Line Items


The AICPA recommended that the IRS reduce unnecessary or redundant information required on Schedule M-3, Net Income (Loss) Reconciliation.


The suggestions were made in late April in a letter from Patricia Thompson, chair of the AICPA’s Tax Executive Committee.


The IRS introduced Schedule M-3 in 2004 as an examination tool for corporations and to increase transparency and standardize the reporting of book-tax differences. In her letter, Thompson asked the IRS to explain how it is currently using the data it obtains from Schedule M-3. She noted that, in the experience of AICPA members, there has been little change in the way the IRS examines taxpayers outside the Compliance Assurance Program, “with examiners still requesting complete book to tax detail for all general ledger accounts.”


Thompson also said taxpayers are spending much time properly reporting items on Schedule M-3, including time spent mapping general ledger income/ expense accounts to column (a), reconciling individual line items to report taxable income totals in column (d) and providing supporting data for cost of goods sold on Form 8916-A, Supplemental Attachment to Schedule M-3.


As a result of these and other increased taxpayer burdens, the AICPA recommends that the IRS:


  • Eliminate required completion of columns (a) and (d) of Parts II and III of Schedule M-3;
  • Eliminate Form 8916-A;
  • Eliminate and revise certain lines on Parts II and III of Schedule M-3, or alternatively, replace them with an expanded Schedule M-1 that would be used by all business taxpayers; and
  • Expand the use of Schedule B (Form 1120) and Schedule C (Form 1065) for risk assessment in lieu of adding new lines and requesting additional supporting detail on Schedule M-3.


One of the new lines in Part III of the schedule that the AICPA recommended deleting is that for research and development (R&D) costs. Thompson said that the item expands the original purpose of the schedule and increases duplication of information and taxpayer burden, despite guidance on completing the line the IRS had recently posted to its website ( as a frequently asked question. The FAQ states that taxpayers using a current deduction method of accounting for R&D expenses under section 174(a) do not need to report those expenses separately for each project or product. However, taxpayers using the deferral and amortization method under section 174(b) are required to provide expenditure details on a project-by-project basis.




The IRS issued Notice 2011-34 giving guidance on various reporting requirements under the Foreign Account Tax Compliance Act (FATCA, part of PL 111-147). The notice responds to concerns raised by commenters following the issuance last August of Notice 2010-60, which contained preliminary guidance on implementation of the FATCA rules.


FATCA expanded the information reporting requirements for foreign financial institutions with respect to certain U.S. accounts. It also imposed withholding, documentation and reporting requirements with respect to certain payments made to certain foreign entities.


Notice 2011-34 provides the procedures for participating foreign financial institutions to follow in identifying U.S. accounts among their pre-existing individual accounts. It also defines what a passthrough payment is for FATCA purposes and provides guidance on withholding on pass-through payments.


The notice also lists certain categories of foreign financial institutions that will be deemed to be compliant. These include certain local banks and certain investment vehicles. However, to be deemed compliant, such foreign financial institutions will have to apply for deemed-compliant status, obtain a foreign financial institution identification number and certify every three years to the IRS that they meet the requirements for such treatment.


The notice discusses foreign financial institutions’ obligations to report U.S. accounts. It also addresses the treatment of qualified intermediaries and provides guidance on the application of IRC § 1471 to affiliated groups of foreign financial institutions.




The U.S. Supreme Court declined to hear the taxpayers’ appeal of the Second Circuit’s holding in Nathel v. Commissioner (615 F.3d 83 (2nd Cir. 2010, aff’g 131 TC 262 (2008)), cert. denied, Sup. Ct. docket no. 10-928 (4/25/11)) that had affirmed the Tax Court (see Tax Matters coverage Aug. 2010, page 70, and April 2009, page 69). Brothers and S corporation co-owners Ira and Sheldon Nathel had sought to characterize their additional capital contributions to three S corporations as an increase in their basis in loans to the entities, offsetting ordinary income to them from repayment of the loans.


Relying primarily on the Supreme Court’s decision in Gitlitz v. Commissioner (531 U.S. 206 (2001)), the Nathels claimed that the capital contributions were an item of tax-exempt income of the corporations under section 1366(a)(1)(A) that could be included with items of taxable income, loss, deduction or credit in determining the pass-through tax liability of shareholders. In its opinion, the Second Circuit called the argument “novel,” noting that section 118(a) explicitly excludes from gross income of a corporation any contribution to its capital of a taxpayer and that contributions to capital traditionally had not been included in income for purposes of section 1366(a)(1)(A).


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