Presentation Transcript

1. Implications Of FIN 48 For Colleges, Universities And Their Foundations

   Presented by: Richard J. Locastro, CPA, J.D. Gelman, Rosenberg & Freedman Seventeenth Annual Tax Institute for Colleges and Universities Indianapolis, IN May 25, 2010
2. Richard Locastro, CPA, J.D. Dick Locastro is a Principal in Gelman, Rosenberg & Freedman’s Nonprofit Tax Department. Mr. Locastro has over 20 years’ experience providing tax services to tax-exempt organizations. He spent five years in a National Tax office with Big Four firms, including three years in KPMG’s Washington National Tax office where he provided tax consulting services to tax-exempt clients across the country. His clients included private foundations, colleges, universities, healthcare organizations, museums and other large nonprofit institutions. Prior to joining Gelman, Rosenberg & Freedman, he spent three years as the Senior Director of Tax Consulting Services at Arctic International LLC, where he provided nonresident alien tax consulting services to colleges, universities, and other tax-exempt organizations. Mr. Locastro is a member of the American Institute of Certified Public Accountants and the New York State Bar Association. He received his B.S. Accounting, Magna cum Laude, from Le Moyne College, Syracuse, N.Y., and his J.D. from the University of North Carolina, Chapel Hill.
3. Overview Background Basic structure of FIN 48 Application to Tax-exempt Organizations Other FIN 48 issues for Preparers and Organizations Questions and Answers
4. Background FASB Interpretation Number (FIN) 48, Accounting for Uncertainty in Income Taxes, was released in July 2006 FIN 48 is an interpretation of FAS 109, Accounting for Income Taxes and applies to all entities, including tax-exempt entities, that prepare GAAP basis financial statements
5. Background FAS 109 is now ASC Topic 740 (ASC 740) FIN 48 concepts are now found throughout Topic 740 “FIN 48” will be used for presentation purposes
6. Background FIN 48 is generally effective for “public” entities for fiscal years beginning after December 15th, 2006 Effective for nonpublic entities for fiscal years beginning after December 15th, 2008 Most tax-exempt entities would be considered nonpublic entities
7. Background A tax-exempt entity may be considered a public entity if, for example, it has tax-exempt bonds traded in a public market.

8. FIN 48 Basics

9. FIN 48 Basics FIN 48 determines how to record and measure a “tax position” for financial statement purposes It applies to all entities that prepare GAAP financial statements It applies to income taxes – defined as domestic and foreign federal, state and local (including franchise) taxes based on income
10. FIN 48 Basics FIN 48 applies to: All material tax positions taken or expected to be taken On any income tax return Including those filed or that should have been filed with federal, state, local or international taxing authorities
11. FIN 48 Basics A tax position includes (but is not limited to): A decision not to file a tax return An allocation or a shift of income between jurisdictions The characterization of income or a decision to exclude reporting taxable income in a tax return A decision to classify a transaction, entity, or other position in a tax return as tax exempt An entity’s status, including its status as a pass-through entity or a tax-exempt not-for-profit entity
12. FIN 48 Basics The “unit of account” depends on the facts and circumstances Two factors should be considered: The manner in which prepares and supports its income tax return The approach it anticipates the taxing authority will take during an examination For example, with respect to unrelated business income activities the appropriate unit of account may be each separate activity
13. FIN 48 Basics FIN 48 is a two-step process Recognition Measurement FIN 48 uses a “more-likely-than-not” (MLTN) standard An organization may not recognize the tax benefits of a tax position unless it is MLTN, based on its technical merits, that the tax position will be sustained upon examination
14. FIN 48 Basics - Recognition An organization may not recognize the tax benefits of a tax position unless it is MLTN, based on its technical merits, that the tax position will be sustained upon examination In assessing whether a tax position is MLTN, it is presumed that the tax position: will be examined, by the appropriate taxing authority, and the appropriate tax authority has full knowledge of all the relevant information
15. FIN 48 Basics - Recognition The technical merits of a tax position derive from sources of authority in the tax law (e.g. legislation, regulations, rulings, cases)
16. FIN 48 Basics – Measurement If a position does not meet the MLTN threshold, no tax benefit may be recognized If the position does meet the MLTN threshold, then the tax benefit must be measured The tax benefit recognized is the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement
17. FIN 48 Basics – Measurement
18. FIN 48 Basics – Measurement In this example, the amount of tax benefit to be recognized is $60 – the largest cumulative benefit that is more than 50% likely As of each subsequent balance sheet date, unresolved uncertain tax positions must be reassessed
19. FIN 48 Basics – Measurement Tax positions will fall into one of three categories with the following consequences: Highly certain – no liability needs to be accrued MLTN – amount of liability will have to be determined Less likely than not – liability for entire amount (if material) will be accrued
20. FIN 48 Basics – Measurement Recognition or derecognitionof the amount of the tax benefit may occur if: There are changes in the tax law, regulations, or new rulings, cases or IRS positions that affect the evaluation Statute of limitations expires The issue is resolved with taxing authorities
21. FIN 48 Basics – Measurement Tax positions to be identified include those taken in all open years Interest and penalties that would be incurred if the position was not ultimately sustained must be accrued
22. FIN 48 Basics – Disclosure Financial statement disclosure includes: Total interest and penalties recognized in the statement of operations and statement of financial position A description of tax years that remain subject to exam by major tax jurisdictions If the total amount of unrecognized benefits may reasonably increase or decrease within 12 months, information about the nature of the uncertainty or event that could cause the change, is required
23. FIN 48 Basics – Disclosure Form 990 for 2008 and later requires disclosure of the text of the FIN 48 footnote on Schedule D, Part XIV Roadmap for the IRS?

