Hi there, do you think you will be able to help me with the Case that I posted that you commented on before?

Case 13-10 LOL - Income Taxes LOL (the \"Company\"), an SEC registrant with a calendar year-end, is a manufacturer and distributor of sports equipment. The Company was created in 1989 and is headquartered in Southern California. The Company has manufacturing operations and numerous sales and administrative locations in the United States. LOL files a consolidated U.S. federal tax return. (This case will not consider the evaluation of the state jurisdictions; it will only consider the federal jurisdiction.) As LOL's auditors, you are now performing the Company's year-end audit for the fiscal year ended December 31, 2010, and have the following information available to you: LOL draft income statement and excerpt from tax footnote as of December 31, 2010 (Handout 1). A deferred tax asset realization analysis showing pre-tax book income projections (Handout 2). The projected income schedule (realization analysis above) projects organic growth beginning in 2012 after stemming the decrease in pre-tax book income. LOL does not have the ability to carryback any losses to prior periods. A significant customer declared bankruptcy in 2010; therefore, the Company wrote off all accounts receivable from this customer. The Company is considering the exclusion of such expense when evaluating if future income is objectively verifiable. The Company does not have a history of operating losses or tax credit carryforwards expiring unused. The Company has identified the following possible tax-planning strategies: o Selling and leasing back manufacturing equipment that would result in a taxable gain of $20 million. o Selling the primary manufacturing facility at a gain to offset existing capital loss carryforwards. Required: Question 1 What are the four possible sources of taxable income according to ASC 740? Question 2 How much of the reversing taxable temporary differences may be considered in estimating future taxable income? Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10: LOL - Income Taxes Page 2 Question 3a In evaluating the income that LOL is projecting related to future operations, is LOL in a cumulative loss position (assuming LOL considers 3 years as the period over which to evaluate pretax accounting income or loss from continuing operations for cumulative losses)? Question 3b In evaluating the income that LOL is projecting related to future operations, may LOL exclude the impact of the impairment of the nondeductible goodwill when estimating future taxable income? Question 3c In evaluating the income that LOL is projecting related to future operations, may LOL exclude the expense from writing off the accounts receivable from the customer who declared bankruptcy when evaluating the projections of future income? Question 3d In evaluating the income that LOL is projecting related to future operations, the Company has projected growth in its future projections. Does the evidence of historic losses affect our ability to accept the Company's estimate of future growth? Question 3e In evaluating the income that LOL is projecting related to future operations, in an effort to satisfy your appropriate professional skepticism, what evidence might you ask for to support the Company's projections? Question 4 Would the tax-planning strategy to sell and lease back manufacturing equipment be a tax-planning strategy that is considered prudent and feasible? Why or why not? Question 5 Would the tax-planning strategy to sell but not lease back the primary manufacturing facility be a tax-planning strategy that is prudent and feasible? Why or why not? Additional Facts- Intraperiod Allocation Consideration Assume a valuation allowance of $105 million is recorded in Issue 1 as of December 31, 2010 ($150 million deferred tax asset (DTA) less $45 million reversing deferred tax liabilities (DTL)). Further assume that during 2010, the Company recognized a loss of $50 million in accumulated other comprehensive income (AOCI) related to a pension adjustment from a loss in investment value. The Company's effective tax rate absent the recognition of a valuation allowance is 37 percent. Required: Question 6 Calculate the tax effect on the loss of $50 million recognized in AOCI in 2010. