IRS Releases Drafts of Uncertain Tax Positions Schedule and Instructions

General Instructions

A tax position is required to be reported on a Schedule UTP attached to a particular tax year's return if (a) at least 60 days before filing the tax return a reserve has been recorded with respect to that tax position, or at least 60 days before filing the tax return a decision was made not to record a reserve based on an expectation to litigate or an IRS administrative practice, and (b) the tax position has been taken by the corporation in a tax return for the current tax year or a prior tax year.

A tax position must be reported regardless of whether the audited financial statement is prepared based on United States generally accepted accounting principles (GAAP), International Financial Reporting Standards (IFRS), or other country-specific accounting standards, including a modified version of any of the above (for example, modified GAAP) that requires a taxpayer to record a reserve for federal income tax positions.

A tax position is based on the unit of account in the audited financial statements in which the reserve is recorded. A tax position taken in a tax return means a tax position that would result in an adjustment to a line item on that tax return if the position is not sustained. A line item on a tax return may be affected by multiple units of account, in which case each unit of account must be reported separately on Schedule UTP.

Reporting current year and prior year tax positions. Tax positions taken by the corporation in the current year's tax return for which the decision whether to record the reserve was made at least 60 days before filing the tax return are reported on Part I. Tax positions taken by the corporation in a prior year's tax return for which the decision whether to record the reserve was made at least 60 days before filing the tax return are reported on Part II. A corporation is not required to report a tax position it has taken in a prior tax year if the corporation reported that tax position on a Schedule UTP filed with a prior year tax return. If a transaction results in tax positions taken in more than one tax return (and a decision whether to reserve has been made), the tax positions arising from the transaction must be reported on Part I of the Schedule UTP attached to each tax return in which a tax position resulting from the transaction is taken regardless of whether the transaction or a tax position resulting from the transaction was disclosed in a Schedule UTP filed with a prior year's tax return. See Example 6. Do not report a tax position on Schedule UTP before the tax year in which the tax position is taken in a tax return by the corporation.

Determinations made within 60 days prior to filing the tax return. Tax positions for which a reserve was recorded within 60 days before filing a tax return, or a decision not to record a reserve was made during that same period based on an expectation to litigate or an IRS administrative practice, must be reported either on Part I of the Schedule UTP for the current year or on Part II of the Schedule UTP for the next tax year.

Concise description of tax position. A corporation that reports a tax position in either Part I or Part II is required to provide a concise description of each tax position on Part III. See Examples 14, 15, and 16.

Transition rules. A corporation is not required to report on Schedule UTP a tax position taken in (a) a tax year beginning before December 15, 2009, or (b) a tax year beginning on or after December 15, 2009, and ending before January 1, 2010, regardless of whether or when a reserve was recorded with respect to that tax position.

Electronic Filing. [RESERVED]

Schedule UTP must accompany a tax return and should not be filed separately. A taxpayer that files a protective Form 1120, 1120 F, 1120 L, or 1120 PC must file Schedule UTP if it satisfies the requirements set forth above.

Affiliated groups. An affiliated group of corporations filing a consolidated return will file a Schedule UTP for the affiliated group. The affiliated group need not identify the member of the group to which the tax position relates or which member recorded the reserve for the tax position. Any affiliate that files separately and satisfies the requirements set forth above must file a Schedule UTP with its return setting forth its own tax positions.

Record a reserve. In general, a corporation or a related party records a reserve with respect to a tax position taken by the corporation when any of the following occurs in an audited financial statement of the corporation or a related party:

Examples -- All examples assume the corporation is a calendar year taxpayer Example 1 (general rule regarding recording a reserve). A corporation has an investment in a partnership and receives a Form 1065 Schedule K-1 from the partnership stating the corporation's share of ordinary income is $100. The partnership took a tax position in its 2010 tax return that resulted in the exclusion of $20 of income reported on the corporation's Schedule K-1. The corporation excluded the $20 of income from its 2010 tax return, and on September 30, 2010, the corporation recorded a reserve with respect to this tax position taken in the 2010 tax return. Because the corporation recorded a reserve for the tax position taken in the 2010 tax year more than 60 days before filing its tax return for the 2010 tax year, the corporation must report the tax position on the Schedule UTP filed with its 2010 tax return.

