QUESTION
Earth Tones, Inc. was a wholly owned subsidiary of Cutlinger Corporation. Several years ago, Earth Tones acquired numero
Category: Business
Subject: Accounting
Due Date: 12/27/2014
Question Asked: 2014-12-28 02:26:02
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User: ZAZU2014
Rating: C+ (1)
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Questions: 60
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Earth Tones,
Inc. was a wholly owned subsidiary of Cutlinger Corporation. Several
years ago, Earth Tones acquired numerous oil leases and began
exploration activities to determine their suitability for commercial
exploitation. The tests were negative. But during the time Earth Tones
owned the land, environmental damage resulted in that required
expenditures of about $30 million to reverse.
These activities cause the value of the Earth Tone stock to fall to
zero. Cutlinger found a buyer for the Earth Tone shares, however.
Courtney Kent purchased the stock for $100,000, but she refused to
assume the obligation for the environmental damage. Those obligations
were spun off into a new wholly owned Cutlinger subsidiary, Western Gold
Inc. and the sale was completed. Cutlinger claimed a $20 million
long-term capital loss on its return for the year of the sale of the
Earth Tones stock.
Western Gold was more successful in purchasing and developing productive
oil and natural gas wells, including some shale fields, where it is
conducting highly profitable fracking operations. Western, flush with
cash, paid the outstanding $30 million obligation of Cutlinger to carry
out the environmental remediation.
Cutlinger filed consolidated Federal income tax returns with both Earth
Tones and Western Gold. The $30 million Western Gold deduction for the
environmental cleanup reduced Cutlinger’s consolidated taxable income
for group in the year of payment.
On audit, the IRS disallowed the entire remediation deduction. Mary
Ellen Rogers, tax director of Cutlinger, wants your analysis of the
situation. Write a letter to her addressing the IRS’S position.
Cutlinger’s corporate offices are at 1101 Office Strip Lane, Suite 3,
Hudson, OH 44237.
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