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10: LOL - Income Taxes Page 3 Additional Facts Assume a valuation allowance of $105 million is recorded in Issue 1 as of December 31, 2010 ($150 million DTA less $45 million reversing DTLs). Further assume that the Company's projection for 2011 pre-tax book income of $0 is accurate, but the Company sells a component of the business and recognizes the component as a discontinued operation. The discontinued operations earn $20 million before tax, and the continuing operations lose $20 million before tax for a net pre-tax book income of $0. As described above, the Company has a full valuation allowance. Required: Question 7a Is there a tax benefit on the loss of $20 million from continuing operations? Question 7b Is there a tax provision on the $20 million of income from discontinued operations? Additional Facts - Interim Reporting Assume a valuation allowance of $105 million is recorded in Issue 1 as of December 31, 2010 ($150 million DTA less $45 million reversing DTLs). Further assume that the actual 2011 net income before tax was $0 as projected at the end of 2010. In calculating the 2012 annual effective tax rate (AETR) at the beginning of the year, the Company projected income before taxes of $40 million ($10 million per quarter). Using the effective tax rate of 37 percent, the $40 million of income would result in a tax provision of $14.8 million during 2012 ($3.7 million per quarter) before considering the release of the valuation allowance. In addition, assume the net operating loss carryforward will be used as income is generated during the year resulting in annual estimated tax of $0 and an annual estimated effective tax rate of 0 percent. Absent a release of the valuation allowance during 2012 from a change in estimate, the end of the year valuation allowance would be $90.2 million ($105 million less $14.8 million) as a result of the income earned in 2012. In the second quarter of 2012, LOL determined that there was sufficient evidence of future taxable income to satisfy the valuation assertion of the DTA. Required: Question 8 Calculate the tax provision (benefit) that would be recognized in the second quarter of 2012. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax Handout 1 LOL Draft Income Statement and Excerpt From Tax Footnote as of December 31, 2010 LOL Corporation CONSOLIDATED STATEMENT OF OPERATIONS Years ended December 31, 2010, 2009, and 2008 (in thousands) 2010 2009 2008 Revenues, net 2,000,000 1,900,000 1,800,000 Cost of goods sold 1,400,000 1,250,000 1,200,000 Gross profit 600,000 650,000 600,000 Selling, general, and administrative expense 500,000 500,000 400,000 Goodwill impairment 750,000 - - (650,000) 150,000 200,000 50,000 50,000 50,000 (700,000) 100,000 150,000 Provision (benefit) for income taxes ???? 36,000 54,000 Net (loss) income ???? 64,000 96,000 Operating income (loss) Interest expense, net Income (loss) before provision for income taxes Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax LOL Corporation INVENTORY OF DEFERRED TAX BALANCES The components of net deferred income taxes are as follows: 2010 2009 30,000 25,000 100,000 100,000 20,000 25,000 150,000 150,000 Depreciation (15,000) (20,000) Indefinite lived intangible assets (trademark) (50,000) (50,000) Prepaid expenses (30,000) (20,000) (95,000) (90,000) 55,000 60,000 Valuation allowance ???? - Net deferred tax asset (liability) ???? 60,000 Year ended December 31, (In thousands) Deferred income tax assets: Allowance for doubtful accounts Tax loss carryforwards Accruals and other Deferred income tax liabilities: Net deferred income taxes At December 31, 2010, LOL had $270 million of net operating loss carryforwards. Of these, $15 million are capital losses and will expire in 2011, and the remaining $255 million are operating losses and will expire in 2025. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax Handout 2 LOL Deferred Tax Asset Realization Analysis Showing Pre-Tax Book Income Projections LOL Corporation Deferred Tax Asset Realization Analysis (in thousands) The documentation below was provided to the auditors as part of their audit. Pre-Tax Book Year Income (Loss) Actual Results 2008 150,000 2009 100,000 2010 (700,000) Projections 2011 2012 40,000 2013 80,000 2014 85,000 2015 90,000 2016 95,000 2017 100,000 2018 105,000 2019 110,000 2020 115,000 2021 120,000 Goodwill Impairment * (750,000) Adjusted PreTax Book Income (Loss) 150,000 100,000 50,000 * The goodwill impaired is nondeductible. There was no basis in the goodwill for tax purposes therefore the impairment had no direct impact on the tax provision. In other words, the impairment of the goodwill for book purposes does not result in a corresponding deduction for tax purposes in any period. The book expense, therefore, does not affect the resulting taxes payable and results in an effective tax rate that differs (unfavorably) from the statutory tax rate. