South Western Federal Taxation 2015 Corporations Partnerships Estates and Trusts 38th Edition Hoffman Test Bank

South-Western Federal Taxation 2015
Corporations Partnerships Estates and

Trusts 38th Edition Hoffman Test Bank
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CHAPTER 8: CONSOLIDATED TAX RETURNS
1. Business reasons, and not tax incentives, constitute the primary motivation for most corporations to form a
conglomerate and file tax and financial accounting reports on a consolidated basis.
a. True
b. False
ANSWER: True
RATIONALE: Nontax incentives predominate over tax motivations.
2. A consolidated Federal income tax return may be the product of a merger of the affiliates, or of a stock-for-
assets takeover.
a. True
b. False
ANSWER: True
RATIONALE: The creation of an affiliated group might be the result of a tax-deferred restructuring of the
capital of the affiliates.
3. The consolidated return rules are designed to allow a tax-neutral means by which to elect to file on a
consolidated basis.
a. True
b. False
ANSWER: True
RATIONALE: The rules are designed to achieve organizational neutrality.
4. Most of the Federal consolidated income tax return rules are found in detailed sections of the tax Regulations.
a. True
b. False
ANSWER: True
RATIONALE: Legislative Regulations are the source of most of the consolidated return rules. These
regulations seldom are challenged successfully in the courts.
5. The rules for computing Federal consolidated taxable income are some of the most complex in the tax law.
a. True
b. False
ANSWER: True
RATIONALE: The tax rules in this area can be difficult to understand.
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Chapter 8: Consolidated Tax Returns
6. 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.
a. True
b. False
ANSWER: False
RATIONALE: For book purposes, changes in the value of the purchased goodwill can become revenue and
expense items, but no amortization is allowed over a fixed period of years.
7. A limited partnership can join the parent’s consolidated group for book and for tax purposes.
a. True
b. False
ANSWER: False
RATIONALE: Only U.S. C corporations can join a Federal consolidated return.
8. After a takeover, the parent’s balance sheet shows a fair market value cost basis in the subsidiary, for both
book and tax purposes.
a. True
b. False
ANSWER: False
RATIONALE: The tax rule as to the basis of the subsidiary stock depends on the form of the takeover:
carryover basis is used where the tax-deferred reorganization rules are met (see Chapter 7), but
a FMV basis is taken when the subsidiary is acquired by purchase in a taxable event.
9. When the parent acquires 51% of a subsidiary U.S. corporation, the subsidiary can join the consolidated
financial statements and the consolidated tax return of the parent.
a. True
b. False
ANSWER: False
RATIONALE: For tax purposes, the ownership requirement usually is 80% or more of the subsidiary’s stock.
10. A consolidated Federal income tax group must meet the eligibility requirements of the Regulations on the first
day of the first year for which the election to consolidate is effective, and then on the last day of every
succeeding tax year.
a. True
b. False
ANSWER: False
RATIONALE: The compliance and eligibility rules of the consolidated tax return must continue to be met on
every day for which the consolidation election is in effect.
11. The right to file on a consolidated basis is available to a group of corporations when they constitute a “parent
subsidiary affiliated group.”
a. True
b. False
ANSWER: True
RATIONALE: Consolidated return status is available to affiliated, not controlled, groups.
12. A Federal consolidated group can claim a dividends received deduction for payments that the parent receives
from other affiliates.
a. True
b. False
ANSWER: False
RATIONALE: A consolidated group eliminates an intercompany dividend. As a result, no dividends received
deduction is available for these payments.
13. 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.
a. True
b. False
ANSWER: True
RATIONALE: The required ownership is 80% for tax purposes, counting multiple tiers of ownership among
the group members.
14. A subsidiary corporation must leave the consolidated group if it is restructured as an LLC.
a. True
b. False
ANSWER: True
RATIONALE: Non-corporate entities are not eligible to join a Federal consolidated group. The rules to
qualify to elect as a consolidated group must continue to be met.
15. A corporation organized in Germany and wholly owned by the U.S. parent can be included in a Federal
consolidated return.
a. True
b. False
ANSWER: False
RATIONALE: Only affiliates that are organized in the U.S. or in a U.S. possession can join a consolidated
group.
16. A tax-exempt charitable trust, created by a U.S. C corporation, can join in a Federal consolidated return.
a. True
b. False
ANSWER: False
RATIONALE: Tax-exempt organizations are ineligible to join Federal consolidated returns.
17. A joint venture, taxed like a partnership, can join in a consolidated Federal income tax return.
a. True
b. False
ANSWER: False
RATIONALE: All group members must be U.S. corporations.
18. A calendar year parent corporation wants to file its tax returns on a consolidated basis with its affiliates. The
group’s election to file consolidated Federal corporate income tax returns must be made by the extended due
date of the first return on which the consolidation is applied (i.e., September 15).
a. True
b. False
ANSWER: True
RATIONALE: The reference date for the election is the tax year of the group’s parent corporation.
19. Campbell Corporation left the Crane consolidated tax return group after the calendar 2014 tax year.
Generally, Crane can add Campbell back to the consolidated group, but no earlier than for the 2020 tax year.
a. True
b. False
ANSWER: True
RATIONALE: In most cases, an affiliate can rejoin the same consolidated group only after five tax years pass.
20. The calendar year Sterling Group files its Federal corporate income tax return on a consolidated basis. The
group’s Form 1120 is due on March 15, or September 15 if an extended due date is approved by the IRS.
a. True
b. False
ANSWER: True
RATIONALE: A six-month filing extension can be approved automatically by the IRS.
21. All affiliates joining in a newly formed consolidated return must consent to the election on Form 1122, as
attached to the Form 1120 for the group.
a. True
b. False
ANSWER: True
22. Consolidated group members each are jointly and severally liable for the entire consolidated income tax
liability.
a. True
b. False
ANSWER: True
23. With the filing of its first consolidated return, the parent corporation of a Federal consolidated group makes
an irrevocable election as to how the group will allocate a tax year’s income tax liability among the group
members.
a. True
b. False
ANSWER: False
RATIONALE: Group members all must agree on the tax-sharing method that is used. That election can be
