Instructions for Schedule UTP (Form 1120)

Transcription

1 2011 Instructions for Schedule UTP (Form 1120) Uncertain Tax Position Statement Department of the Treasury Internal Revenue Service Section references are to the Internal Standards (IFRS), or other of the subsidiary s tax positions in its Revenue Code unless otherwise noted. country-specific accounting standards, former group s prior return, the including a modified version of any of subsidiary should report the tax position the above (for example, modified on Part II of the Schedule UTP filed General Instructions GAAP). with its 2011 tax return, if it files a Future developments. The IRS has If the corporation reconsiders separate return. If the subsidiary is created a page on IRS.gov for whether a reserve is required for a tax included in the return or another information about Schedule UTP (Form position and eliminates the reserve in consolidated group that is required to 1120) and its instructions at an interim audited financial statement file Schedule UTP, the common parent Information issued before the tax position is taken of that consolidated group should report about any future developments in a return, the corporation need not the tax position on Part II of the affecting Schedule UTP (Form 1120) report the tax position to which the Schedule UTP filed with its 2011 tax (such as legislation enacted after we reserve relates on Schedule UTP. return. release it) will be posted on that page. A tax position is based on the unit of Concise description of tax position. account used to prepare the audited A corporation that reports a tax position Purpose of Schedule financial statements in which the in either Part I or Part II is required to Schedule UTP asks for information reserve is recorded (or in which no provide a concise description of each about tax positions that affect the U.S. reserve was recorded because of an tax position in Part III. See Examples federal income tax liabilities of certain expectation to litigate). A tax position 12 through 14. corporations that issue or are included taken on a tax return is a tax position in audited financial statements and Consistency with financial statement that would result in an adjustment to a have assets that equal or exceed $100 reporting. The analysis of whether a line item on that tax return if the million. reserve has been recorded for the position is not sustained. If multiple tax purpose of completing Schedule UTP is positions affect a single line item on a determined by reference to those Reporting Uncertain tax return, report each tax position reserve decisions made by the separately on Schedule UTP. SeeTax Tax Positions corporation or a related party for position taken on a tax return, later. audited financial statement purposes. If on Schedule UTP the corporation or a related party Reporting current year and prior Tax positions to be reported. year tax positions. Tax positions determined that, under applicable Schedule UTP requires the reporting of taken by the corporation on the current accounting standards, either no reserve each U.S. federal income tax position year s tax return are reported in Part I. was required for a tax position taken on taken by an applicable corporation on Tax positions taken by the corporation a tax return because the amount was its U.S. federal income tax return for on a prior year s tax return are reported immaterial for audited financial which two conditions are satisfied. on Part II. A corporation is not required statement purposes, or that a tax to report a tax position it has taken in a position was sufficiently certain so that 1. The corporation has taken a tax prior tax year if the corporation reported no reserve was required, then the position on its U.S. federal income tax that tax position on a Schedule UTP corporation need not report the tax return for the current tax year or for a filed with a prior year tax return. If a position on Schedule UTP. For a prior tax year. transaction results in tax positions corporation subject to FIN 48, a tax 2. Either the corporation or a related taken on more than one tax return, the position is considered sufficiently party has recorded a reserve with tax positions must be reported in Part I certain so that no reserve was respect to that tax position for U.S. of the Schedule UTP attached to each required, and therefore need not be federal income tax in audited financial tax return in which a tax position is reported on Schedule UTP, if the statements, or the corporation or taken regardless of whether the position is highly certain within the related party did not record a reserve transaction or a tax position resulting meaning of FIN 48. for that tax position because the from the transaction was disclosed in a corporation expects to litigate the Transition rule. A corporation is not Schedule UTP filed with a prior year s position. required to report on Schedule UTP a tax return. See Example 7 and tax position taken in a tax year Example 8. Do not report a tax position A tax position for which a reserve beginning before January 1, 2010, even