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Once entities have identified their uncertain tax positions, they need to determine when, if ever, the tax return benefit (or expected tax return benefit) should be recognized for financial reporting purposes. The following principles should be employed when assessing the recognition of benefits from an uncertain tax position.

ASC 740-10-25-6

An entity shall initially recognize the financial statement effects of a tax position when it is more-likely-than-not, based on the technical merits, that the position will be sustained upon examination. 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. For example, if an entity determines that it is certain that the entire cost of an acquired asset is fully deductible, the more-likely-than-not recognition threshold has been met. The more-likely-than-not recognition threshold is a positive assertion that an entity believes it is entitled to the economic benefits associated with a tax position. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold shall consider the facts, circumstances, and information available at the reporting date. The level of evidence that is necessary and appropriate to support an entity’s assessment of the technical merits of a tax position is a matter of judgment that depends on all available information.

ASC 740-10-25-7

In making the required assessment of the more-likely-than-not criterion:
  1. It shall be presumed that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information.
  2. Technical merits of a tax position derive from sources of authorities in the tax law (legislation and statutes, legislative intent, regulations, rulings, and case law) and their applicability to the facts and circumstances of the tax position. When the past administrative practices and precedents of the taxing authority in its dealings with the entity or similar entities are widely understood, for example, by preparers, tax practitioners and auditors, those practices and precedents shall be taken into account.
  3. Each tax position must be evaluated without consideration of the possibility of offset or aggregation with other positions.

15.3.1 More-likely-than-not recognition threshold

For a position to qualify for benefit recognition, the position must have at least a more-likely-than-not chance of being sustained based on its technical merits if challenged by the relevant taxing authorities and taken by management to the court of last resort.
In deciding whether a tax position meets the recognition threshold, an entity must assume that the taxing authority has full knowledge of the position and all relevant facts available as of the reporting date. That is, an entity must be able to conclude that the tax law, regulations, case law, and other objective information regarding the position’s technical merits sufficiently support the sustainability of the position’s benefits with a likelihood that is greater than 50% (detection or examination risk should not be considered).
If an entity decides that a particular position meets the more-likely-than-not recognition threshold, the entity essentially asserts its belief that it is entitled to the economic benefits associated with a tax position. If management cannot reach this conclusion, none of the tax benefit provided by the position can be currently reflected in the financial statements.
Question TX 15-1 addresses considerations for determining whether a position meets the more-likely-than-not recognition threshold when a tax law requires more than one criteria be met to sustain a tax position.
Question TX 15-1

Assume tax law on a particular tax position includes three criteria a company needs to meet in order for the position to be sustained. A company asserts it has a 95% chance of meeting the first two criteria, but only a 40% chance of meeting the third criterion. In determining whether the position meets the more-likely-than-not recognition threshold, should the company evaluate the position by (1) averaging the three probabilities, (2) aggregating the three probabilities, or (3) evaluating each criteria individually?
PwC response
The company should evaluate each of the criteria individually when determining if the position meets the recognition threshold for uncertain tax benefits. None of the tax benefit provided by the position can be currently reflected in the financial statements unless all three criteria meet the more-likely-than-not requirement of ASC 740. In effect, recognition of a benefit for the position is based upon the weakest link in the chain. In this instance, since the third criterion does not meet this standard, the company should not recognize a tax benefit for this uncertain tax position.

