FIN 48 Guidance to be Delayed by One Year

The Financial Accounting Standards Board (FASB) voted in November to delay the implementation of FIN 48 for nonpublic entities not already implementing FIN 48 until periods beginning after December 15, 2007. However, nonpublic entities already implementing FIN 48 and public entities must implement FIN 48 for periods beginning after December 15, 2006. The deferral was granted because of concern that many nonpublic entities and their CPA practitioners were not sufficiently aware of the impact of FIN 48.

FASB’s Statement of Financial Accounting Standards (SFAS) No. 109 (Accounting for Income Taxes) establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities during the current and preceding years. SFAS No. 48 (Accounting for Uncertainty in Income Taxes), clarifies the application of SFAS No. 109 by establishing a threshold condition that a tax position must meet for any part of the benefit of that position to be recognized in financial statements. Under FIN 48, tax benefits (e.g., deductions, credits) from uncertain tax positions that reduce an enterprise’s current or future income tax liability are reported in its financial statements only to the extent each benefit is recognized and measured under the following two-step approach:

1. The enterprise must evaluate each tax position to assess whether, based on the “technical merits” (i.e., based on the relevant tax law authorities), it is “more-likely-than-not” that the position would be sustained upon examination (including related appeals or litigation processes) by a tax authority that has full knowledge of all relevant information. “More likely- than-not” means a likelihood of more than 50 percent.

2. If a tax position satisfies the more-likely-than not threshold, the enterprise then can proceed to measure the amount of tax benefit from the position that can be recognized in the financial statements. Under a cumulative probability approach, an enterprise records in its financial statements the largest amount of tax benefit that is greater than 50 percent likely of being realized after settlement with a tax authority that has full knowledge of all relevant information.

FIN 48 also provides guidance on measurement, derecognition, classification, and disclosure of tax positions. Although a recommendation had been made for an extension for pass-through entities because of the fact that pass-through entities have not been subject to FASB Statement No. 109 in the past, FASB did not approve such an extension. However, pass-through entities that are nonpublic entities qualify for the one year extension for nonpublic entities.

Proposal to Extend Expiring Charitable Incentives and IRA Rollover

House Ways and Means Committee Chairman Charles Rangel’s (D-N.Y.) tax reform bill (H.R. 3970), unveiled last month, would extend a number of charitable incentives that were set to expire in 2007, including one that would allow direct contributions from IRAs to charitable organizations. The bill would extend for one year tax-free distributions from IRAs of up to $100,000 per taxpayer per taxable year.

Various charitable incentives were included in the Pension Protection Act of 2006 (Pub. L. No. 109-280), including one to allow tax-free donations to charities from IRAs by taxpayers aged 70 1/2 or older. The law covered donations to churches and public charities, but excluded donations to foundations, donor-advised funds, supporting organizations and split interest vehicles such as remainder trusts.

The extension would not be expanded to permit rollovers to donor-advised funds and private foundations. Moreover, the bill is not as generous as the “Public Good IRA Rollover Act of 2007.” That bill, which was introduced in both the House (H.R. 1419) and Senate (S. 819), would have expanded the provisions to gifts made to other types of charitable organizations. It also would have applied to gifts of more than $100,000 and would have allowed donors to begin making gifts starting at age 59 1/2 rather then 70 1/2.

However, Rangel’s bill at least would be a temporary fix. The bill would allow modification of unrelated business income tax (UBIT) rules for certain investment partnerships so that pension funds, universities and other tax-exempt entities could directly invest in hedge funds and other investment funds without incurring UBIT. Recent congressional hearings highlighted criticisms of hedge funds, and there has been some interest in changing the rules to prevent universities from using the entities to reduce what otherwise would be taxable income on endowments. The bill would solve the problem by allowing investments in these hedge funds without generating taxable income and having to use tax-planning blocker entities. The bill also would extend for one year the current law on special rules for interest, rents, royalties and annuities received by a tax-exempt entity from a controlled entity.

If a subsidiary pays rent, royalties or interest to its parent, any amount that is in excess of fair market value generally will be treated as unrelated business income to the parent. Absent the provision in the bill, the entire payment could be treated as unrelated business income.

Finally, the bill would extend for one year the current law increasing contribution limits and carryforward periods for donations of appreciated real property (including partial interests in real property) for conservation purposes.

Quick Hits

Funds to 501(c)(3) Organizations that Serve Community Purpose
House Bill 396 was introduced into the Ohio legislature (Hottinger, Dodd) generally to authorize a board of county commissioners to appropriate funds to tax-exempt 501(c)(3) organizations that serve a community purpose. Section 307.852 would provide that “a board of county commissioners may appropriate from the county general fund moneys not appropriated for any other purpose to an organization that the board determines serves a community purpose and that is exempt from federal taxation under subsection 501(a) and described in subsection 501(c)(3) of the Internal Revenue Code.”

Senate Finance Roundtable on Hospitals to Focus on Community Benefit, Charity Care
A roundtable discussion last month of the issues facing tax-exempt hospitals took place regarding potential legislation that would reform the nonprofit hospital sector. The discussion draft recommended that taxexempt hospitals be segregated into ones meeting the qualifications of the basic charity provisions of IRC 501(c)(3) and those falling under the provisions of 501(c)(4) (not-for-profit organizations that serve the common good, such as social welfare organizations). The discussion draft reflects the minority staff’s concern that many nonprofit hospitals receive substantial federal income tax benefits and subsidies without providing commensurate benefits to society.

House Urges IRS to Streamline Form 990 Schedule H Community Benefit Form
A majority of the members of the House urged the IRS Nov. 7 to redesign and streamline proposed Form 990 and Schedule H, which would require tax-exempt hospitals to provide detailed information to show compliance with the community benefit standard. The letter, supported by the American Hospital Association, was signed by 163 Democrats and 142 Republicans, stating that the information requested by the IRS does “not truly reflect the tax-exempt hospital’s mission and obligation to its community.” The letter sought the delay of the obligation to file the forms and schedules until tax year 2010 and pointed out that the new IRS form would not include information regarding patient bad debt and Medicare underpayments, both of which are “significant measures of community benefit.”

University Endowments 5 Percent Payout in Education Bill
Senate Finance Committee member Charles Grassley (R-Iowa) said on Oct. 29 that he would like to see an upcoming higher education tax package include a base payout requirement for university endowments. According to staff, a possible provision would require university endowments to pay out at least 5 percent of their total worth or face a penalty, a change that would put them on a more level playing field with private foundations. Grassley attributes his goal to the increased college tuition rates.