changed, without IRS permission, for every tax year.
24. A Federal consolidated tax return group can apply the “relative taxable income” method as a means to
apportion the tax liabilities of the members among the affiliates.
a. True
b. False
ANSWER: True
RATIONALE: The regulations allow other tax-sharing methods as well.
25. Each of the members of a Federal consolidated tax return group can claim its own $40,000 AMT exemption,
subject to phase-out.
a. True
b. False
ANSWER: False
RATIONALE: Affiliated group members share one AMT exemption, as do the members of all parent-
subsidiary controlled groups.
26. Consolidated group members each must use the same tax year end, and all of the members must use the same
tax accounting methods (e.g., LIFO or FIFO).
a. True
b. False
ANSWER: False
RATIONALE: Members must conform to the parent’s tax year, but tax accounting methods can differ among
the members.
27. When the net accumulated taxable losses of a subsidiary exceed the parent’s acquisition price, the parent’s
basis in the subsidiary’s stock becomes negative.
a. True
b. False
ANSWER: False
RATIONALE: An excess loss account is created. Stock basis in a subsidiary cannot be less than zero.
28. 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.
a. True
b. False
ANSWER: False
RATIONALE: The parent usually recognizes a capital gain equal to the excess loss account. Any remaining
gain often constitutes ordinary income.
29. In computing consolidated E & P, dividends paid to the parent by group members are subtracted.
a. True
b. False
ANSWER: False
RATIONALE: There is no such concept as consolidated E & P in the Federal income tax law. Each entity
accounts for its own E & P on a separate basis, including its share of gain/loss from
intercompany transactions, and decreasing E & P by its apportioned share of consolidated tax
liabilities. Dividends paid within the group are eliminated when the consolidated tax return is
prepared.
30. In computing consolidated E & P, a negative adjustment is allowed for the group’s disallowed travel and
entertainment expenditures.
a. True
b. False
ANSWER: False
RATIONALE: There is no such concept as consolidated E & P in the Federal income tax law. Each entity
accounts for its own E & P on a separate basis, reducing E & P for its allocated share of the
year’s Federal income tax liability.
31. In computing consolidated taxable income, the domestic production activities deduction (DPAD) is removed
from the taxable incomes of the group members and determined on a group basis.
a. True
b. False
ANSWER: True
32. In computing consolidated taxable income, compensation amounts are removed from the taxable incomes of
the group members and determined on a group basis.
a. True
b. False
ANSWER: False
RATIONALE: Compensation is not a group item.
33. In computing consolidated taxable income, capital gains and losses are removed from the taxable incomes of
the group members and determined on a group basis.
a. True
b. False
ANSWER: True
34. The starting point in computing consolidated taxable income is the sum of the separate Federal taxable
income amounts of the affiliated group members.
a. True
b. False
ANSWER: True
35. An example of an intercompany transaction is the use of the trademarks of the parent corporation by a
subsidiary for an arm’s length licensing fee.
a. True
b. False
ANSWER: True
RATIONALE: The payor’s deduction is deferred under § 267 until the recipient recognizes gross income.
36. When a subsidiary sells to the parent some business-use property that has appreciated from its $20,000 basis
to a $50,000 fair market value, the subsidiary immediately recognizes $30,000 ordinary income on the
a. True
b. False
ANSWER: False
RATIONALE: The gain is deferred until the property leaves the group by sale or other exchange. The amount
of the gain for purposes of the eliminating entry is $30,000.
37. Lacking elections to the contrary, Federal consolidated NOLs are carried back two years and then forward
twenty years.
a. True
b. False
ANSWER: True
38. When a consolidated NOL is generated, each affiliate is allocated a share of the loss.
a. True
b. False
ANSWER: True
RATIONALE: Apportionment of the group’s NOL is made among the members, on a proportionate basis.
39. Keep Corporation joined an affiliated group by merger in 2014. The group generated a consolidated 2014
NOL, and Keep’s share of the loss was $50,000. Lacking an election by the parent to the contrary, Keep can
carry the loss back to its separate 2012 return, and the parent can claim a tax refund.
a. True
b. False
ANSWER: False
RATIONALE: Unless the parent elects to forgo the loss carryback, any refund is paid to Keep separately.
40. Keep Corporation joined an affiliated group by merger in 2010. The group generated a 2014 consolidated
NOL, and Keep’s share of the loss was $50,000. Keep’s share of the loss is included in the group’s NOL
carryforward to 2015.
a. True
b. False
ANSWER: True
41. When a member departs from a consolidated group, it leaves behind any NOLs that it generated while in the
group. The parent corporation and remaining affiliates apply those NOLs against future consolidated taxable
income.
a. True
b. False
ANSWER: False
RATIONALE: The affiliate takes its apportioned loss with it.
42. 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.
a. True
b. False
ANSWER: True
RATIONALE: The deduction for a SRLY loss is limited to the lesser of the loss corporation’s current or
cumulative positive contribution to the group’s consolidated taxable income. Here, that
amount is the current year’s $150,000 profit.
43. 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 taxable
loss. For that year, Duck cannot deduct any of Cooper’s NOL in computing consolidated taxable income.
a. True
b. False
ANSWER: True
RATIONALE: The deduction for a SRLY loss is limited to the lesser of the loss corporation’s current or
cumulative positive contribution to the group’s consolidated taxable income. Here, that
amount equals the current-year Cooper profit.
44. The losses of a consolidated group member are subject to both the SRLY rules and a § 382 limitation. When
both limitations apply, the § 382 restrictions override the SRLY rules for this affiliate.
a. True
b. False
ANSWER: True
RATIONALE: Section 382 limits prevail over SRLY restrictions, under the “overlap rule.”
45. A Federal consolidated filing group aggregates its separate charitable contributions for the tax year,
deductions for which then are subject to an annual limitation of 10% of consolidated taxable income.
a. True
b. False
ANSWER: True
46. The foreign tax credit of a consolidated group can be greater than the sum of the credits of the group members
when filing separately.
a. True
b. False
ANSWER: True
RATIONALE: Optimizing deductions and credits is a potential advantage of consolidation.
47. 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.
a. True
b. False
ANSWER: True