Management should consider a wide range of possible factors when asserting that the more-likely-than-not recognition threshold has been met. The entity’s processes should ensure that all relevant tax law, case law, and regulations, as well as other publicly available experience with the taxing authorities, have been considered.
A tax position that is supported by little authoritative guidance or case law may still have a more-likely-than-not chance of being sustained based on the facts, circumstances, and information available at the reporting date. The absence of specific authoritative guidance or case law does not automatically preclude a more-likely-than-not determination. Rather, other sources of authoritative tax law, although they do not specifically address the tax position, could be relevant in concluding whether a position meets the more-likely-than-not recognition threshold.
Example TX 15-1 illustrates the meaning of the term “court of last resort” in determining whether a position has at least a more-likely-than-not chance of being sustained based on the technical merits if challenged by the relevant taxing authorities and taken by management to the court of last resort.
EXAMPLE TX 15-1
The meaning of the term “court of last resort”
State A has enacted a tax law that utilizes a nexus model that subjects Company B to income taxes in State A. Company B does not meet the more-likely-than-not recognition threshold based on the tax law as currently written in State A. In determining whether the recognition criteria is met, Company B considers whether its tax benefit would be sustained in a court of last resort, as per the guidance in ASC 740-10-55-3. Company B believes that the court of last resort would be the US Supreme Court, as this is the highest court that could potentially hear its case. Company B believes that it is more-likely-than-not that the tax law enacted by State A would be overturned by the US Supreme Court based on the constitutional grounds of state tax law and an economic nexus model. Company B’s view is supported by a competent legal analysis although Company B is aware that the US Supreme Court refused to hear a similar case.
Does Company B meet the more-likely-than-not recognition threshold?
Analysis
Yes. As part of determining whether the uncertain tax position meets the recognition threshold, Company B would include an assessment based on the technical merits of whether the issue is in conflict with federal law. As a result, the technical analysis of whether State A’s tax law would be overturned by federal law should be considered. A denial of a request for a hearing by the court of last resort is considered company specific and does not impact Company B’s assessment. Company B should not take into account the court of last resort’s decision not to hear another company’s similar case. Company B also does not need to consider the likelihood of its case ultimately being heard by the court of last resort.
Note that both the likelihood of a settlement with the state taxing authority and the likelihood that the US Supreme Court will hear the case may factor into the measurement of an unrecognized tax benefit. See TX 15.4 for a discussion of the measurement requirements.

Determining whether the recognition threshold has been met is often fact-dependent and requires considerable reliance on professional judgment. Two entities with similar positions might reasonably arrive at different conclusions, depending on which factors management believes are relevant and how those factors are weighted. Management should ensure that its judgments and estimates are reasonable and that the underlying internal control processes are reliable.

15.3.1.1 Sources of authoritative tax laws

Sources of tax authority that should be considered in determining whether an uncertain tax position meets the recognition threshold vary depending on the jurisdiction (federal, state, or foreign) within which a tax position arises. In general, relevant sources include statutes (including the underlying legislative intent), regulations, certain taxing authority rulings, case law, and treaties. For US federal income tax purposes, those authorities include, but are not limited to:
  • Internal Revenue Code (IRC) and other statutory provisions
  • Regulations interpreting such statutes
  • Revenue Rulings, Revenue Procedures, Notices, and Announcements
  • Tax treaties and regulations thereunder and Treasury Department and other official explanations of such treaties
  • Court cases
  • Congressional intent as reflected in committee reports, joint explanatory statements, and floor statements made by one of the bill’s managers
  • General explanations of tax legislation prepared by the Joint Committee on Taxation (the “Blue Book”)
  • Internal Revenue Service information or press releases
  • Pronouncements published in Internal Revenue Bulletins
  • Private Letter Rulings, Technical Advice Memoranda, Chief Counsel Advice, Field Service Advice, and similar documents
When determining whether recognition has been satisfied, entities should consider the weight of the particular authorities cited in relation to the weight of authorities supporting contrary treatment, and the authorities’ relevance, persuasiveness, and the types of document providing the authority. Also, an authority does not continue to be an authority to the extent that it is overruled or modified by a body with the power to overrule or modify the authority.
In the US, when a tax position arises in a state or local jurisdiction, Public Law 86-272 (which governs state nexus requirements in interstate commerce) and any similar federal laws governing interstate commerce are considered authoritative, in addition to the particular state’s tax statutes and regulations. When a tax position arises in a foreign jurisdiction, continental business and tax legislation (e.g., the European Union Directives that govern taxation of cross-border flow of dividends, royalties, and interest within member states) may also be considered authoritative, depending on the jurisdiction.
In addition, certain rulings and agreements issued to the taxpayer by the taxing authority would typically form the basis for meeting the recognition threshold, provided the decision therein is favorable to the taxpayer and if the facts and representations that form the basis of the ruling are complete and accurate. These authorities include, for example:
  • Private Letter Rulings or a Technical Advice Memorandum
  • Advance Pricing Agreements, which are entity-specific transfer pricing agreements with the taxing authority
  • Competent Authority resolution, which is a formal agreement between the taxing authorities of two countries interpreting provisions in a bilateral income tax treaty for the elimination of double taxation applicable to entity-specific facts and circumstances
  • Pre-filing agreements
As it relates to taxpayers who were not a party to the ruling or agreement, such rulings/agreements are generally not binding on the taxing authority and are of more limited authority.

