b. AC I27.108d states that goodwill is not a deferred tax liability if for tax purposes it is not deductible. IRC Sec 197 permits deductions of goodwill, however, tax basis is zero. Is goodwill a deferred tax asset in the above fact pattern?
c. Should all items be netted to compute a non-reportable deferred tax
asset (AC I27.108e) of 1.7 million (inside basis of subsidiary) or should
each be taken individually?
|Tax Basis||Tax Basis||GAAP Basis|
|Cash, receivable and prepaids||100,000||10,000||110,000||n/a|
|Investment in subsidiary||3,500,000||0||0||Deferred Asset?|
|Depreciable assets||0||1,790,000||3,000,000||Deferred Liab?|
|Goodwill (before adjustment for deferred income tax)||0||0||590,000||Deferred Liab?|
2. If Subsidiary subsequently sells its assets (outside the consolidated
group) for 4 million, it will sustain a $2,220,000 taxable gain and in
consolidation incur a tax of $755,000 on such. In liquidation, Parent will
sustain a nondeductible [subsidiary stock loss disallowance rules (Reg
1.1502-20)] loss of $1,820,000 due to the fact that its basis is
in excess of liquidation proceeds. [Computed as beginning tax basis of
3,500,000 plus gain of 2,220,000 less tax of 755,000 less liquidation proceeds
3,145,000.] Thus, loss is not netted against Subsidiary's gain.
2. AC I27.110h anticipates that business combinations will result in deferred income tax assets and liabilities.
3. However, AC I27.108d indicates an item such as Goodwill that will not amortize over time or only at the end of the entity should not result in a deferred tax asset or liability. Evidently, differences that do not reverse until the "end" (sale of entire business) are not recognized. The "investment in subsidiary" account is exactly the opposite of Goodwill, an "end game" asset. Nonetheless, KPMG's publication makes it clear that all such assets and liabilities, except for life insurance type items, result in deferred taxes.
4. ACI27.116 states that deferred assets (net of allowances) and liabilities are separately aggregated before netting of long and short term portions, making AICPA Technical's opinion below questionable.
5. Looking at the actual tax implications of an asset sale one would
conclude that a deferred tax liability exist, even if it is an end game
liability, and should be booked.
AICPA Technical support said that there is no deferred income tax asset or liability due to the fact that the 3.5 million cost basis of stock is being allocated amongst 3.5 million of assets, thus tax basis equals book basis. However, technician was unable to offer any further explanation and abruptly ended the call.
Client believes that end game deferred assets and liabilities, goodwill or otherwise should not be booked.
KPMG's "Accounting for Income Taxes, An Analysis of FASB Statement
109, copyright September 1992" answers by question:
a. Yes (Page 32)
b. Yes (Page 37)
c. Each individually (Page 155)
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