Uncertain Tax Position

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

The FIN 48 (now ASC 740-10) is an accounting requirement for all businesses in the United States to disclose and analyze their uncertain tax positions (UTP). This regulation applies to all businesses using the US GAAP (Generally Accepted Accounting Principles) (Pricewaterhousecoopers [PWC] 14-17). Under this regulation, a business only recognizes an income tax benefit if it highly likely it will materialize (more than 50% likelihood).
An uncertain tax position (UTP) refers to a tax position that is expected to be taken in a future tax return by the company or the tax position of a previously filed return (Financial Accounting Standards Board 18-21). Examples of UTP include decisions to exclude some taxable income in a tax return or a decision to shift income between jurisdictions.

  1. What were the FASB objectives when issuing the FIN 48 interpretation?
  • To clarify the accounting for uncertainty in income taxes recognized in a firms, books of accounts
  • To prescribe the recognition threshold and measurement attribute in for the financials and tax returns
  • Provide guidance for; tax derecognition and classification, tax on interest and penalties, tax accounting in interim periods, tax disclosure, and tax accounting in transitions (Financial Accounting Standards Board [FASB]b).
  • To recognize the amount of taxes payable or refundable in the current year.
  • To recognize the deferred tax liabilities and assets for future taxation of events that are in an entity’s financial statements or tax returns (Pricewaterhousecoopers [PWC] 39).

Temple-Inland Inc.

  1. $562M
  2. Received Tax refund. $0M

Total receivable $281M
Refund included in pre-tax book income $492 M ($281+$160+$51)

  1. Yes it did
  2. 94/11% ($96/$108)
  3. $332M
  4. Valuation allowances on deferred tax assets $23M

The valuation allowances pertained to the net operating loss carryforwards

  1. No, it was not a noteworthy difference

The company must believe that the refund and unrecognized tax benefit does not meet the threshold for recognizing current and deferred taxes. They must determine whether or not the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position (Financial Accounting Standards Board [FASB]b).

  1. All positions will be examined, and tax authorities will have full knowledge of all relevant information, whether this position can be sustained is based solely on the technical merits of the position (Financial Accounting Standards Board [FASB] b).

IRS and the courts will determine the possible outcome of this decision and refund will be accepted if the uncertainty has a more than 50% chance of crystalizing (Financial Accounting Standards Board).

Similarities

  • They had been incorporated/registered in the same state.
  • They have interest and penalties related to uncertain tax positions as income tax expense in their Consolidated Statement of Income (Loss)
  • The unrecognized tax benefit was net of federal benefit for state taxes (Financial Accounting Standards Board [FASB] b).

Differences

  • The operating losses carried forward expired in different years.

Similarities

  • Had foreign subsidiaries with undistributed earnings.
  • They have open tax years

Differences

  • Alternative minimum credits are carried forward indefinitely
  • Had untaxable tax credits
  • Management’s level of estimation and risk appetite.
  • The company’s financial targets since tax refund computations affect the income statements.

Weyerhaeuser Company

  1. $274M
  2. Received the tax refund $191M

Receivable related to the tax credit. $ 55
Refund included in pre-tax book income? $18M

  1. No It did not
  2. If the company did not discuss it, you may assume that the answer is no. No It did not

Tax benefits N/A

  1. $842 M
  2. Valuation allowance $103 M

The valuation allowances did not pertain to the net operating loss carryforwards

  1. No it didn’t

The company must believe that the refund and unrecognized tax benefit does not meet the threshold for recognizing current and deferred taxes. They must determine whether or not the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position (Financial Accounting Standards Board [FASB] b).

All positions will be examined, and tax authorities will have full knowledge of all relevant information, whether this position can be sustained is based solely on the technical merits of the position

IRS and the courts will determine the possible outcome of this decision and refund will be accepted if the uncertainty has a more than 50% chance of crystalizing.

Similarities

  • They had been incorporated/registered in the same state.
  • They have interest and penalties related to uncertain tax positions as income tax expense in their Consolidated Statement of Income (Loss)
  • The unrecognized tax benefit was net of federal benefit for state taxes (Financial Accounting Standards Board [FASB] b).

Differences

  • The operating losses carried forward expired in different years.

Similarities

  • Had foreign subsidiaries with undistributed earnings.
  • They have open tax years

Differences

  • Alternative minimum credits are carried forward indefinitely
  • Had untaxable tax credits
  • Management’s level of estimation and risk appetite.
  • The company’s financial targets since tax refund computations affect the income statements.

Graphic Packaging Holding Company
Using the company’s financial statements, address the following questions:

  1. $217.5M
  2. Received tax refund $ 537.5 M

Received tax refund related to the tax credit $12.7M
Refund included in pre-tax book income? $103M ($90.3+$12.7)

  1. Yes it did

Net Deferred income tax assets was $34.7 million at 31st December 2009 (Will most likely not be paid) (page 66).
Total unrecognized tax benefit as at 31st December, 2009 was $1.5 Million.
Percentage of maximum potential benefits is 4.323%.  (1.5/34.7*100%= 4.323%)

As at 31st December, 2009, the net operating loss were $537.5 Million. (pp. 66)

The valuation allowance were $16.4 Million for Current Deferred income tax and $239.1 million for noncurrent deferred income tax assets and liabilities, which appertained to the net operating loss carryforwards. (pp. 66)

Yes. There were other significant differences in book income and taxable income.

