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Uncertain Tax Positions: New Schedule UTP Requirement for Many Companies in 2013

Making Complex Disclosure Decisions as IRS Reduces its Filing Threshold

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WENESDAY, FEBRUARY 13, 2013

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Uncertain Tax Positions: New Schedule UTP Requirement for Many Companies in 2013 Seminar

• Feb. 13, 2013

Cherie Hennig, University of North Carolina at Wilmington cheriehennig@msn.com

Today’s Program

Why Schedule UTP? Schedule UTP Reporting Requirements Accurately Completing Parts I, II And III Disclosure Requirements Conclusions Slide 8 – Slide 19 Slide 45 – Slide 67 Slide 68 – Slide 69 Slide 20 – Slide 32 Slide 33 – Slide 44

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

WHY SCHEDULE UTP?

Cherie Hennig, University of North Carolina at Wilmington

High Expectations For Schedule UTP!!

• IRS expects Schedule UTP to:

– Reduce time it takes to find audit issues – Give agents and taxpayers more time during tax audits to discuss the issues – Help to identify areas of uncertainty that require additional IRS guidance – Allow IRS to prioritize the selection of returns to audit and the issues to examine during the audit

9

Who Is In Charge?

• The Large Business & International Division (LB&I) maintains a centralized

review process so that it can: – Review every Schedule UTP – Analyze these filings to determine if the disclosures comply with the instructions – Select issues for audit and identify trends – Identify gaps in guidance and move to fill those gaps – Determine the proper use and treatment of information contained on the schedules

10

Steven T. Miller, IRS Deputy Commissioner, Service and Enforcement, The Tax Executives Institute, Mid-Year Conference March 26, 2012

• According to SEC data, LB&I taxpayers are reporting large reserves due to

uncertain positions as unrealized tax benefits. – Although we can’t tell whether these reserves relate to federal, foreign or state tax uncertainties, we need to pay attention to them.

11

Why Schedule M-3?

• Like Schedule M-1, Schedule M-3 provides the IRS with information about

book-tax differences.

• Schedule M-3 provides MUCH greater detail than Schedule M-1. because it

requires a taxpayer to:

• Separately state each transaction giving rise to a book-tax difference (no

materiality threshold, i.e. no dollar or percentage de minimis test), and

• Identify whether each difference is permanent or temporary
• IRS FAQS:

http://www.irs.gov/businesses/corporations/article/0,,id=136967,00.html

• Query? If Schedule M-3 is doing its job, why do we also need Schedule UTP?

12

Why Schedule UTP?

• IRS Commissioner Douglas Shulman characterized the Schedule UTP

disclosure initiative as a “reasonable approach” that will give the IRS the information needed “without asking taxpayers to divulge the strengths or weaknesses of their uncertain tax positions.” (www.irs.gov/newsroom/article/0,,id=221280,00.html) – Speech, Tax Executives Institute on April 12, 2010

• IRS FAQ Web site for UTP:

http://www.irs.gov/ businesses/article/0,,id=237538,00.html)

13

• Ann. 2010-9 And Ann. 2010-75:

Reporting Of Uncertain Tax Positions

• Annual disclosure of uncertain tax positions to improve tax

compliance and administration

• On 9/7/2010, the IRS issued proposed Reg. 1.6012-2, giving it the

regulatory underpinning to require certain corporations to attach the Schedule UTP to their tax returns.

• Schedule UTP will ultimately be required of all corporate Schedule M-

3 filers that issue GAAP financial statements. – Pass-through entities are currently exempt.

14

Asset Size # Of Returns # Of UTPs Filed Year UTP Required $10,000,000 - $50,000,000 36,000 ? 2014 $50,000,000 - $100,000,000 6,000 ? 2012 More than $100,000,000 8,000 2,100 2010 Total 50,000

Form 1120 UTP Filers

15

UTP Filing Results For 2010

• 2,144 UTP Schedules

– (includes 1120-PC, 1120-L, 1120-F)

• 4,766 UTP disclosures
• 50% of returns had only one UTP.
• Top three IRC Code sections

– 41: Research tax credits – 482: Transfer pricing (21%) – 162: Trade and business expenses

• 40% of schedules were prepared by Big Four accounting firms.
• 3% had inadequate explanations.

16

Why UTP For Mid-Sized Corporations?