15.3.1.2 Tax opinions and external evidence

ASC 740-10-25-6 acknowledges that the “level of evidence that is necessary and appropriate to support an entity’s assessment of the technical merits of a tax position is a matter of judgment that depends on all available information.” The standard contains no explicit requirement to obtain an opinion from tax counsel. Whether management decides to obtain a tax opinion to affirm the sustainability of a position based on its technical merits depends, among other things, on the significance (e.g., its nature and complexity) of a tax position taken or expected to be taken on a tax return. A large number of tax positions will have clear support in the tax law and will not require substantial documentation to satisfy the recognition assessment. For example, the tax law may clearly allow a deduction for a noncash expense but there is uncertainty about the amount of benefit. However, there will also be a number of positions that require management to expend a significant amount of time and energy gathering evidence in support of its more-likely-than-not assertion. For these types of positions, it may be useful to obtain a more-likely-than-not opinion from an outside tax adviser.
When appropriate, management should document its conclusion, including the information and factors considered, how those factors were weighted, and which factors might be particularly susceptible to change. Those factors most susceptible to change should be monitored.

15.3.1.3 Examination by taxing authority (detection risk)

ASC 740-10-25-7 and ASC 740-10-30-7 require an entity to assume that an uncertain tax position will be discovered by a taxing authority and that the taxing authority will examine the position with access to all relevant facts and information using resources that have sufficient experience and expertise in the area of tax law creating the uncertainty. ASC 740’s recognition guidance requires entities to presume that a taxing authority has full knowledge of a position, even if the entity has no history of being examined by taxing authorities or the chance of the taxing authority actually identifying the issue (if it were to conduct an audit) is remote.

15.3.1.4 Administrative practices and precedents

According to ASC 740-10-25-7(b), the assessment of whether an entity can sustain a position should be based on the technical merits of the position, including consideration of “administrative practices and precedents.” Administrative practices and precedents represent situations in which a tax position could be considered a technical violation of tax law, but it is widely known, well understood, and a consistent practice of the taxing authority (with full knowledge of the position being taken) to nonetheless accept the position. When asserting that a particular administrative practice or precedent is applicable to a particular tax position, an entity should presume that the taxing authority will examine the position using the same information that is available to the entity.
While administrative practices and precedents do not need to be sanctioned by taxing authorities in formal regulation or letter ruling, it should be clear (through the taxing authorities’ well-known past actions or declarations) that a tax position is more-likely-than-not to be sustained (if examined), despite its apparent conflict with the enacted tax law. Unless it becomes known that the taxing authority will no longer accept a particular administrative practice, preparers should consider these practices in forming their conclusions as to whether a position has satisfied the recognition threshold.
The following ASC paragraphs describe an administrative practice related to asset capitalization.

ASC 740-10-55-91

An entity has established a capitalization threshold of $2,000 for its tax return for routine property and equipment purchases. Assets purchased for less than $2,000 are claimed as expenses on the tax return in the period they are purchased. The tax law does not prescribe a capitalization threshold for individual assets, and there is no materiality provision in the tax law. The entity has not been previously examined. Management believes that based on previous experience at a similar entity and current discussions with its external tax advisors, the taxing authority will not disallow tax positions based on that capitalization policy and the taxing authority’s historical administrative practices and precedents.

