FAS Request for Guidance on FIN 48

Financial Accounting Standards Board Requests for Guidance on Interpretation 48 (FIN 48)

April 17, 2009





Financial Accounting Standards Board




Board Meeting Handout





REQUESTS FOR GUIDANCE ON INTERPRETATION 48


April 15, 2009



PURPOSE OF THIS MEETING


1. At the December 17, 2008, meeting, the Board directed the staff to proceed with the guidance phase for FASB Interpretation No. 48, Accounting for Uncertainly in Income Taxes. At that meeting, the Board also decided to amend the disclosure requirements of Interpretation 48 to eliminate paragraphs 21(a) and 21(b). The purpose of this handout is to discuss comments received on guidance for pass-through and tax exempt not-for-profit entities. This handout discusses the staff's recommended format for the guidance. In addition, this handout will discuss issues the staff believes should be addressed in proposed FSP FIN 48-d, Application Guidance for Pass-through and Tax Exempt Not-for-Profit Entities, and Disclosure Modifications for Nonpublic Entities, and the specific guidance to be included.




INTRODUCTION


2. The Board issued proposed FSP FIN 48-c, Effective Date of FASB Interpretation No. 48 for Certain Nonpublic Enterprises, in November 2008. The proposed FSP's Notice for Recipients asked constituents to provide specific examples of problems that nonpublic pass-through and tax exempt not-for-profit entities will encounter when applying Interpretation 48. The comment letters contain many issues (some of which had multiple scenarios) that the respondents believe need clarification so that pass-through and tax exempt not-for-profit entities can properly apply Interpretation 48.



3. During the research phase of this project, the staff read an article published by the Pennsylvania Society of Certified Public Accountants (PICPA) in the Pennsylvania CPA Journal, Winter 2009 . The article, "Be Vigilant: State and Local Pass-through Entity Issues," discusses the wide variety of tax laws and regulations of state and local taxing jurisdictions. It highlights common issues and provides examples to illustrate the variety and complexity of taxation for pass-through entities. Some of those issues are (a) entity vs. aggregate theory of partnerships, (b) nexus, (c) entity level taxes, (d) nonresident withholding and credits, and (e) LLC taxes and fees. The article illustrates the diversity among taxing authorities that pass-through entities encounter if they operate in multiple jurisdictions.




ISSUES FOR DISCUSSION


4. The staff believes there are three topics for discussion:



a. The format for the proposed FSP



b. The content of the proposed FSP



c. The effective date and transition.




ISSUE 1: THE FORMAT FOR THE PROPOSED FSP


5. The staff has identified two alternative formats to provide guidance to pass-through and tax exempt not-for-profit entities on the implementation of Interpretation 48.



a. Alternative 1: Provide guidance in a question and answer (Q&A) format addressing the specific issues raised in comment letters and other sources.



b. Alternative 2: Provide guidance in narrative form with examples as needed to clarify the application of the guidance.



6. Those who support Alternative 1 point out that a Q&A format is well suited to answer many of the specific questions raised by constituents. Furthermore, they argue that the FASB has issued EITF Abstracts and other guidance in the past to answer specific tax questions.



7. Those who support Alternative 2 believe that a Q&A format is not a practical solution. Because tax laws and regulations change as jurisdictions look for more ways to raise revenue, the specific scenarios mentioned in the comment letters and the PICPA article may change and new scenarios may be created. This could lead to requests for guidance whenever new circumstances arise.



8. Those who support Alternative 2 also point out that there were a lot of questions raised, many with multiple parts asking how to handle a wide variety of situations. The staff identified common traits among the issues raised by respondents and the PICPA article. By developing general principles around those traits, the staff believes current and future questions can be resolved so future guidance will not be needed.




STAFF RECOMMENDATION


9. The staff recommends Alternative 2. The staff believes that a Q&A format answering specific questions will not properly address all constituent concerns and may create the need for more implementation guidance in the future.




QUESTION FOR THE BOARD


10. Does the Board agree with the staff's recommendation?




ISSUE 2: THE CONTENT OF THE PROPOSED FSP


11. After reviewing the comment letters, the staff believes the comments and questions raised by respondents can be addressed by providing guidance to answer the following three questions:



a. Whose income tax is it?



b. What is a tax position?



c. How does Interpretation 48 apply to consolidated/combined financial statements?