on Schedule UTP before the tax year in was recorded (or for which no reserve if a reserve is recorded with respect to which the tax position is taken on a tax was recorded because of an that tax position in audited financial return by the corporation. expectation to litigate) must be reported statements issued in 2010 or later. See regardless of whether the audited If, after a subsidiary member leaves Example 9. In addition, a corporation is financial statements are prepared a consolidated group, the subsidiary, or not required to report accruals of based on U.S. generally accepted a related party of the subsidiary, interest on a tax reserve recorded with accounting principles (GAAP), records a reserve in an audited respect to a tax position taken on a International Financial Reporting financial statement with respect to one pre-2010 tax return. Feb 03, 2012 Cat. No G

2 Periods covered. File a 2011 need not identify the member of the Example 1. General rule regarding Schedule UTP with the 2011 income group to which the tax position relates recording a reserve. A corporation tax return for the calendar year 2011 or which member recorded the reserve recorded a reserve in its 2010 audited and for a fiscal year that begins in for the tax position. Any affiliate that financial statements relating to a tax files its U.S. federal income tax return position taken on its tax return for the separately and satisfies the 2010 tax year. The corporation filed its Who Must File requirements set forth above must file a 2010 tax return on September 15, A corporation must file Schedule UTP Schedule UTP with its return setting The corporation must report the with its income tax return if: forth its own tax positions tax position on Part I of Schedule UTP and file Schedule UTP with its 1. The corporation files Form 1120, Definitions and Special 2010 tax return. If the corporation Rules U.S. Corporation Income Tax Return; increases its reserve with respect to the Form 1120-F, U.S. Income Tax Return Note. All examples in these tax position taken on its 2010 tax return of a Foreign Corporation; Form 1120-L, instructions assume the calendar year in its 2012 audited financial statements, U.S. Life Insurance Company Income is the reporting year both for U.S. the corporation is not required to report Tax Return; or Form 1120-PC, U.S. federal income tax and financial the 2010 tax position again on its 2012 Property and Casualty Insurance statement purposes and the tax return as a result of the reserve Company Income Tax Return; independent auditor s opinion on the increase in The corporation has assets that equal or exceed $100 million; audited financial statements is issued Example 2. Reporting reserves in 3. The corporation or a related party before the filing of the tax return. subsequent years. A corporation issued audited financial statements Audited financial statements. claims a deduction in 2011 and reporting all or a portion of the Audited financial statements mean determines under applicable accounting corporation s operations for all or a financial statements on which an standards that it can recognize the full portion of the corporation s tax year; independent auditor has expressed an benefit of the position. In 2013 the IRS and opinion, whether qualified, unqualified, begins an examination of the 2011 tax 4. The corporation has one or more disclaimed, or adverse, under GAAP, return and decides to examine whether tax positions that must be reported on IFRS, or another country-specific the deduction is proper. The Schedule UTP. accounting standard, including a corporation subsequently reevaluates Do not file a blank Schedule UTP if modified version of any of the above the tax position and records a reserve there are no tax positions to be (for example, modified GAAP). for that position in The reported. Compiled or reviewed financial corporation has taken a tax position in statements are not audited financial its 2011 tax return and recorded a Attach Schedule UTP to the statements. reserve with respect to that tax position. corporation s income tax return. Do not Record a reserve. A corporation or a The corporation must report the tax file it separately. A taxpayer that files a related party records a reserve for a position on Schedule UTP filed with its protective Form 1120, 1120-F, 1120-L, U.S. federal income tax position when a 2013 tax return even if the IRS or 1120-PC must also file Schedule reserve for U.S. federal income tax, identifies the tax position for UTP if it satisfies the four requirements interest, or penalties with respect to examination prior to the recording of set forth above. that position is recorded in audited the reserve. A corporation required to file financial statements of the corporation Related party. A related party is any Schedule UTP also must check Yes to or a related party. A reserve is recorded entity that has a relationship to the Form 1120, Schedule K, Question 14; when an uncertain tax position or a FIN corporation that is described in sections Form 1120-F, Additional Information, 48 liability is stated