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The accounting for uncertain tax positions in the separate financial statements of a member of a consolidated tax group is the same as the accounting applicable to the consolidated group. We believe the assumptions used for determining the unrecognized tax benefits in the separate financial statements of the group member should be consistent with those used in the consolidated financial statements. This is because the assumptions made by management of the consolidated group form the basis for the consolidated tax provision that is being allocated.
In addition, the separate financial statements of a member of a consolidated group should generally include disclosures related to the uncertain tax provisions. The level of disclosures, however, may vary depending on the tax allocation method.
Example TX 14-9 illustrates the accounting for uncertain tax positions in the separate financial statements of a carve-out entity.
EXAMPLE TX 14-9
Uncertain tax positions in the separate financial statements of a carve-out entity
Company A intends to sell a portion of its business to Company B in a transaction structured as an asset sale. The business to be sold (the “Carve-out”) does not comprise a separate legal entity. Financial statements for the Carve-out have not previously been prepared, but Company A will do so for the first time in conjunction with the transaction. The stand-alone financial statements will cover the three-year period ended December 31, 20X1.
In 20X1, Company A recorded a liability for unrecognized tax benefits related to certain deductions claimed on its income tax return but for which no benefit was recognized in the consolidated financial statements. The deductions in question arose from expenses incurred by the Carve-out and reflected in the Carve-out's stand-alone statement of operations. The liability for unrecognized tax benefits will remain with Company A subsequent to the sale of the Carve-Out to Company B. The Carve-out's tax accrual and provision will be prepared using the separate return method.
Should the Carve-out record any income tax benefit for the position taken on the consolidated tax return? If not, should the liability for unrecognized tax benefits be included in the Carve-out's separate financial statements?
Analysis
Because the tax position relates to the activities of the Carve-out, on a separate return basis the Carve-out would reach the same conclusion as Company A in the consolidated accounts. This is because the assumptions made by management at the consolidated level form the basis for the consolidated tax provision being allocated. No income tax benefit would be recognized for those expenses for which no benefit was recognized in consolidation.
With respect to the resulting liability for unrecognized tax benefits, we believe two alternatives are acceptable in the separate financial statements of Carve-out:
  1. Present a liability for unrecognized tax benefits in its separate financial statements. Reflecting the contingent liability in the Carve-out financial statements reflects the fact that on a stand-alone basis, Carve-out has an incremental liability for unpaid taxes for the deduction claimed that did not meet the recognition and measurement criteria under ASC 740.
  2. Reflect a capital contribution for Company A’s assumption of the liability for unrecognized tax benefits. Reflecting the contingent liability as a contribution of capital in the Carve-out financial statements reflects the fact that the contingent liability would remain with Company A subsequent to disposition.
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