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax Handout 3 Example of LOL Pre-Tax Income Forecast Future projections are by their nature subjective. Projecting growth is more subjective as historic results may not have illustrated that such growth is attainable. As discussed above, LOL has negative evidence related to the impairment of goodwill and the cumulative losses over the three-year period. The loss of a significant customer as a result of bankruptcy may be considered objective negative evidence as well. The adjusted historic results might provide evidence of future income. Such evidence might be persuasive enough to overcome the negative evidence. Assumptions related to growth in excess of historic results would be subjective and such subjective evidence might not be sufficient to overcome the objective negative evidence. In this fact pattern, the adjusted income from the most recent year of $50 million would be most indicative of future results. The average adjusted income of $100 million may also be indicative of future results but would be less convincing evidence than the $50 most recent year as a result of the declining results. In projecting future income, LOL might use actual expectations but then limit the expectations by the most recent year's results ($50 million) or the average of the most recent three years ($100 million). The projected income for this scenario might appear as follows: Year Projections 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Pre-Tax Book Income (Loss) Limited to $50 million 40,000 80,000 85,000 90,000 95,000 100,000 105,000 110,000 115,000 120,000 40,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 Limited to $100 million 40,000 80,000 85,000 90,000 95,000 100,000 100,000 100,000 100,000 100,000 All evaluations related to the projection of future taxable income should not be formulaic but should be based on information that is consistent with expectations and supportable on the basis of evidence both objective and subjective. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax Handout 4 Examples of PCAOB and SEC Comments PCAOB Comments The PCAOB, in evaluating compliance with the professional standards, has focused on the need to use professional skepticism when evaluating estimates made by management. An example of a comment made by the PCAOB regarding the evaluation of the need for a valuation is as follows: In evaluating the reasonableness of the issuer's assertion about the realizability of the Federal NOL deferred tax benefits, the engagement team failed to identify and evaluate all relevant elements of positive and negative evidence that existed at the time the engagement team issued its audit opinion and weight those elements of evidence on the basis of the extent to which such items were objectively verifiable. The engagement team's evaluation of the realizability of the Federal NOL deferred tax benefits relied on future projected income. Regarding the issuer's forecasted taxable income: 1. The engagement team failed to evaluate whether the issuer had the ability to forecast income over a XX-year period with a reasonable level of accuracy in light of the uncertain current and future economic environment and the lack of any formal board approved long-term strategic plan. While the engagement team back tested certain aspects of the issuer's forecast for 2008 (compared actual to forecast), it failed to test the issuer's ability to forecast income in the outer years. This was particularly important as the Federal NOL deferred tax benefits were only forecasted to begin realization during the Y year and fully realized in year Z. 2. The engagement team failed to sufficiently consider that cumulative losses are a form of negative evidence that is highly objectively verifiable and carries more weight than other evidence that embodies some degree of subjectivity. For this reason, whenever an enterprise has suffered cumulative losses in recent years, realization of a deferred tax asset is difficult to support if it is based on forecasts of future profitable results without a demonstrated turnaround to operating profitability. Not only did the issuer experience cumulative losses in the prior three years but the issuer projected cumulative losses in the initial forecasted three-year period in both the normal and extreme scenarios, which increased the level of subjectivity of the projections presented as positive evidence. Other negative evidence existed that the engagement team either failed to evaluate, or to which the engagement team failed to assign appropriate weight in its evaluation of positive and negative evidence, and included but Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax was not limited to the following: The current deep economic recession and lack of clarity regarding future prospects for an economic turnaround in the U.S. economy. The categorization by the engagement team of the negative evidence associated with the credit crisis as only being \"subjective.\" The uncertainty over potential future regulatory changes facing the X-industry sector, including the potential for regulatory actions related to the issuer in light of its continuing losses. The issuer had forecasted a projected cumulative loss in the first three-year period because of continuing credit losses, and the issuer has not shown an ability to forecast future credit losses. SEC Comments Examples of SEC comments on the topic are as follows: We note during the fourth quarter of fiscal year 20X1, you recognized a full valuation allowance against your remaining net U.S. deferred tax assets in the amount of $X million because of \"several significant developments, which occurred during the fourth quarter of fiscal year [20X1].