48. Which of the following potentially is a disadvantage of electing to file a Federal consolidated corporate
income tax return?
a. The consolidated ACE adjustment could be reduced for the filing group.
b. The taxation of intercompany dividends is not eliminated. Recognition of losses from certain intercompany
transactions is deferred.
c. The tax basis of investments in the stock of subsidiaries is unaffected by members contributing to
consolidated taxable income.
d. The § 1231 loss of one member is not offset against the § 1231 gain of another member of the group.
ANSWER: b
49. Which of the following is not generally a disadvantage of filing Federal corporate income tax returns on a
consolidated basis?
a. Net capital losses from one affiliate can offset the capital gains from another. This can reduce the tax
liabilities of the group as a whole.
b. Realized losses from transactions between affiliates are not recognized immediately.
c. Compliance costs usually are higher when a consolidation election is in effect.
d. The election generally is binding for future tax years.
ANSWER: a
RATIONALE: This is an advantage of consolidation.
50. Which of the following potentially is a disadvantage of electing to file a Federal corporate income tax
consolidated return?
a. Increased deduction amounts when computations are made on a group basis.
b. Deferral of gains realized in transactions between group members.
c. Increased basis in the stock of a subsidiary that generates annual taxable income.
d. Additional administrative costs in complying with the election.
ANSWER: d
RATIONALE: All of the items may be computed on a group basis and be used to manage the tax liabilities of
the group as a whole.
51. Which of the following is not a requirement that must be met before a group files a consolidated return?
a. None of the corporations can be ineligible under the Code to file on a consolidated basis with the others.
b. All of the corporations must be members of an affiliated group.
c. The group members must share the same inventory accounting method.
d. The group members must share a common tax year end.
ANSWER: c
52. Which of the following tax effects becomes more restrictive if an election is made to file a group’s Federal
corporate income tax returns on a consolidated basis?
a. Choice of members’ tax accounting methods
b. Use of the lower tax rate brackets.
c. Use of the $40,000 AMT exemption.
d. Members who are liable for the consolidated tax liability.
ANSWER: d
RATIONALE: The others are treated alike even if no election to consolidate is made, because the controlled
group rules also apply. Consolidated group members are jointly and severally liable for the
consolidated tax liability.
53. Which of the following entities is eligible to file Federal income tax returns on a consolidated basis?
a. A U.S. C corporation that files on a separate basis for its state income tax returns.
b. The charitable foundation of a U.S. C corporation.
c. The liquidating trust of a U.S. C corporation.
d. A wholly owned French subsidiary of a U.S. C corporation.
ANSWER: a
54. Which of the following entities is eligible to file Federal income tax returns on a consolidated basis?
a. Professional sports team operating as a limited partnership.
b. Japanese corporation engaged in multinational operations, including two-thirds of its activities in the U.S.
c. Japanese corporation engaged in multinational operations, including one-third of its activities in the U.S.
d. U.S. corporation engaged in the nuclear energy industry.
ANSWER: d
55. Which of the following entities is eligible to join in a Federal consolidated return?
a. A sole proprietor with annual sales of more than $50 million.
b. A U.S. corporation’s § 401(k) plan.
c. A partnership organized in Germany.
d. A corporation that operates in seven different U.S. states.
ANSWER: d
56. 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 tax-sharing agreement, each corporation is liable for one-third 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?
a. $0
b. $90,000
c. $93,000
d. $108,000
e. $111,000
ANSWER: e
RATIONALE: Each member has joint and several liability for the entire amount of the group’s income taxes,
interest, and penalties outstanding.
57. How must the IRS collect the liability for Federal taxes from among a consolidated group?
a. Against the parent of the group.
b. According to the members’ current internal taxsharing agreement.
c. Against the member of the group that generated the tax.
d. No particular order of collection is prescribed by IRS rules.
ANSWER: d
RATIONALE: The IRS is not bound to follow a group’s internal taxsharing agreement.
58. How do the members of a Federal consolidated group split among themselves the benefits of the lower tax
brackets on the first $75,000 of taxable income?
a. According to their relative net asset holdings.
b. According to an internal tax-sharing agreement.
c. According to an internal tax-sharing agreement, which may be modified by the IRS upon audit.
d. According to a tax-sharing agreement that must be approved by the IRS by the end of the first quarter of
the tax year.
ANSWER: b
RATIONALE: This agreement is respected by the government if all group members agree to it in writing.
59. Conformity among the members of a consolidated group must be implemented for which of the following tax
items?
a. Use of foreign tax payments (i.e., as a credit or deduction).
b. Tax accounting method (i.e., cash or accrual).
c. Inventory accounting method (e.g., FIFO or dollar-cost averaging).
d. Tax year-end.
ANSWER: d
RATIONALE: The group members all must use the parent’s tax year-end.
60. How are the members of a Federal consolidated group affected by computations related to E & P?
a. Each member keeps its own E & P account.
b. E & P is computed solely on a consolidated basis.
c. Members’ E & P balances are frozen as long as the consolidation election is in place.
d. Consolidated E & P is computed as the sum of the E & P balances of each of the group members, computed
on the last day of the tax year.
ANSWER: a
RATIONALE: There is no such concept as consolidated E & P in the Federal income tax law.
61. Calendar year ParentCo acquired all of the stock of SubCo on January 1, 2013, for $1,000,000. The parties
immediately elected to file consolidated income tax returns. SubCo generated taxable income of $250,000 for
2013 and paid a dividend of $100,000 to ParentCo. In 2014, SubCo generated an operating loss of $350,000,
and in 2015 it produced taxable income of $750,000. As of the last day of 2015, what was ParentCo’s basis in
the stock of SubCo?
a. $1,650,000
b. $1,550,000
c. $1,000,000
d. $0
ANSWER: b
RATIONALE: ParentCo’s initial stock basis was $1,000,000. Positive adjustments to basis include the
$250,000 income for 2013 and the $750,000 of income for 2015. Negative adjustments to
basis include the $100,000 dividend paid to ParentCo in 2013 and the $350,000 loss in 2015.
Purchase price for SubCo, initial basis $1,000,000

