Accounting Today - November 15, 2010

taxstrategy

By GeoRGe G. JoneS and MaRk a. LUScoMBe Revised 2010 Schedule UTP

The burden
of the new
requirements
has been
significantly
lessened.
“
”

In June we discussed the proposed Sched ule U TP and instructions for reporting un certain tax positions. The Internal Revenue Service received a number of comments on those proposals and, on Sept. 24, 2010, issued a final Schedule UTP and related materials for the 2010 year in Announcements 2010 75 and 201076. The final version makes a number of significant changes to the require ments in response to the input received.

stead, all positions are required to be ranked based on the federal income tax reserve re corded for the position and to designate those tax positions, if any, for which the reserve exceeds 10 percent of the aggregate amount of the reserves for all of the tax positions re ported on the schedule. This change should significantly lessen the burden of preparing the new schedule.

WHO MUST FILE?

The original proposal required disclosure with respect to the 2010 tax year from corpo rations that have uncertain tax positions, own assets exceeding $10 million, issue audited financial statements, and are required to file a Form 1120, 1120L, 1120PC or 1120F. Many commentators expressed the view that the $10 million level was too low or should be phased in.

Announcement 201075 changes the asset test. Now the $10 million level is approached over several years. For 2010 tax years, only corporations with total assets equal to or ex ceeding $100 million must file Schedule UTP for the 2010 tax year.

The threshold is reduced to $50 million for the 2012 tax year and to $10 million starting with the 2014 tax year. The IRS is continuing to study whether to extend the reporting re quirement to passthrough and taxexempt entities. This change in any event will give smaller corporations considerably more time to gear up to comply with the new re quirements.

CONCISE DESCRIPTION

In its proposed form, the schedule required a concise description for each position that included a brief statement of the type of tax at issue, the facts involved, the position taken on the return, the rationale for that position, and alternative positions that could be taken. Many commentators said that there was a clear disconnect between the IRS stating that it wanted only a factbased response and a request for the rationale supporting the posi tion. Even the IRS’s own examples of concise descriptions did not seem to meet the stated requirements. Some suggested that taxpayers should hire outside counsel to draft concise descriptions that would read like legal briefs prepared for litigation.

In its final form, the requirement to include the rationale behind the position has been dropped. Now the required “concise state ment” is to include sufficient facts to assess the tax position, but it should not include the taxpayer’s assessment of the hazards of the position or the analysis supporting the position. This change should significantly simplify the preparation of the concise de scription and eliminate discussions about the need to hire outside counsel to draft the concise descriptions.

expectation to litigate would benefit the IRS more than it would burden the taxpayers to provide it.

The IRS has now dropped the requirement to include positions for which there is no re serve due to administrative practice. The final schedule retains, however, the requirement to include positions where a reserve is not reported due to an expectation to litigate the issue. It will still require more effort to deter mine what needs to be reported on Schedule UTP than simply looking at the tax reserves reported on the audited financial statements, but dropping the administrative practice re quirement constitutes a significant reduction of the burdens of determining what should be included.

DUPLICATIVE REPORTING The draft Schedule U TP provided that uncer tain tax positions reported on Schedule U TP need not also be disclosed on Form 8275 or Form 8275R. This is retained in the final ver sion. The service has also stated that it will treat a complete and accurate disclosure on Schedule UTP as satisfying the disclosure re quirements of Code Section 6662(i). The IRS remains open to looking at additional ways to reduce or eliminate duplicative reporting requirements.

THE MTA

The draft schedule required the calculation and reporting of the maximum tax adjust ment (MTA) associated with an uncertain tax position. Exceptions were provided for valua tion and transfer pricing positions, which re quired only a ranking based on the amount of the reserve adjustment. Many commentators stated that calculating the MTA would be a significant burden on taxpayers without pro viding much useful information to the IRS.

The final schedule drops the requirement to report the maximum tax adjustment. In

ADMINISTRATIVE PRACTICE The proposed schedule required the dis closure of uncertain tax positions for which the taxpayer has recorded a reserve in an audited financial statement and also where no reserve is reported, either due to an as serted IRS administrative practice or because of an expectation to litigate the issue. Many commentators questioned whether the ben efit of including administrative practice and

ANNOUNCEMENT 2010-76

Many commentators expressed concern about the effect of the Schedule UTP disclo sure requirements on taxpayer privileges. An nouncement 201076 attempts to respond to this by stating that the IRS is expanding its policy of restraint in connection with Sched ule UTP, and that it will forgo seeking par ticular documents that relate to uncertain tax positions and the workpapers that document the completion of Schedule UTP.

The IRS has also issued internal guidance to its examination and research personnel outlining the various uses for the information reported on Schedule U TP.

George G. Jones, JD, LL.M, is managing editor, and Mark A. Luscombe, JD, LL.M, CPA, is principal analyst, at CCH Tax and Accounting, a Wolters Kluwer business.