\" Considering the significant impact this charge had on your results, it is unclear why you did not provide a comprehensive discussion regarding this charge within your footnotes and within MD&A. Please provide us with the following: A detailed explanation of each of the factors that occurred during the fourth quarter of fiscal year 20X1 that led to such a material charge. What you mean by the statement, \"$X million of which is an adjustment to the beginning-of-year valuation allowance as a result of changes of circumstances, which caused a change in judgment regarding the realizability of the net U.S. deferred tax assets.\" As part of your response, please tell us how you intend to revise your disclosures in future filings with regard to the fourth quarter of fiscal year 20X1 and the first quarter of fiscal year 20X2 charges to recognize a full valuation allowance on your net U.S. and Italian deferred tax assets. You did not disclose why you believe that a valuation allowance is not necessary on the deferred tax asset of $X million related to your credit default swap financial guarantees. Please disclose within MD&A all of the positive and negative factors that you considered and the reasons that you concluded that it is more likely than not that the $X million in deferred tax assets will be realized. Please refer to paragraphs 20-25 of Statement 109 (as codified in ASC 740) for guidance. Please also disclose the status of the federal income tax treatment of credit default Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax swaps, whether it is a settled or unsettled area of tax law, and the possible range of outcomes that may result because of this uncertainty. We note your disclosure on page x that you expect to record significant net losses for a number of years as a result of the amortization of finite lived intangibles and non-cash equity based compensation. In light of your expected losses, please revise your filing to describe how you considered paragraph 23(b) of Statement 109 (as codified in ASC 740) in determining that no valuation allowance was necessary on $X million deferred tax assets as of December 31, 20X1. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax Handout 1 LOL Draft Income Statement and Excerpt From Tax Footnote as of December 31, 2010 LOL Corporation CONSOLIDATED STATEMENT OF OPERATIONS Years ended December 31, 2010, 2009, and 2008 (in thousands) 2010 2009 2008 Revenues, net Cost of goods sold 2,000,000 1,900,000 1,800,000 Gross profit 1,400,000 1,250,000 1,200,000 Selling, general, and administrative expense 600,000 Goodwill impairment 500,000 600,000 500,000 400,000 - - (650,000) 150,000 200,000 50,000 50,000 50,000 (700,000) 100,000 150,000 ???? Operating income (loss) 650,000 36,000 54,000 750,000 Interest expense, net Income (loss) before provision for income taxes Provision (benefit) for income taxes Net (loss) income ???? 96,000 LOL Corporation 64,000 INVENTORY OF DEFERRED TAX BALANCES The components of net deferred income taxes are as follows: Year ended December 31, 2009 2010 (In thousands) Deferred income tax assets: Allowance for doubtful accounts 30,000 Copyright 2010 Deloitte Development LLC 25,000 All Rights Reserved. Case 13-10Ac: LOL - Income Tax Tax loss carryforwards 100,000 20,000 25,000 150,000 150,000 (15,000) (50,000) (20,000) (50,000) (30,000) (20,000) (95,000) (90,000) 55,000 Accruals and other 100,000 60,000 Deferred income tax liabilities: Depreciation Indefinite lived intangible assets (trademark) Prepaid expenses Net deferred income taxes Valuation ???? allowance ???? Net deferred tax asset 60,000 (liability) At December 31, 2010, LOL had $270 million of net operating loss carryforwards. Of these, $15 million are capital losses and will expire in 2011, and the remaining $255 million are operating losses and will expire in 2025. Handout 2 LOL Deferred Tax Asset Realization Analysis Showing Pre-Tax Book Income Projections LOL Corporation Deferred Tax Asset Realization Analysis (in thousands) The documentation below was provided to the auditors as part of their audit. Adjusted PreTax Book Pre-Tax Book Goodwill Income (Loss) Year Income (Loss) Impairment * Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax Actual Results 2008 2009 2010 Projections 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 150,000 100,000 (700,000) (750,000) 150,000 100,000 50,000 40,000 80,000 85,000 90,000 95,000 100,000 105,000 110,000 115,000 120,000 * The goodwill impaired is nondeductible. There was no basis in the goodwill for tax purposes therefore the impairment had no direct impact on the tax provision. In other words, the impairment of the goodwill for book purposes