• “I also want us to move more deeply into the mid-market – those firms

between $10 and $250 million in assets.

• “Up to now, our presence in the mid-market – where we currently have

about 11.9% coverage – hasn’t been as robust as we would like it to be.

• “I believe many mid-market corporations may have the same issues as

larger entities, and perhaps additional issues as well.

• “As UTP transitions into more segments of the community this may

become clearer.” – Steven T. Miller, IRS Deputy Commissioner

17

Disclosure Requirements

Likelihood Of Success And Disclosure Position (Other Than Reportable Transactions) Form 8275 Form UTP

0% to 20% Frivolous position: “Patently improper”- position should never be taken on a return No No 20% to 33% Reasonable basis: No taxpayer penalty if position adequately disclosed on the return Yes1 Yes 33% to 40% Realistic possibility: No tax preparer penalty if adequately disclosed on the return 40% to 50% Substantial authority; no Sect. 6662 penalty No 50% to 99% More likely than not: >50% chance of success 100% Certain No No

1 If UTP filed, Form 8275 not required 18

Slide Intentionally Left Blank

SCHEDULE UTP REPORTING REQUIREMENTS

Cherie Hennig, University of North Carolina at Wilmington

• Uncertain tax positions affecting the federal income tax liability:

– Income recognized for financial income but not recognized on the tax return – Deductions taken on the tax return but not deducted for financial income – Information regarding any tax credit that could be reduced or disallowed upon audit

• Report when:

– A tax position is taken on U.S. federal income tax return for the current

• r prior tax year, AND

– Either corporation or related party has recorded a reserve with respect to that tax position for federal income tax in audited financial statements, OR a reserve for that tax position was not recorded because the corporation expects to litigate the position

Reporting Requirements

21

Reporting Requirements (Cont.)

• A corporate taxpayer with audited financial statements
• A corporate taxpayer without audited financial statements that is:

– A related party (described in Sect. 267(b), Sect. 318(a) or Sect. 707(b)) to a corporate taxpayer that is required to file, or – An entity that is included in the consolidated audited financial statements, in which a corporation with audited financial statements is also included

22

Example

• Red Corp. has $60 million in assets and issues consolidated audited

financial statements with Green Corp., but does not file a consolidated tax return.

• The uncertain tax position taken by Red Corp. on its tax return must be

reported on its Schedule UTP, because a reserve was recorded for the consolidated financial statements in which Red Corp. was included. – Schedule UTP instructions, example 4, page 3

23

What Is An Uncertain Tax Position?

• A tax position taken on a tax return that would result in an IRS audit

adjustment and the corporation or a related party has recorded a reserve, with respect to all or part of that tax position in audited financial statements.

• If multiple tax positions affect a single line item on the tax return, then

each tax position is treated as a separate tax position.

• Also report on Schedule UTP a tax position taken on a return for which no

reserve for income tax was recorded, because the corporation or a related party determines that the probability of settling the position with the IRS is less than 50%, and the corporation expects to litigate the position and has determined that it is more likely than not to prevail on the merits in the litigation.

24

Example

• Purple Corporation entered into a cost-sharing arrangement with a foreign

subsidiary and deducted its proportionate share of the costs as research and development costs. Management has determined that the probability

• f sustaining the full deduction upon an IRS audit is less than 50%. No

reserve was recorded for the potential tax liability, because management expects to litigate the issue and believes it is more likely than not to prevail upon litigation of this issue. The tax position must be disclosed on the Schedule UTP, even though no reserve was made in its audited financial statements. – Schedule UTP instructions, example 5, page 3

25

Schedule UTP Reporting

• If no reserve was required for a tax position taken on a tax return, either

because the amount was not material for audited financial statement purposes or there is sufficient certainty regarding the tax position, then the tax position need not be reported on the Schedule UTP. – The taxpayer determines if a position is material, based upon all the facts and circumstances. – The initial recording of a reserve will trigger reporting of the tax position on the Schedule UTP in the year that the position is taken on the corporate tax return. – Subsequent reserve increases or decreases with respect to the tax position will not trigger additional disclosure.

26

Example

• Beige Corp. has a $100 net operating loss carry forward that will expire if it

not used in the current tax year. The corporation reports net income in the current year of $100 and deducts the loss carry forward.

