Schedule L

Generally, the assets and liabilities required to be reported on Schedule L are the total assets and liabilities reflected on the set(s) of books of the foreign corporation that include assets that give rise to U.S. effectively connected income and U.S. booked liabilities (as defined in Regulations section 1.882-5(d)(2)). The total assets and liabilities include the interbranch assets and liabilities and the noneffectively connected assets reflected on such books. Such books will reflect the assets of the foreign corporation located in the United States and all other of its assets used in its trade or business within the United States (other than its assets giving rise to effectively connected income under sections 864(c)(6) or (7)). A foreign corporation may instead elect to report its worldwide assets and liabilities on Schedule L under Regulations section 1.6012-2(g)(1)(iii). If a foreign corporation (including a foreign bank) elects worldwide reporting on Schedule L, the same set(s) of books must be used to report the adjusted worldwide net income (loss) results in Part I, line 11.

If the foreign corporation has more than one set of books and records relating to assets located in the United States or used in a trade or business conducted in the United States, it must report the combined amounts shown on all such books and records on Schedule L, as adjusted to eliminate transactions recorded between the reportable books. However, amounts recorded for transactions between the set(s) of books and other divisions of the foreign corporation or includible disregarded entities (see definition later under Entity Considerations for Schedule M-3) reportable on Schedule M-3, Part I, line 5, are not eliminated for Schedule L purposes (except for certain transactions with disregarded entities that are also reportable on Schedule L), unless the taxpayer elects worldwide reporting under Regulations section 1.6012-2(g)(1)(iii).

Schedule M-2

If the foreign corporation is a bank (and checked the “Yes” box on Part I, line 1 of Schedule M-3), the amount shown on Schedule M-2, line 2 (Net income (loss) per books) must equal the amount shown on Schedule M-3, Part I, line 11. Both the foreign bank's Form 1120-F, Schedule L reporting and Schedule M-3 (Form 1120-F) reporting are based on the same set(s) of Schedule L books which are generally determined on the basis of Regulations section 1.882-5(d)(2)(iii). If, however, the foreign bank elects to complete its Form 1120-F, Schedule L on the basis of its worldwide books, then the bank will be required to report its net income (loss) on Schedule M-2 and Schedule M-3 from the same worldwide set(s) of books used for Form 1120-F, Schedule L purposes.

If the foreign corporation is not a bank (and therefore checked the “No” box on Part I, line 1), the amount shown on Schedule M-2, line 2 (Net income (loss) per books) should reflect the net income (loss) associated with the Schedule L books. This amount will equal the amount shown on Schedule M-3, Part I, line 11 only if the corporation voluntarily chooses to complete Form 1120-F, Schedule L on the basis of the corporation's worldwide set(s) of books under Regulations section 1.6012-2(g)(1)(iii), or, if the Schedule L books determined under the facts and circumstances constitute the same results as worldwide income reporting under Regulations section 1.882-5(d)(2)(ii). However, the Schedule M-3 reporting on Part I, line 11 must always reflect the worldwide profits and losses of the foreign corporation filing the Form 1120-F even if the Schedule L books determined under Regulations section 1.882-5(d)(2)(ii) gives rise to less than worldwide reporting under the facts and circumstances.

Entity Considerations for Schedule M-3

For purposes of Schedule M-3, references to the classification of an entity (for example, as a corporation, a partnership, or a trust) are to the classification of the entity for U.S. federal income tax purposes.

For a foreign corporation other than a bank, the financial results of an entity that is disregarded as separate from the foreign corporation filing Form 1120-F for federal income tax purposes (“disregarded entity”) are reported on Schedule M-3, Part I, line 4, if the foreign corporation's applicable income statement includes the net income of such disregarded entity. Otherwise, the results of the disregarded entity are separately reported on Part I, line 5. On Parts II and III, any item of income, gain, loss, or deduction of a disregarded entity must be reported as an item of the foreign corporation, and is not reported on Part II, line 9, 10, or 11, as from a partnership or pass-through entity. The applicable financial statement may include a disregarded entity only if it is owned directly or indirectly by the foreign corporation. An applicable financial statement may not include a disregarded entity that is the direct or indirect owner of the foreign corporation filing Form 1120-F.

Related Filing Requirements—Requirements of Reportable Entity Partners

When To Complete Part I

Part I must be completed for any tax year for which the foreign corporation files Schedule M-3.

Specific Instructions for Parts II and III

Treatment of Items Under an Eligible Treaty-Based Return Position to Attribute Business Profits to a U.S. Permanent Establishment

If a foreign corporation elects to use an eligible treaty that provides a permissible method other than the rules of section 864(c) and 882 to determine its business profits attributable to a U.S. permanent establishment, the foreign corporation must report on Form 1120-F, Section II, its business profits attributable to its U.S. permanent establishment under such income tax treaty that applies the OECD Transfer Pricing Guidelines in lieu of the effectively connected income rules of sections 864 and 882. In such a case, the treatment of items in columns (c) and (d) must be adapted to apply the concepts of the applicable treaty.

Schedule M-3 Reporting Requirements for Regulations Section 1.6011-4(b) Reportable Transactions

If an amount is attributable to a reportable transaction described in Regulations section 1.6011-4(b), the amount must be reported in columns (a), (b), (c), (d), and (e), as applicable, of Part II, line 12 (items relating to reportable transactions), regardless of whether the amount would otherwise be reported on another line in Part II or Part III of Schedule M-3. Thus, if a taxpayer files Form 8886, Reportable Transaction Disclosure Statement, the amounts attributable to that reportable transaction must be reported on Part II, line 12.

A corporation is required to report in column (a) of Parts II and III the amount of every item specifically listed on Schedule M-3 that is in any manner included in the foreign corporation's current year income statement net income (loss) or in an income or expense account maintained in the corporation's books and records, even if there is no difference between that amount and the amount included in taxable income. However, this reporting is not required in cases where (a) these instructions provide otherwise, or (b) the amount is attributable to a reportable transaction described in Regulations section 1.6011-4(b) and is therefore reported on Part II, line 12.

For example, with the exception of interest income reflected on a Schedule K-3 received by a foreign corporation as a result of the corporation's investment in a partnership or other pass-through entity, and interest equivalents, all interest income included on Part I, line 11, whether from unconsolidated affiliated companies, third parties, banks, or other entities, whether from foreign or domestic sources, whether taxable or exempt from tax, and whether classified as some other type of income for U.S. income tax purposes (such as dividends), must be included on Part II, line 4a, column (a). For the exceptions, look for the specific line in Part II.

