FIN 48 Summary:

At its November 7, 2007 board meeting, SFAS elected to delay the effective date of FIN 48, Accounting for Uncertainty in Income Taxes, for nonpublic entities to fiscal years beginning after December 15, 2007.  FIN 48 requires Companies to analyze the technical merits of their tax positions and determine the likelihood that these positions will be sustained if they were ever examined by the taxing authorities.  If Companies determine that it is unlikely that their tax positions will be sustained, a corresponding liability is created and the tax benefit of such position is reduced for financial reporting purposes.  Tax positions to consider include, but are not limited to:

• The decision not to file a return in a certain state
• An allocation or a shift of income between tax jurisdictions
• The characterization of income or a decision to exclude reporting taxable income in a tax return
• A decision to classify a transaction, entity, or other position in a tax return as tax exempt
• Excess compensation in a C-Corporation
• R&D credits taken
• International transfer pricing
• Inventory capitalization
• Unrelated business income

Evaluation:
The evaluation of the Company's tax positions is done in two steps:

1) Recognition - FIN 48 addresses the recognition and measurement of income tax positions using a "more-likely-than-not" threshold.  The more-likely-than-not threshold means that

• A benefit related to an uncertain tax position may not be recognized in the financial statements unless it is more-likely-than-not that the position will be sustained based on its technical merits; and
• There must be more than a 50 percent likelihood that the position would be sustained if challenged upon examination including the related appeals or litigation process.  

2) Measurement - The tax benefit of a qualifying position is the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information.  For example, assume a tax position has the following pattern of possible benefit outcomes:

In the above example, $60 is the amount of tax benefit that would be recognized in the financial statements, because it represents the largest cumulative amount of benefit that is more than 50% likely to reflect the ultimate outcome.

Assessing an uncertain tax position begins with the initial determination of the position's sustainability.  As of each balance sheet date, unresolved uncertain tax positions must be assessed, and management should determine whether (1) the factors underlying the sustainability assertion have changed and (2) the amount of the recognized tax benefit is still appropriate. 

Interest and Penalties:
A taxpayer is required to accrue interest and penalties that, under relevant tax law, the taxpayer would incur if the uncertain tax positions ultimately were not sustained.  Accordingly, under FIN 48, interest would start to accrue for financial statement purposes in the period in which it would begin accruing under relevant tax law, and the amount of interest expense to be recognized would be computed by applying the applicable statutory rate of interest to the difference between the tax position recognized in accordance with FIN 48 and the amount previously taken or expected to be taken in a tax return.  Penalties would be accrued in the first period in which the position was taken on a tax return that would give rise to the penalty. 

Disclosure:
FIN 48 requires a reconciliation of the total amount of unrecognized tax benefits at the beginning of the period to the total amount of unrecognized tax benefits at the end of the period.  Fin 48 also requires qualitative and quantitative disclosures, including:

• The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate. 
• The total amounts of interest and penalties.
• For positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date:
  1. The nature of the uncertainty;
  2. The nature of the event that could occur in the next 12 months that would cause the change; and
  3. An estimate of the range of the reasonably possible change or a statement that an estimate of the range cannot be made
• A description of open tax years by major jurisdiction. 

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