Questions $22-23$

Fallon Inc reports taxable income of $$500,000$ for $2011$ and has a marginal tax rate of $20\%.$ The tax rate is expected to increase to $35\%$ next year $(2012)$ and remain at $35\%$ after that. Excluded from Fallon's determination of taxable income was a questionable deduction of $$40,000,$ which represents an uncertain tax position. Fallon would have reported $$540,000$ in taxable income if they did not take the questionable deduction. Fallon believes the deduction satisfies the "more likely than not" criteria of the IRS. They anticipate the following probabilities of outcome with the IRS:

Allowable deduction: Probability

$$30,00030\%$

$$24,00025\%$