Page 227 - The TEFRA Partnership Audit Rules Repeal:

ALI CLE Live Video Webcast / “The TEFRA Partnership Audit Rules Repeal: Partnership and Partner Impacts” June 7, 2016, Jerald David August and Terence Floyd Cuff
payable or a reduction of the amount of an anticipated income tax refund; and/or (ii) a reduction in a deferred tax asset or increase in a deferred tax liability. The required computations under this “liability method” can be complex. 135
First, the business enterprise reporting under GAAP determines whether it is more likely than not that each tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. Only those positions that are more likely than not to produce the desired tax benefit are recognized. Unrecognized tax positions are added to the reserve, plus foreseeable additions to tax in the form of potential penalties and interest.
The second step required under ASC 740-10 (FIN 48) is measurement: A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.
Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one of the following: (i) an increase in a liability for income taxes payable or a reduction of an income tax refund receivable; or (ii) a reduction in a deferred tax asset or an increase in a deferred tax liability
c. Reserves for Foreign Tax Liabilities.
Reporting entities will frequently have to assess whether a particular jurisdiction, e.g., a foreign country, state, or local taxing authority within the United States, has the ability to tax the income, including business profits, sourced from such jurisdiction or as part of a unitary business. In certain instances, the tax returns for the entity will minimize the impact of the taxing authorities in establishing tax reserves. For example, a United States company may have sales agents in several foreign countries but does not consider itself as having fixed bases or permanent establishments in these jurisdictions and is not liable for foreign taxes. The question that FIN 48 demands be answered is whether the assessment of lack of jurisdiction is more likely than not correct.
135 See FASB 109m ¶¶ 16, 17e, 20-21 (deferred tax expense, liability or asset).
© Terence Floyd Cuff and Jerald David August, 2016
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