Schedule M-3: closing the corporate book-tax gap.

EXECUTIVE SUMMARY

* Schedule M-3 was developed in response to concern over differences between book and taxable income, declines in corporate tax revenues and dissatisfaction with Schedule M-1.

* The additional information requirements will increase the compliance burden for both taxpayers and practitioners.

* Filing Schedule M-3 will satisfy tax shelter disclosure requirements for transactions with a significant book-tax difference.

For tax years ending after 2004, corporations with at least $10 million in assets must file Schedule M-3. This article offers an in-depth, line-by-line look at the new form and discusses the IRS's goals and reasons behind it.

In 2004, Treasury and the IRS released the final draft of Form 1120, U.S. Corporation Income Tax Return, Schedule M-3, Net Income (Loss) Reconciliation for Corporations With Total Assets of $10 Million or More; see the exhibit starting on p. 410. Schedule M-3 replaces Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, for taxpayers meeting the dollar threshold. Taxpayers below the cut-off will continue to file Schedule M-1.

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In general, Schedule M-3's chief goal is to increase reporting transparency, while minimizing taxpayer burden. (1) According to Robert Adams, the IRS's Senior Industry Advisor for the Large and Midsized Business Division, "it is estimated that the M-3 should reveal between 75 to 90 percent of the book-tax difference for most companies." The new form should also reduce the time the IRS spends on examining returns, and will allow it to examine the most recently filed returns. Schedule M-3 will identify book-tax differences that matter most when auditing corporate returns.

Certain taxpayers engaging in abusive transactions have benefited from the difference in the rules between financial (book) accounting and tax accounting by claiming tax benefits that have no corresponding financial cost. (2) According to Treasury's Acting Assistant Secretary for Tax Policy, Greg Jenner, "Schedule M-3 will enable the IRS to identify quickly those differences that warrant additional scrutiny."

Another goal of Schedule M-3 is consistent reporting among taxpayers from year to year. Finally, the schedule will be revised periodically to highlight emerging issues, identify trends and adapt to future changes encountered by large and mid-sized businesses.

Reasons for Schedule M-3

Schedule M-3 is replacing Schedule M-1 because of the ever-increasing expansion of the book-tax income gap, a decline in the corporate tax base, an increasing compliance burden on an already overwhelmed IRS and general dissatisfaction with Schedule M-1. (3)

Book and Tax Differences

Differences between book and tax accounting have become a major concern of the IRS. According to a recent IRS Research Bulletin, the aggregate gap between book income and taxable differences continues to generate a sizeable gap in net income per books and net taxable income. (4)

Corporate Tax Revenue

A decline in corporate tax revenue is another motive pushing Treasury and the IRS to close the tax gap. While the number of U.S. tax returns filed and total tax revenues have grown steadily over the past 30 years, corporate tax revenue has remained flat. Some of this decrease can be attributed to changes in tax rates due to the Tax Reform Act of 1986 and its influence on the proliferation of other business entities, such as limited liability companies and S corporations. However, despite these reasons, the IRS, tax policy analysts and members of Congress believe that a significant part of the decline is due to the expanding book-tax gap.

Transparency/Efficiency

A lack of technological and human resources in the IRS is another reason for introducing Schedule M-3; the form is intended to increase transparency and audit efficiency. (5)

Schedule M-1 Problems

Schedule M-1 has two major deficiencies that the IRS is hoping to overcome in the new schedule. First, it does not provide a uniform reporting requirement for net income per books (6); taxpayers could supply information for the worldwide group, the U.S. consolidated tax group or something in between. Similarly, it does not promote uniform disclosure requirements for reporting differences between financial accounting net income and taxable income. These flaws prevent efficient annual comparisons, making it difficult to assess the noncompliance risk associated with a specific issue or a particular taxpayer.

Caveat 

While Schedule M-3's format is a more useful and descriptive presentation of critical information (to help the IRS identify likely audit candidates), the new information comes at a cost--the data requirements will increase the compliance burden for both taxpayers and tax advisers. Corporate tax departments will need additional resources to collect information, the time needed to file a corporate return will increase and practitioners will need to be compensated for the additional time required.

Schedule M-3 Overview

Filing Requirements

A U.S. corporation filing Form 1120 must file Schedule M-3 if it has at least $10 million of assets on Schedule L, Balance Sheets per Books. Total assets shown on Schedule L, line 15, column (d), must equal the corporation's total assets (or, for a consolidated group, all members' total assets) as of the last day of the tax year, and be the same total assets reported by the corporation (or by each member) in its financial statements.