Similarly, all fines and penalties included in Part I, line 11, paid to a government or other authority for the violation of any law for which fines or penalties are assessed, must be included on Part III, line 11, column (a), regardless of the authority that imposed the fines or penalties, regardless of whether the fines or penalties are civil or criminal, regardless of the classification, nomenclature, or terminology attached to the fines or penalties by the imposing authority in its actions or documents.

If a foreign corporation would be required to report in column (a) of Parts II and III the amount of an item specifically listed on Schedule M-3 in accordance with the preceding paragraphs, except for the fact that the corporation has capitalized the item of income or expense and reports the amount in its financial statement balance sheet or in asset and liability accounts maintained in the corporation's books and records instead of in its income statement, the foreign corporation must report the proper tax treatment of the item in columns (b), (c), (d), and (e), as applicable.

Furthermore, in applying the preceding paragraphs, a foreign corporation is required to report in column (a) of Parts II and III the amount of any item specifically listed on Schedule M-3 that is included on Part I, line 11, regardless of the nomenclature associated with that item in the income statements or books and records. Accurate completion of Schedule M-3 requires reporting amounts according to the substantive nature of the specific line items included in Schedule M-3 and consistent reporting of all transactions of like substantive nature that occurred during the tax year.

For example, all expense amounts that are included in the income statements or exist in the books and records that represent some form of “Bad debt expense” must be reported on Part III, line 24, column (a), regardless of whether the amounts are recorded or stated under different nomenclature in the income statements or the books and records such as: “Provision for doubtful accounts,” “Allowance for uncollectible notes receivable,” or “Impairment of trade accounts receivable.” Likewise, as stated above, all fines and penalties must be included on Part III, line 11, column (a), regardless of the terminology or nomenclature attached to them by the corporation in its books and records or income statements. Similarly, if the fine and penalty, for example, are ncluded in another item, the amount of the fine or penalty should be segregated and included on Part III, line 11.

With limited exceptions, Part II includes lines for specific items of income, gain, or loss (“income items”). If an income item is described in Part II, lines 1 through 23, report the amount of the item on the applicable line, regardless of whether or not there is any difference for the item. If there is a difference for the income item, or only a portion of the income item has a difference and a portion of the item does not have a difference, and the item is not described in Part II, lines 1 through 23, report and describe the entire amount of the item on Part II, line 24.

With limited exceptions, Part III includes lines for specific items of expense, allocation, or deduction (“expense items”). If an expense item is described on Part III, lines 1 through 31, report the amount of the item on the applicable line, regardless of whether or not there is a difference for the item. If there is a difference for the expense item, or only a portion of the expense item has a difference and a portion of the item does not have a difference and the item is not described in Part III, lines 1 through 31, report and describe the entire amount of the item on Part III, line 32.

If there is no difference between the financial accounting amount and the taxable amount of an entire item of income, loss, expense, or deduction and the item is not described or included in Part II, lines 1 through 24, or Part III, lines 1 through 32, report the entire amount of the item in columns (a) and (e) of Part II, line 27.

Line 1. Gross Receipts or Sales

Enter total gross receipts or sales net of returns and allowances. In column (e), enter the amount from Form 1120-F, Section II, line 1c. Do not report gross receipts resulting from reportable transactions (line 12), sale of securities that are marked to market (line 14), currency gains and losses from other section 988 transactions (line 15), or receipts or sales of securities from global securities dealings (line 16).

Line 2. Cost of Goods Sold

Report on line 2 any amounts treated as part of cost of goods sold during the tax year, regardless of whether the amounts would otherwise be reported elsewhere in Part II or Part III. However, do not report the items mentioned in the next paragraph on this line 2. Examples of amounts that must be included on line 2 are amounts attributable to inventory valuation, such as amounts attributable to cost-flow assumptions, additional costs required to be capitalized (including depreciation) such as section 263A costs, inventory shrinkage accruals, inventory obsolescence reserves, and lower of cost or market (LCM) write-downs. Attach a statement separately stating each item included on this line and the amount for each column.

Do not report the following on this line 2:

Lines 3a and 3b. Dividends

Report on lines 3a through 3b, column (a), the amount of dividends included on Part I, line 11, from foreign and U.S. entities. Report on lines 3a through 3b, column (e), the amount of any dividends included in taxable income on Form 1120-F, Section II, line 4. Do not include on lines 3a through 3b dividends from global securities dealings which are reportable on Part II, line 16b, or dividends reported elsewhere (for example, substitute dividends reportable on line 3c and reportable transactions reportable on line 12). Any effectively connected dividends from corporations reported by the foreign corporation under the equity method are reported in columns (c) and (e) of this line, as described in the instructions for Part II, line 8.

Line 3c. Substitute Dividend Payments Received

Report on line 3c, the gross substitute dividend payments received with respect to securities loans under section 1058 or substantially similar transactions, or from sale repurchase transactions, as described in Regulations sections 1.861-3(a)(6), 1.864-5(b)(2)(ii), and 1.881-2(b)(2). Do not net substitute dividend payments received against any substitute dividend payments made by the foreign corporation to another securities lender.

Line 4a. Interest Income Excluding Interest Equivalents

Report on Part II, line 4a, column (a), the total amount of interest income included on Part I, line 11, and report on Part II, line 4a, column (e), the total amount of interest income included on Form 1120-F, Section II, line 5, that is not required to be reported elsewhere in Part II. In column (b) or (c), as applicable, adjust for amounts treated for U.S. income tax purposes as interest income that are treated as some other character of income in the income statements, or vice versa. All interbranch interest income included on Part I, line 11, that is excluded from taxable income is reported as a permanent difference in column (c). For foreign corporations other than banks, see the instructions for Part I, line 8, regarding eliminations of interbranch transactions.

Do not report on this line 4a, in any column, amounts reported in accordance with instructions for Part II, lines 4b, 4c, 9 through 13, 16a, 20, and 23.

Line 4b. Substitute Interest Payments Received

Report on line 4b the gross substitute interest payments received with respect to securities loans under section 1058, sale repurchase transactions, or similar transactions, as described in Regulations sections 1.861-2(a)(7), 1.864-5(b)(2)(ii), and 1.881-2(b)(2). Do not net substitute interest payments received against substitute interest payments made by the foreign corporation with respect to any section 1058 sale repurchase transactions, including payments made with respect to “matched book” transactions, or any similar transaction.

Do not report on line 4b substitute interest payments received in custody for another owner of the substitute payment or such payments reportable on line 16a.

Report all substitute interest payments received on line 4b whether or not such amounts are characterized as interest or other income under the Code.

