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 LOL’s auditors, you are now performing the Company’s 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.

Required:

   

• Question 2 — How much of the reversing taxable temporary differences may be considered in estimating future taxable income?

Handout 1 - LOL Draft Income Statement and Excerpt From Tax Footnote as of December 31, 2018 LOL Corporation Consolidated Statement of Operations Years ended December 31, 2018, 2017, and 2016 (in thousands) 2018 2017 2016 Revenues, net 2,000,000 1,900,000 1,800,000 Cost of goods sold 1,400,000 1,250,000 1,200,000 Gross profit 600,000 650,000 600,000 Selling, general, and administrative expense 500,000 500,000 400,000 Goodwill impairment 750,000 Operating income (loss) (650,000) 150,000 200,000 Interest expense, net 50,000 50,000 50,000 Income (loss) before provision for income taxes (700,000) 100,000 150,000 Provision (benefit) for income taxes ???? 36,000 54,000 Net (loss) income ???? 64,000 96,000