In Announcement 2010-9, the U.S. Internal Revenue Service (the "Service") proposed requiring certain entities that file a U.S. tax return to include a new schedule in their return to report their "uncertain tax positions" and their total potential tax exposure for these positions. The significance of this proposal is demonstrated by its announcement by the Commissioner of the Service at the annual meeting of the Tax Section of the New York State Bar Association, one of the largest gatherings of tax lawyers in the U.S.

If enacted under its current form, the requirement to file the proposed schedule will apply only to entities that are required to file a U.S. tax return. In addition, it will only apply to corporations that have in excess of $10 million of assets and that prepare financial statements that are subject to FASB Interpretation No. 48 ("FIN 48") or a similar industry or country-specific generally accepted accounting standard requiring them to disclose "uncertain tax positions". (It was precisely this potential consequence that was a major concern during the adoption of FIN 48.) The information required would include a brief description of the position and the maximum potential amount of taxes that would be paid if the taxpayer's position is not sustained. The taxpayer would not be required to disclose its argument for or against the position, however, or the strength of their belief in the merits of their position. Additionally, the taxpayer would not be required to disclose the amount of any reserves taken with respect to each position on its financial statement.

Essentially, the proposal is designed to give the IRS the benefit of knowing a) what uncertain positions the taxpayer is already reporting on its financial statements, and b) how much money is at stake so that the IRS can determine if the issue might be worth pursuing.

The Service requested comments on the proposal by the end of March, and there are significant questions that will need to be answered before the proposal will be implemented. The resulting schedule likely will undergo significant revision before any implementation.

Depending on the final scope of the proposed schedule, it may become even more important for non-U.S. investors who invest in the U.S. to isolate U.S. tax return filing requirements in "blocker" subsidiary entities.

Authored by Scott Semer.

If you have any questions regarding the foregoing, please contact Peter Glicklich (212.588.5561) or Scott Semer (212.588.5538) in our New York office.

Davies Ward Phillips & Vineberg LLP, with over 240 lawyers, practises nationally and internationally from offices in Toronto, Montréal and New York and is consistently at the heart of the largest and most complex commercial and financial matters on behalf of its North American and international clients.

The information and comments herein are for the general information of the reader and are not intended as advice or opinions to be relied upon in relation to any particular circumstance. For particular applications of the law to specific situations, the reader should seek professional advice.