Shipley Corporation reported book income before income tax for the current year (2015) of $500,000, computed as follows:
Sales revenue $1,250,000
Municipal bond interest 5,000
Less: Cost of goods sold (520,000)
Operating expenses (100,000)
Depreciation expense (90,000)
Contingent loss (45,000)
Book income before income tax $ 500,000
The contingent loss related to a lawsuit filed by one of Shipley’s former employees. Although the suit has not yet gone to trial, the company recorded a potential liability for an expected unfavorable judgment under the suit. Shipley will be permitted a tax deduction only when any judgment is actually paid.
The municipal bond interest is associated with a Colorado municipal bond.
For tax purposes, Shipley has computed a depreciation amount totaling $150,000, including additional first-year bonus depreciation of $50,000 to which the company believes it is entitled. The company also took a Domestic Manufacturing Deduction of $80,000 for tax purposes.
The company’s book and tax basis in its assets and liabilities, at both the beginning and end of the year, is as follows: (Hint: Remember that these amounts have not had any tax rates applied.)
Beginning of Year End of Year
Book Tax Book Tax
Depreciable property $470,000 $450,000 $380,000 $300,000
Other assets 155,000 155,000 170,000 170,000
Contingent liability 0 0 (45,000) 0
Other liabilities (250,000) (250,000) (240,000) (240,000)
At the beginning of the tax year, Shipley has a balance in its deferred tax liability account (DTL) of $6,800.(Hint: Remember that a deferred tax liability/deferred tax asset has already been tax effected, i.e., it is after-tax amounts).
The company’s federal rate is 35% and it is domiciled in Nevada. This year, Shipley began selling its products to customers in other states (Colorado, South Carolina, Wyoming, and Florida), but has taken the position that it has no nexus, and therefore no state tax liability, in these other states.
The apportionment percentages for the states are as follows:
Colorado – 30%
South Carolina – 45%
Wyoming – 10%
Florida – 15%
Required:
Identify those items suggested by the facts above that could be considered ‘uncertain tax positions’ subject to the provisions of FIN 48 and explain why. For each item, also indicate how the item directionally impacted current and/or deferred tax expense. You should identify at least two uncertain tax positions. You do not need any calculations here, just discuss the issues.