Question

Describe FIN 48 (now ASC 740-10) and what is meant by “uncertain tax positions.”

What were the FASB’s objectives in issuing this interpretation?

Download the fiscal year 2009 10-K’s for the following five companies from the SEC website:

Temple-Inland Inc.

Weyerhauser Company

Graphic Packaging Holding Company

Boise Inc.

Rock-Tenn Company

Using these financial statements, address the following questions for each company:

How much did each company request in this tax refund from the Internal Revenue Service in 2009?

How much did each company receive in the tax refund? In other words, how much had each company received as of 2009 fiscal year end, how much was each company’s receivable related to the tax credit, and what was the total? How much of the refund did each company include in pre-tax book income?

Did the company record an unrecognized tax benefit related to the tax refund? If the company did not discuss it, you may assume that the answer is no.

If the company did record an unrecognized tax benefit, what percentage of the maximum potential benefit did they reserve?

What were the net operating loss balances at each company?

What were the valuation allowances on deferred tax assets at each company? Did the valuation allowances pertain to the net operating loss carryforwards?

Did the company have any other large and noteworthy differences between book income and taxable income?

Answer 1

Describe FIN 48 (now ASC 740-10)

Many taxpayers are required by FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48) 1 to identify and quantify uncertain tax positions taken in the return for financial accounting purposes. That is, taxpayers must identify and quantify for financial accounting purposes a tax position relating to a specific federal tax return for which a taxpayer is required to reserve an amount under FIN 48. A taxpayer’s tax reserves and reporting regarding its uncertain tax positions may be reflected in its own books and records or financial statements, or in the books and records or financial statements of a related domestic or foreign entity. Taxpayers not subject to FIN 48 may be subject to other requirements regarding accounting for uncertain tax positions. For example, taxpayers may be subject to other generally accepted accounting standards, including International Financial Reporting Standards (IFRS) and country-specific generally accepted accounting standards. The information developed in the course of complying with FIN 48 or other accounting standards is highly relevant to understanding the taxpayer’s tax positions and assessing how those positions affect the taxpayer’s tax liability. United States v. Arthur Young, 465 U.S. at 815. That information also would aid the Service in focusing its examination resources on returns that contain specific uncertain tax positions that are of particular interest or of sufficient magnitude to warrant Service inquiry, as well as allowing examination teams to identify all of the issues underlying the tax returns more quickly and efficiently.

Uncertain Tax Position

An UTP is defined as a position in a previously filed tax return or a position expected to be taken in a future tax return by the company. Examples of tax positions include but are not limited to:

• A decision to not file a tax return (i.e. state tax return)
• An allocation or a shift in income between jurisdictions (i.e. transfer pricing)
• The characterization of income or a decision to exclude reporting taxable income in a tax return (i.e. deferred revenue)
• A decision to classify a transaction, entity or other position in a tax return as tax exempt

When it comes to UTPs a company has taken or expects to take on its tax returns, FIN 48 provides guidance on how a company should recognize, measure, present and disclose this in its financial statements. It also includes positions in which the company did not file a tax return.

The company must now determine how to move forward. First it must identify any tax positions taken or expected to be taken on its tax returns. Once the company identifies the tax position, it must determine the level at which the tax position will be evaluated (i.e. unit of account). The evaluation can be either qualitative or quantitative. The company should take into account the support, documentation and law of the tax position, as well as the position the taxing authority may take upon audit.

Under FIN 48, a company may not take a tax benefit (i.e. an expense) on its financial statements if it does not believe the position would, more likely than not, be allowed by a taxing authority. "More likely than not" is defined as greater than 50 percent and, in evaluating the "more likely than not" position, the company must assume that the taxing authority is aware of all relevant facts. If the company cannot satisfy this threshold, it is not allowed to take the benefit of the position until is recognized. Therefore, a FIN 48 liability should be established.

There is one known exception to the above "relevant facts" issue - reliance on past administrative practices. For example, if a company typically writes off all fixed assets purchased under $500, and the taxing authority has audited and accepted the company's position, no FIN 48 liability is required, even though there is no specific guidance that allows a company to expense these fixed assets.

If the recognition threshold is met, the tax benefit recognized is measured at the largest amount of the tax benefit that is "more likely than not" to be realized. For example, say the company takes a research and development tax credit of $100,000 on its 2009 tax return. The company then determines that the probability it would receive the full $100,000 credit is 35 percent. The company then accesses the probability that it would receive $75,000 of the credit at 55 percent. Therefore the company can only recognize the tax benefit of the research & development of $75,000, and is required to set up a FIN 48 liability for the remaining $25,000. The company cannot recognize the tax benefit of the $25,000 until it is recognized, with the recognition event being either the lapsing of the statute of limitations or the acceptance under audit of the position by the taxing authority.

As a result of FIN 48, the Treasury has jumped on board and proposed regulations that would require the company to disclose these uncertain tax positions on its 2010 and forward tax returns. Stay tuned, as this is a hot topic with much opposition.

What were the FASB’s objectives in issuing this interpretation?

FASB Interpretation No. 48 (FIN 48) is an interpretationof FASB statement No. 109, Accounting for Income taxes generallyapplicable to years beginning after December 15, 2006. FIN 48 addresses the accounting for uncertainity in income taxes, including state and local income taxes, recognised in an enterprise's financial statements in accordance with FAS 109. Compliance with state and local income tax laws for enterprises with complex legal structures and operations in numerous jurisdictions can be an extraordinary undertaking. Therefore, it should come as no surprise that complex issues will arise when accounting for uncertainstate and local income tax positions in accordance with FIN 48 and FAS 109. The goal of FIN 48 is more consistent reporting of tax positions and it looks to achive this goal by setting forth seperate recognition and measurement standards. Throughthe use of an example, we will highlight a few of the complex issues an enterprise may face when applying FIN 48 to its state and local income tax positions.