Bricks & Mortar Co. (the Company), an SEC registrant, is a manufacturer of constructionequipment. The Company has been in business for more than 50 years, operating profitably for thepast 25. In addition, it has an applicable tax rate of 40 percent and no unused tax loss or creditcarryforwards. The Companys fiscal year ends on December 31.In prior years, the Company determined it had no uncertain tax positions that required recognitionunder U.S. GAAP. The last date of payment of fiscal year 2015 tax is March 15, 2016, for purposesof accruing interest and penalties under the tax law.The Company is preparing its financial statements for the year ended December 31, 2015. Indetermining the amount of its 2015 tax provision, the Company has prepared a draft of its 2015 taxreturn.The Companys tax working papers indicate that its preliminary tax balances, on an as-filed basis(i.e., before financial reporting adjustments), are as follows:Balance sheet accountsCurrent tax liability $4,000 [1]Deferred tax liability $ 1,600 [2]Income statement accountsCurrent tax expense $4,000 [3]Deferred tax expense $ 400 [4][1] Agrees to tax-owed line item in draft tax return[2] Relates to fixed asset temporary differences only (book basis of $200,000 and tax basis of$196,000)[3] Agrees to tax provision rollforward[4] Agrees to deferred tax provision working papersManagement has identified two deductions, taken in its draft 2015 tax return, for which the tax law isnot clear as to whether those tax positions should reduce the Companys 2015 tax liability. TheCompany is evaluating these tax positions for financial reporting purposes. Management is highlyconfident that all other tax positions will be sustained by the taxing authority upon examination andthat 100 percent of the deductions claimed in the tax return should be reflected in the financialstatements because they are based on clear and unambiguous tax law.For Issues 1 and 2, assume that each of the tax positions has substantial authority for the purpose ofdetermining whether penalties may be assessed.Issue 1 Facts:As a result of implementing a certain tax strategy, the Company has included a $200 deduction in itsdraft tax return, resulting in a $80 reduction to taxes payable. There is uncertainty over whether thetax strategy is sustainable under the tax law and therefore over whether the additional $200 isdeductible for tax purposes.Management asserts that there is a 40 percent chance that the tax position would be sustained if takento the court of last resort. However, on the basis of its past experience in negotiating settlements withthe taxing authority, management believes that if it were to negotiate a settlement with the taxing authority rather than take the dispute to the court of last resort, it would have an 80 percentcumulative probability of realizing at least $20 of benefit, (i.e., the Company believes it has a 10percent chance of realizing $80 ($200 40%), a 40 percent chance of realizing $40 ($100 40%), a30 percent chance of realizing $20 ($50 40%), and only a 20 percent chance of realizing nobenefit).The sustainability of this tax position does not affect the tax bases of the Companys assets orliabilities. This tax position meets the substantial authority threshold for determining whetherpenalties may be assessed.Issue 2 Facts:The Company has taken a tax deduction in its draft tax return in the amount of $200, resulting in a$80 reduction to taxes payable. Management has obtained a tax opinion from a law firm at a 65percent level of confidence that the tax position is appropriately deductible under the tax law andconcluded that the tax position meets the more-likely-than-not recognition threshold. Managementasserts that it would negotiate a settlement with the taxing authority in the event of a dispute. In theevent of a negotiated settlement with the taxing authority, management asserts there is a 35 percentprobability that it would sustain the full $80 ($200 40% tax rate) tax benefit, a 35 percentprobability that it would sustain $64 ($160 40% tax rate) of the tax benefit, and a 30 percentprobability that it would sustain $48 ($120 40% tax rate) of the tax benefit.This tax position does not affect the Companys tax bases of its assets or liabilities.