Exam 8: Consolidated Tax Returns

Compute consolidated taxable income for the calendar year Holloway Group, which elected consolidated status immediately upon creation of the two member corporations in January 2010. All recognized income related to the data processing services of the firms. No intercompany transactions were completed during the indicated years.

All affiliates joining in a newly formed consolidated return must consent to the election on Form 1122, as attached to the tax return for the group.

SubCo sells an asset to Parent at a realized loss. That loss is not recognized by the group in the year of the sale, because of the:

ParentCo owned 100% of SubCo for the entire year, and both companies use the accrual method of tax accounting. During the year, SubCo purchased $20,000 of supplies from ParentCo. In addition, SubCo provided internal audit services to ParentCo, which were worth $40,000. Including these transactions, ParentCo's separate taxable income was $75,000, and SubCo's separate taxable income was $100,000. What is the group's consolidated taxable income for the year?

ParentCo purchased all of the stock of SubCo on January 1, 2011, for $500,000. SubCo produced a loss for 2011 of $150,000 and distributed cash of $25,000 to ParentCo. In 2012, SubCo generated a loss of $450,000; in 2013, it recognized net income of $45,000. What is ParentCo's capital gain or loss if it sells all of its SubCo stock to a nongroup member on January 1, 2014, for $50,000?