Assume tax professionals determine the 10% rate does not meet the MLTN threshold when evaluating uncertain tax
Question:
- Assume tax professionals determine the 10% rate does not meet the MLTN threshold when evaluating uncertain tax positions. Determine the amount of the unrecognized tax benefit (UTB), or "reserve" as it is generally referred to in the case, if the settlement of the management fee upon audit is assumed to be 4%. Ignore any impact on the liability that would result from interest and penalties.
To increase cash flow flexibility, the companies under the Lenzini operating umbrella either engage in or are considering four inter-company transactions (ICTs) related to: (1) product sales, (2) working capital loans, (3) royalty payments for licensed intellectual property, and (4) management fees for machine acquisition/refitting. Appendix A provides a summary of the ICTs. Also, Figure 2 illustrates how the ICTs impact the three divisions.
ICT 4: Management Fees for Machine Acquisition/Refitting Before the AVI sale opportunity arose, Harmon Mills was looking to add capacity by purchasing three next-generation mini-mills from Lenzini. Lenzini had encouraged Harmon to purchase the newer equipment in an effort to receive immediate cash that would support Lenzini's R&D operation. Lenzini will first purchase base machines from a Greek manufacturer for $10 million. Lenzini will refit the base machines with $2 million worth of proprietary components and software to enhance production efficiency. The machine purchase contract also stipulates that Harmon Mills will pay Lenzini a 10 percent management fee ($1.2 million) to facilitate the acquisition and refitting of the machines, as well as installation of the completed machines in Harmon's facilities. Harmon already has paid Lenzini a $5 million refundable deposit as part of the purchase contract.
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill