On September 2, 2009, FASB issued an Accounting Standards Update (ASU) No. 2009-06, Income Taxes (Topic 740) – Implementation Guidance on Accounting for Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities. This update clarifies rules originally issued in FIN 48, Accounting for Uncertainty in Income Taxes. Along with exempting private companies from some of the disclosure requirements under the original FIN 48, this update clarifies that FIN 48 does apply to pass-through entities and discusses how pass-through entities will apply these rules.

FIN 48 was originally issued in July 2006. The effective date was deferred until fiscal years beginning after December 15, 2008 for most non-public companies. FIN 48 requires companies to take an inventory of all material tax positions taken or expected to be taken on returns filed and returns that should have been filed with federal, state, local and international taxing authorities. For most companies, the process of identifying and documenting these tax positions will require a significant amount of time and resources.

Under FIN 48, a company may only recognize a benefit related to an uncertain tax position if it is more likely than not (MLTN) that the tax position will be sustained based on its technical merits in an examination. If the tax position does not meet this MLTN threshold, the company would be required to calculate and record the potential liability including penalties and interest under the terms of FIN 48. This liability would be required to be reported separately from other tax balances. Additionally, FIN 48 requires significant disclosures related to these uncertain tax positions and resulting liabilities.

Examples of items which could create exposure to additional income taxes (uncertain tax positions) include, but are not limited to the following:

• Failure to file income tax returns or to pay income taxes.
• The underreporting of taxable income that may result from underreporting of income and/or overstating deductible expenses.
• Challenges to taxpayer status.

The recently released proposed staff position clarifies that all entities including pass-through entities are subject to FIN 48. Several examples of uncertain tax positions that are common in pass through entities include:

• Questions about the entity’s tax status. For instance, does the entity qualify for pass through status in all jurisdictions in which if files a return or have any events occurred that would jeopardize the entity’s tax status?
• Could the entity have neglected to file a return in a jurisdiction in which it has nexus and income, but is not filing a return?
• Are there built in gains resulting from a recent conversion to an S corporation?

If you have questions regarding this update or how it affects your organization, please contact Karyn Lowrey, Partner, at 678-741-2541 or klowrey@bspj.com.