Memo
To: Chief Executive Officer
From: Nicholas Petrovich cc: Controller
Date: February 12, 2013
Re: Income Taxes After reviewing Deloitte (D) guidance and the requirements of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 740, Income Taxes, we addressed (1.) What are the four possible sources of taxable income according to ASC 740? (2.) How much of the reversing taxable temporary differences may be considered in estimating taxable income? (3a.) In evaluating the income LOL is projecting related to future operations, is LOL in a cumulative loss position? (3b.) May LOL exclude the impact of the impairment of the non deductible goodwill when estimating future taxable income? (3c.) May LOL exclude the expense from writing off the accounts receivable from the customer who declared bankruptcy when evaluating the projections of future income? (3d.) Does the evidence of historic losses affect our ability to accept the company’s estimate of future growth? (3e.) In evaluating the income that LOL is projecting related to future operations, what evidence might you ask for to support the company’s projections? (4.) Would the tax- planning strategy to sell and lease back manufacturing equipment be a tax- planning strategy that is considered prudent and feasible? (5.) Would the tax-planning strategy to sell but not lease back the primary manufacturing facility be a tax-planning strategy that is prudent and feasible? We first looked to see if a valuation allowance should be necessary for the deferred tax asset (DTA). The following analysis helped us reach our conclusion that a valuation allowance was necessary.

Four sources of taxable income
According to ASC 740-10-30-18 there are four possible sources of taxable income to realize a tax benefit for deductible temporary differences and carryforwards:
LOL may not use tax