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challenges completing the schedule as other small businesses, and the fact that a foreign filer has substantial non-U.S. assets is not relevant to the materiality of its U.S. tax exposures. Moreover, it would be onerous to require foreign filers to prepare a separate balance sheet for its U.S. business in order to have the lower threshold apply. At the most, application of a U.S. asset threshold for filing the Schedule UTP might warrant requiring foreign filers that report a worldwide balance sheet on Schedule L to also report their gross U.S. assets as of the beginning and end of the taxable year.

The second ambiguity relates to how to deal with foreign companies that file 1120-F “protective returns.” For example, a foreign corporation may believe that its U.S. activities more likely than not do not rise to the level of a trade or business or a permanent establishment under a relevant U.S. tax treaty, but nonetheless records a reserve on its foreign books for a small potential tax risk for U.S. corporate income tax. In order to protect its right to claim expenses, the foreign corporation should protectively file a Form 1120-F that reports no gross receipts subject to U.S. tax.

A taxpayer that completes Schedule L based on its U.S. assets is required to include all assets used in the United States and all other assets used in connection with a U.S. trade or business. For Form 1120-F filers, and in particular, for protective filers, whether any of the taxpayer’s assets are in this latter category may itself turn on an uncertain tax position. In order to avoid this interaction and to keep the $10 million threshold consistent and objective, the AICPA recommends that, for purposes of applying the threshold to Form 1120-F filers, U.S. assets should be defined only with reference to assets located in the United States.

In addition, in order to avoid significant burdens on Form 1120-F protective filers, the AICPA recommends that protective filers that meet the asset threshold, however determined, and therefore are required to complete the schedule, should only be required to report any uncertain tax positions that go to the threshold question of whether they have a U.S. permanent establishment or trade or business, since, in general, the Service would have to examine this position before any other possible U.S. uncertain tax positions would become relevant.

This question relates specifically to an item for which a reserve is later provided, which could arise either because a reserve was not required in a prior year (due to a change in facts, etc.) or because a taxpayer should have recorded a reserve in an earlier year but the reserve was somehow omitted. Subsequent changes resulting from the evaluation of new information should

be treated differently than a new evaluation time of preparing the previous schedule. comprehensive changes in the proposal, we issue.

or new interpretation of information available at the Notwithstanding our recommendations of more think the draft instructions deal adequately with this


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