If the corporation prepares financial statements, Schedule L must equal the sum of the financial statement total assets for each corporation listed on Form 851, Affiliation Schedules, and included in the U.S. consolidated tax return (includible corporation), net of eliminations for intercompany transactions between includible corporations. If the corporation does not prepare financial statements, Schedule L must be based on the books and records. The Schedule L balance sheet may show tax-basis balance sheet amounts if the corporation is allowed to use books and records for Schedule M-3, and the books and records reflect only tax-basis amounts.

Finally, if a consolidated group's parent files Form 1120 and any group member files Form 1120-PC, U.S. Property and Casualty Insurance Company Income Tax Return, or Form 1120-L, U.S. Life Insurance Company Income Tax Return, and the consolidated Schedule L in the return includes the assets of all of the insurance companies (as well as those of the non-insurance companies in the consolidated group), the total assets reported on Schedule L of the consolidated return are used to determine whether the group meets the $10 million threshold to file Schedule M-3.

Entity Classification

For Schedule M-3 purposes, references to the classification of an entity (e.g., as a corporation, partnership or trust) are references to its treatment for Federal income tax purposes. Thus, an entity generally disregarded as separate from its owner for Federal income tax purposes (i.e., a disregarded entity) cannot be separately reported on Schedule M-3. Instead, any item of income, gain, loss, deduction or credit of a disregarded entity must be reported as an item of its owner.

Consolidated Groups

A U.S. consolidated group must file a consolidated Schedule M-3 (i.e., Parts I, II and III (discussed below) of a consolidated Schedule M-3 must reflect the activity of the entire U.S. consolidated group).The parent must also complete Parts II and III of a separate Schedule M-3 to reflect its own activity; each includible corporation must do the same. Finally, Parts II and III of a separate Schedule M-3 should also be completed for consolidation eliminations.

For example, if a U.S. consolidated group consists of four includible corporations (a parent and three subsidiaries), the U.S. consolidated tax group must complete six Schedules M-3, as follows: (1) a consolidated Schedule M-3, with Parts I, II and III completed to reflect the activity of the entire U.S. consolidated group; (2) Parts II and III of a separate Schedule M-3 for each of the four includible corporations, to reflect the activity of each; and (3) Parts II and III of a separate Schedule M-3, to eliminate intercompany transactions between includible corporations and to include limits on deductions and carryovers (e.g., charitable contributions and capital losses).

However, if a parent files Form 1120 and any group member files Form 1120-PC or 1120-L, that member may either (1) fully complete Schedule M-3 in the same way as it filed Form 1120; or (2) complete Schedule M-3 by including the sum of all differences between the member's income statement net income (or loss) and taxable income (differences).

Schedule M-3 Specifics

The schedule consists of three parts:

* Part I, Financial Information and Net Income (Loss) Reconciliation.

* Part II, Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations With Taxable Income per Return.

* Part III, Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations With Taxable Income per Return--Expense/Deduction Items.

A corporation (or consolidated group member) required to file Schedule M-3 must complete the entire form. All schedules required to support an individual line item must be attached at the time Schedule M-3 is filed. The corporation checks the box on Form 1120, page 1, item A, indicating that Schedule M-3 is attached, and does not file Schedule M-1.

General Rules

Part I requests basic financial information, then requires a book-tax net income reconciliation. Parts II and III require detailed information on income and expense items, respectively. For each part, column (a) contains book income statement data, while column (d) shows tax return information. As noted in the schedule's instructions, for any item of income, gain, loss, deduction or credit for which there is a difference between column (a) and column (d), the portion of the difference that is temporary is entered in column (b), while the permanent portion is placed in column (c). Pursuant to GAAP, a temporary difference creates, increases or decreases a deferred tax asset or liability. If a corporation is unable to determine whether a difference between column (a) and column (d) for an item will reverse in a future tax year or is the reversal of a difference that arose in a prior tax year, it should report the difference for that item in column (c).

Part I

Questions 1-3 ask about corporate financial statements and publicly traded common stock. In question 1, the financial statement type is the first listed of the following financial statements: (a) Securities and Exchange Commission (SEC) Form 10-K, Annual (or Transition) Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, financial statements; (b) other certified audited financial statements prepared in conformity with GAAP; or (c) other financial statements (or books and records used in lieu of financial statements). Question 2 asks about income statement period and restatements. Question 3 inquires about publicly traded stock.