Line 4c. Interest Equivalents Other Than Substitute Interest Reported on Line 4b

Report on line 4c interest income equivalents other than substitute interest reportable on line 4b or other interest equivalents reportable on other lines in Part II. Interest equivalents reportable on line 4c generally consist of fees and commission income with respect to certain financial transactions that do not give rise to interest under section 163 (for example, financial guarantee fees, and acceptance confirmation and standby letter of credit fees). Do not report periodic income with respect to notional principal contracts on Part II, line 4c.

Do not report on this line 4c, amounts reported in accordance with instructions for Part II, lines 4a, 4b, 9, 10, 11, 12, 13, 16a, 20, and 23.

Line 5. Gross Rental Income

Report on line 5 gross rental income that is treated as rental income for both the taxpayer's financial reporting purposes and for U.S. income tax purposes. Gross rents that are recorded as a sale for financial purposes and as rental income for federal tax purposes or vice versa are reportable on Part II, line 17, instead of line 5.

Line 7. Fee and Commission Income

Report on line 7, column (a), any amounts included on Part I, line 11, as gross fee and commission income. Such income generally includes income with respect to services performed (for example, fees for brokerage service transactions and negotiation letters of credit). Do not include amounts reportable on Part II, line 4c.

Line 8. Income (Loss) From Equity Method Corporations

Report on line 8, column (a), the income statement income (loss) included in Part I, line 11, for any corporation accounted for on the equity method. Remove such amount in column (b) or (c), as applicable. Include on Part II, line 3, columns (c) and (e), dividends received from any corporation accounted for on the equity method to the extent the dividends constitute effectively connected income.

Lines 9 and 10. Net Income (Loss) from U.S. and Certain Foreign Partnerships

Line 11. Income (Loss) From Other Pass-Through Entities

For any interest in a pass-through entity (other than an interest in a partnership reportable on Part II, line 9 or 10, as applicable) owned by the corporation, report the following on line 11.

Foreign corporations other than banks that have interests in foreign pass-through entities with no effectively connected income for the year need not separately report those interests on this line. If, however, the foreign corporation reports a pass-through interest on the equity method in the income statement used for Part I, line 4, it may report such amounts in column (a) of this line. The corporation should report effectively connected amounts in column (e) consistent with the reporting equity method amounts in column (a). For example, if the foreign corporation does not report the pass-through interest in column (a), it should not report any amounts in column (e) for the pass-through interest. It would instead report the income and other items from the pass-through interest for column (e) purposes based on the reporting for each line included in the income statement. However, if a foreign corporation allocates interest expense under the separate currency pools method in Regulations section 1.882-5(e) or allocates excess interest expense under Regulations section 1.882-5(d)(5), and interest expense included in the foreign corporation's pass-through amount is included in such allocation, see the instructions for Part III, line 26a, for the required reporting.

For each pass-through entity reported on line 11, attach a supporting statement that provides that entity's name, EIN (if applicable), the corporation's end of year profit-sharing percentage (if applicable), the corporation's end of year loss-sharing percentage (if applicable), and the amounts reported by the corporation in column (a), (b), (c), (d), or (e) of line 11, as applicable.

Line 12. Items Relating to Reportable Transactions

Any amounts attributable to any reportable transactions (as described in Regulations section 1.6011-4) must be included on Part II, line 12, regardless of whether the difference, or differences, would otherwise be reported elsewhere in Part II or Part III. Thus, if a taxpayer files Form 8886, Reportable Transaction Disclosure Statement, for any reportable transaction described in Regulations section 1.6011-4, the amounts attributable to that reportable transaction must be reported on Part II, line 12. In addition, all income and expense amounts attributable to a reportable transaction must be reported on Part II, line 12, columns (a) and (e), even if there is no difference between the financial amounts and the taxable amounts.

Each difference attributable to a reportable transaction must be separately stated and adequately disclosed. A corporation will be considered to have separately stated and adequately disclosed a reportable transaction on line 12 if the corporation sequentially numbers each Form 8886 and lists by identifying number on the supporting statement for Part II, line 12, each sequentially numbered reportable transaction and the amounts required for Part II, line 12, columns (a) through (e).

In lieu of the requirements of the preceding paragraph, a corporation will be considered to have separately stated and adequately disclosed a reportable transaction if the corporation attaches a supporting statement that provides the following for each reportable transaction.

If a transaction is a listed transaction described in Regulations section 1.6011-4(b)(2), the supporting statement must also include the information requested on line 3 of Form 8886. In addition, if the reportable transaction involves an investment in the transaction through another entity such as a partnership, the supporting statement must include the name and EIN (if applicable) of that entity as reported on line 5 of Form 8886.

Line 13. Hedging Transactions

Report on line 13, column (a), the net gain or loss from hedging transactions (including hedges of inventory) included in the amount reported on Part I, line 11, other than:

Do not report the income from the hedged item(s) on line 13. For hedging transactions reportable on line 13, report in column (e) the amount of taxable income from hedging transactions as defined in section 1221(b)(2). Use columns (b) and (c) to report all differences caused by treating hedging transactions differently for financial accounting purposes and for U.S. income tax purposes. For example, if a portion of a hedge is considered ineffective under GAAP but still is a valid hedge under section 1221(b)(2), the difference must be reported on line 13. The hedge of a capital asset, which is not a valid hedge for U.S. income tax purposes pursuant to section 1221(b)(2), must also be reported here if it is considered a hedge under the corporation's method of accounting. Transactions that are treated as hedging capital assets solely because the hedged asset gives rise to noneffectively connected income and is not eligible for ordinary treatment under section 582(c), are also reported on line 13. See Example 22.

Report on Part II, line 16c, hedging transactions entered into by a global dealing operation including those that are “risk transfer agreements” defined in Proposed Regulations section 1.475(g)-2. However, income with respect to a risk transfer agreement that is held by the foreign corporation's non-global dealing operations is, unless reported elsewhere in Part II, reported on line 13 to the extent it is reported on Part I, line 11. If a foreign bank does not so report a risk transfer agreement held by a non-global dealing operation on Part I, line 11, any ECI from such risk transfer agreement earned by the non-global dealing operation must be reported on Part II, line 23, column (d).

Report on this line 13 hedging gains and losses with respect to non-dealer transactions that are determined under the mark-to-market method of accounting on the income statement (other than those that are subject to mark-to-market treatment under a valid election under sections 475(e) or (f)).

