Exam 8: Consolidated Tax Returns

A limited partnership can join the parent's consolidated group for book and for tax purposes.

The right to file on a consolidated basis is available to a group of corporations when they constitute a "parent-subsidiary affiliated group."

For consolidated tax return purposes, purchased goodwill is amortized as a deduction to taxable income over 15 years. Under financial accounting rules, 40-year amortization is allowed.

Generally, when a subsidiary leaves an on-going consolidated group, it must wait ____________________ years before it again can reenter the parent's consolidated group.

ParentCo's controlled group includes the following members. ParentCo owns all of the stock in each of the listed entities. Which entities can join ParentCo in a consolidated return? ∙ SubCoA, a manufacturer incorporated in India. ∙ SubCoB, a U.S. manufacturer. ∙ SubCoC, a U.S. S corporation. ∙ SubCoD, a U.S. partnership. ∙ SubCoE, a U.S. limited liability company (LLC). ∙ SubCoF, a U.S. manufacturer incorporated in Puerto Rico. ∙ SubCoG, a U.S. manufacturer that claims a deduction for its production activities (DPAD). ∙ SubCoH, a U.S. tax-exempt museum.

Match each of the following items with the appropriate description, indicating whether the item's treatment for financial accounting and Federal income tax purposes is the same or not. -Parent owns 100% of a U.S. partnership and wants the entity to join the consolidated group.

If subsidiary stock is redeemed or sold outside the group when an excess loss account exists, the selling parent corporation recognizes ordinary income equal to the account balance.

Gold, Silver, and Bronze constitute a Federal consolidated tax return group. Which of the members is responsible to pay the tax liability-the parent, the subsidiaries, or both? How are these tax-payable amounts determined? Hint: Use the term tax-sharing agreement in your answer.

Where are the controlling Federal income tax rules regarding consolidated tax returns to be found? What is the general philosophy of those rules? Do they tend to be pro- or anti-taxpayer?

A subsidiary corporation must leave the consolidated group if it is restructured as an LLC.

Calendar year Parent Corporation acquired all of the stock of SubCo on January 1, Year 1, for $500,000. The subsidiary's operating gains and losses are shown below. In addition, a $50,000 dividend is paid early in Year 2. Complete the following chart, indicating the appropriate stock basis and excess loss account amounts. Excess Operating Stock Loss Year Gain / Loss Basis Account 1 (\ 100,000) ? ? 2 (\ 150,000) ? ? 3 \ 300,000 ? ?

Match each of the following items with the appropriate description, indicating whether the item increases or decreases the parent's basis in the stock of a subsidiary. -Member's operating gains/profits

When an affiliated group elects to file Federal consolidated income tax returns, it gives up the ability to claim a ____________________ deduction for distributions of profits paid to other members.

In the year that the group terminates its consolidation election, a consolidated group's deferred gain from an intercompany asset sale between affiliates is recognized in full, under the ____________________ rule.

List some of the non-tax reasons that groups of corporations form conglomerates and may be eligible also to file consolidated Federal income tax returns.

A penalty can be assessed by the IRS if the parent corporation does not keep good records to support the computation of a subsidiary's stock basis.

When both apply, the § 382 NOL limitation rules override the ____________________ limits.

SubCo sells an asset to ParentCo at a realized gain. While ParentCo still holds the asset, SubCo leaves the consolidated group. As a result:

Calendar year ParentCo acquired all of the stock of SubCo on January 1, Year 1, for $1,000,000. The parties immediately elected to file consolidated income tax returns. SubCo generated taxable income of $250,000 for Year 1 and paid a dividend of $100,000 to ParentCo. In Year 2, SubCo generated an operating loss of $350,000, and in Year 3 it produced taxable income of $750,000. As of the last day of Year 3, what was ParentCo's basis in the stock of SubCo?

The Olson losses offset the Holloway income dollar for dollar, but they do not become large enough to produce a consolidated loss. Because both corporations produce ordinary income, there are no adjustments to make using the format of Exhibit 8.3. There are no consolidated NOL carryovers in any of the specified years. -For each of the indicated tax years. compute consolidated taxable income for the calendar year Whitman Group, which elected consolidated status immediately upon creation of the two member corporations in January Year 1. All recognized income related to the data processing services of the firms. No intercompany transactions were completed during the indicated years. Tax Year Whitman Corp oration Drap er Corporation Year 1 \ 250,000 \ 90,000 Year 2 250,000 (170,000) Year 3 250,000 (560,000) Year 4 250,000 145,000