2013 Income 250,000
2013 Dividend (100,000)
2014 Loss (350,000)
2015 Income 750,000
ParentCo’s Basis in SubCo stock, 12/31/2015 $1,550,000
62. Calendar year ParentCo purchased all of the stock of SubCo on January 1, 2013, for $500,000. SubCo
produced a loss for 2013 of $150,000 and distributed cash of $25,000 to ParentCo. In 2014, SubCo generated
a loss of $450,000; in 2015, it recognized net income of $90,000. What is ParentCo’s capital gain or (loss) if it
sells all of its SubCo stock to a nongroup member on January 1, 2016, for $150,000?
a. $185,000
b. $150,000
c. ($35,000)
d. ($535,000)
e. All gain/loss is ordinary when subsidiary stock is sold.
ANSWER: a
RATIONALE: When accumulated deficits in the subsidiary’s postacquisition earnings and profits exceed the
acquisition price, an excess loss account is created to permit the group to recognize current
subsidiary losses, while avoiding a negative stock basis. If the subsidiary stock is sold to a
nongroup member, the balance of the excess loss account is recognized as capital gain income
by the seller.
Sales Proceeds $150,000

Purchase price of SubCo $500,000
2013 Loss (150,000)
2013 Dividend (25,000)
2014 Loss (450,000)
2015 Income 90,000
Stock basis in subsidiary –0–
Balance of Excess Loss Account 35,000
Capital Gain $185,000
63. 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?
a. $215,000
b. $195,000
c. $175,000
d. $155,000
ANSWER: c
RATIONALE: As a general rule, intercompany transactions are not eliminated by group members, but the
transactions do tend to cancel each other out. In this instance, ParentCo has $20,000 of income
from the sale of supplies to SubCo, and SubCo has a $20,000 deduction. SubCo has $40,000
of income for the services rendered to ParentCo, and ParentCo has a $40,000 deduction. Thus,
consolidated taxable income in this instance is $175,000, the sum of the ParentCo and SubCo
separate taxable incomes.
64. ParentCo owned 100% of SubCo for the entire year. ParentCo uses the accrual method of tax accounting,
whereas SubCo uses the cash method. During the year, SubCo sold raw materials to ParentCo for $35,000
under a contract that requires no payment to SubCo until the following year.
Exclusive of this transaction, ParentCo had income for the year of $30,000, and SubCo had income of
$50,000. The group’s consolidated taxable income for the year was:
a. $165,000.
b. $150,000.
c. $115,000.
d. $80,000.
ANSWER: d
RATIONALE: Since SubCo uses the cash method of accounting, it will not recognize the $35,000 of income
for the materials sold to ParentCo until the next tax period (when payment is received).
ParentCo’s related deduction must also be deferred until the later year. The group’s
consolidated taxable income is $80,000, the sum of ParentCo’s and SubCo’s separate incomes.
65. ParentCo and SubCo have filed consolidated returns since both entities were incorporated in 2012. Taxable
income computations for the members include the following. Neither group member incurred any capital gain
or loss transactions during these years, nor did they make any charitable contributions.
ParentCo’s SubCo’s Taxable Consolidated

Year Taxable Income Income Taxable Income
2012 $100,000 $ 35,000 $135,000
2013 $100,000 ($ 20,000) $ 80,000
2014 $100,000 ($109,000) ?
2015 $100,000 $190,000 ?
The 2014 consolidated loss:

a. must be carried forward, unless an election to forgo carryforward is made by the parent.
b. must be carried back, unless an election to forgo the carryback is made by the parent.
c. can be used only to offset SubCo’s future income.
d. cannot be used to offset any of ParentCo’s 2012 income.
ANSWER: b
RATIONALE: A net operating loss arising in a consolidated return year must first be carried back two years
(starting with the earliest year), and thereafter, if not completely absorbed, may be carried
forward. However, the parent can elect to forgo any carryback, and thus carry the loss forward.
The use of the 2014 loss is not limited to SubCo income amounts, since the companies have
filed consolidated returns for all years of their existence.
66. The consolidated net operating loss of the Parent Group includes all of the following except:
a. Parent’s operating income/loss.
b. Parent’s charitable contributions.
c. Parent’s dividends received deduction.
d. Subsidiary’s operating income/loss.
ANSWER: b
RATIONALE: The charitable deduction has its own carryover period.
67. The Harris consolidated group reports a net operating loss (NOL) for the year. The tax law works to:
a. Allow unused charitable contributions a 20-year carryforward.
b. Disallow any carrybacks of NOL deductions.
c. Keep the consolidated group from benefiting when the election to consolidate is motivated chiefly by tax
reduction strategies.
d. All of the above statements describe effects of the consolidated return rules.
ANSWER: c
RATIONALE: Consolidated NOLs can be carried back two tax years. Charitable contributions are not
included in an NOL carryover.
68. ParentCo purchased 100% of SubCo’s stock on January 1, 2014, and the companies have filed consolidated
returns since then. Taxable income computations for the members include the following. Neither group
member incurred any capital gain or loss transactions during these years, nor did they make any charitable
contributions.
ParentCo’s SubCo’s Taxable Consolidated

2013 $100,000 $ 70,000 N/A
2014 $100,000 ($ 70,000) $30,000
2015 $ 12,000 ($ 20,000) ?
2016 $100,000 $200,000 ?
The 2015 net operating loss:

a. may be carried back to offset SubCo’s 2013 taxable income.
b. may be carried forward only and applied against group income if so elected by ParentCo.
c. cannot be carried back against 2013 SubCo income, as consolidated returns were not filed.
d. either a or b, but not both.
ANSWER: d
RATIONALE: The $8,000 (not $20,000) 2015 net operating loss may be carried back against SubCo’s 2013
taxable income, as SubCo is solely responsible for generating the loss. Alternatively, ParentCo
could elect to forgo the carryback of the 2015 consolidated loss, thus preserving the loss
deduction for the group’s subsequent years.
69. 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 Junior.
Parent ($400,000)
Junior ($600,000)
Minor $100,000
a. $500,000.
b. $540,000.
c. $600,000.
d. $0. All NOLs of a consolidated group are apportioned to the parent.
ANSWER: b
Junior' s separate NOL $600,000

RATIONALE Consolidated NOL $900,000 ×
Aggregate separate NOLs $1,000,000
stock of both Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Minor.
Parent ($400,000)
Junior ($600,000)
Minor $100,000
a. $100,000.
b. $300,000.
c. $0. Minor did not report an NOL of its own.
d. $0. All NOLs of a consolidated group are apportioned to the parent.
ANSWER: c
RATIONALE: Only members with separate NOLs are apportioned any of the consolidated NOL.
stock of both Junior and Minor. Determine the net operating loss (NOL) that is apportioned to Parent.
Parent ($400,000)
Junior ($600,000)
Minor $100,000
a. $360,000.
b. $400,000.
c. $500,000.
d. $900,000. All NOLs of a consolidated group are apportioned to the parent.
ANSWER: a
Parent' s separate NOL $400,000

RATIONALE: Consolidated NOL $900,000 ×
Aggregate separate NOL  $1,000,000
72. ParentCo, SubOne and SubTwo have filed consolidated returns since 2014. All of the entities were
incorporated in 2013. Taxable income computations for the members include the following. None of the
group members incurred any capital gain or loss transactions during these years, nor did they make any
charitable contributions.
ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

Year Taxable Income Income Income Taxable Income
2013 $200,000 $ 50,000 $150,000 N/A
2014 $200,000 ($ 60,000) $ 70,000 $210,000
2015 $ 20,000 ($ 60,000) ($ 40,000) ?
2016 $200,000 $130,000 $ 10,000 ?
How should the 2015 consolidated net operating loss be apportioned among the group members?
ParentCo SubOne SubTwo

a. $80,000 $0 $0
b. $ 0 $60,000 $40,000
c. $ 0 $40,000 $40,000
d. $ 0 $48,000 $32,000
ANSWER: d
RATIONALE: SubOne’s Apportioned NOL = $48,000
= $80,000 × [$60,000 ÷ ($60,000 + $40,000)]
SubTwo’s Apportioned NOL = $32,000
= $80,000 × [$40,000 ÷ ($60,000 + $40,000)]
73. ParentCo and SubOne have filed consolidated returns since 2012. SubTwo was formed in 2014 through an
asset spin-off from ParentCo. SubTwo has joined in the filing of consolidated returns since then. Taxable
income computations for the members include the following. None of the group members incurred any capital
gain or loss transactions during these years, nor did they make any charitable contributions.
ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

Year Taxable Income Income Income Taxable Income
2013 $100,000 $ 50,000 N/A $150,000
2014 $ 30,000 ($ 30,000) $10,000 $ 10,000
2015 $ 50,000 ($ 40,000) ($40,000) ?
2016 $130,000 $130,000 $10,000 ?
If ParentCo does not elect to forgo the carryback of the 2015 net operating loss, how much of the 2015
consolidated net operating loss is carried back to offset prior years’ income?
a. $80,000
b. $40,000
c. $30,000
d. $0
ANSWER: c
RATIONALE: For a consolidated return, current year operating losses first are used to reduce the current year
income of the group and thereafter may be carried back or forward. The group has a net
operating loss for 2015 of $30,000. Of this amount, $15,000 is allocable to SubOne [$30,000
NOL × $40,000 ÷ ($40,000 + $40,000)], and $15,000 is allocable to SubTwo. The Offspring
Rule applies because SubTwo became a member of the group immediately upon its
incorporation. Accordingly, the group may carry back SubTwo’s 2015 loss to offset the
group’s 2013 consolidated taxable income, as well as SubOne’s, despite the fact that SubTwo
was not yet in existence.
74. Which of the following items is not computed on a consolidated basis?