does not result in a corresponding deduction for tax purposes in any period. The book expense, therefore, does not affect the resulting taxes payable and results in an effective tax rate that differs (unfavorably) from the statutory tax rate. Handout 3 Example of LOL Pre-Tax Income Forecast Future projections are by their nature subjective. Projecting growth is more subjective as historic results may not have illustrated that such growth is attainable. As discussed above, LOL has negative evidence related to the impairment of goodwill and the cumulative losses over the three-year period. The loss of a significant customer as a result of bankruptcy may be considered objective negative evidence as well. The adjusted historic results might provide evidence of future income. Such evidence might be persuasive enough to overcome the negative evidence. Assumptions related to growth in excess of historic results would be subjective and such subjective evidence might not be sufficient to overcome the objective negative evidence. In this fact pattern, the adjusted income from the most recent year of $50 million would be most indicative of future results. The average adjusted income of $100 million may also be indicative of future results but would be less convincing evidence than the $50 most recent year as a result of the declining results. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax In projecting future income, LOL might use actual expectations but then limit the expectations by the most recent year's results ($50 million) or the average of the most recent three years ($100 million). The projected income for this scenario might appear as follows: Pre-Tax Book Income (Loss) Year Projections 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 40,000 80,000 85,000 90,000 95,000 100,000 105,000 110,000 115,000 120,000 Limited to $50 million Limited to $100 million 40,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 50,000 40,000 80,000 85,000 90,000 95,000 100,000 100,000 100,000 100,000 100,000 All evaluations related to the projection of future taxable income should not be formulaic but should be based on information that is consistent with expectations and supportable on the basis of evidence both objective and subjective. Handout 4 Examples of PCAOB and SEC Comments PCAOB Comments The PCAOB, in evaluating compliance with the professional standards, has focused on the need to use professional skepticism when evaluating estimates made by management. An example of a comment made by the PCAOB regarding the evaluation of the need for a valuation is as follows: In evaluating the reasonableness of the issuer's assertion about the realizability of the Federal NOL deferred tax benefits, the engagement team failed to identify and evaluate all relevant elements of positive and negative evidence that existed at the time the engagement team issued its audit opinion and weight those elements of evidence on the basis of the extent to which such items were objectively verifiable. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax The engagement team's evaluation of the realizability of the Federal NOL deferred tax benefits relied on future projected income. Regarding the issuer's forecasted taxable income: 1. The engagement team failed to evaluate whether the issuer had the ability to forecast income over a XX-year period with a reasonable level of accuracy in light of the uncertain current and future economic environment and the lack of any formal board approved long-term strategic plan. While the engagement team back tested certain aspects of the issuer's forecast for 2008 (compared actual to forecast), it failed to test the issuer's ability to forecast income in the outer years. This was particularly important as the Federal NOL deferred tax benefits were only forecasted to begin realization during the Y year and fully realized in year Z. 2. The engagement team failed to sufficiently consider that cumulative losses are a form of negative evidence that is highly objectively verifiable and carries more weight than other evidence that embodies some degree of subjectivity. For this reason, whenever an enterprise has suffered cumulative losses in recent years, realization of a deferred tax asset is difficult to support if it is based on forecasts of future profitable results without a demonstrated turnaround to operating profitability. Not only did the issuer experience cumulative losses in the prior three years but the issuer projected cumulative losses in the initial forecasted three-year period in both the normal and extreme scenarios, which increased the level of subjectivity of the projections presented as positive evidence. Other negative evidence existed that the engagement team either failed to evaluate, or to which the engagement team failed to assign appropriate weight in its evaluation of positive and negative evidence, and included but was not limited to the following: The current deep economic recession and lack of clarity regarding future prospects for an economic turnaround in the U.S. economy. The categorization by the engagement team of the negative evidence associated with the credit crisis as only being \"subjective.