Final version of Schedule M-3 available.

On July 7, 2004, Treasury and the IRS released the final version of Schedule M-3, Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More, for reporting annual book-to-tax reconciliations for tax years ending on or after Dec. 31, 2004. The new schedule replaces current Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, and requires taxpayers to submit significant details beyond the general "white paper" disclosure required for many years. A corporation must file Schedule M-3 if it is required to file Form 1120 and its assets equal or exceed $10 million at the end of a tax year.

Overview

The schedule has been combined and reformatted from the draft released in January 2004. Part I, Financial Information and Net Income (Loss) Reconciliation, asks about the corporation's financial statements and reconciles worldwide financial statement net income (or loss) to net book income reported on the return. Part II, Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations With Taxable Income per Return, and Part III, Reconciliation of Nat Income (Loss) per Income Statement of Includible Corporations With Taxable Income per Return--Expense/Deduction Items, are consolidating schedules that require corporations to (1) separately report over 70 items of income and expense in reconciling net income (or loss) and (2) identify each as either a temporary or permanent difference.

FAQs 

In a list of frequently asked questions (FAQs) (available at www.irs.gov/pub/irs-utl/m-3_faq.pdf), the IRS states in Q&A-4 that a corporation must complete only Part I and columns B and C of Parts II and III for a "transition year" (i.e., the first tax year the corporation is required to file Schedule M-3). Q&A-6 clarifies that Part I of Schedule M-3 must be completed once to report consolidated information and activity for an entire U.S. consolidated tax group; however, Parts II and III must be completed separately by each group member to reflect its own activity. Another set of IRS FAQs (available at www.irs.gov/pub/irs-utl/m-3_faq_release_080604.doc} provides additional guidance.

Rev. Proc. 2004-45

Along with the release of final Schedule M-3, the IRS simultaneously issued Rev. Proc. 2004-45, which provides streamlined procedures for meeting a taxpayer's disclosure obligations for reportable transactions with a significant book-tax difference. The procedure states that a corporation's filing of Schedule M-3 with its timely filed original return for the tax year will be deemed to meet Rags. Set. 1.6011-4'S disclosure requirement for reportable transactions with a significant hook-tax difference for the tax year. As a result, a portion of the overlap between Form 8886, Reportable Transaction Disclosure Statement, and Schedule M-3 has been eliminated; however, taxpayers still need to complete Form 8886 for transactions classified as reportable for reasons other than a significant book-tax difference (e.g., Sec. 165 losses).

Conclusion

Schedule M-3'S purpose is to increase the transparency of corporate tax filings; it requires more taxpayer disclosure and a significant understanding of book-tax differences in reporting events that must be taken into account on a corporate return. Thus, corporations and their tax advisers will need to spend more time analyzing how corporate transactions will be reflected on their returns.

Todd B. Reinstein, MAcc, J.D., LL.M., CPA, Senior Associate, Gardner Carton and Douglas LLP, Washington, DC, and Member, AICPA Tax Section