Questions 4-11 begin with worldwide consolidated net income (loss) from financial statements and reconciles to net income (loss) for includible corporations on line 11. The reconciliation process begins in Question 5 with removing nonincludible foreign corporations included in the financial statement consolidated group. Question 6 involves removing the financial statement net income (loss) of each U.S. entity included in the financial statement consolidated group, but not included in the U.S. consolidated tax group, followed in Question 7 by the addition of any net income includible in the U.S. consolidated tax group, but not included in the financial statement consolidated group. The final major adjustment, Question 8, entails removing the effect of transactions between includible corporations and nonincludible entities.

Treasury and the IRS believe that most taxpayers complete this reconciliation process as part of their normal tax compliance process. In other words, when taxpayers have multiple entities, the first step is to determine which parts are includible in a return. For example, less-than-80%-owned entities are excluded for tax purposes, along with subsidiaries with different book and tax years. In addition, certain special-purpose entities (SPEs) may be required for a return, but not for GAAP purposes. Finally, intercompany dividends must be excluded for tax purposes, along with income (loss) from any foreign entities.

The information provided in Part I will enable the IRS, for the first time, to reconcile net income from financial statements with net income for tax. The Service believes that this data will play a large role in helping to close the tax gap. The following examples illustrate Part I's reconciliation process and demonstrate how line 11 reflects the consolidated income statement net income (loss) of all corporations included in a U.S. consolidated return.

Example 1--Net income (loss) per income statement of includible corporations: A U.S. corporation, M, is publicly traded and files SEC Form 10-K. M owns 80% or more of the stock of U.S. corporations DS1-DS75, between 51% and 79% of the stock of U.S. corporations DS76-DS100 and 100% of the stock of foreign subsidiaries FS1-FS50. M eliminates (1) all dividend income from DS1-DS100 and FS1-FS50 in financial statement consolidation entries and (2) the minority interest ownership of DS1-DS100 in financial statement consolidation entries. M's Form 10-K includes M, DS1-DS100 and FS1-FS50. It files a U.S. consolidated tax return with DS1-DS75.

In completing Schedule M-3, M must:

1. Check off Part I, line 1(a), because it filed SEC Form 10-K.

2. Report on line 4 the consolidated net income from the SEC Form 10-K for the financial statement consolidated group of M, DS1-DS100 and FS1FS50.

3. Remove FS1-FS50's net income (loss) on Schedule M-3, Part I, line 5(a) or (b), as applicable.

4. Remove the net income (loss) before minority interests of DS76-DS100 on Part I, line 6(a) or (b).

5. Reverse on line 8 the elimination of any transactions between members of the U.S. consolidated tax group and the nonincludible corporations (DS76DS100 and FS1-FS50), including dividends received from DS76-DS100 and FS1-FS50, and the minority interest's share of the net income (loss) of DS1-DS100.

6. Report on Part I, line 11, the consolidated financial statement net income (loss) attributable to M and DS1DS75 (the members of the U.S. consolidated tax group). Intercompany transactions between such members eliminated in the net income amount on line 4 remain eliminated on line 11. Transactions between members of the U.S. consolidated tax group and the nonincludible corporations (DS76DS100 and FS1-FS50) eliminated in the net income amount on line 4 are no longer eliminated on line 11. (7)

Example 2--Domestic subsidiary does not prepare U.S. financial statements: Foreign corporation F owns 100% of the stock of U.S. corporation P. P owns 100% of the stock of DS1, 60% of the stock of DS2 and 100% of the stock of FS1. F prepares financial statements, but P does not. P files a U.S. consolidated return with DS1.

P must check "no" on Part I, line 1(c), skip lines 2a-10, and enter net income (loss) per books and records of P and DS1 on Part I, line 11, net of eliminations for transactions between P and DS1. (8)

Example 3--Reporting an ownership interest in an LLC: U.S. corporation C owns 60% of the capital and profits interests in a U.S. limited liability company (LLC), N. N has net income of $100 (before minority interests) and makes no distributions during the year. C treats N as a corporation for financial statement purposes and as a partnership for Federal income tax purposes. In its financial statements, C consolidates N and includes $60 net income ($100 - $40 minority interest) on Part I, line 4.

