12. Uncertain Tax Positions RTZ Corporation is a nancial sponsor of a hospital t
ID: 2458693 • Letter: 1
Question
12. Uncertain Tax Positions RTZ Corporation is a nancial sponsor of a hospital that occupies the adjacent property lot. RTZ donates $500,000 per year to the hospital. It ordinarily treats these payments as tax-deductible charitable donations. Recently, the two companies have elected to share the construction costs of a parking garage. The garage will remain the property of the hospital, but one level of the garage is available for use by RTZ’s employees. RTZ has paid a total of $1,250,000 to the hospital in the year in which the parking garage was constructed, and it wants to allocate the full amount as a tax-deductible donation. RTZ’s tax lawyers determine that if the IRS investigates this transaction, only $500,000 is very likely to be sustained. The remaining $750,000 is very likely to be reclassied as a capitalized asset. The CFO asserts, ‘‘Until we’re told otherwise, we are going to include the full $1,250,000 as a charitable deduction in determining our income tax this year.’’ Is the CFO’s proposal GAAP-compliant? Research the appropriate Codication and draft a short memo explaining why or why not
Explanation / Answer
FAS 116 talks about the Accounting for Contributions Received and Contributions Made.
RTZ’s tax lawyers are right in determining that if the IRS investigates this transaction, only $500,000 is very likely to be sustained. The remaining $750,000 is very likely to be reclassied as a capitalized asset.
As the standard specifies that the fair value of the contribution that the donor can recognize is the one to which the donor has no rights.
In this case the donor RTZ would use the parking lot for iparking the cars of its employees and it is not solely used by the donee.
This breaks the spirit of this standard and the concept of donation is also not satisfied.
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