Exam 8: Consolidated Tax Returns

Giant Ltd. owns 100% of the stock of Middle Corporation. BottomCorp is owned 60% by Giant and 40% by Middle. Giant's Federal consolidated income tax return includes both Middle and Bottom.

The Rub, Spill, and Ton Corporations file Federal income tax returns on a consolidated basis. The group's tax return currently is under audit. Under a valid tax­sharing agreement, each corporation is liable for one­third of the group's consolidated tax liability. The affiliates have agreed with the auditor that the group's unpaid liability for the year is $90,000. Because of an incorrect tax return position, another $3,000 in interest and an $18,000 penalty is attributable solely to Ton. At present, only Rub is solvent and has the cash with which to make such a tax payment. What is the maximum amount for which the government could be successful in forcing Rub to satisfy the outstanding liabilities of the consolidated group?

Which of the following is not a requirement that must be met before a group files a consolidated return?

Certain business entities are ineligible to join an affiliated group and file a consolidated Federal income tax return. List three or more entities that cannot be part of a Federal consolidated tax return group.

Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax return. a. Advantage of consolidating b. Disadvantage of consolidating c. Neither an advantage nor a disadvantage -A new affiliate uses the LIFO method for inventories

Which of the following items is not computed on a consolidated basis?

One of the motivations for the consolidated return rules is to discourage conglomerates from trafficking in the deductible of other entities.

Cooper Corporation joined the Duck consolidated Federal income tax return group, when Cooper held a $1 million NOL carryforward. In its first year as a part of the Duck group, Cooper generated a $150,000 operating profit. For that year, Duck can deduct only $150,000 of Cooper's NOL in computing consolidated taxable income.

If, on joining an affiliated group, SubCo has a different tax year than that of ParentCo, SubCo must switch its year- end to ParentCo's by the end of the (first, second, etc.) tax year after the election to consolidate.

Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax return. a. Advantage of consolidating b. Disadvantage of consolidating c. Neither an advantage nor a disadvantage -Binding nature of election over multiple tax years

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. a. Tax and book treatment is the same b. Tax and book treatment differ -Joining the consolidated group is mandatory if ownership requirements are met by the entities.

Outline the major advantages and disadvantages of filing Federal corporate income tax returns on a consolidated basis. Limit your comments to the income tax effects of the election.

A corporation organized in Germany and wholly owned by the U.S. parent can be included in a Federal consolidated return.

Parent's basis in the stock of Child, its subsidiary, is $1 million at the beginning of the year. Child's share of consolidated taxable income this year is a $1.25 million operating loss. Parent's basis in the Child stock now is zero. Explain.

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

A Federal consolidated group can claim a dividends received deduction for payments that the parent receives from other affiliates.

The Philstrom consolidated group reported the following taxable income amounts. Parent owns all of the stock of both Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Parent.

Consolidated group members each are jointly and severally liable for the entire consolidated income tax liability.

ParentCo's separate taxable income was $200,000, and SubCo's was $50,000. Consolidated taxable income before contributions was $200,000. Charitable contributions made by the affiliated group included $60,000 by ParentCo and $10,000 by SubCo. Compute the group's maximum charitable contribution deduction.

After a takeover, the parent's balance sheet shows a fair market value cost basis in the subsidiary, for both book and tax purposes.