Exam 8: Consolidated Tax Returns

Correct Answer:

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The benefit that the controlled group receives from the 15%,25%,and 34% graduated tax rates are limited.The group only receives one rate reduction for each reduced tax rate bracket.Where no special apportionment plan is adopted,each bracket is divided equally between the members of the controlled group.Under our facts,Alpha,Beta,Gamma,and Delta each would be allocated $12,500 of the 15% bracket,$6,250 of the 25% bracket,and $2,481,250 of the 34% bracket.This method will not result in the lowest overall tax liability if,for example,one or more of the four- member corporations of the controlled group incurs a loss or has taxable income below $18,750 ($12,500 + $6,250).In this situation,the tax savings generated by the lower two rate brackets will not be fully used.A solution to this problem is the adoption of a special plan of apportionment.With this plan,the group has the latitude to allocate the brackets so as to achieve the maximum tax savings by allocating the reduced tax rates to each member corporation based on its level of taxable income.This plan must be filed with each corporation's tax return and is elected each year.Therefore,it can be adjusted to fit each year's facts.Since Delta is a nonincludible corporation,it will receive an allocable share of the reduced tax rate benefits unless a special apportionment plan is elected,even though it is not part of the consolidated return.