ASC 740 quarterly update

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Accounting for income taxes:
ASC 740 quarterly update

Original Broadcast Date: September 2013

© Grant Thornton LLP. All rights reserved.

Today's

Presenters

Randy Robason

Chuck Evans

National Partner-in-Charge,
TARAS
Dallas, Texas

Partner,
Accounting Principles
Houston, Texas

Joe Calianno

Mark Ritter

Partner,
International Tax
Consulting
Washington, D.C.

Managing Director,
Compensation and
Benefits Consulting
Atlanta, Ga.


2

Today's

Presenters

Bill Marx

Terry Gaul

Partner
Federal Tax
Philadelphia, Pa.

Managing Director
State and Local Tax
Houston, Texas


3

Learning objectives

•
•
•
•
•

Identify updates in federal issues
Name significant international tax developments
Define accounting principles issues
Recognize significant state tax issues
Identify and discuss new compensation and
benefits developments


4

Agenda

• Federal Legislative Updates and Related Tax
Accounting Topics
• International taxation
• Hot topics in accounting for taxes
• State and local taxation
• Compensation and benefits update


5

Federal Legislative Updates and Related Tax
Accounting Topics

• Section 336(e) Regulations Issued
• IRS Guidance Issued after Supreme Court Strikes Down
DOMA
• Other Items You May Have Missed
• Never Too Early to Plan


6

6

Accounting Topics – Section 336(e) Regs.
What is the effect of a Sec. 336(e) election?
Who makes the election?
What is the effective date of the regulations?
Tax accounting implication

See T.D. 9619 for details.

Are you accounting for
the tax basis of acquired
assets properly?


7

Accounting Topics – IRS Issues DOMA Guidance

The Supreme Court held that section 3 of the
Defense of Marriage Act (DOMA) was unconstitutional.
What are the implications?
Tax accounting implication

What did the IRS recently decide?
What should or can employers do?


8

•

FICA refunds should not be
accounted for under ASC
740, i.e., FICA is an excise
tax for the employer

Accounting Topics – Items You May Have Missed

What happened?

Tax Accounting?

• IRS will no longer issue
• Determining uncertain tax
Section 355 comfort letters
benefits under ASC 740-10
• Deduction denied for costs • Measured current tax
associated with stock
liability properly?
offering
• IRS cuts refundable
• Measured deferred tax
corporate AMT credit
asset properly?


9

9

Accounting Topics – Never Too Early to Plan
Sample of "Tax Extenders" That Will Expire at Dec.
31, 2013:
• Bonus depreciation; Increased Section 179
Expensing Limits; 15-year Straight-line Cost
Recovery for Qualified Leasehold, Restaurant and
Retail Improvements

• Credit for Increasing Research Activities
• Work Opportunity Tax Credit (WOTC)
• Look-through Rule for Controlled Foreign
Corporations (CFCs)
• Subpart F Active Financing Income for CFCs
• and more…

10

Why worry?
• It's budget
season!
• Also, consider
ASC 740-10-30-2
in the future

Agenda

Accounting Topics


11

Section 334(b)(1)(B)/362(e)(1) and the
Proposed Regulations
• Sections 334(b)(1)(B) and 362(e)(1) (the anti-loss
importation provisions) were enacted as part of the
American Jobs Creation Act of 2004 to prevent erosion of
the corporate tax base through the importation of loss in
nonrecognition transactions
– These provisions have been operative for a number of
years
– Section 334(b)(1)(B) cross-references section
362(e)(1)(B)


12

12

• The anti-loss importation provisions apply when a
corporation acquires property that is described in section
362(e)(1)(B) in a transaction described in section
332, 362(a), or 362(b) and, under the generally applicable
basis rules (other than the anti-loss duplication rule in
section 362(e)(2) that applies in certain transactions), the
acquiring corporation (Acquiring) would take the property
with an aggregate basis in excess of value.


13

13

• Some typical transactions in which these provisions may
apply include:
– A liquidation of a foreign corporation into a U.S.
corporation in a section 332 liquidation,
– A foreign person's transfer of property to a domestic
corporation in a section 351 transfer, and
– A foreign corporation reorganizing into a U.S. corporation
in a section 368 reorganization.