ASC 740-10-55-92

Some might deem the entity’s capitalization policy a technical violation of the tax law, since that law does not prescribe capitalization thresholds. However, in this situation the entity has concluded that the capitalization policy is consistent with the demonstrated administrative practices and precedents of the taxing authority and the practices of other entities that are regularly examined by the taxing authority. Based on its previous experience with other entities and consultation with its external tax advisors, management believes the administrative practice is widely understood. Accordingly, because management expects the taxing authority to allow this position when and if examined, the more-likely-than-not recognition threshold has been met.

Use of the administrative practices and precedents accommodation should be limited and considered only if a tax position might be deemed a technical violation of the tax law or if there is compelling evidence that the taxing authority has and is expected to accept the tax position as an administrative accommodation.
A particular agent or examiner within a taxing authority may historically have accepted a position that is generally not accepted by other agents auditing other taxpayers in similar businesses. Regardless of how a particular agent has treated an item in the past, the recognition step requires that tax positions be evaluated on the technical merits of the position. The historical action of one agent or examiner would not represent a consistent administrative practice that is “widely understood” and hence would not generally be relevant in determining whether the recognition threshold has been met.
Administrative practices and precedents available to entities that self-report
Many jurisdictions offer amnesty programs or limit the tax they assess in past periods for taxpayers that voluntarily come forward and admit noncompliance in previous years. However, the administrative practice or precedent that may be available to self-reporting entities for nexus-related issues may not be available to those entities that fail to come forward and are subsequently identified by the taxing authority. Accordingly, it would not be appropriate for an entity that has no intention of coming forward to consider an administrative practice made available to those that do come forward, unless there is substantial evidence that they will be treated the same way as those that self-report.
The same concept may also apply to real estate investment trusts (REITs) and regulated investment companies (RICs) that have uncertain tax positions that could affect their qualification for special treatment under the relevant tax law. These specialized entities can often cite experience with taxing authorities and describe how those authorities have historically handled inadvertent, self-reported disqualifying events that could have led to the entity’s disqualification as a REIT or RIC. Entities with no intention of self-reporting can only rely on the taxing authorities’ practices for handling disqualifications identified during an audit, and only if those practices are widely understood and consistently applied.
Nexus-related administrative practices and precedents
In general, an entity may have some form or combination of legal, structural, or commercial ties to a jurisdiction (e.g., employees, inventory, fixed assets, commissionaire arrangements, contract manufacturing arrangements). An entity with such ties could potentially have nexus, and would therefore be required to file a tax return under the tax laws of the relevant jurisdiction. Absent an applicable administrative practice, a nexus position (i.e., a decision not to file a tax return in a particular jurisdiction if nexus potentially exists) that does not meet the recognition threshold would require the accrual of tax, interest, and penalties for the entire period in which nexus could be asserted by the taxing authority.
However, as a matter of administrative convenience, some jurisdictions have limited the number of years for which an entity would be required to file back tax returns. Under ASC 740-10-25-7, that practice should be considered in management’s decision to record tax, interest, and/or penalties.
ASC 740-10-55-94 through ASC 740-10-55-95 provide the following example about the use of administrative practices and precedents within the context of nexus.

ASC 740-10-55-94

An entity has been incorporated in Jurisdiction A for 50 years; it has filed a tax return in Jurisdiction A in each of those 50 years. The entity has been doing business in Jurisdiction B for approximately 20 years and has filed a tax return in Jurisdiction B for each of those 20 years. However, the entity is not certain of the exact date it began doing business, or the date it first had nexus, in Jurisdiction B.