anywhere in a 267(b), 318(a), or 707(b), or any entity Question AA; Form 1120-L, Schedule corporation s or related party s financial that is included in consolidated audited M, Question 15; or Form 1120-PC, statements, including footnotes and any financial statements in which the Schedule I, Question 13. other disclosures, and may be indicated corporation is also included. by any of several types of accounting Computation of assets that equal or Example 3. Related party general journal entries. Some of the types of exceed $100 million. rule. Corporation A is a corporation entries that, entered alone or in filing Form 1120 that has $160 million Forms 1120, 1120-L, and 1120-PC. tandem, indicate the recording of a of assets. Corporation B is a foreign A corporation s assets equal or exceed reserve are: (1) an increase in a current corporation not doing business in the $100 million if the amount reported on or non-current liability for income taxes, United States and is a related party to page 1, item D of Form 1120, or the interest or penalties payable, or a Corporation A. Corporations A and B higher of the beginning or end of year reduction of a current or non-current issue their own audited financial total assets reported on Schedule L of receivable for income taxes and/or statements. Corporation A takes a tax Form 1120-L or Form 1120-PC, is at interest with respect to the tax position; position on its tax return. If Corporation least $100 million. or (2) a reduction in a deferred tax B records a reserve with respect to that Form 1120-F. The assets of a asset or an increase in a deferred tax tax position in its own audited financial corporation filing a Form 1120-F equal liability with respect to the tax position. statements, even though Corporation A or exceed $100 million if the higher of The initial recording of a reserve will does not, then that tax position must be the beginning or end of year total trigger reporting of a tax position taken reported by Corporation A on its worldwide assets of the corporation on a return. However, subsequent Schedule UTP. reported on Form 1120-F, Schedule L, reserve increases or decreases with Example 4. Reserve recorded in Line 17, would be at least $100 million respect to the tax position will not. consolidated financial statements. if the corporation were to prepare a If a corporation is included in Corporation C files a tax return and has Schedule L on a worldwide basis. multiple audited financial statements, assets of $160 million. Corporations C Affiliated groups. An affiliated group the corporation must report a tax and D issue consolidated audited of corporations filing a consolidated position on Schedule UTP if a reserve financial statements, but they do not file return will file a Schedule UTP for the for that position was recorded in any of a consolidated tax return. Corporation affiliated group. The affiliated group those audited financial statements. C takes a tax position for which a -2-

3 reserve was recorded in the might not result in the payment of any project level and expects the IRS to consolidated financial statements of additional tax. address the issues during an Corporations C and D. The tax position A single decision about how to report examination of each project separately. taken by Corporation C on its tax return an item of income, gain, loss, Corporation B determines that the must be reported on its Schedule UTP deduction, or credit may affect line appropriate unit of account for GAAP because a reserve was recorded for its items in multiple years returns. If so, financial reporting purposes is the tax position in consolidated financial that decision can result in a tax position functional expenditures, based on the statements in which Corporation C was taken on each affected year s return. amount of its expenditures, the included. For example, a decision to amortize an anticipated credits to be claimed, its expense rather than currently deduct previous experience, and the advice of Reserve not recorded based on that expense, or a decision to currently its tax advisors. Based on the unit of expectation to litigate. A corporation deduct rather than amortize an account used for financial reporting must report on Schedule UTP a tax expense, affects line items on each purposes, Corporation A must use each position taken on its return for which no year s return in which the tax position is project as its unit of account for reserve for income tax was recorded if taken during the period of amortization. Schedule UTP reporting, and the tax position is one which the Whether these tax positions taken on a Corporation B must use functional corporation or a related party return are reported on Schedule UTP expenditures as its unit of account for determines the probability of settling for a particular tax year, and when they Schedule UTP reporting, regarding the with the IRS to be less than 50% and, are reported, depends on whether and research and development credit. under applicable accounting standards, when a reserve is recorded. See no reserve was recorded in the audited Example 