McGraw-Hill's Taxation of Business Entities 3rd Edition by Connie Weaver, Brian Spilker, Edmund Outslay, John Robinson, Ronald Worsham, Benjamin Ayers, John Barrick

Exercise 5

Spartan Builders Corporation is a builder of high end housing with locations in major metropolitan areas throughout the Midwest. At June 30, 2011, the company has deferred tax assets totaling $10 million and deferred tax liabilities of $5 million, all of which relate to U.S. temporary differences. Reversing taxable temporary differences and taxable income in the carryback period can be used to support approximately $2 million of the $10 million gross deferred tax asset. The remaining $8 million of gross deferred tax assets will have to come from future taxable income.
The company has historically been profitable. However, significant loses were incurred in fiscal years 2009 and 2010. These two years reflect a cumulative loss of 10 million, with losses of $3 million expected in 2011. $7 million of the losses was due to a write-down of inventory. Beginning in fiscal 2012, management decided to get out of the metropolitan Chicago market, which had become over-saturated with new houses.
Evaluate the company's need to record a valuation allowance for the $10 million of gross deferred tax assets. What positive and negative evidence would you weigh