Accounting for Income Taxes: Managing Uncertain Tax Positions Under ASC 740 and ASC 450 — A Practical Guide (Portfolio 5005)

Bloomberg BNA Tax and Accounting Portfolio 5005, Accounting for Income Taxes: Managing Uncertain Tax Positions Under ASC 740 and ASC 450 – A Practical Guide (Accounting Policy and Practice Series), provides a comprehensive and holistic analysis of how to properly account for and strategically manage a portfolio of uncertain tax positions. To access this Portfolio, visit Bloomberg Tax Financial Accounting Resource Center for a free trial. 

 

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This Portfolio is part of the Accounting Policy and Practice Series, an essential resource including more than 70 accounting Portfolios and the latest news and developments.

Description

Bloomberg BNA Tax and Accounting Portfolio 5005, Accounting for Income Taxes: Managing Uncertain Tax Positions Under ASC 740 and ASC 450 – A Practical Guide (Accounting Policy and Practice Series), provides a comprehensive and holistic analysis of how to properly account for and strategically manage a portfolio of uncertain tax positions. This Portfolio begins with an overview of what constitutes a tax based upon income, the entities covered by the income tax accounting rules, and an overview of the Flaw of Averages – how non-linear items impact forecasts and models of uncertain numbers. The Portfolio continues with a discussion of how to generate an inventory of uncertain income tax positions and addresses the differences between a valuation allowance analysis and an uncertain income tax position analysis. The Portfolio then covers in detail the recognition and measurement steps under ASC 740 and associated matters.

Separate analysis sections are also included for later period changes to recognition and/or measurement (contrasted with ASC 450 Type 1 and Type 2 subsequent events); accrual of interest and penalties; balance sheet classification and disclosure considerations; specific transaction considerations; privilege and work product doctrine and related matters; and federal income tax return disclosure requirements. The Portfolio also includes a discussion of how to build tax models and stress-test them. The Portfolio is supplemented with a series of interactive Monte Carlo Simulation models of uncertain tax positions with which the user may experiment by changing various inputs and assumptions to run thousands of trials and simulate distributions of potential outcomes on a portfolio basis. These models can aid in understanding the rules associated with tax positions and in managing cash in anticipation of future tax payments.

This Portfolio is a practical guide for companies that must identify, assess, and report uncertain tax positions. Detailed technical rules regarding accounting for income taxes can be found in the following portfolios:



• 5000-5th, Accounting for Income Taxes FASB ASC 740 (Accounting Policy & Practice Series)
 • 5001, Accounting for Income Taxes Fundamental Principles and Special Topics (Accounting Policy & Practice Series)
 • 5002-2nd, Accounting for Income Taxes: Uncertain Tax Positions (Accounting Policy & Practice Series)
 • 5003-2nd, Accounting for Income Taxes: Uncertain Tax Positions-Selected Topics (Accounting Policy & Practice Series)
 • 5004, Accounting for Income Taxes: Uncertain Tax Positions in Transfer Pricing (Accounting Policy & Practice Series)


This Portfolio may be cited as Bloomberg BNA Tax and Accounting Portfolio 5005, Salama, Accounting for Income Taxes: Managing Uncertain Tax Positions Under ASC 740 and ASC 450 – A Practical Guide (Accounting Policy & Practice Series).

Authors

Michael H. Salama, Esq.

Michael H. Salama has a B.S. in Mathematics from Vassar College (Ford Foundation Scholar in Mathematics); a J.D. from George Washington University Law School (with honors); and a MBA (Directors Award: Class Rank 2nd, Operations Management Prize, Academic Achievement Award) from Cambridge University. He is the Vice President of Tax & Lead Tax Counsel for The Walt Disney Company (Burbank, CA). Previous positions include: senior manager, Washington National Tax Services Group, PricewaterhouseCoopers LLP; senior trial attorney, Office of Chief Counsel, I.R.S., clerk Anti-Trust Division, Department of Justice, Computers & Finance Section. Mr. Salama is a board member of the not-for-profit ProbabilityMangement.org and has published extensively on a variety of topics including in the state and federal income tax areas.