Example 2 (reserve increase). A corporation took a tax position in its 2010 tax return and recorded a reserve for the tax position on September 30, 2010. On December 31, 2012, the corporation increased its reserve with respect to the tax position taken in its 2010 tax return. Because the corporation recorded a reserve with respect to its 2010 tax position more than 60 days before filing its 2010 tax return, the corporation must report the 2010 tax position on the Schedule UTP filed with its 2010 tax return. The taxpayer is not required to report the 2010 tax position again on its 2012 tax return as a result of the reserve increase in 2012.

Related party. A related party is any entity that is related to the corporation under sections 267(b), 318(a), or 707(b), or any entity that is included in a consolidated audited financial statement in which the corporation is also included.

Examples -- All examples assume the corporation is a calendar year taxpayer.

Example 3 (related party general rule). Corporation A is a corporation filing Form 1120 with $20 million of assets. Corporation B is a foreign corporation not doing business in the United States and is related party to Corporation A. Corporations A and B issue their own audited financial statements. If Corporation A has taken a tax position in a tax return, but does not record a reserve with respect to that tax position in its own audited financial statements, that tax position must be reported by Corporation A on its Schedule UTP if the audited financial statements of Corporation B include a reserve with respect to that tax position.

Example 4 (reserve recorded in consolidated financial statement). Corporation C files a Form 1120 and has assets of $20 million. Corporations C and D issue a consolidated audited financial statement, but they do not file a consolidated tax return. Corporation C has taken a tax position for which a reserve was recorded in the consolidated financial statements of Corporations C and D. The tax position taken by Corporation C on its tax return must be reported on its Schedule UTP because a reserve was recorded for its tax position in a consolidated financial statement in which Corporation C was included.

Reserve not recorded based on administrative practice. A tax position required to be reported on Schedule UTP includes a tax position for which a reserve would have been recorded in the audited financial statement but for a determination that, based upon past administrative practices and precedents of the IRS in dealing with the tax position of the taxpayer or similar taxpayers, the IRS has a practice of not challenging the tax position during an examination.

Reserve not recorded based on expectation to litigate. A tax position required to be reported on Schedule UTP includes a tax position for which a reserve was not recorded in the audited financial statement after the taxpayer or a related party determines that, if the IRS had full knowledge of the tax position it is unlikely a settlement could be reached. For this purpose, a settlement is unlikely if the probability of settlement is less than 50%.

Example 5 (expectation to litigate). A corporation takes a position that it can exclude certain income from its 2010 tax return. On September 30, 2010, the corporation determines that, if the IRS had full knowledge of the tax position, there is less than a 50% probability of settling the issue with the IRS. The corporation also determines that, if the tax position were litigated, it has a 60% probability of prevailing in the litigation. Based upon these determinations, the corporation did not record a reserve for the tax position. Because the corporation made a decision not to record a reserve with respect to its 2010 tax position based on a determination, consistent with applicable accounting standards, that it will litigate, rather than settle, the issue with the IRS and that the corporation will prevail in the litigation, and because that decision was made more than 60 days before filing its 2010 tax return, the corporation must report this tax position on the Schedule UTP filed with its 2010 tax return.

Tax position taken in a tax return. A tax position taken in a tax return means a tax position that would result in an adjustment to a line item on that tax return (or would be included in a section 481(a) adjustment) if the position is not sustained.

Examples -- All examples assume the corporation is a calendar year taxpayer

Example 6 (permanent differences). A corporation incurs an expenditure in its 2010 tax year and takes the position that the expenditure may be amortized over 5 years beginning in its 2010 tax return. The corporation determines it is uncertain whether any current deduction or amortization of this expenditure is allowable. The corporation has taken a tax position in each of the 5 tax years because in each year's tax return there would be an adjustment to a line item on that return if the position taken in that year is not sustained.

Example 7 (temporary difference). A corporation incurs an expenditure in its 2010 tax year and claims a deduction for the entire amount on its 2010 tax return. The corporation determines it is uncertain whether the deduction is allowable in the 2010 tax year or the amount instead is amortizable over 5 years. The corporation has taken a tax position in each of the 5 years, even though it claimed a deduction in a single year, because in each year's tax return there would be an adjustment to a line item on that return if the position taken in that year is not sustained.

Example 8 (use of expiring net operating loss carryforward). A corporation has a $100 net operating loss carryforward that will expire unless it is used in the 2010 tax year. The corporation reports $100 of income in 2010 but is uncertain whether the income should be reported in 2010 or 2011. The corporation has taken a tax position in each of its 2010 and 2011 tax returns because in each return there would be an adjustment to a line item on that return if the position taken in that year is not sustained.

