FIN 48 — Accounting for Uncertain Tax Positions
By Richard Soukup
Community Bank Advisor, 2007 Winter 

Last summer, the Financial Accounting Standards Board (FASB) released FIN 48 as a further guidance for FAS 109, Accounting for Income Taxes. This interpretation is effective for calendar-year companies beginning in 2007 and is meant to provide companies with a framework to account for their income tax liabilities and make the disclosure of these liabilities more consistent and comparable from bank to bank. It is also intended to eliminate the tax “cushion” for any “unallocated” tax amounts by making companies assess the tax positions they have taken and reflect these uncertainties on their financial statements.

Working within the overall framework of FAS 109, banks are now required to assess whether their tax liability is adequately stated by taking a two-step approach: First, assess each position and determine if it is “more likely than not” (greater than 50% chance) to be sustained, assuming the position is reviewed by the IRS or other taxing authority (state and local governments) and litigated to the “highest court possible.” You must assume that the IRS has knowledge of all relevant facts related to each position and that the position will be audited by the appropriate taxing authority. If a position is determined not to meet this test, an adjustment must be made to increase the bank’s book liability. For example, if there is some question as to the tax-free nature of $100,000 of your municipal bond portfolio resulting in a loss of tax-free status of the interest, and you further determine that there is a less than 50% chance that this interest should be treated as a deduction on the return (and any return still open under the statute of limitations, generally 3 years), then the bank should not recognize the “benefit” from the $100,000 of interest. It should increase its income tax liability for the amount determined not deductible ($40,000 at a 40% tax rate).

If a position is determined to have a greater than 50% chance of being upheld, the next step is to determine the value at which its probability will be upheld. Using the example above, if you assume that the position has a greater than 50% chance of success, but there is still some uncertainty, and it is determined that there is a 75% chance that $60,000 of the interest in deductible, then the benefit from the $40,000 deduction ($16,000 at 40%) should not be recognized.

We will be happy to assist you in work through these rules and applying them appropriately to your tax positions.