12. Comments and questions also raised the issue of whether a tax is an income tax or not. The staff recommends not addressing this issue in the proposed FSP because the staff believes that whether a tax is an income tax is outside the scope of this project. The purpose of the proposed FSP is to address issues relating to Interpretation 48 as it applies to pass-through and tax exempt not-for-profit entities. The question of whether a tax is an income tax or not relates to Statement 109 and applies to all entities whether or not they are pass-through entities or tax exempt not-for-profit entities.



13. Does the Board agree with the staff's recommendation to exclude from the proposed FSP the issue of whether a tax is an income tax?




ISSUE 2A: WHOSE TAX IT IS?


14. Many respondents mentioned the fact that some jurisdictions do not follow the federal income tax laws regarding the entity's pass-through status. In some jurisdictions, the federal pass-through status is disregarded and the entity is subject to income taxes at the state, local, or foreign level. Some jurisdictions require the entity to pay income taxes on behalf of the owners. Some jurisdictions only require it for nonresident owners. Some jurisdictions allow the owners to file returns. Others do not. Several respondents asked where to record the debit when income taxes are paid by the entity but are being paid on behalf of the owners.



15. The staff believes that deciding if the debit should be to income taxes or a transaction with owners should be based on whose tax it is --the entity's or the owner's. The staff believes deciding whose tax it is should be based on the laws and regulations of the taxing authority. If it is the entity's income tax, the debit should go to income taxes. If it is the owner's income tax, the debit should be recorded as a transaction with the owners. The proposed FSP would provide examples, if needed, to clarify the application of this principle.



16. The staff also considered using agreements between the entity and the owners to determine whose tax it is --the entity's or the owner's. The staff believes this may result in abuse of the system and decided that it is more appropriate to use the laws and regulations of the taxing authority.



17. The staff initially considered the concept of ultimate responsibility based on the laws and regulations of the taxing authority to determine whose tax it is. However, during the research phase, the staff received a letter from a CPA practitioner stating that ultimate responsibility should not be the criterion. He expressed concern that the ultimate responsibility for payment might fall on the entity but the laws and regulations might indicate that the payment is made on behalf of the owners. He suggested the concept of assignment. He suggested that payments on behalf of the owners which have been assigned to the entity should be charged to distributions. If payments are made that exceed the amount assigned to the owners, that excess should be charge to income taxes.



18. The staff discussed the concept of ultimate responsibility with representatives from the Big Four. Two representatives raised the issue of joint and several liability for the income tax. They said that when the entity and the owners are jointly and severally liable for the income tax, ultimate responsibility could not be determined. One representative suggested the concept of primary responsibility. He said primary responsibility could be used when the laws and regulations indicate that both the entity and the owners have ultimate responsibility for payment. The primary responsible party would be determined by whom the taxing authority would go to first for payment.



19. The staff believes the concept of primary responsibility could have unintended consequences. First, it acknowledges that there are others who also are responsible for the income taxes, those who are secondarily liable. Who is primary and who is secondarily liable can be different for two jurisdictions with identical laws and regulations. The staff does not believe it is appropriate to provide guidance that could result in two entities with identical circumstances recognizing different amounts for the same transaction.



20. Also, if primary responsibility is the criterion, in the situation where the entity pays on behalf of the owners making the entity primarily responsible, the entity would have an income tax expense, which is counterintuitive. Because the taxing authority often goes to the entity first because it is administratively easier, there could be a situation in which the owners could utilize the payments on their returns when the entity is primarily responsible.




STAFF RECOMMENDATION


21. Based on the comments received, the staff believes the determination of whose income tax it is should be based on attribution of the income tax to the entity or its owners based on the laws and regulations of the taxing authority, rather than who has ultimate responsibility for paying the tax. The staff believes determining attribution of income taxes to either the entity or its owners rather than the responsibility for payment will resolve the issues raised in paragraphs 18 and 19. If income taxes are attributed to the entity based on the laws and regulations of the taxing authority, the debit should be to income taxes and Interpretation 48 would apply. If income taxes are attributable to the owners, the debit should be treated as a transaction with owners.



