Uncertain Tax Position

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.
The objectives of FASB when issuing the FIN 48 interpretation were:

  • 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.
            The company requested for a deferred tax refund of $562M from the IRS in 2009. It did not receive any refund during this period. It also had a receivable related to tax credit of $281M. Temple-Inland Inc. included a tax refund of $492 in its pre-tax book income. The company recorded an unrecognized tax benefit related to tax benefit in its financial statements. The company reserved a maximum potential benefit of 88.88% ($96/$108). In 2009, the net operating loss for the company was $332M. The valuation allowances were $23M, and they pertained to the net operating loss carryforwards. Finally, there was no large noteworthy differences between book income and taxable income.
Weyerhaeuser Company
            Weyerhaeuser Company requested for a deferred tax refund of $247M from the IRS in 2009. It received a tax refund during this period of $191M. It also had a receivable related to tax credit of $55M. Weyerhaeuser Company included a tax refund of $18M in its pre-tax book income. The company did not recorded an unrecognized tax benefit related to tax benefit in its financial statements. In 2009, the net operating loss for the company was $842M. The valuation allowances were $103M, and they pertained to the net operating loss carryforwards. Finally, there was no large noteworthy differences between book income and taxable income.
Graphic Packaging Holding Company
Graphic Packaging Holding Company requested for a deferred tax refund of $217.5M from the IRS in 2009. It received a tax refund during this period of $537.5M. It also had a receivable related to tax credit of $12.7M. The company included a tax refund of $103M (90.3+12.7) in its pre-tax book income. Graphic Packaging Holding Company recorded an unrecognized tax benefit of 4.323% ($1.5/$34.7)related to tax benefit in its financial statements. In 2009, the net operating loss for the company was $537.5M. The valuation allowances were $255.5M (239.1+16.4), and they pertained to the net operating loss carryforwards. Finally, there was no large noteworthy differences between book income and taxable income.
Boise Inc.
Boise Inc. requested for a deferred tax refund of $136,243 from the IRS in 2009. It received a tax refund during this period of $43,492. It also had a receivable related to tax credit of $58,564. Boise Inc. included a tax refund of $4,250 ($1,906+ $2,344) in its pre-tax book income. The company recorded an unrecognized tax benefit related to tax benefit in its financial statements. They reserved a 95.41% ($83.3/$87.83) of the company’s potential benefit. In 2009, the net operating loss for the company was $150.94M. The valuation allowances were $44M, and they did not pertain to the net operating loss carryforwards. Finally, there was no large noteworthy differences between book income and taxable income.
Rock-Tenn Company
Rock-Tenn Company requested for a deferred tax refund of $9.2M from the IRS in 2009. It had received a tax refund of $104.7M as of 2009. It also had a receivable related to tax credit of $60.8M ($1.7+$3.7+$55.4). Rock-Tenn Company included a tax refund of $5.4M in its pre-tax book income. The company recorded an unrecognized tax benefit related to tax benefit in its financial statements. They reserved 8.7% ($9.2/$104.7) of the company’s potential benefit. In 2009, the net operating loss for the company was $191M. The valuation allowances were $2.4M, and they pertained to the net operating loss carryforwards. Finally, had large noteworthy differences between book income and taxable income.
Boise Inc.
Boise Inc. requested for a deferred tax refund of $136,243 from the IRS in 2009. It received a tax refund during this period of $43,492. It also had a receivable related to tax credit of $58,564. Boise Inc. included a tax refund of $4,250 ($1,906+ $2,344) in its pre-tax book income. The company recorded an unrecognized tax benefit related to tax benefit in its financial statements. They reserved a 95.41% ($83.3/$87.83) of the company’s potential benefit. In 2009, the net operating loss for the company was $150.94M. The valuation allowances were $44M, and they did not pertain to the net operating loss carryforwards. Finally, there was no large noteworthy differences between book income and taxable income.
Rock-Tenn Company
Rock-Tenn Company requested for a deferred tax refund of $9.2M from the IRS in 2009. It had received a tax refund of $104.7M as of 2009. It also had a receivable related to tax credit of $60.8M ($1.7+$3.7+$55.4). Rock-Tenn Company included a tax refund of $5.4M in its pre-tax book income. The company recorded an unrecognized tax benefit related to tax benefit in its financial statements. They reserved 8.7% ($9.2/$104.7) of the company’s potential benefit. In 2009, the net operating loss for the company was $191M. The valuation allowances were $2.4M, and they pertained to the net operating loss carryforwards. Finally, had large noteworthy differences between book income and taxable income.
 
 
If a company excluded the tax refund from taxable income and did not record an unrecognized tax benefit, it must believe that the refund and unrecognized tax benefit do 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).
If a company excluded the tax refund from taxable income and did not record and unrecognized tax benefit, it must believe that 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).
If a company included the tax refund in taxable income, it must believe that the 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).
The similarities and differences noticed about companies that account for tax refund in the same way are as follows:
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.

The similarities and differences on companies that account for tax refunds differently are as follows:
Similarities

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

Differences

  • Alternative minimum credits are carried forward indefinitely
  • Had untaxable tax credits

Besides the above similarities and differences, and FIN 48, companies decisions may be affect by the following:

  • 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.