3D Printing Inc. stands in the rapidly changing environment of corporate taxation, where it faces its complicated situation with Subsidiary J and several issues relating to receivable indemnification linked to taxes. 3D Printing’s decision to record indemnification receivables, the events that followed an IRS audit, and its vast effects on financial reporting are discussed in detail. This discussion also covers the presentation of indemnification receivables and UTBs on an income statement, wherever there are two scenarios – one in which Subsidiary J is not considered a discontinued operation and another where it falls into that category.

Background and Rationale for Recording Indemnification Receivables

In 2011, Subsidiary J accomplished a tax-free distribution by spinning off all of its shares to the shareholders. 3D Printing also had an indemnification commitment from Subsidiary J for tax payments above the pre-spin periods. 3D Printing also recognized $10 Million of indemnification receivables as part of this transaction, claiming it to be a contractual recovery mechanism, in other words, similar to that of an insurance policy.

3D Printing’s view that it should record indemnification receivables because such amounts are recoveries arising from contracts resembles the rationale of recognizing insurance contract liabilities (Li, 2021). Accumulating these receivables can act as a preventive measure to mitigate possible losses resulting from tax uncertainties and support the financial stability of this company.

3D Printing has adopted the stance that indemnification receivables accounting should duplicate the measurement used in its associated liability model. There should be an adjustment for changes in the recorded liability without worrying about whether or not the receivable is collectible (de Salas & Widmark, 2021). The indemnification receivables were not netted against the related UTBs as per ASC 210-20, Balance Sheet: Offsetting.

This strategic move is in tandem with the company’s commitment to transparency and accurate financial reporting. 3D Printing avoids netting indemnification receivables against UTBs so that the financial statements truly reflect the company’s position, with stakeholders able to discern directly and indirectly which aspects of these elements are involved.

IRS Audit and Settlement

2012 marks another development in the story as the Internal Revenue Service (IRS) began to audit 3D Printing’s return for tax year 2010 and closed out its investigation sometime during Q4 of that same year. The settlement terms required payment of $6 million in cash by 3D Printing to the IRS for tax settlements costing $490,000 and Interest totaling $1.1 million (Li, 2021). At the same time, Subsidiary J, in compliance with the tax-sharing agreement, was to pay $4 million linked to 3D Printing for resolving its IRS settlement, which could be offset during Q4 of

The resolution of all UTPs associated with Subsidiary J was a turning point. The outstanding indemnification receivable and UTB of $6 million were written off to the income statement; however, this did not affect net income. The dynamic nature of tax positions and the financial consequences that IRS settlements can entail are highlighted by this resolution toward corporations.

The IRS audit and resolution’s complexities present an in-depth analysis demonstrating how overlooked regulatory bodies interact with corporate entities. 3D Printing’s compliance with the terms of a settlement and its financial adjustments are examples of strategic ways to navigate such an inquiry.