14

14

– When an anti-loss importation provision applies,
Acquiring's basis in each such property is equal
to the property's value under these rules.


15

15

• Property is described in section 362(e)(1)(B) ("importation
property") if two conditions are satisfied:
– Any gain or loss recognized on a disposition of the
property would not be subject to Federal income tax in
the hands of the transferor immediately before the
transfer.
– Any gain or loss recognized on a disposition of the
property would be subject to Federal income tax in the
hands of the transferee immediately after the transfer.


16

16

• The IRS and Treasury recently issued proposed regulations
(REG-161948-05) under sections 334(b)(1)(B) and
362(e)(1) that address several issues relating to the
operation of these provisions including:
– The definition of importation property

– The treatment of partnerships, S corporations and
grantor trusts when such entities are involved in the
transaction


17

17

Section 334(b)(1)(B) / 362(e)(1) and the
– Certain anti-avoidance rules that apply to domestic trusts,
estates, RICs, REITs and cooperatives that directly or
indirectly transfer property in a section 362 transaction, if
the property had been directly or indirectly transferred to
or acquired by the entity as part of a plan to avoid the
application of the anti-importation provisions.


18

18

– The application of the rules in the case of CFCs and
PFICs
– The interaction of sections 367(e)(1) and 367(e)(2)
– General operation of the rules


19

19

Distribution of importation property in a loss importation transaction
Example 1 - Liquidations under section 332
Prop. Reg. § 1.334-1
Facts

Analysis

On Date 1, FC distributes A1, A2 and A3
to USP in a complete liquidation that
qualifies under section 332.

1. Determine whether A1, A2 or A3 are
importation properties
•
•

U.S. Parent
("USP")

100%

Foreign Corporation
("FC")

FC Assets:

A1

A2

A3
•

Basis

$40

$120

$140

Value

$50

$30

Consider effect to transferor (FC) and
transferee (USP)
Assume that, if FC sold these assets
immediately before the transaction, no gain or
loss recognized on the sale would have been
taken into account in determining a Federal tax
liability.
•
The fact that any gain or loss recognized
by a CFC may affect an income inclusion
under section 951(a) does not alone
cause gain or loss recognized by the CFC
to be treated as taken into account in
determining a Federal tax liability.
If USP had sold these assets immediately after
the transaction, USP would take into account
any gain or loss recognized on the sale in
determining its Federal tax liability.

$20


20

20

Example 1 - Liquidations under section 332
Prop. Reg. § 1.334-1
Facts

Analysis

On Date 1, FC distributes A1, A2 and A3
to USP in a complete liquidation that
qualifies under section 332.

1. Determine whether the liquidation of FC is a
"loss importation transaction"
•
•

U.S. Parent
("USP")

100%

Foreign Corporation
("FC")

2.

A1

A2

Basis

$40

$120

$50

$30

A1: $50
A2: $30
A3: $20

$140

Value

Determine USP's basis in property
received
•
•
•

A3

Aggregate basis of importation property: $300
Aggregate value of importation property : $100
•
Because USP's aggregate basis in the
importation properties would be, but
for section 334(b)(1)(B) greater than
the aggregate value, the distribution is
a loss importation transaction.

$20

FC Assets:


21

21

Example 1A - Liquidations under section 332
Prop. Reg. § 1.334-1
Facts

Analysis

Same as Example 1, except FC is
engaged in a U.S. trade or business and
A3 is used in that U.S trade or business

1.

U.S. Parent
("USP")

2.

100%

Foreign Corporation
("FC")

A1

A2

A3

Basis

$40

$120

$140

Value

$50

$30

$20

FC Assets:

Determine whether A1, A2 or A3 are importation
properties
•
Consider effect to transferor (FC) and
transferee (USP)
•
A3 is not importation property.
•
Only A1 and A2 are importation property.