a. Dividends received deduction.
b. Cost recovery deduction.
c. Charitable contributions.
d. Net capital losses.
ANSWER: b
RATIONALE: Each group member may continue to apply the depreciation methods best suited for its needs.
75. Which of the following statements is true with regard to intercompany transactions?
a. An intercompany transaction is eliminated from consolidated taxable income.
b. All intercompany gains are recognized, but losses must be deferred.
c. A cash sale of a business asset by the purchasing member to an acquirer outside of the group triggers
immediate recognition of the gain or loss.
d. The gain or loss on an intercompany transaction is deferred for up to ten years, after which it is recognized.
ANSWER: c
RATIONALE: Both gains or losses on intercompany transactions are deferred until a restoration event
triggers the recognition of income.
76. ParentCo purchased all of the stock of ChildCo on January 2, 2012, and the two companies filed consolidated
returns for 2012 and thereafter. Both entities were incorporated in 2011. Taxable income computations for the
members include the following. Neither group member incurred any capital gain or loss transactions during
these years, nor did they make any charitable contributions. No § 382 limit applies.
ParentCo’s ChildCo’s Taxable Consolidated

2011 $100,000 ($ 75,000) N/A
2012 $100,000 ($ 40,000) $60,000
2013 $100,000 $ 10,000 ?
2014 $100,000 $125,000 ?
To what extent can ChildCo’s 2011 losses be used by the group in 2014?
a. $135,000
b. $125,000
c. $75,000
d. $10,000
e. $0
ANSWER: c
RATIONALE: The $40,000 2012 ChildCo loss is absorbed in the current year against ParentCo’s income.
Because the 2011 loss arose in a separate return year, its use as a deduction against group
income is limited to the lesser of ChildCo’s currentyear or cumulative positive contribution to
consolidated taxable income. For 2012 and 2013, this amount is less than zero. As of 2014,
ChildCo’s cumulative contribution to consolidated taxable income was $95,000 = $40,000
loss for 2012 + 2013’s $10,000 income + 2014’s income of $125,000. Thus, all of the ChildCo
2011 separate return year $75,000 loss can be deducted against 2014 income.
77. ParentCo purchased all of the stock of ChildCo on January 2, 2012, and the two companies filed consolidated
returns for 2012 and thereafter. Both entities were incorporated in 2011. Taxable income computations for the
members include the following. Neither group member incurred any capital gain or loss transactions during
these years, nor did they make any charitable contributions. No § 382 limit applies.
ParentCo’s ChildCo’s Taxable Consolidated

2011 $10,000 ($95,000) N/A
2012 $10,000 $50,000 ?
2013 ($25,000) $40,000 ?
2014 $10,000 $10,000 ?
Assuming that no election is made to forgo the carryback, to what extent are ChildCo’s 2011 losses used by
the group in 2012-2014?
a. $100,000
b. $95,000
c. $75,000
d. $0
ANSWER: c
RATIONALE: Losses from ChildCo’s 2011 separate return year limitation return may only be used to the
lesser of ChildCo’s currentyear or cumulative positive contribution to consolidated taxable
income. Therefore, $50,000 of ChildCo’s 2011 loss is absorbed in 2012, $15,000 in 2013, and
$10,000 in 2014.
78. ParentCo and SubCo had the following items of income and deduction for the current year.
ParentCo’s SubCo’s Taxable
Item Taxable Income Income
Income (loss) from Operations $100,000 ($10,000)
§ 1231 Loss (5,000)
Capital Gain 15,000
Charitable Contribution 12,000
Compute ParentCo and SubCo’s taxable income or loss computed on a separate basis.
ParentCo SubCo
a. $85,000 $5,000
b. $85,000 $3,000
c. $85,500 $5,000
d. $85,500 $3,000
d. None of the above.
ANSWER: c
RATIONALE: ParentCo
Income from Operations $100,000
§ 1231 Loss (5,000)
$ 95,000
Charitable Contribution (10% TI limit) (9,500)
ParentCo’s Separate Taxable Income $ 85,500
SubCo
Income from Operations ($10,000)
Capital Gain 15,000
$ 5,000
Charitable Contribution –0–
SubCo’s Separate Taxable Income $ 5,000
Aggregate Separate Taxable Incomes $ 90,500

Income (loss) from Operations $100,000 ($10,000)
§ 1231 Loss (5,000)
Capital Gain 15,000
Charitable Contribution 12,000
Compute ParentCo and SubCo’s consolidated taxable income or loss.

a. $81,000
b. $88,000
c. $90,000
d. $90,500
ANSWER: c
RATIONALE: Income from Operations ($100,000 – $10,000) $ 90,000
§ 1231 and Capital Gains and Losses [($5,000) + $15,000] 10,000
$100,000
Consolidated Taxable Income $ 90,000

Income (loss) from Operations $100,000 $10,000
§ 1231 Loss (10,000)
Capital Gain 12,000
Charitable Contribution 20,000 1,000
ParentCo SubCo
a. $81,000 $21,000
b. $81,000 $22,000
c. $70,000 $22,000
d. $70,000 $21,000
ANSWER: a
ParentCo
RATIONALE: Income from Operations $100,000
§ 1231 Loss (10,000)
$ 90,000
SubCo
Income from Operations $ 10,000
Capital Gain 12,000
$ 22,000
Charitable Contribution (actual payment, no limit) (1,000)
Aggregate Separate Taxable Incomes $102,000

Income (loss) from Operations $100,000 $10,000
§ 1231 Loss (10,000)
Capital Gain 12,000

a. $91,000
b. $100,800
c. $112,000
d. $122,000
ANSWER: b
RATIONALE: Income from Operations ($100,000 + $10,000) $110,000
§ 1231 and Capital Gains and Losses [($10,000) + $12,000] 2,000
$112,000
Consolidated Taxable Income $100,800
82. ParentCo and SubCo recorded the following items of income and deduction for the current tax year.