Whether any of the tax positions taken in Examples 6, 7, or 8 must be reported on Schedule UTP in a particular tax year depends upon whether a reserve is recorded in an audited financial statement or is not recorded because of an expectation to litigate or an IRS administrative practice.

Unit of account. A unit of account is the level of detail used in analyzing a tax position, taking into account both the level at which the taxpayer accumulates the information to support the tax return and the level at which the taxpayer anticipates addressing the issue with the IRS. The unit of account used by a GAAP or modified GAAP taxpayer for reporting a tax position on Schedule UTP must be the same unit of account used by the taxpayer for GAAP or modified GAAP. In the case of audited financial statements prepared under other accounting standards, a unit of account based on an entire tax year or entire income tax return for a tax year may not be used as the basis for determining a tax position to be reported on Schedule UTP, even if that is the level of detail used for other applicable accounting standards, such as IFRS. In such cases, a unit of account that may be used as the basis for determining a tax position to be reported on Schedule UTP is any level of detail that is consistently applied and reasonably based on the items of income, gain, loss, deduction or credit.

The MTA does not include interest or penalties. The effects of a tax position on state, local, or foreign taxes are disregarded when computing the MTA.

Each item of income, gain, loss, deduction or credit relating to a tax position taken in a tax return is determined separately and may only be offset by other such items relating to that tax position. For example, if a $100 deduction is associated with a tax position taken in a tax return, enter $35 on Schedule UTP, even if that deduction is used to offset $100 of income generated by general operations of the business. Likewise, if $200 of income is associated with a tax position taken in a tax return, enter $70 [($200 x 0.35)] on Schedule UTP, even if the $200 of income was offset by $200 of net operating losses. Items of income, gain, loss, deduction, or credit associated with a tax position may offset each other in determining the MTA for that tax position. For example, if income of $100 is associated with a tax position taken in a tax return and a deduction of $300 is associated with that same tax position, then the MTA is $70 [($300 - $100) x 0.35].

Affiliated groups. The determination of the MTA for a tax position taken in a tax return by an affiliated group is to be determined at the affiliated group level and must take into account all items of income, gain, loss, deduction, or credit with respect to that tax position for all members of the affiliated group.

Determination of MTA for valuation and transfer pricing tax positions. A determination of a maximum tax adjustment amount is not required for valuation or transfer pricing tax positions. Instead, the MTA reporting requirement is satisfied by indicating whether the tax position is a valuation or a transfer pricing tax position and by providing a ranking of these tax positions based on either the amount recorded as a reserve for United States federal income tax for that tax position taken in the tax return, or the estimated adjustment to United States federal income tax that would result if the tax position taken in the tax return is not sustained. For tax positions that relate to items of income, gain, loss, and deduction, estimate the total amount in dollars and multiply by 0.35 (35%). The corporation may choose either method and is not required to describe the method chosen or report the reserve or adjustment amounts for the reported positions. The method selected must be consistently applied to all valuation tax positions and transfer pricing tax positions reported on this schedule. The rankings should be done separately for the valuation tax positions and the transfer pricing tax positions. See Specific Instructions to Parts I and II, Column F.

Other disclosures and penalties. [RESERVED]

Example 9 (temporary difference). A corporation incurs an expenditure in 2010 and claims the entire amount as a deduction on its 2010 return. On September 30, 2010, the corporation determines it is uncertain whether the expenditure should instead be amortized over 5 years and records a reserve with respect to the position taken in 2010. The corporation did not record a reserve for any of the positions taken in tax years 2011 through 2014. The corporation has taken a tax position in each of the 5 tax years because in each year's tax return there would be an adjustment to a line item on that return if the position taken in that year is not sustained. The tax position taken in the 2010 tax year must be reported on Part I of Schedule UTP filed with the 2010 tax return because a reserve was recorded with respect to the tax position more than 60 days before filing that return. None of the 2011 to 2014 tax positions must be reported on Schedule UTP because the corporation did not record a reserve with respect to any of those tax positions.

Example 10 (permanent differences). A corporation incurs an expenditure in 2010 and takes the position that the expenditure may be amortized over 5 years beginning in its 2010 tax return. The corporation determines it is uncertain whether any deduction or amortization of this expenditure is allowable. On September 30 of each year beginning in 2010, the corporation records a reserve with respect to the amortization deduction claimed in each tax year. The corporation has taken a tax position in each of the 5 tax years because in each year's tax return there would be an adjustment to a line item on that return if the position taken in that year is not sustained. Because the corporation recorded a reserve for the 2010 tax position more than 60 days before filing the 2010 tax return, the corporation must report the 2010 tax position on Part I of Schedule UTP for the 2010 tax year. In addition, because the corporation recorded a reserve more than 60 days before filing its tax returns for tax years 2011 through 2014, the tax position taken in each of those tax years must be reported on Part I of the Schedule UTP filed with the tax return for the respective tax year in which the tax position was taken.