Lines 14a Through 14d. Mark-to-Market Income (Loss)

Except for global dealing operations reportable on line 16 and for certain hedging transactions reported on line 13, report on lines 14a through 14d, column (a), any amount that is subject to mark-to-market treatment under section 475. Report on line 14a income or (loss) from securities held by a dealer in securities, in its capacity as a dealer under section 475(a). On line 14b, report the mark-to-market treatment of securities held by a dealer other than in its capacity as a dealer that is subject to the characterization provisions of section 475(d)(3)(B). Report on line 14c the mark-to-market income of a dealer in commodities having made a valid election under section 475(e), and on line 14d, report the mark-to-market income of a trader in securities or commodities having made a valid election under section 475(f). “Securities” for these purposes are securities described in section 475(c)(2) and commodities described in section 475(e)(2). “Securities” do not include any items specifically excluded from sections 475(c)(2) and 475(e)(2), such as certain contracts to which section 1256(a) applies (which may be reportable on line 13 as hedges).

Report hedging gains and losses from transactions held in investment capacity or trader capacity not subject to a securities or commodities trading election, but which are determined under the mark-to-market method of accounting, on Part II, line 13 (hedging transactions), and not on line 14.

Line 15. Gains (Losses) From Certain Section 988 Transactions

Report on line 15 gains or (losses) from certain section 988 transactions. These are only those section 988 transactions that are not reportable with respect to hedging transactions, mark-to-market gains (losses), or global securities dealing operations on Part II, lines 13, 14, and 16. Section 988 gains (losses) reportable on line 15 will generally be those recognized with respect to foreign currency denominated instruments that are acquired and normally held for investment or otherwise not held by a global securities dealer. Foreign currency transactions entered into by a global securities dealing operation are reportable exclusively on line 16c. Do not report on line 15 qualified integrated foreign currency hedging transactions, as defined in Regulations section 1.988-5(a) (see line 13 instructions).

Lines 16a and 16b. Interest Income and Dividends From Global Securities Dealing

Report on lines 16a and 16b interest and dividends (including substitute interest defined in Regulations section 1.861-2(a)(7) and substitute dividends defined in Regulations section 1.861-3(a)(6)) earned with respect to transactions entered into in a global securities dealing operation, as defined in Proposed Regulations section 1.482-8.

Line 16c. Gains (Losses) and Other Fixed and Determinable, Annual, or Periodic Income From Global Securities Dealing

Report on line 16c gains and losses and other fixed and determinable, annual, or other periodic income or expense (FDAP) with respect to notional principal contracts from global securities dealing operations (as defined in Proposed Regulations section 1.482-8) that would be subject to source and allocation under Proposed Regulations section 1.863-3(h) (see “Note” on page 8 for a clarification regarding Proposed Regulations section 1.863-3(h)). Foreign currency gains and losses with respect to securities transactions entered into by a global dealing operation are also included in global dealing gains and (losses) on line 16c. The foreign corporation may be a global securities dealer with respect to some but not all of its securities dealing activities. Gains and losses from securities dealing activities that would not be subject to source and allocation under Proposed Regulations section 1.863-3(h) are reportable as mark-to-market income on line 14, and the interest, dividend, and other FDAP income earned in such non-global dealer activities is reportable on Part II, lines 3 and 4. Reporting on line 16 is determined by whether the income, gains and (losses) would be subject to allocation under Proposed Regulations section 1.863-3(h) and not by whether all or none of the amount would be allocable to ECI. If income of a global dealing operation would be entirely allocable to ECI or non-ECI under Proposed Regulations section 1.863-3(h), the amount is reportable on line 16 and not on line 14.

If the income or losses from global dealing operations of foreign banks reportable on any of lines 16a through 16c are allocable in whole or in part to effectively connected income but not reportable in column (a), apportion the ECI amounts of the global dealing operation in columns (d) and (e). If the foreign bank does include a global dealing operation in column (a), then report the apportionment of such operation to non-ECI in column (d) and the residual ECI amount in column (e). Attach a statement providing a brief description of each global dealing operation (for example, interest rate notional principal contracts, equity notional principal contracts, foreign currency options (list each foreign currency separately for each foreign currency that constitutes a separate global dealing operation)).

Line 17. Sale Versus Lease (for Sellers and/or Lessors)

Asset transfer transactions with periodic payments characterized for financial accounting purposes as either a sale or a lease may, under some circumstances, be characterized as the opposite for tax purposes. If the transaction is treated as a lease, the seller/lessor reports the periodic payments as gross rental income and also reports depreciation expense or deduction. If the transaction is treated as a sale, the seller/lessor reports gross profit (sale price less cost of goods sold) from the sale of assets and reports the periodic payments as payments of principal and interest income.

On Part II, line 17, column (a), report the gross profit or gross rental income for financial statement purposes for all sale or lease transactions that must be given the opposite characterization for tax purposes. On Part II, line 17, column (e), report the gross profit or gross rental income for federal income tax purposes. Interest income amounts for such transactions must be reported on Part II, line 4a (interest income excluding interest equivalents), in columns (a) and (e), as applicable. Depreciation expense for such transactions must be reported on Part III, line 23 (depreciation), in columns (a) and (e), as applicable. Use columns (b), (c), and (d) of Part II, lines 4a and 17, and Part III, line 23, as applicable, to report the differences between columns (a) and (e).

Line 18. Section 481(a) Adjustments

With the exception of a section 481(a) adjustment that is required to be reported on Part II, line 12, for reportable transactions, any difference between an income or expense item attributable to an authorized (or unauthorized) change in method of accounting made for U.S. income tax purposes that results in a section 481(a) adjustment must be reported on Part II, line 18, regardless of whether a separate line for that income or expense item exists in Part II or Part III.

Line 19. Unearned/Deferred Revenue

Report on line 19, column (a), amounts of revenues included in Part I, line 11, which were deferred from a prior financial accounting year. Report on line 19, column (e), revenues recognizable for federal income tax purposes that are recognized for financial accounting purposes in a different year. Also, report on line 19, column (e), any amount of revenues reported on line 19, column (a), that are recognizable for U.S. income tax purposes in the current tax year. Use columns (b), (c), and (d) of line 19, as applicable, to report the differences between column (a) and column (e). If the amounts are not includible on set(s) of books reportable on Form 1120-F, Schedule L, but are reportable in Part I, line 11, for a foreign corporation other than a bank, then report the entire difference as temporary in column (b). Any amount allocable to noneffectively connected income should, to that extent, be included in column (d) to reverse some or all of the amount included in column (b).

Line 19 must not be used to report income recognized from long-term contracts. Instead, use line 24 (other income (loss) items with differences).