C must remove N's $100 net income on Part I, line 6a, and reverse on Part I, line 8, the elimination of N's $40 minority interest net income. The result is that C includes no income for N on Part I, line 11, but must report its taxable income from N on Part II, line 9, Income (loss) from U.S. partnerships. (9)

Example 4--Net income of includible corporation before intercompany interest: U.S. corporation P owns 80% of corporation DS1's stock. DS1 is included in P's consolidated Federal return, even though it is not included in P's consolidated financial statements. DS1 has current-year net income of $100 after paying $40 interest to P. P has $1,040 net income after recognizing the interest income from DS1. In its financial statements, P reports the $40 interest as part of its net income of $1,040 on Part I, line 4.

P is required to:

1. Include DS1's $100 net income on Part I, line 7; DS1's operations must be included in P's return on a fully consolidated basis.

2. Remove on Part I, line 8, the $40 interest income received from DS1 and included by P on line 4, and the $40 interest expense of DS1 included in line 7 (for a net change of zero on line 8).

3. On line 8, remove the $20 minority interest in the net income of DS1 ($100 x 20% minority interest). On Part 1, line 11, P reports $1,120 ($1,040 from line 4, $100 from line 7 and ($20) from line 8).

The result is that P includes on Part I, line 11, DS1's entire $140 net income before minority interest and interest expense to P, less the $20 minority interest in DS1's net income, and P's entire $1,000 net income measured before recognizing the intercompany interest from DS1 and the consolidation of DS1's operations. (10)

Part II

Schedule M-3, Part II, focuses on the details of the income (loss) items that make up net income from Part I. Line 1, column (a), shows the Income (loss) per income statement, from any equity method foreign corporation included in Part I, line 11. Dividends from any equity method foreign corporation are shown in column (d) on lines 2-4, as applicable. Line 6 presents the same information for U.S. taxpayers. Lines 2-5 show untaxed foreign dividends, subpart F, Sec. 78 gross-up and previously taxed foreign distributions. Line 7 shows U.S. dividends not eliminated in consolidation. Minority interests for U.S. corporations are disclosed on line 8. Lines 9-11 are reserved for income (loss) from U.S. and foreign partnerships, along with other flowthrough entities. Lines 12-16 show income from reportable transactions, tax-exempt interest, accrual to cash adjustments, hedging transactions and market-to-market income. Lines 17-20 show inventory valuation adjustments, sale versus lease, Sec. 481(a) and deferred-revenue items. The remaining line items in Part II cover Form 4797, Sales of Business Property, and capital gains and losses. Line 18 includes any differences (e.g., revenue, cost of goods sold (COGS), interest and depreciation) due to characterization of a transaction as a sale for income statement purposes and as a lease for Federal income tax purposes, or vice versa.

Example 5--Minority interest for U.S. corporations: U.S. corporation B owns 90% of the stock of U.S. corporation C. B files a Federal consolidated return with C and prepares certified GAAP financial statements for the consolidated group consisting of B and C. B has no net income. C has $1,000 financial statement income (before minority interests) and taxable income. On Part I, line 11, the U.S. consolidated group reports $900 financial statement income ($1,000 net income-$100 minority interest). The U.S. consolidated tax group reports ($100) in Part II, line 8, column (a), $100 in column (c) as a permanent difference and zero in column (d). On Part II, line 29 (Other income (loss) and expense/ deduction items with no differences), the consolidated tax group reports $1,000 in both columns (a) and (d). Thus, total book income in Part II, line 30, column (a), totals $900; taxable income in column (d) totals $1,000. (11)

Example 6--Sale vs. lease: U.S. corporation C sells and leases property to customers. C treats each transaction as a sale for financial statement purposes, but as a lease for Federal tax purposes. The differences due to these characterizations will reverse in a future tax year and so must be classified as temporary. During 2004, C reports in its financial statements $1,000 in sales and $700 COGS for the 2004 lease transactions, plus $100 interest income on deferred payments from prior lease transactions. For Federal tax purposes, C reports $500 rental income from leasing transactions and $200 depreciation expense.