• Since the corporation is uncertain whether the income should be reported

in the current or a future tax year, a disclosure is required on both the current and the future tax return, because there would be an adjustment to a line item on both returns if the position taken in that year is not sustained. – Schedule UTP instructions, example 7, page 4

27

Schedule UTP Reporting (Cont.)

• If a transaction results in a UTP disclosure position being taken on more

than one tax return, then the position must be reported in each year that the position is taken.

• A current requirement to report exists when a corporate taxpayer took a

position on that year’s return that is a UTP disclosure position (i.e., a reserve must have been recorded for that position or a reserve not recorded based on an expectation to litigate).

• Subsequent reserve increases or decreases with respect to that position

will not need to be disclosed.

28

Example (Cont.)

• Brown Corp. deducted an expense for warranty costs for financial

accounting but not on its tax return.

• A deferred tax asset was recorded for the deferred tax benefit.
• If management believes that a portion of the warranty costs may not be

deductible based on current U.S. tax law, then the deferred tax asset is reduced and current financial tax expense is increased by an amount that reflects the uncertain tax position.

• The uncertain tax position is not disclosed on the Schedule UTP, because

the deduction has not yet been taken on the U.S. federal tax return.

29

Example (Cont.)

• White Corp. deducted the full amount of an expenditure incurred in the

current tax year.

• The corporation determines it is uncertain whether the expenditure is

currently deductible or should be amortized over five years.

• It records a reserve with respect to the position taken. If the deduction is

not sustained on the current year tax return, then an amortization deduction would be allowed on its subsequent tax returns.

• The position must be disclosed on Part I of the Schedule UTP for the

current year and also in subsequent tax years. – Schedule UTP Instructions, example 8, page 4

30

Example (Cont.)

• Orange Corp. recorded a reserve equal to 30% of a tax benefit taken
• n its current year tax return and made the proper disclosure on

Schedule UTP.

• In a subsequent tax year, the reserve with respect to this tax

position was increased to 50%.

• The corporation is not required to disclose the increase in the

reserve on the subsequent tax return. – Schedule UTP Instructions, example 1, page 2

31

Slide Intentionally Left Blank

ACCURATELY COMPLETING PARTS I, II AND III

Cherie Hennig, University of North Carolina at Wilmington

Part I Disclosures

• The IRC section(s) relating to the tax position
• Whether the position is permanent (P) or temporary (T)
• The EIN of the pass-through entity, if any, to which the tax position

relates (indicate F for foreign partnership) – Example: The tax position involves the corporate partner’s distributive share of a partnership item

• Major tax position: Check box if the relative size of the tax position is

>=10% of the sum of all the tax positions listed – Do not check if corporation expects to litigate the position

• Rank tax positions from largest (1) to smallest
• Letter T for transfer pricing positions and G for all others

34

Part II Disclosures

• For 2012, use Part II to report tax positions taken by the corporation

in a prior year that have not been reported on a prior year’s Schedule UTP.

• Use same disclosure requirements as for Part I.

35

Part II Example

• Grey Corp. deducted an expense on its current-year tax return. No

tax reserve was made on its financial statements, because management was certain that the amount was deductible in full. In a subsequent tax year, management determined that it is more likely than not that the expense would not be fully deductible and recorded a tax reserve for the tax position taken on the prior year tax return. The uncertain tax position must be disclosed on part II of Schedule UTP in the subsequent tax year. – Schedule UTP Instructions, example 2, page 2

36

Part III Disclosures

• Include a concise description of each uncertain tax position, including

a description of the relevant facts and information that will apprise the IRS of the identity of the tax position and the nature of the issue – Not required: The rationale for the position, an assessment of the hazards of a tax position, or an analysis of the support for or against the tax position

• In most cases, the description should not exceed a few sentences.

– Stating that the description is “available upon request” is not an adequate description.

37

Example From Instructions

• Taxpayer incurred costs of completing one business acquisition and

investigating and partially negotiating potential business acquisitions that were not completed. The issue is whether the allocation of costs between completed and uncompleted acquisitions is appropriate.

38

Example From Instructions (Cont.)

• Taxpayer is a member of an LLC that is treated as a U.S. partnership, for

tax purposes. Taxpayer received a cash distribution during the year from the LLC. The issue is the potential application of Sect. 707(a)(2) to recharacterize the distribution as a sale of a portion of the taxpayer’s interest in the LLC.