Income (Loss) from Operations $100,000 $20,000
§ 1231 Loss (8,000)
Capital Gain (Loss) (10,000) 14,000
ParentCo SubCo
a. $78,300 $30,600
b. $80,000 $33,000
c. $81,000 $33,000
d. $82,800 $30,600
e. $82,800 $33,000
ANSWER: e
RATIONALE: ParentCo
Income from Operations $100,000
§ 1231 Loss (8,000)
Capital Loss (can only offset capital gains) –0–
$ 92,000
SubCo
Income from Operations $ 20,000
Capital Gain 14,000
$ 34,000
Charitable Contribution (actual payment) (1,000)
Aggregate Separate Taxable Incomes $115,800
83. ParentCo and SubCo recorded the following items of income and deduction for the current tax year.

Income (Loss) from Operations $100,000 $20,000
§ 1231 Loss (8,000)
Capital Gain (Loss) (10,000) 14,000

a. $95,000
b. $99,000
c. $104,400
d. $116,000
e. $120,000
ANSWER: c
RATIONALE: Income from Operations ($100,000 + $20,000) $120,000
Net capital gain 4,000
§ 1231 Loss (ordinary) (8,000)
$116,000
Consolidated Taxable Income $104,400
84. 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.
a. $70,000
b. $60,000
c. $25,000
d. $20,000
ANSWER: d
RATIONALE: 10% × $200,000. Charitable contributions are a group item.
85. ParentCo’s separate taxable income was $200,000, and JuniorCo’s was $50,000. Consolidated taxable
income before contributions was $200,000. Charitable contributions made by the affiliated group
included $5,000 by ParentCo and $1,000 by JuniorCo. Compute the group’s maximum charitable
contribution deduction.
a. $0
b. $600
c. $6,000
d. $20,000
e. $25,000
ANSWER: c
RATIONALE: 10% × $200,000, but not to exceed the total gifts of $6,000.
86. JuniorCo sells an asset to SeniorCo at a realized loss. That loss is not recognized by the group in the year of
the sale, because of the:
a. Wash sale rule.
b. Transfer pricing rules.
c. Matching rule.
d. Acceleration rule.
e. None of the above. The group deducts the loss.
ANSWER: c
87. SubCo sells an asset to ParentCo at a realized gain. While ParentCo still holds the asset, SubCo leaves the
consolidated group. As a result:
a. The gain never is recognized.
b. SubCo recognizes the gain on its first tax return after leaving the group.
c. The group recognizes the gain, under the related party rules.
d. The group recognizes the gain, under the acceleration rule.
ANSWER: d
88. One of the motivations for the consolidated return rules is to discourage conglomerates from trafficking in the
deductible of other entities.
ANSWER: losses
89. Most of the rules governing the use of consolidated returns are found in tax , and
not the ____________________.
ANSWER: regulations, Code
90. Deferring recognition of an intercompany gain is one ____________________ (advantage/disadvantage) of

electing to file consolidated returns.
ANSWER: advantage
91. The calendar year parent and affiliates must elect to file on a consolidated basis by 15
after the first consolidated tax year.
ANSWER: March
September
September (the extended Form 1120 due date)
92. A parent-subsidiary controlled group exists where there is percent ownership of

all of the affiliates within the group, and there is an identifiable corporation.
ANSWER: 80, parent

eighty, parent
93. 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.
ANSWER: dividends received
94. Members of a parent-subsidiary controlled group must share one $40,000 for
the tax year.
ANSWER: AMT exemption
95. In terms of the consolidated return rules, the Radcliffe Charitable Foundation is a(n)
entity.
ANSWER: ineligible
96. Generally, when a subsidiary leaves an on-going consolidated group, it must wait years
before it again can reenter the parent’s consolidated group.
ANSWER: five
5
97. Consolidated estimated tax payments must begin for the (first, second, etc.) tax
year after the group’s election.
ANSWER: third
3rd
98. All members of an affiliated group have and liability for

each other’s Federal income tax liabilities.
ANSWER: joint, several

several, joint
99. Consolidated return members determine which affiliates will pay how much of the annual Federal
income tax liability by making a(n) election.
ANSWER: tax-sharing
100. 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.
ANSWER: first
1st
101. Within a Federal consolidated income tax group, SubOne (can/cannot) use the
LIFO inventory method at the same time that SubTwo uses the FIFO method.
ANSWER: can
102. Dividends paid out of a subsidiary’s E & P to the parent cause a (positive/negative)
adjustment to the parent’s stock basis of the subsidiary.
ANSWER: negative
103. When negative adjustments are made to the stock basis of the subsidiary that exceed the basis as of the
beginning of the tax year, a(n) account is created, rather than giving the parent a negative
tax basis in the stock.
ANSWER: excess loss
104. If there is a balance in the excess loss account when a subsidiary’s stock is sold, the balance is recognized as
____________________ gain/income.
ANSWER: capital
105. The consolidated return rules combine the members’ transactions involving items
(e.g., § 1231 gain/loss) when computing consolidated taxable income.
ANSWER: group
106. In computing consolidated taxable income, a net capital gain/loss is an example of a(n)
___________________ item.
ANSWER: group
107. In computing consolidated taxable income, the profit/loss from a sale between Subsidiary and Parent is an
example of a(n) ____________________ item.
ANSWER: elimination
108. In computing consolidated taxable income, the purchase at a realized gain of a depreciable asset by
Subsidiary from Parent is an example of a(n) transaction.
ANSWER: intercompany
109. The rules can limit the net operating loss deduction claimed on a Federal
ANSWER: separate return limitation year