C must report on Part II, line 13, Interest Income, $100 in column (a), ($100) in column (b) and zero in column (d). In addition, C must report, on Part II, line 18, for its 2004 tax year, $300 gross profit in column (a), $200 in column (b) and $500 gross rental income in column (d). Lastly, C must report on Part III, line 31, Depreciation, $200 in columns (b) and (d). (12)

Part III

This Part has attracted the greatest number of comments and the most controversy from taxpayers. It has 35 separate lines of expense/deduction items. The first seven lines relate to Federal, state and foreign taxes. Lines 8-10 cover options and other equity-based compensation. Line 11 depicts meals and entertainment expense. Fines and penalties are disclosed on line 12. Punitive damages are placed on line 13. Lines 14-18 deal with different forms of compensation: excess parachute payments, excess Sec. 162(m) compensation, pension and profit-sharing, other post-retirement benefits and deferred compensation. Lines 19-22 cover various aspects of charitable contributions, including contributions of intangibles, and carryforwards and limits.

Lines 23 and 24 require information on payment of professional fees to investment bankers, lawyers and accountants. Lines 25-28 require separate presentation of other current-year acquisition/reorganization costs, amortization of goodwill, start-up costs and other writeoffs. Line 29 is for Sec. 198 environmental remediation expenses. Lines 30-32 disclose depletion, depreciation and bad debt expense. Line 33 displays corporate-owned life insurance premiums. Line 34 depicts differences in purchase costs versus lease expenses. Lastly, line 35 is set aside for other expense/deduction items not detailed elsewhere in Part III.

Example 7--Permanent vs. temporary timing differences: U.S. publicly traded corporation B files a Federal consolidated return and prepares GAAP financial statements. B acquired 100% of the stock of D Corp. in 1990 in a tax-free transaction; this included intellectual property (IP) and goodwill. While the IP is amortizable for both financial statement and Federal income tax purposes, the goodwill is amortizable only for financial statement purposes. B's annual amortization expense for the IP is $6,000 for financial statement purposes and $9,000 for Federal income tax purposes. B's annual amortization expense for the acquired goodwill is $5,000 for financial statement purposes and zero for Federal income tax purposes. Even though the amortization attributable to the acquired goodwill may reverse in the future for Federal income tax purposes (e.g., if D sells all of its assets), the amortization expense is a permanent difference, because it is not treated as a temporary difference in B's financial statements.

B must report on Part III, line 28 (Other amortization or impairment write-offs), an income statement amortization expense of $11,000 in column (a), a temporary difference of $3,000 in column (b), a permanent difference of ($5,000) in column (c) and a Federal income tax amortization expense of $9,000 in column (d). (13)

Example 8--General reporting requirements: depreciation: E Corp. is a calendar-year taxpayer that placed in service eight depreciable fixed assets in 2001. Its total depreciation expense for 2004 for six of the assets is $75,000 for income statement purposes and $90,000 for Federal income tax purposes. E's total annual depreciation expense for 2004 for the other two assets is $30,000 for income statement purposes and $25,000 for Federal income tax purposes. The depredation differences will reverse in future tax years and must be classified as temporary.

E must combine all of its depredation adjustments. Accordingly, it must report on Part III, line 31 (Depreciation) for its 2004 tax year, $105,000 income statement depreciation expense in column (a), a $10,000 temporary difference in column (b) and $115,000 Federal income tax depreciation expense in column (d). (14)

Example 9--General reporting requirements: reserves: On Dec. 31, 2004, H Inc., a calendar-year taxpayer, established three $100,000 reserve accounts. One is an allowance for accounts receivable estimated to be uncollectible. The second is an estimate of a settlement payment H may have to make stemming from pending litigation. The third is an estimate of future warranty expenses. H treats the three reserve accounts in its financial statements as giving rise to temporary differences that will reverse in future years. The three reserves are expenses in H's 2004 financial statements, but are not deductions for 2004 Federal income tax purposes.

H cannot combine the Schedule M-3 differences for the three reserve accounts. Accordingly, it must report the amounts attributable to the allowance for uncollectible accounts receivable on line 32 (Bad debt expense), and must separately state and adequately disclose the amounts attributable to the reserve for pending litigation and the warranty reserve on line 35 (Other expense/deduction items with differences). (15)

Example 10--General reporting requirements: bad debt expense: On Jan. 1, 2004, G Corp., a calendar-year taxpayer, established a $100,000 allowance for uncollectible accounts receivable (bad debt reserve). During 2004; G increased the reserve by $250,000, then decreased it $75,000 for accounts receivable discharged in bankruptcy that year. The balance in the reserve account on Dec. 31, 2004, was $275,000. The $100,000 to establish the reserve account and the $250,000 to increase the reserve account are expenses on G's 2004 financial statements, but are not deductible for Federal income tax purposes in 2004. However, the $75,000 decrease to the reserve is deductible for Federal income tax purposes in that year. G treats the reserve account in its financial statements as giving rise to a temporary difference that will reverse in future tax years.