7 and Example 8. Ranking Tax Positions by financial statements because the Note. Although the use of an NOL or a Size corporation intends to litigate the tax position and has determined that it is credit carryforward is a tax position The corporation must rank by size each more likely than not to prevail on the taken on a tax return, do not report the tax position listed in Part I. The size of merits in the litigation. use of the NOL or credit carryforward if a tax position, however, need not be the corporation has previously reported reported anywhere on Schedule UTP. Example 5. Reserve not recorded the tax position that created or added to See the instructions for Part I, column after a change in circumstances the NOL or credit carryforward on (f), regarding coding to be used to rank based on expectation to litigate. A Schedule UTP. See Example 10. the corporation s tax positions. corporation takes a tax position on its Unit of account. A unit of account is Size. The size of each tax position is 2011 tax return for which no reserve is the level of detail used in analyzing a determined on an annual basis and is recorded because the corporation tax position, taking into account both the amount of U.S. federal income tax determines the tax position is correct. the level at which the taxpayer reserve recorded for that position. If a Circumstances change, and in 2013 the prepares and supports the tax return reserve is recorded for multiple tax corporation determines that the tax and the level at which the taxpayer positions, then a reasonable allocation position is uncertain, but does not anticipates addressing the issue with of that reserve among the tax positions record a reserve because of its the IRS. The unit of account used by a to which it relates must be made in expectation to litigate the position. That GAAP or modified GAAP taxpayer for determining the size of each tax is, the corporation or a related party reporting a tax position on Schedule position. determines the probability of settling UTP must be the same unit of account If an amount of interest or penalties with the IRS to be less than 50% and, used by the taxpayer for GAAP or relating to a tax position is not under applicable accounting standards, modified GAAP. separately identified in the books and no reserve was recorded because the In the case of audited financial records as associated with that corporation intends to litigate the tax statements prepared under accounting position, then that amount of interest position and has determined that it is standards other than GAAP or modified and penalties is not included in the size more likely than not to prevail on the GAAP, a corporation that issues of a tax position used to rank that merits in the litigation. The corporation audited financial statements with a unit position or compute whether the must report that position on Part II of of account that is based upon the entire position is a major tax position. the Schedule UTP filed with the 2013 tax year may not use that unit of tax return either if it records a reserve Expectation to litigate. Do not account for Schedule UTP. The or if it does not record a reserve determine a size for positions listed corporation must instead identify a unit because it expects to litigate, even if because of an expectation to litigate. of account based on similar principles that decision to record or not record See the instructions for Parts I and II, applicable to GAAP or modified GAAP occurs because of a change in column (f), regarding ranking of these taxpayers, or use any other level of circumstances in a later year. positions. detail that is consistently applied if that Tax position taken on a tax return. identification is reasonably expected to Affiliated groups. The determination A tax position taken on a tax return apprise the IRS of the identity and of the size of a tax position taken in a means a tax position that would result nature of the issue underlying the tax tax return by an affiliated group filing a in an adjustment to a line item on any position taken on the tax return. consolidated return is to be determined schedule or form attached to the tax Example 6. Unit of account. at the affiliated group level for all return (or would be included in a Corporation A and Corporation B each members of the affiliated group. section 481(a) adjustment) if the have two individual research projects Coordination with Other position is not sustained. If multiple tax and each anticipates claiming a Reporting Requirements positions affect a single line item on a research and development credit tax return, each tax position is a arising out of their projects. Corporation A complete and accurate disclosure of separate tax position taken on a tax A chooses each individual research a tax position on the appropriate year s return. For example, a tax position that project as the unit of account for GAAP Schedule UTP will be treated as if the is reported on a line item on Form 5471 financial reporting purposes, since the corporation filed a Form 8275, is a tax position taken on a return, even corporation accumulates information for Disclosure Statement, or Form 8275-R, though an adjustment to that line item the tax return about the projects at the Regulation Disclosure Statement, -3-

