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.
Using the company’s financial statements, address the following questions:

  1. How much did the company request in this tax refund from the Internal Revenue Service in 2009? $562M
  2. How much did the company receive in the tax refund? In other words, how much had each company received as of 2009 fiscal year end. $0

How much was each company’s receivable related to the tax credit, and what was the total? $281M
How much of the refund did each company include in pre-tax book income? $492 M ($281+$160+$51)

  1. 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. Yes it did
  2. If the company did record an unrecognized tax benefit, what percentage of the maximum potential benefit did they reserve?11% ($96/$108)
  3. What were the net operating loss balances at each company? $332M
  4. What were the valuation allowances on deferred tax assets at each company? $23M

Did the valuation allowances pertain to the net operating loss carryforwards? Yes they did

  1. Did the company have any other large and noteworthy differences between book income and taxable income? No, it was not a noteworthy difference
  2. Given the facts you just compiled, address the following questions for each company:
  3. If the company excluded the tax refund from taxable income, and did not record an unrecognized tax benefit, what must the company believe about whether the IRS and tax courts will challenge and allow this exclusion? Explain using the language of FIN 48.

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. If the company excluded the tax refund from taxable income, and did record an unrecognized tax benefit, what must the company believe about whether the IRS and tax courts will challenge and allow this exclusion? Explain using the language of FIN 48.

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).

  1. If the company included the tax refund in taxable income, what must the company believe about whether the IRS and tax courts would challenge and allow this excluding the tax refund? Explain using the language of FIN 48.

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).

  1. What similarities and differences do you notice among the companies that accounted for the tax refund in the same way?

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.
  1. What similarities and differences do you notice among the companies that accounted for the tax refund the differently?

Similarities

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

Differences

  • Alternative minimum credits are carried forward indefinitely
  • Had untaxable tax credits
  1. Given these similarities and differences, what factors – other than the appropriate use of FIN 48 – might have affected these companies’ decisions on how to account for the tax refund?
  • Management’s level of estimation and risk appetite.
  • The company’s financial targets since tax refund computations affect the income statements.

Weyerhaeuser Company
Using the company’s financial statements, address the following questions:

  1. How much did the company request in this tax refund from the Internal Revenue Service in 2009? $274M
  2. How much did the company receive in the tax refund? In other words, how much had each company received as of 2009 fiscal year end. $191M

How much was each company’s receivable related to the tax credit, and what was the total? $ 55M
How much of the refund did each company include in pre-tax book income? $18M

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

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

  1. What were the net operating loss balances at each company? $842 M
  2. What were the valuation allowances on deferred tax assets at each company? $103 M

  Did the valuation allowances pertain to the net operating loss carryforwards? Yes they did

  1. Did the company have any other large and noteworthy differences between book income and taxable income? No it didn’t
  2. Given the facts you just compiled, address the following questions for each company:
  3. If the company excluded the tax refund from taxable income, and did not record an unrecognized tax benefit, what must the company believe about whether the IRS and tax courts will challenge and allow this exclusion? Explain using the language of FIN 48.

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. If the company excluded the tax refund from taxable income, and did record an unrecognized tax benefit, what must the company believe about whether the IRS and tax courts will challenge and allow this exclusion? Explain using the language of FIN 48.

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

  1. If the company included the tax refund in taxable income, what must the company believe about whether the IRS and tax courts would challenge and allow this excluding the tax refund? Explain using the language of FIN 48.

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.

  1. What similarities and differences do you notice among the companies that accounted for the tax refund in the same way?

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.
  1. What similarities and differences do you notice among the companies that accounted for the tax refund the differently?

Similarities

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

Differences

  • Alternative minimum credits are carried forward indefinitely
  • Had untaxable tax credits
  1. Given these similarities and differences, what factors – other than the appropriate use of FIN 48 – might have affected these companies’ decisions on how to account for the tax refund?
  • 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. How much did the company request in this tax refund from the Internal Revenue Service in 2009? $217.5M
  2. How much did the company receive in the tax refund? In other words, how much had the company received as of 2009 fiscal year end? $ 537.5 M

How much was the company’s receivable related to the tax credit, and what was the total? $12.7M
How much of the refund did the company include in pre-tax book income? $103 M ($90.3+$12.7)

  1. 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. Yes it did
  2. If the company did record an unrecognized tax benefit, what percentage of the maximum potential benefit did they reserve?

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%)

  1. What were the net operating loss balances at the company?

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

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

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)

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

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

  1. Given the facts you just compiled, address the following questions for each company:
  2. If the company excluded the tax refund from taxable income, and did not record an unrecognized tax benefit, what must the company believe about whether the IRS and tax courts will challenge and allow this exclusion? Explain using the language of FIN 48.

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. If the company excluded the tax refund from taxable income, and did record an unrecognized tax benefit, what must the company believe about whether the IRS and tax courts will challenge and allow this exclusion? Explain using the language of FIN 48.