22. Management also should consider all the facts and circumstances when determining whether to attribute income taxes to the entity or its owners. If the laws and regulations state that the payments are on behalf of the owners, it would be an indication that the income taxes are attributable to the owners. If the laws and regulations indicate that the owners have the ability to utilize payments on their income tax returns, it also would be an indication that the income taxes are attributable to the owners. Management may consider who has responsibility to pay the income taxes, but that consideration would be used as part of the analysis rather than the overriding factor.



23. In summary, the staff proposes that based on the laws and regulations of the taxing authority when income taxes are attributed to the owners, the transaction should be treated as transaction with the owners. If the income tax is attributed to the entity, the transaction should be treated as income taxes subject to Statement 109 and Interpretation 48.



24. The guidance will include examples as needed, to illustrate the application of this guidance.




QUESTIONS FOR THE BOARD


25. Does the Board agree with the staff's recommendation to use the concept of attribution?



26. If not, does the Board prefer the assignment concept, ultimate responsibility, primary responsibility, or another approach?




ISSUE 2B: WHAT IS A TAX POSITION?


27. Another common theme among the comments and questions is whether certain situations create uncertain tax positions. [Emphasis added.]



28. The term tax position is defined in paragraph 4 of Interpretation 48 as follows:



The term tax position as used in this Interpretation refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for interim or annual periods. A tax position can result in a permanent reduction of income taxes payable, a deferral of income taxes otherwise currently payable to future years, or a change in the expected realizability of deferred tax assets.




STAFF RECOMMENDATION


29. The staff believes that issues relating to tax positions can be resolved by referencing the definition of tax position in paragraph 4 of Interpretation 48. The staff also believes that the guidance should clarify that all tax positions can be uncertain. In other words, the proposed FSP should not define uncertain tax positions. Rather, it should clarify the concept of a tax position. Management should be using professional judgment when evaluating the level of uncertainty in the tax positions taken based on all the facts and circumstances.



30. Examples would be provided as needed, to illustrate the application of the proposed guidance.




QUESTION FOR THE BOARD


31. Does the Board agree with the staff's approach?




ISSUE 2C: HOW DOES INTERPRETATION 48 APPLY TO CONSOLDIATED/COMBINED FINANCIAL STATEMENTS?


32. Another area of concern identified in the comments and questions relates to consolidated or combined financial statements. Respondents asked about situations where a pass-through entity has subsidiaries that are taxable entities.



33. The staff believes that the underlying issue in the comments and questions is whether the parent's status as a taxable, pass-through, or tax exempt not-for-profit entity should govern whether Interpretation 48 is applicable. There seems to be confusion about whether the parent's status would override the tax status of any entities included with the consolidated group. The staff believes this question can be answered by referencing consolidation standards that would require that consolidated financial statements present the results of operations and the financial position of a parent and all its subsidiaries as if the consolidated group were a single economic entity. Therefore, if any entity within the group is subject to Interpretation 48, it should be reflected in the consolidated statements whether or not the parent is a pass-through or tax exempt not-for-profit entity. In other words, one should look at each member of the group to determine whether it is subject to Interpretation 48. If so, the results of applying the Interpretation should be included within the consolidated statements.




STAFF RECOMMENDATION


34. The staff believes that for situations in which the reporting entity has consolidated entities some of which apply Interpretation 48 and some that do not, the guidance should indicate that the consolidated financial statements should include tax positions for each entity within the consolidated group that has applied Interpretation 48 or has taxable income assigned to it from a pass-through subsidiary. The staff suggests that the proposed FSP also state that management should apply consolidating standards to determine what needs to be included in the financial statements.



35. Examples would be provided as needed, to illustrate the applicability of the guidance.




QUESTION FOR THE BOARD


36. Does the Board agree with the staff's approach?




ISSUE 3: EFFECTIVE DATE AND TRANSITION STAFF RECOMMENDATION


37. The staff recommends that the proposed FSP be effective upon issuance for entities currently applying Interpretation 48. For entities that have deferred the application of Interpretation 48, the staff recommends that this FSP be applied upon initial adoption of Interpretation 48.




QUESTION FOR THE BOARD


38. Does the Board agree with the staff's recommendation?


The staff prepares Board meeting handouts to facilitate the audience's understanding of the issues to be addressed at the Board meeting. This material is presented for discussion purposes only; it is not intended to reflect the views of the FASB or its staff. Official positions of the FASB are determined only after extensive due process and deliberations.