Trim, Fit, and Fun, Inc. (TuFF)



Trim, Fit, and Fun, Inc. (TuFF)

A. Federal Income Tax Return Reporting Related to Jury Award

Deduction. What conditions must be met in order for TuFF to be able to deduct the $51 million (net) Smith litigation award? What Code provisions apply?

In order for TuFF to be able to deduct the $51 million (net) Smith litigation award, the Company should follow a strategy to resolve the doubt about its ability to continue as a going concern. The company should vigorously contest the outcome of this jury verdict through post trial proceedings and appeal, in order to obtain a reversal or substantial reduction of the award. It is recommended that these financial statements be read in conjunction with the financial statements and other information included in the Company's reports.

Effect if Litigation Award is NOT Deducted in 2012. If the Smith award is NOT deductible in 2012, in general terms, how would the 2012 federal income tax be determined?

If the Smith award is NOT deductible in 2012, it will have positive effect on the Operating income. When Smith award was deducted, there was an operating loss of -45216. However, when Smith award was not deducted, it converted in to an operating income of 5,784. The Loss before income taxes has also turned positive i.e. 5,945, due to the increase in operating income (Tuller, 2008). Since the federal statutory rate of 34% is applicable on the amount of loss or income before income taxes, the Income tax expense (benefit) has also increased from 7,220 to 26,283.

Effect if Litigation Award IS Deducted in 2012. If the Smith award IS deductible in 2012 and creates an NOL, can that loss be carried forward or back? If so, what rules apply? What is the result? What complications arise? What planning techniques can be used to maximize any benefit of the NOL?

If the Smith award IS deductible in 2012 and creates an NOL, the loss can be carried forward. In this case, the amount to be carried forward is -$53,696. Company can elect to carry forward an NOL up to 20 years. If taxes are raised in the future, Company may be better off taking a tax loss later, rather than going back to try to use it to offset profits in the past (Keyn, 2006). If Company thinks their business has a lot of potential for growth, and profit, over the next 20 years, they might decide to forgo the carry back possibilities and go with the carry forward.

B. Alternative 1: Sale of Assets to Sports Camp, USA (SCU)

How will TuFF's sale of assets at the amounts indicated in Quinn's schedule be treated by TuFF?

The amounts indicated in Quinn's schedule will be treated by TuFF as loss on sale of assets. This is due to the fact that the fair value of assets is $125000 and SCU has agreed to purchase the same assets for $120000. This loss will be accounted as decrease in value of Goodwill and going concern (Kess, ...