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Treasury Answers M-3 Questions

DEPARTMENT OF THE TREASURY
OFFICE OF PUBLIC AFFAIRS

For Immediate Release
August 6, 2004         

Contact: Tara Bradshaw
(202) 622-2014

TREASURY ANSWERS M-3 QUESTIONS

On July 7, 2004, The Treasury Department and the Internal Revenue Service issued Rev. Proc. 2004-45, which streamlines the disclosure by taxpayers of transactions with a significant book-tax difference.  Section 4.01 of Rev. Proc. 2004-45 eliminates the overlap between the revised return disclosure regulations finalized in February 2003 and the new Schedule M-3.  Sections 4.02 and 4.03 of Rev. Proc. 2004-45 also provide procedures (“alternative disclosure procedures”) that simplify the disclosure of book-tax differences for 2003 and for businesses that are not required to complete the new Schedule M-3.

Taxpayers and practitioners have raised several questions regarding the alternative disclosure procedures.  The Treasury Department and the IRS may issue guidance, having the same effective date as Rev. Proc. 2004-45, to address these questions and clarify aspects of Rev. Proc. 2004-45.  In the interim, the following questions and answers are provided: 

  1. Do the alternative disclosure procedures apply only to corporations? 
    No.  The alternative disclosure procedures apply to corporations and other business entities, including, for example, partnerships and S corporations.

  2. Can taxpayers use the alternative disclosure procedures for the 2003 taxable year? 
    Yes.  Taxpayers may use the alternative disclosure procedures for taxable years ending before December 31, 2004. 

  3. If a taxpayer uses the alternative disclosure procedures, must the taxpayer complete all parts of Schedule M-3? 
    No.  The taxpayer is only required to complete Columns B and C of Parts II and III of Schedule M-3 for any difference greater than $10 million. 

  4. If a taxpayer uses the alternative disclosure procedures, must differences of $10 million or less be disclosed on Schedule M-3? 
    No.  Only differences greater than $10 million must be disclosed.

  5. Under the alternative disclosure procedures, how must a taxpayer determine whether a difference is greater than $10 million? 
    The determination is made on an item-by-item basis (for each member, in the case of a U.S. consolidated tax group) in accordance with the rules applicable to a corporation required to complete Schedule M-3, and not on a transaction-specific basis (notwithstanding § 1.6011-4(b)(6)).  

  6. Under the alternative disclosure procedures, may a taxpayer disclose differences greater than $10 million on a substitute schedule (e.g., a spreadsheet) in lieu of Schedule M-3? 
    No.  Differences greater than $10 million must be disclosed on the most recent version of Schedule M-3 (see attachment below).

  7. Under the alternative disclosure procedures, must a taxpayer disclose differences that do not affect financial statement or taxable income? 
    No.  Only differences greater than $10 million that affect financial statement or taxable income must be disclosed.  Other differences that do not affect financial statement or taxable income, such as differences in computing earnings and profits, are not required to be disclosed.

  8. If a U.S. consolidated tax group uses the alternative disclosure procedures, must all members of the group comply with the procedures? 
    Yes.  The alternative disclosure procedures must be applied consistently by all members of the group.

  9. Must a U.S. consolidated tax group using the alternative disclosure procedures take into account intercompany transactions? 
    No.  A U.S. consolidated tax group has the option of determining whether a difference is greater than $10 million by including or excluding intercompany transactions.  However, all members of a U.S consolidated tax group must make the determination in the same manner, i.e., all members must either include or exclude intercompany transactions.  If a U.S. consolidated tax group excludes intercompany transactions, excluded intercompany transactions greater than $10 million are not required to be disclosed on a Schedule M-3.

  10. Is a taxpayer using the alternative disclosure procedures required to disclose differences described in Rev. Proc. 2003-25? 
    No.  If a taxpayer uses the alternative disclosure procedures and has a difference greater than $10 million that is described in Rev. Proc. 2003-25, the taxpayer may exclude the disclosure of that difference on Schedule M-3.

  11. Do the alternative disclosure procedures satisfy a taxpayer’s disclosure obligations for other reportable transactions? 
    No.  The alternative disclosure procedures are limited to transactions described in § 1.6011-4(b)(6) (transactions with a significant book-tax difference) and do not satisfy a taxpayer’s disclosure obligation with respect to a transaction described in §§ 1.6011-4(b)(2) (listed transactions), (b)(3) (confidential transactions), (b)(4) (transactions with contractual protection), (b)(5) (loss transactions), or (b)(7) (transactions with a brief asset holding period), even if the transaction is also described under § 1.6011-4(b)(6).  For example, if a taxpayer uses the alternative disclosure procedures and engages in a transaction described in § 1.6011-4(b)(3) that results in a difference greater than $10 million, the taxpayer must, nevertheless, disclose the difference on Schedule M-3 and also must disclose the transaction as a confidential transaction on Form 8886, Reportable Transaction Disclosure Statement.

Attachments:
Schedule M-3 released July 7, 2004
Rev. Proc. 2004-45

 

Return to:
  Schedule M-3 for Large and Mid-Size Businesses

Page Last Reviewed or Updated: 18-Apr-2014