4 regarding the tax position. A separate recording the reserve in 2010 for all of of the Schedule UTP filed with Form 8275 or Form 8275-R need not the tax positions taken in each of the 5 MergerCo s 2011 tax return even be filed to avoid certain years, the corporation records a though the reserve was recorded by accuracy-related penalties with respect reserve in each year that specifically AcquiringCo. AcquiringCo should not to that tax position. relates to the tax position taken on the report the tax position on the Schedule return for that year. UTP filed with its 2011 tax return Comprehensive Example 9. Transition rule. The because MergerCo s final return is a facts are the same as in Example 8, prior year tax return on which the tax Examples except that the corporation incurred the position was reported. Example 7. Multiple year expenditure and recorded the reserve positions. A corporation incurred an in The corporation has taken a expenditure in 2010 and claimed the tax position in each of the 5 tax years entire amount as a deduction on its Specific Instructions (2009 through 2013) because on each 2010 return. During the course of year s tax return there would be an reviewing its tax positions for purposes adjustment to a line item on that return Part I. Uncertain Tax of establishing reserves for U.S. federal if the position taken in that year is not income taxes for its 2010 audited Positions For the sustained. However, the corporation financial statements, the corporation should not report the tax position taken Current Tax Year determines it is uncertain whether the in the 2009 tax year because it was expenditure should instead be taken in a tax year beginning before When to Complete Part I amortized over 5 years and records a January 1, The tax position taken reserve with respect to the position Part I is used to report tax positions in each of the 2010 to 2013 tax years taken in The corporation did not taken by the corporation on its 2011 tax must be reported on Part I of the record a reserve for any of the positions return. Schedule UTP filed with the tax return taken in tax years 2011 through for the respective tax year in which the Information from Related The corporation has taken a tax position was taken. Parties position in each of the 5 tax years because, on each year s tax return, Example 10. Creation and use of Check the box at the top of Part I if the there would be an adjustment to a line net operating loss (NOL). A corporation was unable to obtain item on that return if the position taken corporation incurred a $50 expenditure sufficient information from one or more in that year s return is not sustained. in 2010 and claimed the entire amount related parties and was therefore The tax position taken in the 2010 tax as a deduction on its 2010 tax return. unable to determine whether a tax year must be reported on Part I of The deduction increases the position taken on either its current or Schedule UTP filed with the 2010 tax corporation s NOL carryforward from prior year s tax return is required to be return. None of the 2011 to 2014 tax $100 to $150. The corporation uses the reported in either Part I or Part II of this positions must be reported on Schedule entire $150 NOL carryforward on its schedule. UTP because the corporation did not 2011 tax return. Claiming the $50 Column (a). UTP No. record a reserve with respect to any of deduction in 2010 is a tax position those tax positions. taken in the 2010 tax year because the Enter a number in column (a) for each position would result in an adjustment tax position reported. A corresponding Example 8. Multiple year to a line item on the 2010 tax return if number will be used in Part III for positions. A corporation incurred an the position is not sustained. The reporting the concise description of the expenditure in 2010 and takes the deduction in 2011 of the NOL carried tax position. Begin with the number 1 position that the expenditure may be forward from 2010 is a tax position and do not skip any whole numbers. amortized over 5 years beginning on its 2010 tax return. During the course of taken on the 2011 tax return, because Column (b). Primary IRC reviewing its tax positions for purposes the position would result in an Sections of establishing reserves for U.S. federal adjustment to a line item on the 2011 tax return if the position is not Provide the primary IRC sections (up to income taxes for its 2010 audited sustained. The corporation recorded a three) relating to the tax position. financial statements, the corporation determines it is uncertain whether any reserve with respect to its 2010 tax Column (c). Timing Codes deduction or amortization of this position, in its 2010 audited financial Check T for temporary differences, P expenditure is allowable. In the 2010 statements. Because the corporation for permanent differences, or check audited financial