For its 2004 tax year, G must report on fine 32 (bad debt expense), a $350,000 income statement bad debt expense in column (a), a ($275,000) temporary difference in column (b) and a $75,000 Federal income tax bad debt expense in column (d). (16)

Effective Date

As was previously noted, one of Schedule M-3's main goals is to increase transparency between differences in financial accounting net income and taxable income. This will help IRS agents determine whether to audit particular returns. Schedule M-3 must be used by eligible Form 1120 filers for tax years ending after Dec. 30, 2004; all others continue to use Schedule M-1. In addition, if a corporation meets the filing requirements, it may complete only certain sections of Schedule M-3 in the first tax year it is required to file. (17) Issued in conjunction with Schedule M-3, Rev. Proc. 2004-45 (18) states that filing Schedule M-3 meets the Regs. Sec. 1.6011-4(b)(6) requirement to disclose reportable transactions with a significant book-tax difference.

Conclusion

Ultimately, the Schedule M-3 compliance burden will fall on the taxpayers who have to provide the additional data for tax advisers to complete the form. The form's creation reflects the increasing expectations of the corporate tax function. In the ongoing effort to increase shareholder value, companies are motivated to continuously reduce their tax liabilities. The IRS believes that taxpayers are going too far in their efforts to reduce tax; it has created Schedule M-3 to close the tax gap.

However, is it possible for a three-page form to reveal book-tax differences like consolidation and SPEs? Can Schedule M-3 make up for a reduced IlLS staff facing a mounting workload? Will it close the U.S. corporate book-tax income gap? The Service's hope is that it Hill accomplish these objectives.

Schedule M-3 should provide an abundance of the type of information the IlLS desires to make its audits more efficient. Perhaps the next step would be for the Service to make these disclosures public.

Finally, the IRS also seems ready to expand the application of Schedule M-3 to other major tax forms, such as Forms 1120S, U.S. Income Tax Return for an S Corporation, and 1065, U.S. Return of Partnership Income. (19) As a result, taxpayers should get used to providing a clearer picture to the IlLS of the nature of differences between book and taxable income.

(1) See IR-2004-91 and -92 (7/7/04).

(2) Id.

(3) See Mills and Plesko, "Corporate Tax Avoidance and the Properties of Corporate Earnings," LVII Nat'l Tax J 739 (September 2004).

(4) See Mills, Newberry and Trautman, "Trends in Book-Tax Income and Balance Sheet Differences," presented at the 2002 IRS Research Conference (5/20/02); see also Department of the Treasury, "The Problem of Corporate Tax Shelters: Discussion, Analysis and Legislative Proposals" (7/1/99).

(5) Sec the IRS Oversight Board Annual Report (March 2004).

(6) See Mills and Plesko, "Bridging the Reporting Gap: A Proposal for More Informative Reconciling of Book and Tax Income," MIT Sloan Working Paper No. 4289-03 (3/17/03).

(7) See the IRS Instructions for 2004 Schedule M-3 (Form 1120), at p. 4, Example 2.

(8) See id. at p. 5, Example 3.

(9) See id. at p. 5, Example 4.

(10) See id. at p. 5, Example 5.

(11) See id. at p. 8, Example 12.

(12) See id. at p. 11, Example 18.

(13) See id. at p. 6, Example 7.

(14) See id. at p. 7, Example 8.

(15) See id. at p. 7, Example 9.

(16) See id. at p. 7, Example 10.

(17) See IR-2004-91, note 1 supra.

(18) Rev. Proc. 2004-45, IRB 2004-31, 140. Treasury and the IRS may issue guidance to clarify aspects of disclosure procedures for reportable transactions under Rev. Proc. 2004-45. In the interim, they issued frequently asked questions and answers at www.irs.gov/pub/irs-utl/ m-3_faq_release_080604.doc; see Reinstein, NewsNotes, "Final Version of Schedule M-3 Available," 35 The Tax Adviser 597 (October 2004).

(19) See NewsNotes, "Schedule M-3," 35 The Tax Adviser 189 (April 2005).

John R. McGowan, Ph.D., CPA 

Professor

Department of Accounting

Saint Louis University 

St. Louis, MO

David Killion, M. Acc.

Tax Associate

PricewaterhouseCoopers LLP 

St. Louis, MO