ASC 740-10-55-95

The entity understands that if a tax return is not filed, the statute of limitations never begins to run; accordingly, failure to file a tax return effectively means there is no statute of limitations. The entity has become familiar with the administrative practices and precedents of Jurisdiction B and understands that Jurisdiction B will look back only six years in determining if there is a tax return due and a deficiency owed. Because of the administrative practices of the taxing authority and the facts and circumstances, the entity believes it is more-likely-than-not that a tax return is not required to be filed in Jurisdiction B at an earlier date and that a liability for tax exposures for those periods is not required.

15.3.1.5 Existence of potentially offsetting positions

ASC 740-10-25-7 requires that each tax position be evaluated on its own information, facts, and technical merits, without consideration of the possibility of offset or aggregation with other tax positions. For instance, a corporation must separately assess for recognition each known, significant uncertain tax position, even if the corporation expects that it will prevail on one position because it expects to settle another related tax position.

15.3.1.6 Existence of potential indirect benefits

A liability recorded for one position may cause a tax benefit to be recognized on another position. The resulting indirect benefit of the latter position should not affect the need to separately assess the recognition of a liability on the first tax position. For example, an uncertain tax position taken in a foreign jurisdiction must be separately assessed for recognition of a liability, even though the resulting liability could give rise to a foreign tax credit benefit in the parent jurisdiction. Example TX 15-2 discusses the accounting for indirect effects (i.e., benefits) arising in a jurisdiction that is not the same jurisdiction in which the liabilities arise.
EXAMPLE TX 15-2
Federal effects of unrecognized tax benefits related to state taxes
Company A has taken an uncertain tax position in State X that reduces taxes payable by $100. Company A has determined that it is more-likely-than-not that the position will be sustained upon examination but has recorded a liability of $40 for unrecognized tax benefits in State X (measurement is discussed in TX 15.4).
If Company A is ultimately required to make an additional payment of state taxes, it will receive an additional federal tax deduction.
Should Company A record an asset for the federal tax deduction related to the liability on an unrecognized tax benefit in State X?
Analysis
Yes. Company A should record a federal deferred tax asset (or potentially a current tax receivable depending on the facts and circumstances) for the federal indirect benefit from the potential disallowance of the uncertain tax position in State X.

15.3.1.7 Uncertainties regarding valuation

For tax positions for which the uncertainty is based solely on a transaction’s value (e.g., transfer pricing, value of goods donated), we believe that the recognition threshold has been met if it can be concluded that some level of tax benefit in the year in which the transaction occurred meets the more-likely-not recognition threshold. If the recognition threshold is met, the uncertainty associated with the transaction’s valuation should be addressed as part of measurement. For example, an entity may donate shares in a privately held company to a charity and claim a tax deduction. If the entity’s deduction is certain (based on the position’s technical merits), the tax benefits can be recognized. However, the deduction amount may be uncertain because of complexities surrounding the appropriate fair market value of the donated shares. The entity should consider this valuation uncertainty in determining the measurement of the uncertain tax position (discussed in TX 15.4).