Line 20. Original Issue Discount, Imputed Interest, and Phantom Income

Report on line 20 any amounts of original issue discount (OID), other imputed interest, phantom income, or OID includible on line 16a. The term “original issue discount and other imputed interest” includes, but is not limited to:

Line 21a. Income Statement Gain/Loss on Sale, Exchange, Abandonment, Worthlessness, or Other Disposition of Assets Other Than Inventory and Pass-Through Entities

Report on line 21a, column (a), all gains and losses on the disposition of assets except for (a) gains and losses on the disposition of inventory, and (b) gains and losses allocated to the corporation from pass-through entities (for example, on Schedule K-3) that are included on line 9, 10, or 11. Reverse the amount reported in column (a) in column (b) or (c), as applicable. The corresponding gains and losses for U.S. income tax purposes are reported on Part II, lines 21b through 21g, columns (b), (c), and (e), as applicable. Reverse any additional amounts recognizable under U.S. tax principles that are allocable to noneffectively connected income on Part II, lines 21b through 21g, column (d).

Line 21b. Gross Capital Gains From Schedule D, Excluding Amounts From Pass-Through Entities

Report on line 21b gross capital gains reported on Schedule D (Form 1120), Capital Gains and Losses, excluding capital gains from pass-through entities that are included on line 9, 10, or 11, as applicable.

Line 21c. Gross Capital Losses From Schedule D, Excluding Amounts From Pass-Through Entities, Abandonment Losses, and Worthless Stock Losses

Report on line 21c gross capital losses reported on Schedule D (Form 1120), excluding capital losses from (a) pass-through entities that are included on line 9, 10, or 11, as applicable; (b) abandonment losses, which must be reported on Part II, line 21e; and (c) worthless stock losses, which must be reported on Part II, line 21f. Do not report on line 21c capital losses carried over from a prior tax year and utilized in the current tax year. See the instructions for Part II, line 22, regarding the reporting requirements for capital loss carryovers utilized in the current tax year.

Line 21d. Net Gain/Loss Reported on Form 4797, Line 17, Excluding Amounts From Pass-Through Entities, Abandonment Losses, and Worthless Stock Losses

Report on line 21d the net gain or loss reported on line 17 of Form 4797, Sales of Business Property, excluding amounts from (a) pass-through entities included on line 9, 10, or 11, as applicable; (b) abandonment losses, which must be reported on Part II, line 21e; and (c) worthless stock losses, which must be reported on Part II, line 21f.

Line 21f. Worthless Stock Losses

Report on line 21f any worthless stock loss, regardless of whether the loss is characterized as an ordinary loss or a capital loss. See Regulations section 1.864-4(c)(2)(iii)(a) for limitations on effectively connected treatment under the asset use test and Regulations section 1.864-4(c)(5)(ii)(a) for limited effectively connected eligibility of stock to foreign corporations engaged in a banking, financing, or similar business. Attach a statement that separately states and adequately discloses each transaction that gives rise to a worthless stock loss that is treated as allocable to effectively connected income and the amount of each loss. Do not include on the statement any worthless stock loss that is wholly allocable to noneffectively connected income. Do not include worthless stock losses that are incurred as part of a securities dealing or global securities dealing operation. Report these securities losses as mark-to-market loss on line 14a, 14c, or 16c.

Line 21g. Other Gain/Loss on Disposition of Assets Other Than Inventory

Report on line 21g any gains or losses from the sale or exchange of property other than inventory and that are not reported on lines 21b through 21f.

Line 22. Capital Loss Limitation and Carryforward Used

Report as a positive amount on line 22, column (b) or (c), as applicable, and column (e) the excess of the net capital losses over the net capital gains reported on Schedule D (Form 1120) by the corporation.

If the corporation utilizes a capital loss carryforward on Schedule D (Form 1120) in the current tax year, report the carryforward utilized as a negative amount on Part II, line 22, columns (b) or (c), as applicable, and column (e).

Line 23. Gross Effectively Connected Income of Foreign Banks From Books That Do Not Give Rise to U.S. Booked Liabilities

Line 23 applies only to foreign banks (as described in Regulations section 1.882-5(c)(4)). Foreign banks report in columns (d) and (e) the gross effectively connected income or loss (other than income or loss from a global dealing operation) that is excluded from the set(s) of books reportable on Form 1120-F, Schedule L, and excluded from the net income shown on Part I, line 11. Gross effectively connected income or loss of this type is that which is ordinarily recorded on books of non-U.S. branches or locations that do not ordinarily engage in effectively connected income producing activities, such as income from securities recorded in a home office that are attributable to a U.S. office under Regulations section 1.864-4(c)(5)(iii). Gross effectively connected income or loss reportable on line 23 is also income of a type that is recognized under sections 864(c)(6) and 864(c)(7) with respect to property that ceases to be held in connection with a trade or business within the United States (for example, transferred securities of a non-banking, financing or similar business or of a former banking, financing or similar business) or that is recognized under the Code at a time subsequent to cessation of the trade or business within the United States. Amounts from a global dealing operation that are apportionable in whole or in part to effectively connected income are reported on line 16 and not on this line 23.

Line 24. Other Income (Loss) Items With Differences

Separately state and adequately disclose on Part II, line 24, all items of income (loss) with differences that are not otherwise listed on Part II, lines 1 through 23. Attach a statement that describes and itemizes the type of income (loss) and the amount of each item and provides a description that states the income (loss) name for book purposes for the amount recorded in column (a) and describes the adjustment being recorded in column (b), (c), or (d). The entire description completes the tax description for the amount included in column (e) for each item separately stated on this line.

The attached statement should have six columns. The first column has the description for the next five columns. The second column is column (a), income (loss) per income statement. The third column is column (b), temporary differences. The fourth column is column (c), permanent differences. The fifth column is column (d), other permanent differences for allocations to non-ECI and ECI. The sixth column is column (e), income (loss) per tax return. For each item listed on the attached statement for line 24, columns (a) through (d) when combined must equal column (e). The amounts in columns (a) through (e) for all items must be totaled on the attached statement and the total amounts must be included on Part II, line 24.

If any “comprehensive income” as defined by Statement of Financial Accounting Standards (SFAS) No. 130 is reported on this line, describe the item(s) in detail. Foreign corporations may report on line 24 net income (loss) from their distributive share of foreign partnership interests that do not have any U.S. source or effectively connected income, that the foreign corporation does not report on line 10. The aggregate income from such partnerships should be reported on line 24, column (d), as a negative number.

Line 26. Total Expense/ Deduction Items

Report on Part II, line 26, columns (a) through (e), as applicable, the inverse of the amounts reported on Part III, line 33, columns (a) through (e). For example, if Part III, line 33, column (a), reflects an amount of $1 million, then report on Part II, line 26, column (a), ($1 million). Similarly, if Part III, line 33, column (b), reflects an amount of ($50,000), then report on Part II, line 26, column (b), $50,000.