Table of Contents

Detailed Analysis
I. Scope of ASC 740
A. Applicable to Taxes Based on Income
1. Impact of Tax Classification – Income Tax Expense vs. Operating Expense: Below-the-Line vs. Above-the Line
2. General Definitions Concerning Scope
3. Select Examples
a. Gross Receipts Taxes
b. Tonnage Taxes
c. Credits and Incentives
B. Tax Accounting Rules vs. the Section 901 Regulation Net Income Provisions
II. ASC 450 Standard for Non-Income Tax Matters
A. Discussion of Construct of ASC 450-20
1. Example
2. Introduction to the Flaw of Averages
a. ASC 450-20: A Special Case the Flaw of Extremes
b. On-Line Interactive Example
III. Introduction to the Uncertain Tax Position Rules in ASC 740 (Former FIN 48)
A. Reasons for Special Rules on Uncertain Income Tax Positions
B. Entities Covered by Uncertain Income Tax Position Rules
C. Types of Taxes Covered by Uncertain Income Tax Rules
IV. Generating an Inventory of Uncertain Tax Positions
A. Defining Tax Positions
B. Lack of a Materiality Scoping in the Rules
1. State and International Income Tax Example
2. Practical Considerations
V. Differentiating Between a Valuation Allowance Analysis and an Uncertain Tax Position Analysis
VI. Step One: Recognition
Introductory Material
A. Defining the Unit of Account
1. Two-Pronged Test for Determining Units of Accounts
2. No Netting of Positions
3. No General Reserves Allowed
4. Similar and Distinctive Multiple Transactions
5. Unit of Account Changes
a. Generally
b. Illustration
B. More Likely Than Not Standard
1. History Leading Up to Adoption of the More Likely Than Not Standard
2. Explanation of the More Likely Than Not Standard
3. Consideration of Review by the “Court of Last Resort”
4. Information Sources for Applying the More Likely Than Not Standard
a. Tax Authorities Relevant to the MLTN Analysis
b. Use of Tax Opinions
c. More Likely Than Not vs. Should Level Opinions
5. Application of the Flaw of Averages
6. Consideration of Administrative Practices and Precedents
a. General Considerations
b. Examples
i. State Widely Known Administrative Look-Back Policy
(a) The Flaw of Averages
ii. Cost Capitalization Matters
7. Informal Refund Claims and Amended Returns
8. Valuation Considerations
a. General Considerations
b. Tax Planning Strategies Under the Accounting Literature
9. Timing and Temporary Differences
a. Introduction
b. Case Illustrations
C. IFRS Accounting Differences
VII. Step Two: Measurement
A. Introduction
B. Determining the Cumulative Probability Point
1. Determining the Potential Distribution of Outcomes and Relative Probabilities
2. Illustrations
3. Prior Dealings With the Taxing Authority
4. Experience of Advisors and/or Legal Opinions of Advisors
5. Highly Certain Income Tax Positions
6. “Binary” Tax Positions – The All or Nothing Approach
7. Preparation of a Non-Mandatory Cumulative Probability Table
a. Discussion of Usefulness
b. Potential Relevance Upon Convergence to IFRS?
VIII. Later Period Changes to Recognition and/or Measurement
Introductory Material
A. Audit and Other Administrative Developments
B. Later Guidance, Judicial Developments, and Change in Facts
1. ASC 740 Construct
2. ASC 450 (Former FAS 5) Type 1 and Type 2 Subsequent Events
a. Type 1 Subsequent Events
b. Type 2 Subsequent Events
C. Achieving Effective Settlement
1. Factors to Consider
a. Is the Case Closed?
b. What if the Position Was Never Reviewed?
c. Intention to Pursue Administrative Appeals or Litigate
D. Later Derecognition
E. Change in Recognition and Measurement
1. Change in Estimate vs. Correction of Error
2. Booking the Impact of Changes in Recognition and Measurement
a. Changes to Prior Year Positions
b. Changes to Current Year Positions
F. Assessing Materiality
IX. Interest and Penalties
Introductory Material
A. Interest
1. Introduction
2. Consideration of Applicable Rates and Offset and Netting Concepts
B. Penalties
1. Introduction
2. Substantive Tax Penalty Considerations – U.S. Federal Income Tax Illustration
a. Accuracy – Related Penalties
b. Adequate Disclosure
c. Other Penalty Considerations
C. Policy Election for Classification of Interest and Penalties
X. Balance Sheet Classification and Disclosures
A. Conceptual Introduction to Balance Sheet Classification
1. General Rules
2. SEC General Rules
3. Special Circumstances Involving NOLs or Tax Credit Carryforwards
B. Disclosing Tax Positions in Financial Statements
1. Disclosing Use of Estimates
2. Annual Disclosure Requirements
a. Interest and Penalties
b. 12-Month Look Forward Statement
i. Requirements and Considerations
ii. Examples
c. Accounting Standard Update 2013-11: Presentation of Unrecognized Tax Benefits When an NOL Carry-forward or Tax Credit Carry-forward Exists
d. Tabular Reconciliation of Unrecognized Tax Benefits
i. Requirements and Considerations
ii. Example
XI. Considerations in Business Combination Transactions
Introductory Material
A. Booking Impact of Target's Existing Tax Uncertainties
B. Indemnifications
1. General Awareness
2. Framework, Geography and Disclosure
a. Considerations From the Indemnifying Party's Perspective
b. Considerations From the Recipient's Perspective
XII. Privilege, Work Product Doctrine and Related Considerations
Introductory Material
A. The Attorney-Client Privilege
1. Overview
2. Client's Privilege
3. The Relationship
4. Waiver
B. Work Product Protection
1. The General Standard
2. In Anticipation of Litigation
3. Waiver of Work Product Protection
C. Accountant-Client Privilege
XIII. Tax Return Schedule UTP Disclosure
A. Applicable Regulation
B. Forms and Instructions
1. Positions That Need to Be Reported
a. What Constitutes a Tax Position?
b. Unit of Account Considerations
c. General Two-Pronged Test for Identifying Reportable Positions
d. Who Is Subject to the Filing Requirements
i. General Rules
ii. Affiliated Groups
2. Transition Rule
3. Reporting Current Year and Prior Year Positions
a. What It Means to Record a Reserve
b. Current Year
c. Recording the Reserve in a Later Year
d. Reserve Not Recorded Based on Litigation Expectations
e. Multiple Year Positions
f. Corporate Mergers
4. Information Provided on Schedule UTP
a. Description of Tax Position
b. Information From Related Parties
c. UTP Number
d. Primary Code Sections
e. Timing Codes
f. Year of Tax Position
g. Pass-through Entity EIN
h. Major Tax Positions and Ranking by Relative Size – Gross Exposure Not Included
5. Consistency With Financial Statement Reporting
6. Coordination With Other Reporting Requirements
C. IRS Pronouncements
1. Announcement 2010-75 – Reporting of Uncertain Tax Positions
a. Five-Year Phase In Period
b. Removal of Maximum Tax
c. Removal of Rationale and Nature of Uncertainty Requirement
d. Lack of Administrative Practice Reporting
e. Consistency Between Financial Statement Reserve Decisions and UTP Reporting
f. Additional Assorted Areas of Clarification
g. Policy of Restraint Concerns
h. Response to Scope Limitations on Type of Positions
i. Internal Directive and Related Changes
j. Information Exchange With Foreign Governments
k. Future Guidance and Changes
l. Penalties
m. Coordination With Forms 8275 and 8886
2. Announcement 2010-76: Revised Policy of Restraint and Uncertain Tax Positions
a. Overview of Announcement 2010-76
b. Types of Work Papers
c. Additional Guidance Under Announcement 2010-76
d. Prior Policy of Restraint Guidance
e. Service Policy for Requesting Work Papers
i. General Rules
ii. Tax Accrual Work Papers Concerning Listed Transactions
f. Processes for Requesting Audit and Accrual Work Papers
D. Select IRS and LB&I Guidance Memorandum
1. Guidance for Preparing UTP Concise Descriptions
2. UTP Guidance and Procedures for the Field
3. Intersection With Compliance Assurance Process (CAP) Program
4. Centralized Management of LB&I Returns With UTP Disclosures
XIV. Steps to Building a Basic Tax Model & Non-Monte Carlo Means of Conducting Stress Testing
Introductory Material
A. Introduction
B. Setting Up Models in Microsoft Excel®
C. The Idealized-Model-Type
D. Conclusion

