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.

Answer 1

C) $84 million

Step-by-step explanation:

Given that:

Taxable income = $255 million

Tax credit = $30 million

Tax rate = 40% = 0.4

Therefore, Tax payable = (Tax income × Tax rate) - Tax credit = ($255 million × 0.4) - $30 million tax credit = $72 million.

Since Warren believes the likelihood that a $30 million is sustained is 25%, and the likelihood that an $18 million is sustained is 30%, the total likelihood = (25% + 35% = 55% > 50%)

Therefore the liability for uncertain tax positions = $30 million - $18 million = $12 million.

Warrens income tax expense for the year = Tax payable + uncertain tax positions = $72 million + $12 million = $84 million.