15.3.1.8 Uncertainties related to timing of tax payment

ASC 740 defines a temporary difference as the difference between the tax basis of an asset or liability and its reported amount in the financial statements. ASC 740’s recognition and measurement criteria are applicable to temporary differences between book and tax bases, even if the only uncertainty is the timing of the position taken for tax purposes. For example, assume that an entity deducts for tax purposes the entire balance of an intangible asset in the year of an acquisition. For book purposes, the entity amortizes the intangible asset over five years (leading to a deferred tax liability). While the ultimate deduction of the asset is certain under the relevant tax law, the timing related to whether the deduction can be taken in full in the year of the acquisition is uncertain. Uncertain tax positions relating to temporary differences do not generally affect the aggregate amount of taxes payable over time. However, they can generate an economic benefit by delaying the payment of tax to future periods. Thus, an uncertain tax position associated with the timing of the tax payment can result in an exposure for interest and penalties.
Uncertain tax positions that relate only to timing (i.e., when, not whether, an item of income or expense is included in a tax return) are automatically deemed to meet the more-likely-than-not recognition threshold under ASC 740-10-25-6. See examples 9 and 10 in ASC 740-10-55-110 through ASC 740-10-55-116 for an illustration of the application of the guidance to timing-related uncertainties.
Example TX 15-3 illustrates the recognition of uncertain tax positions that relate only to timing.
EXAMPLE TX 15-3
Recognition of timing-related uncertain tax positions
Company A incurs $100 in repairs and maintenance expenses. For financial statement purposes, Company A expenses the costs as incurred and plans to take the entire $100 as a deduction on its current-year tax return. However, Company A believes that the taxing authority would require straight-line amortization of the $100 expenditure over four years. Therefore, if the as-filed tax position (i.e., the full deduction claimed in the current-year tax return) is not sustained, Company A would be entitled to only a $25 deduction in the current year with the remaining $75 of deductions taken over the next three years. Company A is a profitable taxpayer in the current year, and has a 25% tax rate in this jurisdiction. For purposes of this example, interest is ignored.
How should Company A compute its liability for unrecognized tax benefits and calculate its deferred taxes?
Analysis
Company A has no book basis because it fully expensed the associated costs when incurred. The tax basis would be $75 (the cost of $100 less the current-year permitted deduction of $25). At the reporting date, Company A has a $75 deductible temporary difference and would record the resulting deferred tax asset of $18.75 ($75 × 25%).
Company A would record the following journal entry:
Dr. Income taxes payable
$25
Cr. Current income tax benefit
$  6.25
Cr. Liability for unrecognized tax benefit
$18.75
The journal entry above records (1) the reduction of $25 in income taxes payable for the $100 maintenance deduction ($100 × 25% tax rate), (2) a current tax benefit for the tax effect of the deduction taken on the tax return that meets the recognition and measurement criteria of ASC 740 ($25 × 25% tax rate), and (3) a liability for the tax effect of the amount deducted on the tax return that did not meet the recognition and measurement criteria of ASC 740 ($75 at a 25% tax rate).
The following additional journal entry records the deferred tax asset for the expected future deductible amount associated with the repairs and maintenance costs ($75 × 25% tax rate) determined pursuant to ASC 740’s recognition and measurement criteria (i.e., straight-line amortization over four years, with three years remaining as of the end of the current year).
Dr. Deferred tax asset
$18.75 
Cr. Deferred income tax benefit
$18.75