Working Papers

TABLE OF WORKSHEETS
Worksheet 1— Quarterly Income Tax Controversy Documentation
Worksheet 2— Quarterly Income Tax Controversy FIN 48 Checklist
Worksheet 3— Tax Credit Decision Tree
Worksheet 4— IRS Announcement 2010-75
Worksheet 5— IRS Announcement 2010-76
Worksheet 6— Approaches to Resolving Uncertain Income Tax Provisions
Worksheet 7— Visa, Inc., Annual Report (Form 10-K) (Filed Nov. 22, 2013) (Excerpt)
Worksheet 8— ABA White Collar Crime Committee Working Group, Upjohn Warnings: Recommend Practices When Corporate Counsel (July 17, 2009)
Worksheet 9— The New Breed of Gross Receipts Taxes and Their Implications For Economic Policy, Constitutional Concerns, Financial Reporting
Worksheet 10— ASC 450 Interactive Monte Carlo Simulation Model
Worksheet 11— ASC 740 Interactive Monte Carlo Simulation Model (Assuming the More-Likely-Than-Not Recognition Standard Is Not Met)
Worksheet 12— ASC 740 Interactive Monte Carlo Simulation Model (Assuming the More-Likely-Than-Not Recognition Standards Is Met)
Worksheet 13— ASC 740 Interactive Monte Carlo Simulation Model With Decision Tree (Assuming the More-Likely-Than-Not Recognition Standard Is Met)