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

  1. If the company included the tax refund in taxable income, what must the company believe about whether the IRS and tax courts would challenge and allow this excluding the tax refund? Explain using the language of FIN 48.

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.

  1. What similarities and differences do you notice among the companies that accounted for the tax refund in the same way?

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.
  1. What similarities and differences do you notice among the companies that accounted for the tax refund the differently?

Similarities

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

Differences

  • Alternative minimum credits are carried forward indefinitely
  • Had untaxable tax credits
  1. Given these similarities and differences, what factors – other than the appropriate use of FIN 48 – might have affected these companies’ decisions on how to account for the tax refund?
  • Management’s level of estimation and risk appetite.
  • The company’s financial targets since tax refund computations affect the income statements.

Boise Inc.
Using the company’s financial statements, address the following questions:

  1. How much did the company request in this tax refund from the Internal Revenue Service in 2009? $ 136,243
  2. How much did the company receive in the tax refund? In other words, how much had each company received as of 2009 fiscal year end? $43,492
  3. How much was each company’s receivable related to the tax credit, and what was the total? $58,564

How much of the refund did each company include in pre-tax book income? $ 4,250 ($1,906+$2,344)

  1. 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. Yes it did
  2. If the company did record an unrecognized tax benefit, what percentage of the maximum potential benefit did they reserve? 41% ($83.3/$87.83)
  3. What were the net operating loss balances at each company? $ 150.94 M
  4. What were the valuation allowances on deferred tax assets at each company? $44 M

Did the valuation allowances pertain to the net operating loss carryforwards? No they do not

  1. Did the company have any other large and noteworthy differences between book income and taxable income? It was not noteworthy.
  2. Given the facts you just compiled, address the following questions for each company:
  3. If the company excluded the tax refund from taxable income, and did not record an unrecognized tax benefit, what must the company believe about whether the IRS and tax courts will challenge and allow this exclusion? Explain using the language of FIN 48.
    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).
  4. If the company excluded the tax refund from taxable income, and did record an unrecognized tax benefit, what must the company believe about whether the IRS and tax courts will challenge and allow this exclusion? Explain using the language of FIN 48.

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).

  1. If the company included the tax refund in taxable income, what must the company believe about whether the IRS and tax courts would challenge and allow this excluding the tax refund? Explain using the language of FIN 48.

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).
 

  1. What similarities and differences do you notice among the companies that accounted for the tax refund in the same way?

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.
  1. What similarities and differences do you notice among the companies that accounted for the tax refund the differently?

Similarities

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

Differences

  • Alternative minimum credits are carried forward indefinitely
  • Had untaxable tax credits
  1. Given these similarities and differences, what factors – other than the appropriate use of FIN 48 – might have affected these companies’ decisions on how to account for the tax refund?
  • Management’s level of estimation and risk appetite.
  • The company’s financial targets since tax refund computations affect the income statements.

Rock-Tenn Company
Using the company’s financial statements, address the following questions:

  1. How much did the company request in this tax refund from the Internal Revenue Service in 2009? $9.2 M
  2. How much did the company receive in the tax refund? In other words, how much had each company received as of 2009 fiscal year end, $ 104.7 M

How much was each company’s receivable related to the tax credit, and what was the total?  $60.8M ($1.7+$3.7+$55.4)
How much of the refund did each company include in pre-tax book income? $5.4M

  1. 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. Yes it did
  2. If the company did record an unrecognized tax benefit, what percentage of the maximum potential benefit did they reserve?7% ($9.2/104.7)
  3. What were the net operating loss balances at each company? $191 M
  4. What were the valuation allowances on deferred tax assets at each company? $2.4 M

Did the valuation allowances pertain to the net operating loss carryforwards? Yes it did

  1. Did the company have any other large and noteworthy differences between book income and taxable income? Yes it had a noteworthy difference
  2. Given the facts you just compiled, address the following questions for each company:
  3. If the company excluded the tax refund from taxable income, and did not record an unrecognized tax benefit, what must the company believe about whether the IRS and tax courts will challenge and allow this exclusion? Explain using the language of FIN 48.

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).

  1. If the company excluded the tax refund from taxable income, and did record an unrecognized tax benefit, what must the company believe about whether the IRS and tax courts will challenge and allow this exclusion? Explain using the language of FIN 48.

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

  1. If the company included the tax refund in taxable income, what must the company believe about whether the IRS and tax courts would challenge and allow this excluding the tax refund? Explain using the language of FIN 48.

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.

  1. What similarities and differences do you notice among the companies that accounted for the tax refund in the same way?

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.
  1. What similarities and differences do you notice among the companies that accounted for the tax refund the differently?

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
  1. Given these similarities and differences, what factors – other than the appropriate use of FIN 48 – might have affected these companies’ decisions on how to account for the tax refund?
  • 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.