Implications o f fin 48 for colleges universities a nd their foundations
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Implications O f FIN 48 For Colleges, Universities A nd 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. Richard Locastro, CPA, J.D.

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Implications O f FIN 48 For Colleges, Universities A nd Their Foundations

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Implications o f fin 48 for colleges universities a nd their foundations

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


Implications o f fin 48 for colleges universities a nd their foundations

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.


Overview

Overview

  • Background

  • Basic structure of FIN 48

  • Application to Tax-exempt Organizations

  • Other FIN 48 issues for Preparers and Organizations

  • Questions and Answers


Background

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


Background1

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


Background2

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


Background3

Background

  • A tax-exempt entity may be considered a public entity if, for example, it has tax-exempt bonds traded in a public market.


Fin 48 basics

FIN 48 Basics


Fin 48 basics1

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


Fin 48 basics2

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


Fin 48 basics3

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


Fin 48 basics4

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


Fin 48 basics5

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


Fin 48 basics recognition

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


Fin 48 basics recognition1

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)


Fin 48 basics measurement

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


Fin 48 basics measurement1

FIN 48 Basics – Measurement


Fin 48 basics measurement2

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


Fin 48 basics measurement3

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


Fin 48 basics measurement4

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


Fin 48 basics measurement5

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


Fin 48 basics disclosure

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


Fin 48 basics disclosure1

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?


Application to tax exempt organizations

Application to Tax-Exempt Organizations


Application to tax exempt organizations1

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


Application to tax exempt organizations2

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


Application to tax exempt organizations3

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


Application to tax exempt organizations4

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


Application to tax exempt organizations5

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


Application to tax exempt organizations6

Application to Tax-Exempt Organizations

  • Operated

    • Private inurement

      • Compensation

      • Transactions with insiders

      • Joint ventures


Application to tax exempt organizations7

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


Application to tax exempt organizations8

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


Application to tax exempt organizations9

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


Application to tax exempt organizations10

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?


Application to tax exempt organizations11

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)


Application to tax exempt organizations12

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


Application to tax exempt organizations13

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


Other fin 48 issues

Other FIN 48 Issues


Other fin 48 issues1

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


Other fin 48 issues2

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


Implications o f fin 48 for colleges universities a nd their foundations

Questions & Answers

Richard Locastro, CPA, J.D.

Principal, NonprofitTax Department

  • [email protected] or 301-951-9090

    Gelman, Rosenberg & Freedman, CPAs

    4550 Montgomery Avenue, Suite 650 N

    Bethesda, MD 20814

    www.grfcpa.com


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