Deferred Tax Assets & the Disclosure of Tax Planning Strategies

Citigroup, Inc and American International Group, Inc have two very disparate views on the realisability of their deferred tax assets. Important to each company's decision is the assessed availability or lack of tax-planning strategies needed to generate future taxable income. Yet, notwithstanding the importance of such strategies to these firms and others generally, little is known about them. Further, we find that companies are often not forthcoming in their disclosures of what tax-planning strategies are available to them and how they might be used. Investors and analysts could use this information in assessing the likelihood of future taxable income and the need for a valuation allowance against reported deferred tax assets.In this research report we look closely at tax-planning strategies and the details, or lack thereof, provided by firms in describing them. From a sample of 34 firms drawn from recent filings with the SEC, we identify and categorize tax-planning strategies currently being used. We find that investment-related tax-planning strategies, eg., selling appreciated securities or switching tax-exempt securities to taxable ones are the most common strategy in use, comprising 47 per cent of our sample. Planned sales of other assets comprise 16 per cent and transactions related to sale and leaseback transactions and other income-acceleration transactions constitute 13 per cent of the sample. Five percent of the sample each employ a permanent reinvestment of foreign subsidiary earnings or capitalizing R&D costs for tax purposes. The remaining sample firms use a host of other miscellaneous practices, including the purchase of replacement properties, the merging of subsidiaries, or the shifting of entities to lower tax-rate jurisdictions. Given the general lack of disclosures observed, the FASB may wish to consider requiring more disclosure of tax-planning strategies by reporting firms