Line 27. Other Items With No Differences

If there is no difference between the financial accounting amount and the taxable amount of an entire item of income, gain, loss, expense, or deduction and the item is not described or included in Part II, lines 1 through 24, or Part III, lines 1 through 32, report the entire amount of the item in columns (a) and (e) of line 27. If a portion of an item of income, loss, expense, or deduction has a difference and a portion of the item does not have a difference, do not report any portion of the item on line 27. Instead, report the entire amount of the item (that is, both the portion with a difference and the portion without a difference) on the applicable line of Part II, lines 1 through 24, or Part III, lines 1 through 32. See Example 12.

Lines 1 Through 4. Income Tax Expense

If the corporation does not distinguish between current and deferred income tax expense in its applicable financial statement described in Part I, report income tax expense as current income tax expense using lines 1 and 3, as applicable. U.S. current and deferred income taxes and non-U.S. deferred income taxes are not deductible and column (e) is inapplicable for lines 1, 2, and 4. Column (e) of line 3 is used to report only foreign income tax the corporation is deducting, other than the withholding taxes reported on line 5 below. If the corporation is crediting foreign income tax against the U.S. income tax liability, no amount is reported on line 3, column (e).

Line 5. Non-U.S. Withholding Taxes

Report on line 5, column (a), the amount of non-U.S. (foreign) withholding taxes included in determining adjusted financial net income on Part I, line 11. If the corporation is deducting any foreign withholding tax, use column (b), (c), or (d), as applicable, to report any difference between foreign withholding tax included in financial accounting net income and the amount of any foreign withholding tax deduction reported in column (e). If the corporation is crediting foreign withholding taxes against its U.S. income tax liability, no amount is reported in column (e).

Line 6. Corporate Officer's Compensation With Section 162(m) Limitation

Report on line 6, column (a), the total amount of non-performance-based current compensation expense (“applicable employee remuneration”) for corporate officers that are “covered employees” under section 162(m)(3). Report in column (b) or (c), as applicable, the nondeductible amount of current compensation in excess of $1 million ($500,000 if the corporation receives or has received financial assistance under the Treasury Troubled Asset Relief Program (TARP)). Report the noneffectively connected portion of the deductible compensation in column (d), and the deductible portion of the compensation allocable to effectively connected income in column (e). Do not report the “applicable employee remuneration” for “covered employees” defined under section 162(m) on line 8, 9, or 15.

Line 7. Salaries and Other Base Compensation

Report salary and bonus compensation of the type reported on Form 1120-F, Section II, line 13, other than stock option expense and other equity-based compensation reported on lines 8 and 9.

Line 8. Stock Option Expense

Report on line 8, column (a), amounts expensed on Part I, line 11, net income per the income statement, that are attributable to all stock options. Report on line 8, column (e), deduction amounts attributable to all stock options.

Line 9. Other Equity-Based Compensation

Report on line 9 any amounts for equity-based compensation or consideration that are reflected as expense in the financial statements (column (a)) or deducted in the U.S. income tax return (column (e)) other than amounts reportable elsewhere on Schedule M-3, Parts II and III (for example, on Part III, line 8, for stock options expense). Examples of amounts reportable on line 9 include payments attributable to employee stock purchase plans (ESPPs), phantom stock options, phantom stock units, stock warrants, stock appreciation rights, qualified equity grants, and restricted stock, regardless of whether such payments are made to employees or non-employees, or as payment for property or compensation for services.

Line 10. Meals and Entertainment

Report on line 10, column (a), any amounts paid or accrued by the corporation during the tax year for meals, beverages, and entertainment that are accounted for in financial accounting income, regardless of the classification, nomenclature, or terminology used for such amounts, and regardless of how or where such amounts are classified in the corporation's financial income statement or the income and expense accounts maintained in the corporation's books and records. Report only amounts not otherwise reportable elsewhere on Schedule M-3, Parts II and III (for example, Part II, line 2).

Line 11. Fines and Penalties

Report on line 11 any fines or similar penalties paid to a government or other authority for the violation of any law for which fines or penalties are assessed. All fines and penalties expensed in financial accounting income (paid or accrued) must be included on this line 11, column (a), regardless of the government or other authority that imposed the fines or penalties, regardless of whether the fines and penalties are civil or criminal, regardless of the classification, nomenclature, or terminology used for the fines or penalties by the imposing authority in its actions or documents, and regardless of how or where the fines or penalties are classified in the corporation's financial income statement or the income and expense accounts maintained in the corporation's books and records. In addition, report on line 11, column (a), the reversal of any overaccrual of any amount described in this paragraph. See section 162(f) for additional guidance.

Report on line 11, column (e), any such amounts as are described in the preceding paragraph that are includible in effectively connected taxable income, regardless of the financial accounting period in which such amounts were or are included in financial accounting net income. Complete columns (b), (c), and (d), as appropriate.

Do not report on this line 11 amounts required to be reported in accordance with instructions for Part III, line 12.

Do not report on this line 11 amounts recovered from insurers or any other indemnitors for any fines and penalties described above.

Line 12. Judgments, Damages, Awards, and Similar Costs

Report on line 12, column (a), the amount of any estimated or actual judgments, damages, awards, settlements, and similar costs, however named or classified, included in financial accounting income, regardless of whether the amount deducted was attributable to an estimate of future anticipated payments or actual payments. Also report on line 12, column (a), the reversal of any overaccrual of any amount described in this paragraph.

Report on line 12, column (e), any such amounts as are described in the preceding paragraph that are includible in taxable income, regardless of the financial accounting period in which such amounts were or are included in financial accounting net income. Complete columns (b), (c), and (d), as appropriate.

Do not report on this line 12 amounts required to be reported in accordance with instructions for Part III, line 11.

Do not report on this line 12 amounts recovered from insurers or any other indemnitors for any judgments, damages, awards, or similar costs described above.

Line 13. Pension and Profit-Sharing

Report on line 13 the expenses and deductions attributable to the corporation's pension plans, profit-sharing plans, and any other retirement plans. Complete columns (b), (c), and (d), as applicable.

Line 14. Other Post-Retirement Benefits

Report on line 14 the expenses and deductions attributable to other post-retirement benefits not otherwise includible on Part III, line 13 (for example, retiree health and life insurance coverage, dental coverage, etc.). Complete columns (b), (c), and (d), as appropriate.

Line 15. Deferred Compensation

Report on line 15, column (a), any compensation expense included in the net income (loss) amount reported in Part I, line 11, that is not deductible for U.S. income tax purposes in the current tax year and that was not reported elsewhere on Schedule M-3, column (a). Report on line 15, columns (d) and (e), the noneffectively connected and effectively connected portions of any compensation deductible in the current tax year that was not included in the net income (loss) amount reported in Part I, line 11, for the current tax year and that is not reportable elsewhere on Schedule M-3. For example, report originations and reversals of deferred compensation subject to section 409A on line 15.