39

Example From Instructions (Cont.)

• Taxpayer incurred costs to clean up environmental contamination caused

by activities in prior tax years at a site that includes both its manufacturing facility and its corporate headquarters. The issue is the allocation of the cleanup costs between production and non-production activities under

• Sect. 263A.

40

http://www.irs.gov/Businesses/Corporations/Schedule-UTP- Guidance-for-Preparing-Concise-Descriptions

Insufficient Description Sufficient Description This is a research credit issue. The taxpayer incurred support department costs that were allocated to various research projects based upon a methodology the taxpayer considers reasonable. The issue is whether the taxpayer’s method of allocating these costs is acceptable by the IRS.

41

http://www.irs.gov/Businesses/Corporations/Schedule-UTP- Guidance-for-Preparing-Concise-Descriptions (Cont.)

Insufficient Description Sufficient Description This is a transfer pricing issue. The taxpayer allocated management service costs between its domestic subsidiaries and a foreign subsidiary located in Country X using a methodology the taxpayer considers reasonable. The issue is whether the taxpayer’s method of allocating these costs is acceptable by the IRS.

42

http://www.irs.gov/Businesses/Corporations/Schedule-UTP- Guidance-for-Preparing-Concise-Descriptions (Cont.)

Insufficient Description Sufficient Description

The taxpayer incurred costs during the year that are deductible as ordinary and necessary business expenses under IRC Section 162 and are included on Line 26, "Other deductions.” The taxpayer claimed a deduction for travel and entertainment expenses for conventions and sales

• meetings. The issues are whether adequate

documentation has been retained to substantiate the deductions claimed and whether some of the expenses constitute entertainment subject to a 50% limitation.

43

Slide Intentionally Left Blank

DISCLOSURE REQUIREMENTS

Cherie Hennig, University of North Carolina at Wilmington

When To Make UTP Accrual: Example

• Cat Co. purchased and placed in service on Jan. 1 of the current year a

building that cost $1,000,000.

• Applicable and marginal tax rate of 34%
• Annual straight-line financial depreciation expense is $50,000.
• Results of component depreciation analysis will be used to compute the

year 1 depreciation expense on building and its component parts.

• The accrual for the deferred tax liability, and management’s determination
• f the likelihood of success of sustaining the deduction in an IRS audit, are

given on the next slide for four alternate scenarios.

46

Financial Depreciation Expense Tax Depreciation Expense Deferred Tax Liability Probability Of success UTP Accrual A $ 50,000 $ 50,000 $ - 100% $ - B $ 50,000 $ 100,000 $ 7,000 95% $ - C $ 50,000 $ 150,000 $ 34,000 60% $13,600 D $ 50,000 $ 200,000 $ 51,000 40% $51,000

47

When To Make UTP Accrual: Example (Cont.)

• A. No accrual for a deferred tax liability, since book and tax

depreciation are the same and there is no accrual for an uncertain tax position

• B. Accrual for a deferred tax liability of $17,000 [($100,000 -

$50,000) x 34%] on the difference between the book and tax depreciation, using an applicable tax rate – In this case, management has decided against an accrual for an uncertain tax position, since the 5% risk would require an accrual for an uncertain tax position of only $850 ($17,000 x 5%), which managements feels is not a material amount in relation to its tax accruals for the year.

48

When To Make UTP Accrual: Example (Cont.)

• C. Management has determined that it is “more likely than

not” that the tax depreciation deduction would be sustained upon audit, but makes an accrual for the 40% of the accrual that is deemed to be an uncertain tax position. – This position must be disclosed on Schedule UTP.

• D. The tax depreciation deduction does not meet the “more

likely than not” threshold, so an UTP accrual for the entire deferred tax liability must be made. – This position must be disclosed on Schedule UTP.

49

Comprehensive Case: CF Corp., 12/31/2012 Year-End, Accrual Method Of Accounting

50

Facts

• More than $50 million in assets, so must file Schedule M-3 and Schedule

UTP

• Financial income before tax is $20,000,000.
• Applicable federal tax rate of 35%
• State and international taxes are not considered.
• Tax accrual is based solely upon current-year deductions.
• The appropriate unit of account is each separately identified transaction.
• No “true up" adjustment
• No accruals for interest and penalties

51

Bad Debt Expense

• Addition to allowance for doubtful accounts for financial accounting;

actual bad debt expense for tax

• Deferred tax asset:

$35,000 [(125,000 – 25,000) x .35]

• No UTP disclosure, since there is no uncertain tax position associated with

this deduction

52

Net Capital Loss

• Net capital loss of $100,000 on the sale of land held for investment.

