On Wednesday April 5, 2023, the Chief Financial officer of the Cobalt Boat Company (i.e. Cobalt)...

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On Wednesday April 5, 2023, the Chief Financial officer of the Cobalt Boat Company (i.e. Cobalt) came to you with a tax and financial accounting issue and is seeking your advice. Cobalt had a lot of excess cash several years ago and invested in a high-Tech stock that it just sold and recognized a capital loss of $5 million. The CFO's financial statement auditor has told her that since Cobalt had no capital gains in prior years and does not have a capital gain yet this year, Cobalt may not be able to recognize a tax benefit for the capital loss and may have to set up a valuation allowance. The CFO becomes concerned because a valuation allowance would have a detrimental impact on Cobalt's effective tax rate and hence its earnings. Since you are not the auditor of Cobalt, you agreed to be engaged by Cobalt to provide some tax planning advice regarding utilization of the capital loss as well as aiding with the potential tax accounting implications of the loss. Cobalt has recognized no other capital losses this year or in prior years. Cobalt is an accrual basis taxpayer for both tax and financial reporting. Cobalt's tax year and financial reporting year is the calendar year. Cobalt's financial statements are presented under U.S. GAAP. Cobalt is a taxable corporation and has been since its inception in 1969. Cobalt's statutory tax rate is 21% for federal income tax purposes and 4% for State after considering the benefit for federal income taxes. Cobalt has no foreign operations and pays no income taxes to local jurisdictions. Cobalt has no other significant investments but may have other assets used in its business that have appreciated in value. Cobalt has a small passenger jet that it bought 8 years ago for 4,500,000. The jet is fully depreciated and now has a market value of $8,500,000. Cobalt has been contemplating selling the jet due to a downturn in its business but has not done so yet. It also has land with a basis of 1,000,000 that was recently appraised for 4,000,000. Cobalt has no future plans for the land that it had bought some years ago and is contemplating selling it. Cobalt also had net losses from the sale of equipment used in its business during the three prior years of $400,000, $600,000, and $500,000, respectively. Cobalt did not have any business property transactions in the two years prior to that. The CFO inquires of you what the estimated financial impact will be to Cobalt if she must set up a valuation allowance for Cobalt's 2023 reporting year. She also inquires whether, based on Cobalt's facts, there is an opportunity to avoid establishing a valuation allowance and what that opportunity might be. Assume for this purpose that the Capital loss is also being recognized for financial reporting purposes in 2023. Also assume that before the capital loss, Cobalt is projecting 2023 pre-tax book income of $20,000,000. Please provide a memo to the file documenting facts, analysis and conclusion of the above inquires including IRC reference. On Wednesday April 5, 2023, the Chief Financial officer of the Cobalt Boat Company (i.e. Cobalt) came to you with a tax and financial accounting issue and is seeking your advice. Cobalt had a lot of excess cash several years ago and invested in a high-Tech stock that it just sold and recognized a capital loss of $5 million. The CFO's financial statement auditor has told her that since Cobalt had no capital gains in prior years and does not have a capital gain yet this year, Cobalt may not be able to recognize a tax benefit for the capital loss and may have to set up a valuation allowance. The CFO becomes concerned because a valuation allowance would have a detrimental impact on Cobalt's effective tax rate and hence its earnings. Since you are not the auditor of Cobalt, you agreed to be engaged by Cobalt to provide some tax planning advice regarding utilization of the capital loss as well as aiding with the potential tax accounting implications of the loss. Cobalt has recognized no other capital losses this year or in prior years. Cobalt is an accrual basis taxpayer for both tax and financial reporting. Cobalt's tax year and financial reporting year is the calendar year. Cobalt's financial statements are presented under U.S. GAAP. Cobalt is a taxable corporation and has been since its inception in 1969. Cobalt's statutory tax rate is 21% for federal income tax purposes and 4% for State after considering the benefit for federal income taxes. Cobalt has no foreign operations and pays no income taxes to local jurisdictions. Cobalt has no other significant investments but may have other assets used in its business that have appreciated in value. Cobalt has a small passenger jet that it bought 8 years ago for 4,500,000. The jet is fully depreciated and now has a market value of $8,500,000. Cobalt has been contemplating selling the jet due to a downturn in its business but has not done so yet. It also has land with a basis of 1,000,000 that was recently appraised for 4,000,000. Cobalt has no future plans for the land that it had bought some years ago and is contemplating selling it. Cobalt also had net losses from the sale of equipment used in its business during the three prior years of $400,000, $600,000, and $500,000, respectively. Cobalt did not have any business property transactions in the two years prior to that. The CFO inquires of you what the estimated financial impact will be to Cobalt if she must set up a valuation allowance for Cobalt's 2023 reporting year. She also inquires whether, based on Cobalt's facts, there is an opportunity to avoid establishing a valuation allowance and what that opportunity might be. Assume for this purpose that the Capital loss is also being recognized for financial reporting purposes in 2023. Also assume that before the capital loss, Cobalt is projecting 2023 pre-tax book income of $20,000,000. Please provide a memo to the file documenting facts, analysis and conclusion of the above inquires including IRC reference.

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MEMORANDUM To CFO of Cobalt Boat Company From Sage Subject Tax Planning Advice Regarding Utilization of Capital Loss and Potential Tax Accounting Implications Date May 16 2023 Background On April 5 20... View the full answer