Settled or Not Settled

Fact Pattern 1

3D Printing Inc. (3D Printing), a calendar-year-end company, has multiple uncertain tax

positions (UTPs) related to its 2010 federal tax return. Some UTPs met the more-likely than-not recognition threshold on the basis of 3D Printings initial assessment while

others did not. During 2012, the IRS audited the 2010 tax return. During Q3 2012, the

examining agents verbally indicated the preliminary conclusion on certain UTPs, and the

IRS and 3D Printing formalized their agreement on these UTPs by signing IRS Form

906, Closing Agreement on Final Determination Covering Specific Matters, in Q4

2012. Subsequently, in Q1 2013, the IRS completed its examination of the 2010 tax

return whereby the IRS and 3D Printing agreed to the final closing agreement. 3D

Printing does not intend to appeal or litigate any aspects of the examined UTPs, and it is

remote that the IRS would examine or reexamine any aspects of the 2010 federal tax

return. Refer to the table below for further facts on each of the UTPs.

Met Recognition Threshold?		Amount of Tax Benefit Recognized in the Financial Statements		Specifically Examined?		Verbally Communicated in Q3?		Listed on Q4 Form 906?		Benefit Sustained
UTP 1	No		0%		Yes		Yes		Yes		80%
UTP 2	No		0%		No		No		No		100%
UTP 3	No		0%		Yes		No		Yes		0%
UTP 4	Yes		65%		Yes		Yes		Yes		50%
UTP 5	Yes		70%		No		No		No		100%
UTP 6	Yes		60%		Yes		No		Yes		0%

Fact Pattern 2

3D Printing spun off 100 percent of Subsidiary J to shareholders as a tax-free distribution

in 2011. 3D Printings 2010 federal tax return included J. As part of the spin-off, 3D

Printing entered into a tax-sharing agreement in which J indemnified 3D Printing for any

incremental tax payments due for the pre-spin periods arising from the ultimate resolution

of tax positions directly related to J. At the time of the spin-off, 3D Printing accrued $10

million of indemnification receivables.

Recording the indemnification receivables is deemed appropriate by 3D Printing because

it represents a contractual recovery of a portion of the potential loss associated with its

tax uncertainties, similar to an insurance contract. 3D Printing also concluded that the

accounting for the indemnification receivables should (1) follow the same measurement

accounting model as the related liability and (2) be adjusted accordingly for any

adjustments to the recorded liability, excluding any concerns about the collectibility of

the receivable. In addition, the indemnification receivables were not netted against the

related unrecognized tax benefit (UTB) because the criteria for offset was not met as

outlined in ASC 210-20, Balance Sheet: Offsetting.

During 2012, the IRS audited the 2010 tax return and concluded the examination in Q4

2012. On the basis of the terms of the IRS settlement, 3D Printing was required to remit a

cash payment to the IRS of $6 million, which consisted of $4.9 million for the settlement

of tax matters and $1.1 million of interest. According to the tax-sharing agreement, J

owed 3D Printing $4 million related to the IRS settlement and remitted that amount in Q4

2012. Since all the UTPs of J have been resolved, the remaining indemnification

receivable and UTB of $6 million were both written off to the income statement,

resulting in no impact to net income.

Required to answer the following question:

Based on the Settled or Not Settled case what are the criteria for recognizing the benefits of an uncertain tax position? Please explain.