Question

Warren Company has taken a position in its tax return to claim a tax credit of $30 million (direct reduction in taxes payable) and has determined that its sustainability is "more likely than not," based on its technical merits. The tax credit would be a direct reduction in current taxes payable. Warren believes the likelihood that a $30 million, $18 million, or $6 million tax benefit will be sustained is 25%, 30%, and 45%, respectively. Warren's taxable income is $255 million for the year. Its effective tax rate is 40%. Warren's income tax expense for the year is?

            A)         $12 million.

            B)         $72 million.

            C)         $84 million.

            D)         $102 million.

Please provide details if possible, especially on the tax benefit probabilities. Thank you

Answer 1

Answer

(c)$84 million

Explanation:

Particulars	Amount ($)
Tax credit	$72 million
Recognized liability for uncertain tax positions (Tax payable - Uncertain tax position amount) ($ 30*- $ 18)	$12 million
Warren's income tax expense for the year	$84 million

*Tax payable = ($255 million × 40/100) = $30 million

Uncertain tax position amount “more likely than not” to be sustained = $18 million (there is a 25% likelihood that $30 million is sustained and a 30% likelihood that $18 million is sustained, and (25% + 30% = 55%) > 50%.So the amount that is “more likely than not” to be sustained is $18 million).