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 LOLs auditors, you are now performing the Companys 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 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.

Additional Facts 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 Companys 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.

Question 7b Is there a tax provision on the $20 million of income from discontinued operations?

I know the answer is yes. However, can you explain what the tax provision is and go into detail about how you found it so that I can understand it.