Form 1120 Archives - TAX CONTROVERSY 360

Update on Schedule UTP Comments

by Kevin Spencer and McDermott Will & Emery | Nov 14, 2022 | IRS Guidance, Tax Refunds

We previously discussed the Internal Revenue Service’s (IRS) announcement regarding draft changes to Schedule UTP, Uncertain Tax Position Return Statement, and Instructions to Schedule UTP (Form 1120). The IRS requested comments by November 18, 2022.

On November 14, 2022, we submitted our comments to the IRS outlining some of our concerns with the draft changes, focusing primarily on the scope of disclosure. We made the following recommendations:

Reconsider whether any changes should be made to Schedule UTP given the current rules in place regarding other disclosures (g., Forms 8275 and 8275-R) and the serious privilege concerns raised by the additional disclosure requirements.

Remove the requirement to disclose any positions that are “contrary” to any authorities or, at a minimum, to any Private Guidance.

If changes are made to Schedule UTP, work with taxpayers to determine the appropriate standard for determining whether there is “contrary” authority and what steps a taxpayer or return preparer must take before being able to satisfy the jurat requirement.

Issue published guidance clarifying that proper disclosure on Schedule UTP will satisfy the adequate disclosure requirement for purposes of both the disregard of rules and regulations and substantial understatement of tax grounds for imposing penalties under I.R.C. § 6662.

If changes are made to Schedule UTP, delay the effective date to the 2023 tax year (processing year 2024).

We will continue to track potential changes to Schedule UTP and Form 1120 and will provide updates as they are made known.

IRS to Update Schedule UTP to Require Additional Transparency

by Kevin Spencer and McDermott Will & Emery | Oct 14, 2022 | IRS Guidance, Tax Refunds

On October 11, 2022, the Internal Revenue Service (IRS) announced draft changes to Schedule UTP, Uncertain Tax Position Return Statement, and Form 1120, Instructions for Schedule UTP, for the 2022 tax year (processing year 2023). Since the 2010 tax year, Schedule UTP has been used by certain corporations to report uncertain tax positions. Corporations filing Forms 1120, 1120-F, 1120-L or 1120-PC are required to file Schedule UTP if their total assets equal or exceed the applicable asset threshold for the tax year and if the corporation records a liability for unrecognized tax benefits for a US federal income tax position in audited financial statements.

The changes to the form include a new field for the incremental dollar amount of the uncertain tax positions taken. Also, for tax positions reported on Schedule UTP, rather than filing Form 8275, Disclosure Statement, or Form 8275-R, Regulation Disclosure Statement, new columns will identify the rulings or regulation sections that are contrary to positions taken on the tax return. (Proper disclosure on Schedule UTP may allow taxpayers to avoid certain penalties). Finally, the instructions incorporate more relevant examples and provide enhanced guidance on what constitutes an adequate disclosure for the concise description. Comments can be submitted to the IRS regarding the draft changes.

Practice Point: The IRS is continuing its effort of having corporations self-identify uncertain tax positions (although there remain questions on how the IRS actually uses the information disclosed on a Schedule UTP). Requiring the identification of specific IRS guidance that is contrary to the taxpayer’s position is noteworthy given the IRS’s recent position that challenges to regulations will not be resolved at the examination or IRS Appeals levels. Corporations subject to the Schedule UTP reporting requirement will need to review their past practices and ensure that future Schedule UTP filings comply with the draft changes once finalized.

Court Holds Compensation Paid to Four Sons Was Not Reasonable

by Kevin Spencer and Ruth Wimer | Nov 30, 2016 | Court Procedure Matters, Trial Courts, Uncategorized

Reasonable compensation is a fact based analysis, and once again has been decided against the taxpayer. In Transupport, Inc. v Commissioner, T.C. Memo. 2016-216, the issue presented for decision was whether amounts deducted by the taxpayer, a distributor and supplier of aircraft engines and parts, during 2006‒2008 as compensation that was paid to the four sons of taxpayer’s president and majority shareholder were reasonable and deductible pursuant to Internal Revenue Code (IRC) Section 162 and whether accuracy related penalties applied. In 2005, the president and 98-percent owner of Transupport, gifted and sold shares in equal percentages to his four sons. The president and his four sons were the sole employees and officers for the tax years at issue. The president determined the compensation payable to his sons without consultation with his accountant or anyone else, and the only factors considered were reduction of reported taxable income, equal treatment of each son and share ownership. (more…)