Determine whether the liquidation of FC is a "loss
importation transaction"
•
Aggregate basis of importation property: $160
•
Aggregate value of importation property: $80
•
Because USP's aggregate basis in the
importation properties would be, but for
section 334(b)(1)(B) greater than the
aggregate value, the distribution is a
loss importation transaction.
3. Determine USP's basis in property received
•
A1: $50
•
A2: $30
•
A3: $140 (carryover)

22

22

Agenda

Accounting Topics


23

Emerging Issues Task Force (EITF) Update

• ASU 2013 –11: Presentation of Unrecognized Tax
Benefit
• Issue 13 – B: Investments in Qualified Affordable
Housing Projects


24

EITF Issue Accounting Standards Update (ASU 2013-11)
13-C: final consensus
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward or Tax Credit
Carryforward Exists

Issue
Whether an unrecognized tax benefit can be offset against a
deferred tax asset for a net operating loss, similar tax loss,
or tax credit carryforward

Applies to all unrecognized tax benefits existing at
effective date
Addresses diversity in practice


25

Carryforward Exists

If company has an unrecognized tax benefit and…
Exception – If
carryforwards not available
to settle additional taxes
from disallowance or entity
does not intend to use the
DTA for settlement

Deferred tax assets (NOL
or similar tax loss/credit
carryforwards) for same
jurisdiction with exception
at right…

Then…
Net presentation –
reduce deferred tax
asset


Gross presentation –
present a liability for
unrecognized tax
benefit
26

Carryforward Exists

ABC Inc. has at the beginning of the year a deferred tax asset of $2.4 million
resulting from a $6 million net operating loss carryforward (tax rate is 40%)—this is
its only deferred tax item. The DTA is offset fully by a valuation allowance. During
the current year, ABC reports taxable income of $3 million on its tax return, which
includes a $2 million deduction that does not meet the recognition criteria of ASC
740. The unrecognized tax position is a permanent item. ABC’s NOL carryforward
is available to settle the additional taxes from disallowance of the uncertain tax
position related to the current year deduction.
Applying the guidance in ASU 2013-11:
ABC would offset the unrecognized tax position of $2 million ($0.8 million tax
affected) against the available NOL of $3 million ($6 million less the tax return
income of $3 million). The balance sheet would reflect a DTA of $0.4 million, net
of any valuation allowance needed.


27

ASU 2013- 11

Effective date and transition
• Public entities: annual periods, and interim periods within
those annual periods, beginning after December 15, 2013
• Nonpublic entities: annual periods, and interim periods
within those annual periods, beginning after December
15, 2014
• Prospective application, with option to apply retrospectively
• Early adoption permitted


28

28

Issue 13-B: consensus-for-exposure

Investments in affordable housing tax credits
Issue
Whether to loosen the restrictions on applying an effective
yield method for Low Income Housing Tax Credit (LIHTC)
investments
• Effective yield method: investor recognizes tax credit net of
the amortization of limited partnership investment as a
component of income taxes attributable to continuing
operations
• Proposed guidance expected to expand availability of the
effective yield method


29

29

Issue 13-B

Investments in affordable housing tax credits
Old "effective yield" criteria

New "effective yield" criteria

Availability of tax credits is
guaranteed by creditworthy entity

Probable that tax credits will be
available to investor

Projected yield based solely on
cash flows from tax credits is
positive

Projected yield based solely on cash
flows from both tax credits and other
tax benefits is positive

Investor is a limited partner in the
affordable housing project for
legal and tax purposes, and
liability is limited to investment

Investor is a limited liability investor
in the affordable housing project for
legal and tax purposes, and liability
is limited to investment
Investor retains no operational
influence over investment and
substantially all projected benefits
result from tax credits and other tax
benefits


30

30

Agenda

Accounting Topics


31

Accounting Standard Update (ASU) 20013-11
(July 18, 2013)
Guidance on the presentation of an unrecognized tax benefit (UTB) when
an NOL or tax credit exists
-

UTB is presented as a reduction to the deferred tax asset (DTA) if the
DTA is available to offset the UTB
- a form of "net" reporting

-

Public entities – tax years beginning after December 15, 2013

-

Nonpublic entities – tax years beginning after December 15, 2014

-

Amendments should be applied to all unrecognized tax benefits that
exist at adoption date

-

Early adoption permitted


32

32

Pennsylvania Income Tax Legislation

Pennsylvania Tax Reform (H.B. 465)
-

Intangible expense addback
- but do they really mean it?