statements, the recorded a reserve with respect to the both T and P for a tax position that corporation recorded a reserve with tax position taken in 2010, it reported creates both a temporary and respect to the amortization deduction to the 2010 tax position on the Schedule permanent difference. Categorization be claimed in each tax year. The UTP filed with its 2010 tax return. as a temporary difference, permanent corporation has taken a tax position in Because it reported the tax position in difference, or both must be consistent each of the 5 tax years because on its 2010 tax return, the corporation with the accounting standards used to each year s tax return there would be should not report the 2011 tax position prepare the audited financial an adjustment to a line item on that on the Schedule UTP filed with its tax statements. return if the position taken in that year return for the 2011 tax year. is not sustained. The corporation must Example 11. Corporate merger. Column (d). Pass-Through report the 2010 tax position on Part I of On June 30, 2011, MergerCo merges Entity EIN Schedule UTP for the 2010 tax year. In into AcquiringCo, in a transaction in If the tax position taken by the addition, the tax position to be taken in which AcquiringCo survives. corporation relates to a tax position of a each of the 2011 to 2014 tax years MergerCo s tax year ends on that date. pass-through entity, enter the EIN of must be reported on Part I of the After the merger, AcquiringCo records a the pass-through entity to which the tax Schedule UTP filed with the tax return reserve with respect to a tax position position relates. For example, if the for the respective tax year in which the that is taken on MergerCo s final return corporation is a partner in a partnership tax position was taken. The result in its audited financial statements. That and the tax position involves the would be the same if, instead of tax position must be reported on Part I partner s distributive share of an item of -4-

5 income, gain, loss, deduction, or credit Information from Related Request is not an adequate of the partnership, enter the EIN of the Parties description. partnership. A pass-through entity is Check the box at the top of Part I if the A concise description should not any entity listed in section 1(h)(10). If corporation was unable to obtain include an assessment of the hazards the tax position is not related to a tax information from related parties of a tax position or an analysis of the position of a pass-through entity, leave sufficient to determine whether a tax support for or against the tax position. this blank. Enter F if the pass-through position taken in 2010 is a UTP. See entity is a foreign entity that does not Examples of Concise Information from Related Parties in the have an EIN. Descriptions for Hypothetical instructions for Part I. Fact Patterns Column (e). Major Tax Position Column (a). UTP No. The following examples set out a Check this box if the relative size of the Continue the numeric sequence based description of hypothetical facts and the tax position is greater than or equal to on the last UTP number entered on uncertainties about a tax position that 0.10 (10%). The relative size of a tax Part I. For example, if the last UTP would be reportable on Schedule UTP. position is the amount computed by listed on Part I is 10, enter 11 for the Following each set of hypothetical facts, dividing the size of that position by the first UTP listed on Part II. which would not be disclosed on the sum of all of the sizes for all of the tax schedule, is an example of a sufficient Column (b). Primary IRC positions listed on Parts I and II. concise description that would be Sections reported in Part III to disclose that Disregard expectation to litigate See the instructions for Part I, column hypothetical case. positions for column (e) purposes. (b). Round amounts using rules similar to Example 12. the rules in the Instructions for Form Column (c). Timing Codes Facts. The corporation investigated 1120 for rounding dollar amounts. See the instructions for Part I, column and negotiated several potential (c). business acquisitions during the tax Column (f). Ranking of Tax year. One of the transactions was Column (d). Pass-Through completed during the tax year, but all Position Entity EIN other negotiations failed and the other Enter a letter and a ranking number for See the instructions for Part I, column potential transactions were abandoned each tax position. Use the letter T for (d). during the tax year. The corporation transfer pricing positions and the letter deducted costs of investigating and G for all other tax positions. Column (e). Major Tax Position partially negotiating potential business See the instructions for Part I, column acquisitions that were not completed, Rank all tax positions in Parts I and (e). and capitalized costs allocable to one II together, regardless of type. Starting business acquisition that was with the largest size, assign the number Column (f). Ranking of Tax completed. The corporation established 1 to the largest, the