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 carry back 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 whether future income is objectively verifiable.

?The Company does not have a history of operating losses or tax credit carry forwards expiring unused.

?The Company has identified the following possible tax-planning strategies:oSelling and leasing back manufacturing equipment that would result in a taxable gain of $20 million. oSelling the primary manufacturing facility at a gain to offset existing capital loss carryforwards.

Additional Facts ? Interim Reporting

Assume that a valuation allowance of $105 million is recorded 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 that 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. In the absence of a release of the valuation allowance during 2012 from a change in estimate, the year-end 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