Can ABC assert an effective settlement for any of the deductions taken on the 2016 tax return

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Question:

Can ABC assert an “effective settlement” for any of the deductions taken on the 2016 tax return at December 31, 2017?

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ABC Co. took four tax deductions on their 2016 tax return that have issues that could result in some or all of the deductions being disallowed if ABC’s 2016 tax return is audited. ABC believes the deductions are justifiable but knows that tax law related to each item is unclear. Information about each deduction follows:

1) Amount of deduction $500,000

ABC’s probability full deduction will be allowed 60%

ABC’s estimate of potential deduction being allowed

500,000 60%

400,000 30%

250,000 10%

2) Amount of deduction $800,000

ABC’s probability full deduction will be allowed 40%

ABC’s estimate of potential deduction being allowed

800,000 40%

650,000 30%

500,000 20%

400,000 10%

3) Amount of deduction $300,000

ABC’s probability full deduction will be allowed 30%

ABC’s estimate of potential deduction being allowed

300,000 30%

250,000 15%

200,000 40%

125,000 15%

4) Amount of deduction $900,000

ABC’s probability full deduction will be allowed 45%

ABC’s estimate of potential deduction being allowed

900,000 45%

800,000 40%

650,000 15%

ABC’s 2016 tax rate was 25%. ABC is a calendar-year company. During 2017, ABC Co. received notification that its 2016 tax return was being audited. At December 31, 2017, the IRS had verbally communicated their findings on deductions 1 – 3. Their findings were as follows:

Deduction 1 $120,000 disallowed

Deduction 2 no disallowance

Deduction 3 $80,000 disallowed

Deduction 4 was still under examination at December 31, 2017. Prior to December 31, 2017, ABC and the IRS formalized their agreement on deductions 2 and 3 by signing IRS Form 906, “Closing Agreement on Final Determination Covering Specific Matters.” ABC is disputing the IRS’ findings related to deduction 1.