Frederic Attermeier

Mark Nachbar

Kris Weinman

State and Local Tax Positions and FASB Interpretation No. 48 (FIN 48)

Areas revealed in which reporting companies need to be prepared, focusing particularly on state and local income taxation and the challenges reporting companies face.

December 11, 2007
by Frederic Attermeier, et al.

The Financial Accounting Standards Board (FASB) released its Interpretation No. 48 (FIN 48) in June 2006, applicable generally to fiscal periods beginning after December 15, 2006. For publicly held entities, it meant that they were required to build FIN 48 computations into their quarterly financial statements beginning with the first quarter of 2007. Numerous commentators requested that FASB delay the implementation of FIN 48, but on January 17, 2007, Board Members unanimously refused to do so.

In evaluating the need for an accrual under SFAS No. 5, management was able to use its judgment to determine if a liability would be assessed, including the likelihood of detection. However, under FIN 48, there is a presumption that taxing authorities will review all issues and have all available facts for their analysis.

This article briefly reviews the principles of FIN 48 and highlights areas in which reporting companies need to be prepared, focusing particularly on state and local income taxation and the challenges reporting companies face in this area.

The state and local tax area is of particular concern as many companies have inadvertently taken “tax positions” that will need analysis under FIN 48, such as nexus determinations, data used for apportionment formulas, and combined reporting options. In management’s judgment, these “tax positions” may not have been detected by state taxing authorities in the past; however, under FIN 48 they are now required to analyze and prepare a reserve for these “tax positions.”

Principles of Fin 48

The announced goal of FIN 48 is to increase relevance and comparability in the financial reporting of income taxes and to provide more complete information about income tax assets and liabilities for financial statement users. Uncertainties in tax positions on non-income taxes (as well as uncertainties in non-tax liabilities) will continue to be accounted for under SFAS No. 5, “Accounting for Contingencies.”

A “tax position” is a stance taken on an income tax return, or a position expected to be taken on a future tax return, that is reflected in measuring deferred income tax assets or liabilities. For instance, it is a “tax position” not to file an income tax return in a jurisdiction because management determines that the administrative expense of doing so outweighs the probable economic value of filing or if management has inadvertently failed to file an income tax return in a particular jurisdiction. Also, the characterization of income reported on a return as taxable in a particular category, such as capital vs. ordinary or business vs. nonbusiness, is a “tax position.”

Challenges Noted to Date

  • Nexus. State income tax nexus presents one of the greatest challenges related to FIN 48 with respect to state taxes. We often find that companies, through inadvertence or for administrative convenience, have not filed income tax returns in states in which their presence would establish nexus under the state’s interpretation of its rules.

    New concepts of an economic presence creating nexus (economic nexus) or the presence of an affiliated entity in a state (affiliate nexus) make the frequent re-examination of claims of immunity necessary.
  • Characterization of state taxes. Many state levies combine income tax bases with other bases. Specifically New Jersey, New York, Ohio and Pennsylvania tax income to some extent along with capital. A change in the basis of the tax from income to capital or vice versa would change whether the “tax positions” taken would be evaluated under FAS No. 5 or FIN 48, as the analysis under FIN 48 only applies to income taxes.
  • Offsets and netting. FIN 48 does not allow an entity to offset the potential refund savings in one jurisdiction with an assessment in another. A common situation would be if all the income had inappropriately been reported to State A when some of the income should have been reported to State B. The taxpayer may have the opportunity to file a refund claim in State A when assessed the tax due in State B, and the refund would offset the liability. However, FIN 48 prohibits the netting of the two amounts. The State B liability would be reported in full as an uncertain tax position with no offset for the State A refund.
  • Statutes of limitation. In the state and local income tax context, statutes of limitation present special challenges that will have a direct bearing on FIN 48 calculations. It is almost a universal rule that (1) extension of the federal statute of limitations on an income tax return automatically extends the underlying states’ statutes and (2) a federal RAR with respect to an item of income reopens the states’ calculation of income related to the RAR. It is less clear, and is often a point of contention, whether a RAR on an issue that does not affect state income (or affects only unrelated items) reopens a state’s statute of limitations on the unrelated state items.

    For instance, suppose the statute of limitations has run for a particular year in a state. A federal RAR is issued for which there is no state effect (e.g., the RAR reallocates income between two foreign countries, leaving domestic income unchanged). State tax law (statutory, regulatory or judicial) has changed between the time the statute expired on the state return and the submission of the RAR. Does the federal RAR reopen the state’s statute on unrelated items on which the law has changed since the statute expired? Surprisingly, many states claim the statute is reopened, particularly in the case of adjustments that are unfavorable to the taxpayer.
  • Tax auditor gold mine. The data required to be gathered for the FIN 48 calculations and the financial statement auditors’ workpapers stand to be a gold mine of information for a tax auditor. The FIN 48 workpapers will, after all, describe in detail the most vulnerable tax positions of every company, with a full discussion of the weakest points in their arguments.

    The IRS has, to date, indicated that it will not ordinarily subpoena tax accrual workpapers, except in extraordinary circumstances. However, we are not aware of any states that have made such a concession. Our experience is that, when one state gets information through audit inquiries, all states get it through information sharing agreements. Furthermore, the level of protection for taxpayer information at the state level is primitive compared to that at the federal level. The storage systems and security of state departments of revenue are often substantially below those of the IRS. Worse, state audit standards imposing civil and criminal penalties on audit personnel who disclose taxpayer information are nonexistent or much less strict at the state level than the federal.


FIN 48 requires every entity to reconsider all “tax positions” it has taken in every income tax jurisdiction in which it operates where the statute of limitations remains open. As an entity can no longer use its own judgment to determine whether it is likely that these “tax positions” will go undetected, many inadvertent decisions in a state income “tax position” that had not previously been considered under FAS 109 will need to be analyzed under FIN 48.

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Frederic J. Attermeier is a Senior State and Local Tax Specialist. Attermeier can be reached at 713-407-3824. Mark L. Nachbar is a Managing Director. Nachbar can be reached at 312-416-9098. Kris Weinman is a Managing Director. Weinman can be reached at 713-407-3922. The professionals of the State and Local Tax Services Team of UHY Advisors SALT, LLC offer solutions to complex, multi-state tax issues from strategic planning to compliance. They provide a holistic approach to helping companies minimize exposure and maximize savings.