Line 16. Charitable Contributions

Report on line 16 any charitable contribution of tangible or intangible property to a U.S. or foreign charity. For example, include contributions of:

Include any temporary differences for the charitable contribution carryforward limitation in column (b). Report any net limitation carryforward for the current year as a net negative number. Report any utilization of a prior year limitation carryforward net of the current year limitation as a positive number in column (b). Report any amounts from column (b) that are allocable to noneffectively connected income in column (d) and the effectively connected portion of the utilization of charitable contribution carryforward in column (e).

Line 17. Section 162(r)—FDIC Premiums Paid by Certain Large Financial Institutions

Report on line 17, column (a), the total amount paid or accrued as FDIC premiums included on Part I, line 11. Report on line 17, column (c), any disallowed amounts, subject to the applicable percentage, of any FDIC premiums paid or included by the large financial institution. For this purpose, the large financial institution includes members of its expanded affiliated group, as defined in section 162(r)(6)(B). This disallowance does not apply if the institution’s (including members of its expanded affiliated group’s) total consolidated assets (determined as of the close of the tax year) do not exceed $10 billion.

The applicable percentage is the excess of the corporation’s total consolidated assets over $10 billion, divided by $40 billion. For taxpayers with total consolidated assets of $50 billion or more, the applicable percentage is 100%. See section 162(r).

Line 18. Current Year Acquisition or Reorganization Investment Banking Fees, Legal and Accounting Fees

Report on line 18 any investment banking fees and any legal and accounting fees paid or incurred in connection with a taxable or tax-free acquisition of property (for example, stock or assets) or a tax-free reorganization. Report on this line any investment banking fees incurred at any stage of the acquisition or reorganization process including, for example, fees paid or incurred to evaluate whether to investigate an acquisition, fees to conduct an actual investigation, and fees to consummate the acquisition. Also, include on line 18 investment banking fees incurred in connection with the liquidation of a subsidiary, a spin-off of a subsidiary, or an initial public stock offering.

Line 19. Current Year Acquisition/Reorganization Other Costs

Report on line 19 any other fees paid or incurred in connection with a taxable or tax-free acquisition of property (for example, stock or assets) or a tax-free reorganization not otherwise reportable on Schedule M-3 (for example, Part III, line 18). Report on this line any fees paid or incurred at any stage of the acquisition or reorganization process including, for example, fees paid or incurred to evaluate whether to investigate an acquisition, fees to conduct an actual investigation, and fees to consummate the acquisition. Also, include on line 19 other acquisition/reorganization costs incurred in connection with the liquidation of a subsidiary, a spin-off of a subsidiary, or an initial public stock offering.

Line 20. Amortization/Impairment of Goodwill

Report on line 20 amortization of goodwill or amounts attributable to the impairment of goodwill.

Line 21. Amortization of Acquisition, Reorganization, and Start-Up Costs

Report on line 21 amortization of acquisition, reorganization, and start-up costs. For purposes of columns (b), (c), (d), and (e), include amounts amortizable under section 167, 195, or 248.

Line 22. Other Amortization or Impairment Write-Offs

Report on line 22 any amortization or impairment write-offs not otherwise includible on Schedule M-3.

Line 23. Depreciation

Report on line 23 any depreciation expense that is not required to be reported elsewhere on Schedule M-3 (for example, on Part II, line 2, 9, 10, or 11).

Line 24. Bad Debt Expense

Report on line 24, column (a), any amounts attributable to an allowance for uncollectible accounts receivable or actual write-offs of accounts receivable included in determining net income per the income statement. Report in columns (d) and (e) the respective noneffectively connected and the effectively connected portions of the deductible amount of bad debt expense determined under section 166 for federal income tax purposes that is also included in column (a). If a foreign bank has an effectively connected bad debt expense that is not reportable in column (a), the ECI amount is included in column (b) if it is a temporary difference and in column (e) to report the ECI treatment. If there is no temporary difference between the foreign bank's books and tax treatment, then such ECI amount that is not included in column (a) is apportioned in column (d), and its total is reflected in column (e).

Line 25. Purchase versus Lease (for Purchasers and/or Lessees)

Asset transfer transactions with periodic payments characterized for financial accounting purposes as either a purchase or a lease may, under some circumstances, be characterized as the opposite for tax purposes.

If a transaction is treated as a lease, the purchaser/lessee reports the periodic payments as gross rental expense. If the transaction is treated as a purchase, the purchaser/lessee reports the periodic payments as payments of principal and interest and also reports depreciation expense or deduction with respect to the purchased asset.

Report on line 25, column (a), gross rent expense for a transaction treated as a lease for income statement purposes but as a sale for U.S. income tax purposes. Report on line 25, column (e), gross rental deductions for a transaction treated as a lease for U.S. income tax purposes but as a purchase for income statement purposes. Report interest expense for such transactions on Part III, lines 26a through 26e, columns (a) and (e), as applicable. Report depreciation expense or deductions for such transactions on Part III, line 23 (depreciation), columns (a) and (e), as applicable. Use columns (b), (c), and (d) of Part III, lines 23, 25, and 26a through 26e, as applicable, to report the differences between columns (a) and (e) for such recharacterized transactions.

Line 26a. Interest Expense Per Books

The detail for the foreign corporation's interest expense is reported on Schedule I (Form 1120-F). The scope of the interest expense lines on Part III, line 26, is limited to a summarization of the results from Schedule I that reconcile the foreign corporation's book interest expense to effectively connected taxable income.

On line 26a, no amount is allocated and apportioned to effectively or noneffectively connected income. Report in line 26a, column (a), interest expense included in Part I, line 11. Report amounts in column (b) or (c), as applicable. The corresponding interest expense for U.S. income tax purposes is reported on Part III, lines 26b through 26e, column (e). Do not report on this line 26a, column (a), amounts reportable on:

Line 26b. Interest Expense Allocable Under Regulations Section 1.882-5

The interest expense deduction under Regulations section 1.882-5 is based on a three-step formula required to be reported on Schedule I (Form 1120-F). Report the allocable amount of interest expense from Schedule I, line 23, in column (d) and in column (e) of line 26b.

Line 26c. Regulations Section 1.882-5 Allocation Amount Subject to Deferral or Disallowance

Enter in column (e) the amount reported on Schedule I (Form 1120-F), line 24g.

Enter in column (b) the combined amounts from Schedule I, lines 24b, 24c, 24e, and 24f, as a positive or negative number as the case may be for the current year. In column (c), enter the combined amounts from Schedule I, lines 24a and 24d as a negative number.