Example 11 (transition rule). The facts are the same as in Example 10, except that the corporation incurred the expenditure and recorded the reserve in 2009. The corporation has taken a tax position in each of the 5 tax years (2009 through 2013) because in each year's tax return there would be an adjustment to a line item on that return if the position taken in that year is not sustained. However, the corporation should not report the tax position taken in the 2009 tax year because it was taken in a tax year beginning before December 15, 2009. Because the corporation recorded a reserve more than 60 days before filing its tax returns for tax years 2010 through 2013, the tax position taken in each of those tax years must be reported on Part I of the Schedule UTP filed with the tax return for the respective tax year in which the position was taken.

The following chart illustrates when and how to report tax positions on Schedule UTP.

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All examples assume the corporation is a calendar year taxpayer

Example 12. On February 15, 2011, a corporation records a reserve relating to a tax position taken in its tax return for the 2010 tax year. The corporation files its 2010 tax return on September 15, 2011. Because the reserve for the 2010 tax position was recorded at least 60 days before filing the 2010 return, the corporation must report the 2010 tax position on Part I of Schedule UTP filed with its 2010 tax return.

Example 13. A corporation incurs a $50 expenditure in 2010 and claims the entire amount as a deduction on its 2010 tax return. The deduction increases the corporation's net operating loss carryforward from $100 to $150. The corporation uses the entire $150 net operating loss carryforward in its 2011 tax return. Claiming the $50 deduction in 2010 is a tax position taken in the 2010 tax year because the position would result in an adjustment to a line item on the 2010 tax return if the position is not sustained. The deduction in 2011 of the net operating loss carried forward from 2010 is a 2011 tax position, because the position would result in an adjustment to a line item on the 2011 tax return if the position is not sustained. The corporation did not record a reserve with respect to its 2010 tax position, but did record a reserve on September 30, 2011, with respect to its 2011 tax position. Because the corporation did not record a reserve with respect to the tax position taken in 2010, the 2010 tax position is not required to be reported on Schedule UTP. However, because the corporation recorded the reserve for the 2011 tax position more than 60 days before filing its 2011 tax return, the 2011 tax position must be reported on Part I of Schedule UTP filed with the tax return for the 2011 tax year.

Specific Instructions for Part II [This section will not be completed in 2010]

Specific Instructions for Part III

Provide a concise description of the tax position, including information that reasonably can be expected to apprise the IRS of the identity of the tax position and the nature of the uncertainty. The description must include a statement that the position involves an item of income, gain, loss, deduction, or credit against tax; a statement whether the position involves a determination of the value of any property or right or a computation of basis; and the rationale for the position and the reasons for determining the position is uncertain. In most cases, the description should not exceed a few sentences.

Examples of concise descriptions

Example 14. The corporation investigated and negotiated several potential business acquisitions during the tax year. One of the transactions was completed during the tax year, but all other negotiations failed and the other potential transactions were abandoned during the tax year. The corporation deducted costs of investigating and partially negotiating potential business acquisitions that were not completed, and capitalized costs allocable to one business acquisition that was completed. The issue is the allocation of costs between failed acquisitions and the successful acquisition.

Example 15. The corporation entered into a loan transaction in which it made a general pledge of its assets to its lender. The corporation's assets include stock of FSub, a wholly-owned foreign subsidiary. FSub reports no earnings and profits for U.S. federal income tax purposes based on its treatment of an item of income that defers income recognition to a later year. The corporation has taken the position that the pledge of FSub stock did not result in an investment in U.S. property under section 956. The issue is whether there was an investment in U.S. property causing a deemed distribution of FSub earnings to the corporation as a result of the treatment of an item of FSub's income that defers its recognition.

Example 16. The corporation received a cash distribution from Venture LLC (Venture LLC is treated as a U.S. partnership for tax purposes). The corporation claims the distribution is not taxable because it did not exceed the corporation's basis in its interest in Venture LLC. The issue concerns (1) the computation of basis in the Venture LLC interest, and (2) the application of the disguised sale and partnership antiabuse rules of Subchapter K and regulations thereunder to recharacterize the transaction as other than a distribution.