Tax Research Memo, Case Study Example

Relevant Facts: Altidore Inc. operates a calendar-year-end business that suffers from dramatic seasonal variation in taxable income. For example, it often operates at a net loss for the first two quarters of the year and then operates profitably for the last two quarters and, for as long as anyone can remember, finishes the year with taxable income. The new tax director has been asked to help calculate the deferred tax assets at the end of the first quarter. After looking at the quarterly loss, he claims that since there is no net income, there are no deferred tax assets because the effective tax rate is zero. (Carrybacks and carryforwards are not allowed in this jurisdiction.) Is the tax director correct in his assessment of the effective tax rate for calculating the deferred tax assets?

Specific Issues: Is the tax director correct in his assessment of the effective tax rate for calculating the deferred tax assets?

Conclusions: The tax director is correct in that there should not be anything added to their tax assets for this quarter.

 Support: For one, since this jurisdiction does not allow for carrybacks and carryforwards for tax purposes the deferrable tax asset is the only way to lower the tax income in the future quarter. However, one criterion for the addition of deferrable tax assets is that there must be reason to believe that the probability of the next quarter showing taxable income is over fifty percent. Yet, this company traditionally shows profits only in the third and fourth quarters each year. This decision is being made with regards to the first quarter which obviously is not immediately followed by either of the two quarters that are usually profitable for the company. Deferrable tax assets are to be used to lessen the company’s taxable income, but in this situation the taxable income is too far out from the present situation. This extended gap leads to more variability between the present quarter and the profitable ones. This creates more uncertainty about the profitability of the quarter and therefore deferrable tax assets are not applicable yet

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