Page 228 - 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
d. Tax Position Requirement.
FIN 48 applies to “tax positions” contained in a previously filed tax return or a position that will result in a permanent reduction in taxes currently payable or a deferral of income taxes to be paid until a future year. The tax liability for uncertain tax positions under FIN 48 is not included in the general label of deferred taxes. Rather, it must be classified separately from other tax balances based on the expected timing of cash flows to or from taxing authorities. The term “position” includes: (i) an allocation or shift of income between jurisdictions, i.e., intercompany pricing agreements under Section 482; (ii) the characterization of income or a decision to exclude reporting taxable income, e.g., an assumed tax-free reorganization transaction without the presence of taxable “boot” or gain recognition; (iii) a decision to classify a transaction, entity or other position contained in a tax return as tax exempt; and (iv) a decision not to file a tax return, for example, in a foreign jurisdiction based on the assumed correctness that such income is not taxable.136
e. Role of Management of Entity Subject to ASC 740-10 (FIN 48).
If management, on its review and analysis, determines that the uncertain tax position will more likely than not be sustained in the event of audit by the Internal Revenue Service or judicial review of an Internal Revenue Service challenge, the position can be currently recognized for financial accounting purposes as well. For this purpose, FAS 48 provides that “the term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. The more-likely-than-not recognition threshold is a positive assertion that an enterprise believes it is entitled to the economic benefits associated with a tax position. The determination of whether or not a tax
136 On whether a business enterprises’ foreign operations can result in the finding of a permanent established or fixed base or the carrying on of a business in one or more foreign jurisdictions, see, e.g., I.R.C. § 875, Rev. Rul. 85-60, 1985-1 CB 187. See, e.g., Donroy, Ltd. v. Commissioner, 9 AFTR 2d 1129 301 F2d 200, 62-1 USTC ¶9373 (CA-9, 1962), aff’g 196 F. Supp. 54 (D.C. Ca. 1961) (Canadian corporations taxable on share of income of a California limited partnership which operated a business in California); Johnston v. Commissioner, 24 T.C. 920 (1955) (Canadian individual taxable on share of partnership with a United States permanent establishment); Unger v. Commissioner, T.C. Memo 1990-15 PH TCM ¶90015 58 CCH T.C.M. 1157, aff’d, 936 F.2d 1316 (CA-D.C., 1961). Whether a taxpayer maintains a fixed base or permanent establishment in a foreign jurisdiction is frequently resolved by application of a pertinent bilateral income tax convention. See, e.g., Canada art 7(1); Japan art. 8(1); Netherlands art. 3(1); United Kingdom art 7(1). See also Consolidated Premium Iron Ores, Ltd. v. Commissioner, 3 AFTR 2d 1150 265 F2d 320 59-1 USTC ¶9387 (CA-6, 1959), aff’g 28 T.C. 127 (1957).
© Terence Floyd Cuff and Jerald David August, 2016
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