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The acquisition of a business can significantly impact the acquiring company’s estimated annual expected tax rate. Because a business combination is a transaction that is not typically accounted for in periods prior to the acquisition date, no effect should be given to a business combination in the estimated annual ETR before the interim period in which the business combination is consummated.
Beginning with the interim period in which the purchase is consummated, the estimated annual ETR for the year would be calculated to reflect the expected results, including the results of the acquired company. That rate would be applied to the consolidated year-to-date ordinary income/(loss) to compute the year-to-date tax provision/(benefit) on ordinary income/(loss).
When assessing changes to the valuation allowance as a result of a business combination in an interim period, the valuation allowance release would follow the general approach used when releasing a valuation allowance at an interim period (see Example TX 16-5).
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