The answers to these frequently asked questions (FAQs) are based on guidance developed by the Statements on Standards for Tax Services (SSTSs) Guidance Task Force in response to questions that were presented during the SSTS public exposure period and since that time in administering the SSTSs. These FAQs are not rules, regulations or official statements of the Tax Executive Committee issued pursuant to its rule-making authority and, therefore, are not authoritative guidance.
The SSTSs should be used in conjunction with these FAQs. The answers to these FAQs may not necessarily address the requirements of other regulatory bodies, including State Boards of Accountancy, the Internal Revenue Service and other tax regulatory bodies whose rules may differ from those of the AICPA. A member should always consult these other sources to ensure compliance with all appropriate regulatory requirements.
Would it be reasonable to use retained earnings shown on a financial statement as an estimate of cumulative earnings and profits for years that have missing tax returns (in the following situation)?
Company A will be making a distribution to shareholders and must determine its earnings and profits in order to determine the amount of the distribution that is dividend income and enable shareholders’ treatment of the distribution with respect to capital gain and/or return of capital. The company has been in existence longer than 10 years and has never made any type of distribution and has never calculated its earnings and profits. Copies of tax returns for the past five years are available and financial statement information is available for all years of the company's existence. Although the company has made diligent efforts to obtain the missing tax returns, it has been unable to do so. It is not practical to obtain the missing information by any reasonable means. There have not been any Forms 5452, Corporate Report of Nondividend Distributions, prepared, which would reflect the earnings and profits on a yearly basis.
The company has indicated these financial statement amounts could be used in preparing estimates for earnings and profits for the tax years for which tax returns are not available. The member has reviewed this information and believes it is reasonable to use as an estimate for earnings and profits purposes. Would it be reasonable to use financial statement retained earnings for the years where the returns are missing as an estimate of cumulative earnings and profits for those years?
Yes. The member may use the taxpayer’s estimate of the earnings and profits based on the financial statement retained earnings since the member has determined the estimates are reasonable based on the facts and circumstances known to the member and the member has exercised professional judgment.
May the member prepare the necessary filings for the taxpayer to report distributions when the taxpayer will not make any effort to obtain the missing information (in the following situation)?
Same facts as Question 1, except the taxpayer will not make any effort to obtain missing information to determine the earnings and profits and the tax consequences of the distributions to the shareholders. The taxpayer also is not willing to treat the distributions as ordinary dividends due to the absence of any information to the contrary. May the member prepare the necessary filings for the taxpayer to report the distributions?
No. The member may not prepare the necessary filings for the taxpayer because the taxpayer has not made reasonable efforts to obtain information necessary to estimate the earnings and profits to make the determination of the tax effect of the distributions.
The AICPA’s Statements on Standards for Tax Services (SSTSs) are enforceable tax practice standards for members of the AICPA. Additional guidance is also found in the corresponding interpretations and frequently asked questions (FAQs). Access to the complete set of SSTSs and guidance are available in the AICPA’s Statements on Standards for Tax Services Library.