15.3.1.9 Amended returns and refund claims

Although an uncertain tax position is most commonly associated with a tax liability or the decrease of a tax asset, it can also be associated with cases that result in an increase of a tax asset (e.g., a tax receivable recorded as a result of the filing, or the intent to file, an amended return).
An entity may be in the process of preparing amended returns to claim refunds on taxes paid in prior periods, but may be unable to file the amended returns before the end of the accounting period or before it files the current-period financial statements. If this is the case, all significant tax positions expected to be included in the amended returns or refund claims would need to meet the recognition threshold before the refund receivable can be recognized in the financial statements.
There may be instances in which an entity’s expectations and intentions regarding an amended return or refund claim are unclear. Such situations may require the use of professional judgment to determine whether, or to what extent, the amended return or refund claim can be considered when assessing recognition and measurement criteria.
ASC 740 is applicable to all tax positions that were included on previously filed returns and are expected to be included on returns that have not yet been filed (including amended returns or refund claims that have not yet been filed).Therefore, when a refund claim or an amended return fails the requirement for recognition, the expected tax benefit (i.e., refund receivable) cannot be recognized in the financial statements. A refund receivable recognized in a prior period would be derecognized if it fails the recognition threshold in the current period (i.e., the tax receivable asset would be reversed). That is, because the recognition threshold has not been met, nothing would be recognized in the balance sheet for the refund claim. However, the amount of the refund claim would still be included as an unrecognized tax benefit in the disclosures required under ASC 740-10-50-15.
Courts in some jurisdictions require that taxes in question be paid as a prerequisite to petition the court. If the taxpayer’s position meets the recognition threshold (and no reserve is required in the measurement step), the taxpayer should record an asset for the prepaid tax and accrue interest income (if applicable). Example TX 15-4 illustrates this situation in further detail.
EXAMPLE TX 15-4
Payment for uncertain tax positions prior to final resolution
Company X has taken a position in its tax return that it believes is more-likely-than-not to be sustained. This position has no corresponding impact on deferred tax balances (i.e., it is a permanent item). By taking this position, Company X reduced its taxes payable by $100. After assessing several possible outcomes, Company X has determined the need for a $25 liability for its unrecognized tax benefits.
The taxing authority challenges the position and delivers a $100 assessment to Company X. Company X intends to appeal the assessment. However, the taxing authority requires the assessment to be paid before an appeal can be filed.
Does this payment change the assessment of the uncertain tax position under the ASC 740 model?
Analysis
No. The payment of the assessment does not directly impact the recognition and measurement of the uncertain tax position. The uncertain tax position should continue to be assessed at the balance sheet date as if the payment had not been made. The payment of the tax would be recorded against the UTP. If the payment exceeds the amount of the UTP, any excess would be recorded as a tax receivable.
Given the fact pattern above, Company X would record the following journal entries:
1) Year in which the deduction is claimed on a tax return
Dr. Income tax payable
$100
Cr. Current tax expense
$100
Dr. Current tax expense
$  25
Cr. Liability for unrecognized tax benefits
$  25
2) Payment of required assessment
Dr. Liability for unrecognized tax benefits
$25 
Dr. Income tax receivable
$75
Cr. Cash
$100 

In the US, during an IRS examination, taxpayers may present claims for additional tax benefits that were not reported on the original tax return under examination. Such claims generally arise from new information that was not available when the original return was filed. The IRS policy allows for claims to be submitted during the examination without requiring the filing of an amended return. However, documentation supporting the basis for the claim and the resulting impact on the tax liability must be presented to the IRS during the examination process.
Such claims constitute tax positions subject to ASC 740’s recognition and measurement principles. If the application of ASC 740 would result in no or a partial benefit being reported for the claims, an uncertain tax benefit must be included in the required tabular reconciliation of uncertain tax positions until the tax benefits can be recognized or the statute closes. The disclosure requirement begins when a taxpayer decides to present claims for additional tax benefits (refer to FSP 16.7 for additional discussion of the disclosure requirements for uncertain tax benefits).

15.3.1.10 Uncertain tax positions and valuation allowance assessments

The recognition of an additional tax liability as a result of an uncertain tax position must be distinguished from the assessment of the need for a valuation allowance. The recognition of a liability for an unrecognized tax benefit stems from uncertainty about the sustainability of a tax position taken or expected to be taken on a tax return. The recognition of a valuation allowance stems from uncertainties related to whether taxable income will prove sufficient to realize sustainable tax positions. That is, uncertainties about sustaining tax positions relate to whether a tax liability or deferred tax asset exists. Uncertainties about sufficient taxable income relate to the realization of recorded deferred tax assets. Therefore, valuation allowances may not be used to replace a liability for unrecognized tax benefits.

15.3.2 Unit of account for uncertain tax positions

The unit of account defines the level at which a tax position should be analyzed. A tax exposure could have multiple elements or parts that are interrelated with varying implications on the expected tax benefits. Therefore, the selection of a unit of account (i.e., the appropriate level of disaggregation) can affect the amount of tax benefit that may be recognized in the financial statements. The unit of account is addressed in ASC 740-10-25-13.

ASC 740-10-25-13

The appropriate unit of account for determining what constitutes an individual tax position, and whether the more-likely-than-not recognition threshold is met for a tax position, is a matter of judgment based on the individual facts and circumstances of that position evaluated in light of all available evidence. The determination of the unit of account to be used shall consider the manner in which the entity prepares and supports its income tax return and the approach the entity anticipates the taxing authority will take during an examination. Because the individual facts and circumstances of a tax position and of an entity taking that position will determine the appropriate unit of account, a single defined unit of account would not be applicable to all situations.