-

Market-based sourcing of receipts for services
- at long last - some guidance, any guidance

-

Increase in NOL Cap
- but watch the refund claims on this one – What Cap?

-

Franchise Tax "Dead Horse" legislation

– the "halfway there" theorem in operation


33

33

North Carolina and Massachusetts
Income Tax Legislation
North Carolina Corporate Income Tax Rate reduction (H.B. 998)
-

from 6.9% to 5.0% (and perhaps 3.0%)

Massachusetts adopts market-based sales factor apportionment (H.B.
3535)

-

expansive adoption with some exclusions from the factor

Massachusetts sales/use tax imposed on computer and software services
(H.B. 3535)
-

H.B. 3535 overrode Gov. Patrick's veto

-

Movements afoot to repeal services tax and replace revenues


34

34

Texas Franchise (Income) Tax Developments

To simplify and improve the administration of the franchise tax (H.B 500)
-

(minor) Rate Reduction and the 0.5% tax rate to select taxpayers

-

$1MM or less Total Revenue - exemption from tax made permanent

-

Pipeline Companies may claim COGS deduction

-

certain Nonadmitted Insurance Organizations exempt from the tax

R&D Franchise Tax Credit/Sales/Use Tax Exemption (H.B. 800)
-

a 5.0% franchise tax credit on R&D activities in Texas - or

-

a sales/use tax exemption for depreciable property used in R&D activities (but
not both in a single year)

But retroactive COGS Rule amendment remains the BIG news for qualified
Taxpayers

35

35

Alaska and Oregon Tax Developments

Alaska referendum to repeal Oil Production Tax reduction

- ~$1B per year at issue
- Vote Yes! Repeal the Reduction!
- Or – Reducing What We Take is a Giveaway?
Oregon repeals related party addback statute (H.B. 3069)
- and for a very good reason!

- (they didn't really mean it)


36

36

Other State Tax recent items

MTC Three (3) Factor Elective Apportionment Formula
-

California and Michigan in the judicial lead

In New York (at least) it depends upon how unitary your definition of
"unitary" is

-

Matter of Knowledge Corp.

California Supreme Court – NO Property Tax on Emissions Reduction
Credits
-

Elk Hills Power, LLC

-

overruled appellate court, trial court and SBE


37

37

Year-end State Income Tax Accounting
considerations
Effective Tax Rate (ETR)
-

Changes in laws, regulations, court decisions

-

Mergers and divestitures

-

Changes in apportionment patterns
- reconsider market-based sourcing applications

-

Nexus

-

Combined unitary filings

-

State income tax treatment and reporting of pass-through entities

-

State taxation (or not) of foreign operations

-

Adjustments to tax expense outside the ETR


38

38

considerations
ASC 740-10 (fka FIN 48)
-

Update SOL status
- know the effects of the federal SOL

-

Take another look at issues and governing authorities
- consider acquisitions and divestitures

-

Update interest and penalty computations

-

Consider federal adjustments
- State computations should parallel federal ASC 740-10

-

Current and deferred treatment of UTPs should be consistent

-

Consider ASC 450 (fka FAS 5), including disclosures
- E.g., bulk sale sales/use tax liabilities/acquired liabilities


39

39

considerations
-

Account reconciliations

-

Tax assets (e.g., NOLs) and related valuation allowances
- State adoption (or not) of IRC Sec. 382 limitations

-

Estimated payments

-

Review FIT provision

-

Intercompany agreements and transactions

-

Credits and Incentives

-

File these in the Better Early than Late or Never cabinet


40

40

Agenda

Accounting Topics
• Compensation and benefits
update


41

Special considerations in computing the APIC
pool: Reorganizations
• Most reorganization transactions have implications for excess tax
benefits held in APIC pool
• But first, what are excess tax benefits?
– Increments to the APIC pool created when equity compensation
deductions exceed related deferred tax asset
– Used to offset tax benefit shortfalls (where tax deduction is less than
related deferred tax asset)
• APIC pool tracks net excess benefits and shortfalls
• If insufficient balance in APIC pool to offset a shortfall, it's
recognized as increased tax expense on income statement