Line 26d. Substitute Interest Payments

All foreign corporations, report on line 26d all U.S. source substitute interest payments (as to the recipient) with respect to securities lending transactions described in Regulations sections 1.861-2(a)(7) and 1.881-2(b)(2). Foreign banks that record substitute interest payments on set(s) of books that are not reported on Form 1120-F, Schedule L, might also report foreign source substitute interest payments whether or not they are allocable in whole or in part to ECI. Foreign banks report in column (c) all U.S. source and allocable foreign source substitute interest payments not already reflected in column (a). The amounts reported in column (c) are apportioned to noneffectively connected income of the foreign corporation in column (d) and reported as a negative number. Amounts included in column (a) that are also apportioned to non-ECI are also reported in column (d) as a negative number. The combined amounts of columns (a), (b), (c), and (d) are apportioned to effectively connected income in column (e) as the case may be.

Line 26e. Interest Equivalents (Guarantee Fees)

All foreign corporations, report on line 26e the foreign corporation's amounts with respect to deductions that are not interest payments but are sourced to the recipient in the manner of interest (“interest equivalents”). These amounts include fees expensed for financial guarantee and confirmation, acceptance, and standby letter of credit transactions. Foreign banks that record U.S. source guarantee fees on set(s) of books not reported on Form 1120-F, Schedule L, and not reported in column (a), must report the U.S. source fees as a permanent difference on line 26e, column (c), and allocate and apportion the relevant amounts to noneffectively connected income in column (d) even if there is no amount to allocate to effectively connected amounts in column (e). Foreign corporations other than banks must record all interest equivalent payments in column (a).

Line 27. Substitute Dividend Payments

All foreign corporations report on line 27 the amount of U.S. source substitute dividend payments with respect to securities lending transactions described in Regulations sections 1.861-3(a)(6) and 1.881-2(b)(2). Foreign banks that record substitute dividend payments on set(s) of books that are not reported on Form 1120-F, Schedule L, might also report foreign source substitute dividend payments whether or not they are allocable in whole or in part to ECI. Foreign banks report in column (c) U.S. source and allocable foreign source substitute dividends not already reflected in column (a). The amounts reported in column (c) are apportioned to noneffectively connected income of the foreign corporation in column (d) and reported as a negative number. Amounts included in column (a) that are also apportioned to non-ECI are also reported in column (d) as a negative number. The combined amounts of columns (a), (b), (c), and (d) are apportioned to effectively connected income in column (e) as the case may be.

Line 28. Fee and Commission Expense

Enter on Part III, line 28, column (a), the amounts of fees and commissions included on Part I, line 11. Fee and commission expense generally includes amounts paid or accrued for services rendered to the foreign corporation including expenses paid for brokerage commissions. Fees and commissions reportable on line 28 do not include amounts that are interest equivalents reportable on line 26e.

Line 29. Rental Expense

Report on line 29, column (a), the amount of rental expense included on Part I, line 11. Rental expense is the amount classifiable as rent under U.S. tax principles.

Line 30. Royalty Expense

Report on line 30, column (a), the amount of royalty expense included on Part I, line 11. Include in columns (b) through (e) amounts that are allocable as imputed royalties under U.S. tax principles that are not included in financial income reported on Part I, line 11.

Line 31. Expenses Allocable Under Regulations Section 1.861-8

Line 31 applies only to foreign banks. For purposes of Schedule M-3, all of the home office and other allocations to U.S. effectively connected income that are reportable on Schedule H (Form 1120-F) under Regulations section 1.861-8 (including amounts that are subject to timing differences under U.S. tax principles, such as home office depreciation) are reportable as apportionments to ECI in column (d). Report in columns (d) and (e) the amount from Schedule H, line 20.

Line 32. Other Expense/Deduction Items With Differences and Reconciliation to Eliminate Duplicate Amounts on Line 31

Separately state and adequately disclose on line 32 all items of expense/deduction that are not otherwise listed on Part III, lines 1 through 31. Amounts included on line 31, column (e), from Schedule H (Form 1120-F), line 20, that are also included in this Schedule M-3, Part III, lines 3, 5 through 23, 25, 26d, 26e, and 27, need to be reversed to avoid duplicate allocation. The combined amounts for these lines reported in column (e) that is duplicative of any amount included in line 31, column (e), is reported and reversed on line 32. Report such duplicative amount as a negative amount includible in line 32, column (c) and column (e). Such negative amount will need to be combined with other expense/deduction items that have differences. Attach a statement to show the duplicative items that are being reversed.

Attach a statement that describes and itemizes the type of expense/deduction and the amount of each item, and provides a description that states the expense/deduction name for book purposes for the amount recorded in column (a) and describes the adjustment being recorded in column (b), (c), or (d). The entire description completes the tax description for the amount included in column (e) for each item separately stated on this line.

The statement attached to the Schedule M-3 for line 32 must separately state and adequately disclose the nature and amount of the expense related to each reserve and/or contingent liability. The appropriate level of disclosure depends upon each taxpayer’s operational activity and the nature of its accounting records. For example, if a corporation’s net income amount reported in the income statement includes anticipated expenses for a discontinued operation as a single amount, and its general ledger or other books, records, and workpapers provide details for the anticipated expenses under more explanatory and defined categories such as employee termination costs, lease cancellation costs, loss on sale of equipment, etc., a supporting statement that lists those categories of expenses and their details will satisfy the requirement to separately state and adequately disclose. In order to separately state and adequately disclose the employee termination costs, it is not required that an anticipated termination cost amount be listed for each employee, or that each asset (or category of asset) be listed along with the anticipated loss on disposition.

The attached statement should have six columns. The first column has the description for the next five columns. The second column is column (a), expense per income statement. The third column is column (b), temporary differences. The fourth column is column (c), permanent differences. The fifth column is column (d), other permanent differences for allocations to non-ECI and ECI. The sixth column is column (e), deduction per tax return. For each item listed on the attached statement for line 32, columns (a) through (d) when combined must equal column (e). The amounts in columns (a) through (e) for all items must be totaled on the attached statement and the total amounts must be included on line 32 of the face of the statement.

Line 33. Total Expense/Deduction Items

Report on Part II, line 26, columns (a) through (e), as applicable, the inverse of the amounts reported on Part III, line 33, column (a) through (e), as applicable. For example, if Part III, line 33, column (a), reflects an amount of $1 million, then report on Part II, line 26, column (a), ($1 million). Similarly, if Part III, line 33, column (b), reflects an amount of ($50,000), then report on Part II, line 26, column (b), $50,000.