\" The uncertainty over potential future regulatory changes facing the X-industry sector, including the potential for regulatory actions related to the issuer in light of its continuing losses. The issuer had forecasted a projected cumulative loss in the first three-year period because of continuing credit losses, and the issuer has not shown an ability to forecast future credit losses. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax SEC Comments Examples of SEC comments on the topic are as follows: We note during the fourth quarter of fiscal year 20X1, you recognized a full valuation allowance against your remaining net U.S. deferred tax assets in the amount of $X million because of \"several significant developments, which occurred during the fourth quarter of fiscal year [20X1].\" Considering the significant impact this charge had on your results, it is unclear why you did not provide a comprehensive discussion regarding this charge within your footnotes and within MD&A. Please provide us with the following: A detailed explanation of each of the factors that occurred during the fourth quarter of fiscal year 20X1 that led to such a material charge. What you mean by the statement, \"$X million of which is an adjustment to the beginning-of-year valuation allowance as a result of changes of circumstances, which caused a change in judgment regarding the realizability of the net U.S. deferred tax assets.\" As part of your response, please tell us how you intend to revise your disclosures in future filings with regard to the fourth quarter of fiscal year 20X1 and the first quarter of fiscal year 20X2 charges to recognize a full valuation allowance on your net U.S. and Italian deferred tax assets. You did not disclose why you believe that a valuation allowance is not necessary on the deferred tax asset of $X million related to your credit default swap financial guarantees. Please disclose within MD&A all of the positive and negative factors that you considered and the reasons that you concluded that it is more likely than not that the $X million in deferred tax assets will be realized. Please refer to paragraphs 20-25 of Statement 109 (as codified in ASC 740) for guidance. Please also disclose the status of the federal income tax treatment of credit default swaps, whether it is a settled or unsettled area of tax law, and the possible range of outcomes that may result because of this uncertainty. We note your disclosure on page x that you expect to record significant net losses for a number of years as a result of the amortization of finite lived intangibles and non-cash equity based compensation. In light of your expected losses, please revise your filing to describe how you considered paragraph 23(b) Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10Ac: LOL - Income Tax of Statement 109 (as codified in ASC 740) in determining that no valuation allowance was necessary on $X million deferred tax assets as of December 31, 20X1. Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10 LOL - Income Taxes LOL (the \"Company\"), an SEC registrant with a calendar year-end, is a manufacturer and distributor of sports equipment. The Company was created in 1989 and is headquartered in Southern California. The Company has manufacturing operations and numerous sales and administrative locations in the United States. LOL files a consolidated U.S. federal tax return. (This case will not consider the evaluation of the state jurisdictions; it will only consider the federal jurisdiction.) As LOL's auditors, you are now performing the Company's year-end audit for the fiscal year ended December 31, 2010, and have the following information available to you: LOL draft income statement and excerpt from tax footnote as of December 31, 2010 (Handout 1). A deferred tax asset realization analysis showing pre-tax book income projections (Handout 2). The projected income schedule (realization analysis above) projects organic growth beginning in 2012 after stemming the decrease in pre-tax book income. LOL does not have the ability to carryback any losses to prior periods. A significant customer declared bankruptcy in 2010; therefore, the Company wrote off all accounts receivable from this customer. The Company is considering the exclusion of such expense when evaluating if future income is objectively verifiable. The Company does not have a history of operating losses or tax credit carryforwards expiring unused. The Company has identified the following possible tax-planning strategies: o Selling and leasing back manufacturing equipment that would result in a taxable gain of $20 million. o Selling the