Management believes it is not “probable” that the loss will be utilized within the five-year carryforward period and recommends establishment of a valuation allowance.

• Deferred tax asset, net of valuation allowance: $21,000

[$100,000 x .35 x (1 - .40)]

• No UTP disclosure, since there is no uncertain tax position associated

with this deduction

53

Contingent Liability

• Accrual for a contingent liability of $100,000 from potential

environmental contamination. No payment will be made until all legal appeals have been exhausted, which management expects to occur within three to five years. No deduction can be taken on this year's tax return, because the “economic performance” test has not been

• met. A portion of the payment may be a non-deductible capital

expenditure.

• Deferred tax asset, net of UTP: $17,500

[$100,000 x 35% - (1- .5)]

• No UTP disclosure, since position not yet taken on the tax return

54

Component Depreciation Expense

• Component tax depreciation expense > financial depreciation by

$100,000. Management believes it is “more likely than not” that the deduction is allowable, but the IRS could reclassify the useful lives of certain components (IRC Sect. 167).

• Deferred tax liability: $26,250

[$100,000 x 35% x (1 - .25)]

• Accrual for UTP: $8,750

[$35,000 x .25]

• UTP disclosure required

55

Reportable Transaction

• $100,000 ordinary partnership loss from a “listed transaction” deducted

for both financial and tax. Management believes at the “more likely than not" level that the loss is deductible in full. The IRS could challenge the deductibility of the loss as not meeting the “substantial economic effect” test under IRC Sect. 704(c) or the “economic substance doctrine” of IRC

• Sect. 7701(o)(1)(D).
• Accrual for UTP: $10,500

[($100,000 x 35%) x .30]

• UTP disclosure required
• Form 8886 (reportable transaction) required

56

Domestic Production Deduction

• Management believes at the “realistic possibility of success” level

(40%) that a deduction of $100,000 is allowable. However, the IRS could challenge the deduction because of uncertainty regarding whether the income is from a “qualifying domestic production activity” (IRC Sect. 199).

• This is a “permanent difference.”
• Accrual for UTP: $35,000

($100,000 x 35%)

• UTP disclosure required
• Form 8275 (disclosure statement) no longer required

57

R&E Credit

• An R&E tax credit of $7,280 reduced both financial tax expense and

federal tax payable. Management believes it is “more likely than not” that the full credit can be claimed; however, the IRS could deny part of the credit due to inadequate contemporaneous documentation.

• This is a “permanent difference.”
• Accrual for UTP: $728

[$7,280 x .10]

• UTP disclosure required
• Query: Would this accrual have been made for financial?

58

• Sect. 118 Exclusion
• The corporation received a $100,000 community development grant to

expand its manufacturing operations in Township W. For financial accounting purposes, the corporation reported income of $100,000. For tax purposes, the payment was excluded under Sect. 118, and the tax basis of depreciable equipment was reduced resulting in $10,000 less in tax depreciation in the current year.

• Deferred tax liability: $18,900

[$90,000 x 35% x (1 - .40)]

• Accrual for UTP: $12,600 [$31,500 x .40]
• UTP disclosure required

59

Slide Intentionally Left Blank

Line # a b c d 9 e. Partnership (Loss) $ (100,000) $ (100,000) Explanation: RE LLC, 14-7258369, profit/loss-sharing ratio: 40% 23a b. Income gains/losses $ (100,000) $ 100,000 $ - 23c b. Gross capital loss $ 100,000) $ (100,000) 24 b. Capital loss limitation $ 100,000 $ 100,000 26 Total income (loss) items $ (200,000) $ 100,000 $ - $ (100,000) 27 Total line 38 Part III $ (7,436,698) $ 10,000 $6,611,698 $ (815,000) 28 Other items with no differences $ 20,000,000 20,000,000 29a Total lines 26 through 28 $ 12,363,302 $ 110,000 $ 6,611,698 $19,085,000 30 Reconciliation totals $ 12,363,302 $ 110,000 $ 6,611,698 $19,085,000