For many tax exposures, the selection of the appropriate unit of account is intuitive (e.g., company-wide cost of meals and entertainment in a taxing jurisdiction). However, for some tax exposures, such as a special deduction for qualified domestic manufacturing activities or transfer pricing, determining a unit of account can be a complex exercise that involves a number of different factors (e.g., different jurisdictions, activities, characteristics of the benefits).
To determine the appropriate unit of account, management should consider the facts and circumstances specific to each entity and position, including the tax return computation of a deduction, credit, or income generated by the position, including the workpapers, schedules, and technical analysis that support the calculation. An entity should also consider the audit approach that a taxing authority might take when examining the position and the entity’s audit experience related to the same or similar positions.
The significance of the exposure in relation to the overall tax return may impact the assessment of unit of account. A position that results in a tax return benefit that is significant within the context of the entity’s operations or key measures might suggest that a more disaggregated analysis should be performed.
ASC 740-10-55-83 through ASC 740-10-55-86 provides an example of how to apply the guidance on unit of account.

15.3.2.1 Consistency in a tax position’s unit of account

Once a unit of account for a given tax position has been determined, it should be applied consistently to that position from period to period, unless changes in circumstances suggest that a change in the analysis is warranted. Factors that might prompt management to change its assessment of the appropriate unit of account include, but are not limited to, changes in organizational structure and level of activity, changes in product line or service offering, changes in the regulatory environment, and experience with the taxing authority. These types of changes would be characterized as a change in estimate. See ASC 740-10-55-88 through ASC 740-10-55-89 for an example of when a change in the unit of account may be warranted.

15.3.2.2 Consideration of offsetting positions

The unit of account of a particular tax position should be based on an individual tax position’s facts and technical merits. The possibility of offset in the same or another jurisdiction or the possibility that the position might be part of a larger settlement should not affect the determination of the unit of account.

15.3.2.3 Consideration of offsetting uncertain tax positions

An entity may have multiple transactions or positions that are similar and likely to be evaluated in aggregate by the relevant taxing authority. In certain cases, management’s assessment might support one unit of account for all of the transactions combined (e.g., the unit of account is 50 similar transactions analyzed as one). Management may be able to support a single unit of account if it concludes that the transactions are substantially the same in terms of (1) the expected tax benefits, (2) the relevant technical issues and uncertainties, and (3) the approach that a taxing authority will take during an examination (i.e., if a portfolio approach would be used). If using a portfolio approach, a taxing authority may reject certain individual positions that a filer takes as a means of settlement because they are precluded from negotiating a settlement on an individual position. Still, as long as the related positions are substantially the same, management may be able to support a single unit of account even though the taxing authority may choose to settle the components individually.

15.3.2.4 Unit of account for multiple dissimilar transactions

An entity may take positions on multiple transactions that require a separate unit of account for each transaction. If all of the positions meet the requirements for recognition, but the taxing authority is expected to settle them in aggregate (i.e., a portfolio approach), entities may consider using a single unit of account for measurement even though separate units of account were used for the recognition assessment. We believe that the unit of account should be the same for recognition and measurement of a tax position. When the appropriate unit of account is determined to be the individual transaction, the recognition and measurement steps should be applied to that discrete position. A taxing authority’s portfolio approach to settlement can be viewed as another possible outcome in a range of possible outcomes used in the measurement analysis. See TX 15.4.
For example, assume that a research credit has five individual tax positions that all meet the recognition threshold and are expected to be settled using a portfolio approach. The taxpayer expects to receive 80 cents on the dollar for those five positions in aggregate. Under this approach, 80% of each individual position would be separately recognized (i.e., you would assume each position will be settled at 80%). This is acceptable if there is evidence to suggest that the relevant taxing authority has accepted such a settlement approach in the past.
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