primary manufacturing facility at a gain to offset existing capital loss carryforwards. Required: Question 1 What are the four possible sources of taxable income according to ASC 740? Question 2 How much of the reversing taxable temporary differences may be considered in estimating future taxable income? Copyright 2010 Deloitte Development LLC All Rights Reserved. Case 13-10: LOL - Income Taxes Page 2 Question 3a In evaluating the income that LOL is projecting related to future operations, is LOL in a cumulative loss position (assuming LOL considers 3 years as the period over which to evaluate pretax accounting income or loss from continuing operations for cumulative losses)? Question 3b In evaluating the income that LOL is projecting related to future operations, may LOL exclude the impact of the impairment of the nondeductible goodwill when estimating future taxable income? Question 3c In evaluating the income that LOL is projecting related to future operations, may LOL exclude the expense from writing off the accounts receivable from the customer who declared bankruptcy when evaluating the projections of future income? Question 3d In evaluating the income that LOL is projecting related to future operations, the Company has projected growth in its future projections. Does the evidence of historic losses affect our ability to accept the Company's estimate of future growth? Question 3e In evaluating the income that LOL is projecting related to future operations, in an effort to satisfy your appropriate professional skepticism, what evidence might you ask for to support the Company's projections? Question 4 Would the tax-planning strategy to sell and lease back manufacturing equipment be a tax-planning strategy that is considered prudent and feasible? Why or why not? Question 5 Would the tax-planning strategy to sell but not lease back the primary manufacturing facility be a tax-planning strategy that is prudent and feasible? Why or why not? Additional Facts- Intraperiod Allocation Consideration Assume a valuation allowance of $105 million is recorded in Issue 1 as of December 31, 2010 ($150 million deferred tax asset (DTA) less $45 million reversing deferred tax liabilities (DTL)). Further assume that during 2010, the Company recognized a loss of $50 million in accumulated other comprehensive income (AOCI) related to a pension adjustment from a loss in investment value. Copyright 2010 Deloitte Development LLC The Company's effective tax rate absent the recognition of a valuation allowance is 37 percent. Required: Question 6 Calculate the tax effect on the loss of $50 million recognized in AOCI in 2010. All Rights Reserved. Case 13-10: LOL - Income Taxes Page 3 Additional Facts Assume a valuation allowance of $105 million is recorded in Issue 1 as of December 31, 2010 ($150 million DTA less $45 million reversing DTLs). Further assume that the Company's projection for 2011 pre-tax book income of $0 is accurate, but the Company sells a component of the business and recognizes the component as a discontinued operation. The discontinued operations earn $20 million before tax, and the continuing operations lose $20 million before tax for a net pre-tax book income of $0. As described above, the Company has a full valuation allowance. Required: Question 7a Is there a tax benefit on the loss of $20 million from continuing operations? Question 7b Is there a tax provision on the $20 million of income from discontinued operations? Additional Facts - Interim Reporting Assume a valuation allowance of $105 million is recorded in Issue 1 as of December 31, 2010 ($150 million DTA less $45 million reversing DTLs). Further assume that the actual 2011 net income before tax was $0 as projected at the end of 2010. In calculating the 2012 annual effective tax rate (AETR) at the beginning of the year, the Company projected income before taxes of $40 million ($10 million per quarter). Using the effective tax rate of 37 percent, the $40 million of income would result in a tax provision of $14.8 million during 2012 ($3.7 million per quarter) before considering the release of the valuation allowance. Copyright 2010 Deloitte Development LLC In addition, assume the net operating loss carryforward will be used as income is generated during the year resulting in annual estimated tax of $0 and an annual estimated effective tax rate of 0 percent. Absent a release of the valuation allowance during 2012 from a change in estimate, the end of the year valuation allowance would be $90.2 million ($105 million less $14.8 million) as a result of the income earned in 2012. In the second quarter of 2012, LOL determined that there was sufficient evidence of future taxable income to satisfy the valuation assertion of the DTA. Required: Question 8 Calculate the tax provision (benefit) that would be recognized in the second quarter of 2012. All Rights Reserved. Copyright 2010 Deloitte Development LLC