financial statement purposes. This issue was extraordinarily intense during the 2003-2004 time period, with the Financial Accounting Standards Board (FASB) arguing that stock options should be reflected as an expense on the financial statements while industry argued that they should be reflected as an item on the balance sheet. Most employees in the high-technology sector agreed that they should be reflected as an item on the balance sheet, and I strongly supported the high-technology position.

This topic has no bearing on the filing of a corporate tax return. For tax return purposes, stock option exercises usually are treated as an income tax expense.

My colleagues in the IRS often would argue about this issue over lunch or at other meetings. Almost universally they would take the position that stock options should be treated as an expense for financial statement purposes. I would counter that, in all of my experiences in the high-technology area, it was better not to make this change. They would smile at me (some would glare) as if I did not know what I was talking about. It would have been a futile exercise to try to persuade them otherwise. I would have been like the lone Republican in the House of Representatives trying to persuade the 434 Democrats in that body that they were wrong on an issue. Conversations like these made it clear to me that I might as well be from Mars.

Another time, I was engaged in a discussion about depreciation of telecommunication equipment. It seemed apparent to me that the equipment at issue was similar to high-technology equipment that, by statute, has a depreciation period of five years. At this point, telecommunication equipment was not clearly covered by statute, and the IRS contention was that the equipment had a ten-year life.

I argued that depreciation is merely a timing issue, meaning that it is just a cash flow issue for the government and does not result in lost taxes. On the other hand, the benefit of faster cash flow through faster depreciation means a lot to capital-intensive telecommunications companies.

I also felt that a ten-year life was not competitive relative to depreciation programs for telecommunications companies in other countries. My IRS colleagues had the power to help U.S. international competitiveness if they would agree to five-year depreciation.

They paid lip-service to me but finally chose to apply the ten-year life. Clearly they had decided that I was from some other planet.

While I may indeed have come from Mars, I believe that some of my thinking, and my deportment, may have had an influence on the IRS executive team. Toward the end of my term, I found that they listened to me more often. The meetings seemed to be shorter and more to the point. And I noticed that they sought my advice more frequently.

In accordance with Circular 230 Disclosure

Avatar

Cliff Jernigan is a long-time member of the California bar, with a law degree from Hastings College of the University of California and an advanced tax law degree from New York University Law School. He has been associated with a New York City international law firm and has held corporate tax counsel positions in the areas of banking, chemicals, food and real estate, and semiconductors, where he was Director of Tax and Global Public Policy for AMD. His last position was as a US Treasury Department appointee in the senior management of the IRS in the Large and Mid-Size Business Division, where he advised management on the major issues of the telecommunications, high-technology and media industries.

Jernigan has been a leader in promoting positive relationships between industry and the IRS. He was a founder and first president of the Santa Clara Valley Chapter of the Tax Executives Institute, the founder/director of the Silicon Valley Tax Directors Group, the Chair of the Tax Committee of the American Electronics Association, and the Chair of the Semiconductor Industry Association.

For many years he was a part-time business school adjunct assistant professor at Golden Gate University and an instructor in the Graduate Tax Program at San Jose State University.

Jernigan has written three books. Two of the books dealt with the topic of international trade issues for the high-technology industry. The last book describes his experiences during his appointment to the IRS.

Meet Tax Experts At TaxConnections...