  1. The company must believe that the refund and unrecognized tax benefit does not meet the threshold for recognizing current and deferred taxes. They must determine whether or not the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position (Financial Accounting Standards Board [FASB] b).

All positions will be examined, and tax authorities will have full knowledge of all relevant information, whether this position can be sustained is based solely on the technical merits of the position

IRS and the courts will determine the possible outcome of this decision and refund will be accepted if the uncertainty has a more than 50% chance of crystalizing.

Similarities

  • They had been incorporated/registered in the same state.
  • They have interest and penalties related to uncertain tax positions as income tax expense in their Consolidated Statement of Income (Loss)
  • The unrecognized tax benefit was net of federal benefit for state taxes (Financial Accounting Standards Board [FASB] b).

Differences

  • The operating losses carried forward expired in different years.

Similarities

  • Had foreign subsidiaries with undistributed earnings.
  • They have open tax years

Differences

  • Alternative minimum credits are carried forward indefinitely
  • Had untaxable tax credits
  • Management’s level of estimation and risk appetite.
  • The company’s financial targets since tax refund computations affect the income statements.

Boise Inc.

  1. $ 136,243M
  2. Received tax refund. $43,492M

Receivable refund related to the tax credit $58,564M
Refund included in pre-tax book income? $ 4,250M ($1,906+$2,344)

  1. Yes it did
  2. 41% ($83.3/$87.83)
  3. $94 M
  4. Valuation allowances on deferred tax assets $44 M

The valuation allowances did not pertain to the net operating loss carryforwards

  1. It was not noteworthy.
    1. The company must believe that the refund and unrecognized tax benefit does not meet the threshold for recognizing current and deferred taxes. They must determine whether or not the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position (Financial Accounting Standards Board [FASB] b).

All positions will be examined, and tax authorities will have full knowledge of all relevant information, whether this position can be sustained is based solely on the technical merits of the position (Financial Accounting Standards Board [FASB] b).

IRS and the courts will determine the possible outcome of this decision and refund will be accepted if the uncertainty has a more than 50% chance of crystalizing (Financial Accounting Standards Board).
 

Similarities

  • They had been incorporated/registered in the same state.
  • They have interest and penalties related to uncertain tax positions as income tax expense in their Consolidated Statement of Income (Loss)
  • The unrecognized tax benefit was net of federal benefit for state taxes (Financial Accounting Standards Board [FASB] a).

Differences

  • The operating losses carried forward expired in different years.

Similarities

  • Had foreign subsidiaries with undistributed earnings.
  • They have open tax years

Differences

  • Alternative minimum credits are carried forward indefinitely
  • Had untaxable tax credits
  • Management’s level of estimation and risk appetite.
  • The company’s financial targets since tax refund computations affect the income statements.

Rock-Tenn Company

  1. $9.2 M
  2. Tax Refund $ 104.7 M

Receivable related to the tax credit $60.8M ($1.7+$3.7+$55.4)
Refunded includes in pre-tax book income? $5.4M

  1. Yes it did
  2. 7% ($9.2/104.7)
  3. $191 M
  4. Valuation allowances on deferred tax $2.4M for 2009.

The valuation allowances pertained to the net operating loss carryforwards

  1. Yes it had a noteworthy difference
  2. Given the facts you just compiled, address the following questions for each company:

The company must believe that the refund and unrecognized tax benefit does not meet the threshold for recognizing current and deferred taxes. They must determine whether or not the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position (Financial Accounting Standards Board [FASB] a).

All positions will be examined, and tax authorities will have full knowledge of all relevant information, whether this position can be sustained is based solely on the technical merits of the position

IRS and the courts will determine the possible outcome of this decision and refund will be accepted if the uncertainty has a more than 50% chance of crystalizing.

Similarities

  • They had been incorporated/registered in the same state.
  • They have interest and penalties related to uncertain tax positions as income tax expense in their Consolidated Statement of Income (Loss)
  • The unrecognized tax benefit was net of federal benefit for state taxes (Financial Accounting Standards Board [FASB] a).

Differences

  • The operating losses carried forward expired in different years.

Similarities

  • Had foreign subsidiaries with undistributed earnings.
  • They have open tax years (Financial Accounting Standards Board).

Differences

  • Alternative minimum credits are carried forward indefinitely
  • Had untaxable tax credits
  • Management’s level of estimation and risk appetite.
  • The company’s financial targets since tax refund computations affect the income statements.

Works Cited
Deloitte. ASC 740-Income Taxes. 2017. Available from https://www.iasplus.com/en-us/standards/fasb/expenses/asc740. Accessed 17 February 2018.
Financial Accounting Standards Board [FASB] a. “Income Taxes (Topic 740). Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosures Amendments for Nonpublic Entities.” Financial Accounting Series: Accounting Standards Update, No. 2009-06, September 2009, https://asc.fasb.org/imageRoot/50/6844350.pdf.
Financial Accounting Standards Board [FASB] b. Summary of Interpretation No. 48. http://www.fasb.org/summary/finsum48.shtml, Accessed 17 February 2018
Pricewaterhousecoopers (PWC). Income Taxes. 2017, https://www.pwc.com/us/en/cfodirect/assets/pdf/accounting-guides/pwc-income-taxes-guide.pdf. Accessed 17 February 2018.