42

42

• Most reorganization transactions have implications for excess tax
benefits held in APIC pool:
– Pooling: Accounting method that allows the balance sheets of two
companies to be added together pursuant to an acquisition or
merger
– Purchase Accounting: The alternative accounting method, whereby
the purchasing company adds the absorbed company's assets to its
own balance sheet
– Sale of a subsidiary: Excess tax benefit pool stays with the parent if
the excess tax benefit was from an award of the parent’s equity; it
follows the subsidiary if it was related to an award related to the
subsidiary’s equity
– Spin-offs: Currently conflicting views: either follow the subsidiary
sale view above, or the pool follows the employee

43

43

• Poolings
– No change in basis, and include all pooled companies' excess tax
benefits
• Purchase Accounting
– Under this method new basis is recognized and excess tax benefits
of target do not carry over to purchaser
– Excess tax benefits from awards issued in the acquisition (new
awards or substitutions for target equity compensation grant) are
recognized by purchaser


44

44

• Sale of a subsidiary
– Excess tax benefit pool stays with the parent if the excess tax benefit
was from an award of the parent’s equity
– Follows the subsidiary if it was related to an award related to the
subsidiary’s equity
• Spin-offs — Currently conflicting views, probably can account under
either of two ways:
– Follow subsidiary sale method above, or
– Pool follows the employee (i.e., belongs to entity for whom services
were performed)


45

45

• Special note: Bankruptcy accounting:
– Company generally applies fresh-start accounting upon emerging
from bankruptcy (ASC 852-10)
– Fresh-start accounting creates new basis similar to purchase
accounting
– Therefore apply purchase accounting approach and excess tax
benefits do not remain with company upon emerging from
bankruptcy


46

46

Comments?

Questions?


47

47

Do you have any immediate concerns regarding
ASC 740 matters?
A member of Grant Thornton’s Tax Accounting and
Risk Advisory team would be happy to speak with
you regarding your specific situation.
Please provide your name, phone number and email in the
form on the next screen and we will be in touch. Only Grant
Thornton will have the ability to see this information.
Alternatively, please contact any of today's presenters directly.
Their contact details are provided on the next slides.


Contact

Information

Randy Robason

Chuck Evans

National Partner-inCharge, TARAS

Partner,
Accounting Principles

Randy.Robason@us.gt.com

Charles.Evans@us.gt.com

Joe Calianno

Mark Ritter

Partner,
International Tax
Consulting

Managing Director,
Compensation and
Benefits Consulting

Joe.Calianno@us.gt.com

Mark.Ritter@us.gt.com


Contact

Information

Bill Marx

Terry Gaul

Partner,
Federal Tax

Managing Director,
State and Local Tax

Bill.Marx@us.gt.com


Terry.Gaul@us.gt.com

Disclaimer
**********************
IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the
U.S. Internal Revenue Service, we inform you that any U.S. federal tax advice
contained in this PowerPoint is not intended or written to be used, and cannot be
used, for the purpose of (a) avoiding penalties under the U.S. Internal Revenue Code
or (b) promoting, marketing or recommending to another party any transaction or
matter addressed herein.
**********************
The foregoing slides and any materials accompanying them are educational materials prepared by Grant Thornton LLP and are not
intended as advice directed at any particular party or to a client-specific fact pattern. The information contained in this presentation
provides background information about certain legal and accounting issues and should not be regarded as rendering legal or
accounting advice to any person or entity. As such, the information is not privileged and does not create an attorney-client
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reflect the most current legal developments, verdicts, or settlements.
You may contact us or an independent tax advisor to discuss the potential application of these issues to your particular situation. In
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treatment or tax structure of any matter addressed herein.
© 2013 Grant Thornton LLP, the U.S. member firm of Grant Thornton International. All rights reserved. Printed in the U.S.A. This
material is the work of Grant Thornton LLP, the U.S. member firm of Grant Thornton International, Ltd.


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