number 2 to the Position a reserve for financial accounting next largest, and so on, in order. This See the instructions for Part I, column purposes in recognition of the number is the ranking number for the (f). possibility that the amount of costs tax position. Expectation to litigate allocated to the uncompleted positions may be assigned any ranking Column (h). Year of Tax acquisition attempts was excessive. number. Position Sample concise description. The List the prior tax year in which the tax corporation incurred costs of For example, the corporation has 1 position was taken and the last month completing one business acquisition transfer pricing tax position and 2 other of that tax year, using a six-digit and also incurred costs investigating tax positions. The transfer pricing number. For example, enter for and partially negotiating potential position is the largest and one of the tax years ending December 31, 2010, business acquisitions that were not other tax positions is the expectation to and for tax years ending completed. The costs were allocated litigate position. The expectation to August between the completed and litigate position is assigned a rank of 2. uncompleted acquisitions. The issue is Enter T1 for the transfer pricing Part III. Concise whether the allocation of costs between position, G2 for the expectation to uncompleted acquisitions and the litigate position, and G3 for the second Description of UTPs completed acquisition is appropriate. other tax position. Example 13. Facts. The corporation is a member of Venture LLC, which is treated as a U.S. partnership for tax When to Complete Part III Part II. Uncertain Tax Part III must be completed for every tax position listed in Part I or Part II. Enter Positions For Prior Tax the corresponding UTP number from purposes. During the tax year, Venture Part I or Part II, column (a), related to Years LLC raised funds through (i) admitting a the description. new member for a cash contribution Concise description. Provide a and (ii) borrowing funds from a financial When to Complete Part II concise description of the tax position, institution, using a loan partially Part II is used to report tax positions including a description of the relevant guaranteed by the corporation. Also taken by the corporation in a prior tax facts affecting the tax treatment of the during the tax year, Venture LLC made year that have not been reported on a position and information that a cash distribution to the corporation Schedule UTP filed with a prior year s reasonably can be expected to apprise that caused its membership interest in tax return. Do not report a tax position the IRS of the identity of the tax Venture LLC to be reduced from 25% taken in a tax year beginning before position and the nature of the issue. In to 2%. The corporation has taken the January 1, See Transition rule most cases, the description should not position that the cash distribution is under Reporting Uncertain Tax exceed a few sentences. Stating that a properly characterized as a nontaxable Positions on Schedule UTP, earlier. concise description is Available upon distribution that does not exceed its -5-

6 basis in its Venture LLC interest, but environmental contamination caused in accounting purposes in recognition of has established a reserve for financial prior years by its operations at Site A. the possibility that a portion of the accounting purposes, recognizing that Site A contains both the corporation s current year deduction of costs the transaction might be manufacturing plant and its corporate allocated to the corporate headquarters recharacterized as a taxable sale of a headquarters. Based on its analysis might be reallocated to the portion of its Venture LLC interest that the cleanup activities equally manufacturing plant. under section 707(a)(2). benefited both the manufacturing plant Sample concise description. The Sample concise description. The and its corporate headquarters, the corporation incurred costs during the corporation is a member of Venture corporation allocated the environmental tax year to clean up environmental LLC, which is treated as a U.S. cleanup costs equally between them. It contamination that was caused by its partnership for tax purposes. The capitalized the portion of environmental activities in prior years at Site A, which corporation received a cash distribution cleanup costs allocated to its contains both its manufacturing facility during the year from Venture LLC. The manufacturing plant to inventory and its corporate headquarters. The issue is the potential application of produced during the taxable year and issue is the allocation of the cleanup section 707(a)(2) to recharacterize the deducted the portion of environmental costs between X s production and distribution as a sale of a portion of the cleanup costs allocated to its corporate non-production activities under section corporation s Venture LLC interest. headquarters. The corporation 263A. Example 14. established a reserve for financial Facts. The corporation incurred costs during the tax year to clean up -6-