24. Application to Tax-Exempt Organizations

25. Application to Tax-Exempt Organizations A tax position includes (but is not limited to): A decision not to file a tax return An allocation or a shift of income between jurisdictions The characterization of income or a decision to exclude reporting taxable income in a tax return A decision to classify a transaction, entity, or other position in a tax return as tax exempt An entity’s status, including its status as a pass-through entity or a tax-exempt not-for-profit entity
26. Application to Tax-Exempt Organizations Determine all of the organization’s tax positions Evaluate the tax positions and determine which are highly certain, MLTN, or less likely than not Consider all open years and all jurisdictions Determine unit of account for each position
27. Application to Tax-Exempt Organizations For a tax-exempt organization, common tax positions are: Tax-exempt status Revenue streams as related or unrelated State filing requirements
28. Application to Tax-Exempt Organizations Tax-exempt status Analysis of this tax position should evaluate whether the organization is organized and operated for exempt purposes Organized Look at IRS determination letter, Articles of Incorporation and by-laws Compare Form 1023 (if possible) with current activities
29. Application to Tax-Exempt Organizations Operated Understand current activities and relationship to exempt status No political activities How do we monitor and verify? Activities of student clubs may pose issue? Not more than insubstantial lobbying Private inurement Compensation Transactions with insiders Joint ventures
30. Application to Tax-Exempt Organizations Operated Private inurement Compensation Transactions with insiders Joint ventures
31. Application to Tax-Exempt Organizations Unrelated Business Income Analyze all revenue streams Categorize as related, unrelated or excluded Determine whether the tax position for each is highly certain, MLTN, or less likely than not For positions that are not highly certain, measure potential liability and determine if material
32. Application to Tax-Exempt Organizations Unrelated Business Income For revenue that is reported as unrelated, evaluate the expense allocations and determine if methodology is consistent with IRC and IRS guidance
33. Application to Tax-Exempt Organizations Unrelated Business Income In addition to analyzing revenue streams, don’t forget: Alternative investments (K-1s) Transactions with controlled entities Joint ventures
34. Application to Tax-Exempt Organizations Jurisdictional Issues – State filings Where is the organization currently filing income tax returns? Which states should the organization be filing income tax returns? Do any states in which the organization has nexus require filing for state recognition of exemption?
35. Application to Tax-Exempt Organizations Jurisdictional Issues – State filings Potential sources of nexus to other states may include: Employees in other states (including telecommuting) Publishing or sales activities Business activities through investments (e.g. real estate owned in another state through a partnership)
36. Application to Tax-Exempt Organizations Jurisdictional Issues – Foreign International activities could result in foreign filing requirements: Employees in other countries Campuses or other programs Investment activity
37. Application to Tax-Exempt Organizations Remember - FIN 48 Analysis should: Include all open tax years Aggregate all uncertain tax positions Determine if interest and penalties apply

38. Other FIN 48 Issues

39. Other FIN 48 Issues Role of Counsel and privilege in preparation of FIN 48 analysis Can privilege apply and does inclusion of analysis in audit workpapers impact privilege? IRS Roadmap IRS generally does not go after tax accrual workpapers in an audit, but it appears IRS may be rethinking its policy
40. Other FIN 48 Issues Impact on Paid Preparers Professional standards can impose sanctions for preparers for tax positions that are not MLTN unless properly disclosed If FIN 48 analysis concludes position is not MLTN Does paid preparer know? If so, disclosure of position may be required
41. Questions & Answers Richard Locastro, CPA, J.D. Principal, NonprofitTax Department rlocastro@grfcpa.com or 301-951-9090 Gelman, Rosenberg & Freedman, CPAs 4550 Montgomery Avenue, Suite 650 N Bethesda, MD 20814 www.grfcpa.com