Schedule M-3, Part II

61

Line # a b c d 1 U.S. current tax expense $ 6,672,470 $ (6,672,470) $ - 2 U.S. deferred tax expense $ 39,228 $ (39,228) $ - 13

• c. Awards (contingent

liability ) $ 100,000 $(100,000) $ - 22

• f. Domestic

production activities deduction $ - $ 100,000 $ 100,000 31

• d. Depreciation

$ 500,000 $ 100,000 $ 600,000 32

• a. Bad debt expense $ 125,000

$(100,000) $ 25,000

Schedule M-3, Part III

62

Line # a b c d 35

• g. R&D costs

$ 100,000 $ - $ 100,000 Explanation: Financial accounting R&D is from account: 20-111900 and includes qualified wages, supplies and equipment lease costs that are recorded in separate sub-accounts. The Sect. 280C reduced credit was elected, so there is no book-tax difference (not required). 36

• h. Sect. 118

exclusion $ (100,000) $ 90,000 $ (10,000) Explanation: A $100,000 community development grant was received for expansion of manufacturing operations in Township W. For financial accounting purposes, the $100,000 was included in income. For tax purposes, the payment was excluded under Sect. 118, and the tax basis

• f depreciable equipment was reduced, resulting in $10,000 less in tax

depreciation in the current year. 38 Total $ 7,436,698 $ (10,000) $ (6,611,698) $ 815,000

Schedule M-3, Part III (Cont.)

63

M-3, Part III, Line 2: Deferred Tax Expense

Deferred tax assets: a. Bad debt expense ( 35,000) b. Capital loss, net ($35,000 - $14,000) ( 21,000) c. Contingent liability, net ($35,000 - $17,000) ( 17,500) ( 73,500) Deferred tax liabilities: d. Depreciation, net ($35,000 - $8,750) 26,250

• h. Sect. 118 exclusion

($31,500 - $12,600) 18,900 45,150

64

M-3, Part III, Line 2: Deferred Tax Expense (Cont.)

Deferred tax assets: ( 73,500) Deferred tax liabilities: 45,150 Tax liability for uncertain tax positions: d. Depreciation deduction 8,750 e. Partnership loss 10,500 f. Domestic production activity deduction 35,000 g. R&E credit 728 h.

• Sect. 118 exclusion

12,600 67,578 Non-current tax expense $ 39,228

65

UTP # IRC Sections Timing Code Pass-Through Entity EIN Major Tax Position Ranking Of Tax Position Explanation: 1 167 T X G4 A cost segregation study reclassified a significant portion of the cost of a building as personalty. The issue is whether the shortened lives will be sustained upon IRS audit. 2 752, 704(c), 7701(o) 14-7258369 X G3 The deduction for the partnership loss is based on a computation of the outside basis, which includes a special allocation of non-recourse debt and a depreciation deduction that is a listed transaction. The issue is whether the basis computations will be sustained upon IRS audit. 3 199 P X G1 The taxpayer engaged in activities that it believes qualifies for the DPAD. The issue is whether the “qualifying domestic production activity” income definition has been met in order to claim the full deduction.

Schedule UTP

66

UTP # IRC Sections Timing Code Pass-Through Entity EIN Major Tax Position Ranking Of Tax Position Explanation: 4 904(d)(6) P G5 The taxpayer incurred significant research and development costs during the

• year. The issue is whether the full R&E tax credit is allowable, considering the

lack of adequate contemporaneous records. 5 118, 61(a) T X G2 The taxpayer received a community development grant to expand its manufacturing operations. The issue is whether a cash payment from a municipality can be excluded under Sect. 118.

Schedule UTP (Cont.)

67

CONCLUSIONS

Cherie Hennig, University of North Carolina at Wilmington

Conclusions

• Is requiring both Schedule M-3 and Schedule UTP disclosure overload?

– Modify M-3 so that UTP disclosures can be included as explanations to the line affected on M-3? – Eliminate M-3 for Schedule UTP filers? – Raise asset threshold for filing M3? For UTP?

• Avoid Schedule UTP reporting?

– Make an S election – Stop issuing audited financial statements

• Have we gone from a “voluntary tax system” to a “voluntary disclosure

system?”

69