SRLY
§ 382
Section 382
110. When both apply, the § 382 NOL limitation rules override the limits.
ANSWER: SRLY
Separate return limitation year
111. The treatment of group items on a Federal consolidated corporate income tax return
(always, sometimes, never) results in a reduction of consolidated taxable income.
ANSWER: sometimes
112. The domestic production activities deduction (DPAD) of the affiliates is an example of an item that is
computed on a basis on a Federal corporate income tax consolidated return.
ANSWER: group
113. If one member sells an asset with a realized gain to another member of an affiliated group, any gain on the
transaction is not recognized at that time; such a deferral applies the rule.
ANSWER: matching
114. 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.
ANSWER: acceleration
115. 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.
ANSWER: ParentCo can include only its subsidiaries B and G on a consolidated return. The other entities
are not eligible to file on a consolidated basis.
116. Maxi Corporation owns 100% of the stock of MiniCo, and the two corporations file a consolidated tax
return. Over a five-year period, the corporations generate the following taxable income/(loss). Indicate how
you would assign the taxpayers’ low marginal rates that apply to the group’s first $75,000 of taxable
income. Explain the rationale for your recommendation.
Maxi’s MiniCo’s Low Brackets Low Brackets

Taxable Taxable Assigned to Assigned to
Year Income Income Maxi MiniCo
1 $250,000 ($ 50,000) ? ?
2 ($ 50,000) $ 150,000 ? ?
3 $ 80,000 $ 15,000 ? ?
4 $100,000 $ 20,000 ? ?
5 $400,000 $1,800,000 ? ?
ANSWER: The discounted rates must be assigned equally between the group members, unless both of them
consent to some other computation. § 1552. Such an allocation can be changed for every tax
period, as long as all parties continue to consent. The following proposed solution assumes that
such a consent has been secured. Other allocations are possible.
Maxi’s MiniCo’s Low Brackets Low Brackets

Taxable Taxable Assigned to Assigned to
Year Income Income Maxi MiniCo
1 $250,000 ($ 50,000) $75,000 $0
2 ($ 50,000) $ 150,000 $0 $75,000
3 $ 80,000 $ 15,000 $75,000 $0
4 $100,000 $ 20,000 $75,000 $0
5 $400,000 $1,800,000 Irrelevant; Irrelevant;
the rate the rate
discount is discount is
fully phased fully phased
out out
117. The Parent consolidated group reports the following results for the tax year. Determine each member’s
share of the consolidated tax liability, assuming that the members all have consented to use the relative
taxable income tax-sharing method. Dollar amounts are listed in millions, and a 35% marginal income tax
rate applies to all of the entities.
ANSWER:
Consolidated tax liabilities are shared in the following manner.
Parent SubOne SubTwo SubThree Consolidated

Ordinary income $600 $200 $ 60 ($30) $830
Capital gain/loss –0– –0– 20 (5) 15
§1231 gain/loss 130 –0– (55) –0– 75
($30),
Separate taxable
$730 $200 $ 25 with a $5
incomes
capital loss
Consolidated carryover
$920
taxable income
Consolidated tax
$322
liability
Energy tax
credit, from (10)
SubOne
Net tax due $312
Separate Taxable
Income Allocation Ratio Allocated Tax Due
Parent $730 730/955 $239
SubOne 200 200/955 65
SubTwo 25 25/955 8
SubThree –0– 0 –0–
Totals $955 $312
118. The Parent consolidated group reports the following results for the tax year. Determine each member’s
share of the consolidated tax liability, assuming that the members all have consented to use the relative tax
liability tax-sharing method. Dollar amounts are listed in millions, and a 35% marginal income tax rate
applies to all of the entities.
Parent SubOne SubTwo SubThree Consolidated

Ordinary income $600 $200 $60 ($30) $830
Capital gain/loss –0– –0– 20 (5) 15
§ 1231 gain/loss 130 –0– (55) –0– 75
($30),
Separate taxable
$730 $200 $25 with a $5
incomes
capital loss
carryover
Consolidated
$920
taxable income
Consolidated tax
$322
liability
Energy tax
credit, from (10)
SubOne
Net tax due $ 312
ANSWER:
Consolidated tax liabilities are shared in the following manner.
Separate Taxable Separate Tax Allocation Allocated

Income Liability Ratio Tax Due
Parent $730 $255.5 255.5/324.25 $246
60, after applying
SubOne 200 energy tax credit 60/324.25 58
SubTwo 25 8.75 8.75/324.25 8
SubThre –0– –0– 0 –0–
e Totals $955 $324.25 $312
119. TopCo owns all of the stock of BottomCo. Both taxpayers are subject to the alternative minimum tax (AMT)
this year for the first time, due to a dependence on accelerated MACRS deductions. The corporations incurred
no intercompany transactions during the year. TopCo has a consolidation election in effect for the group.
If the affiliates were to file separate Forms 1120 this year, the following amounts would be reported.
TopCo’s adjusted current earnings $2,000,000

TopCo’s AMT income before the ACE adjustment 1,200,000
BottomCo’s adjusted current earnings 500,000
BottomCo’s AMT income before the ACE adjustment 1,000,000
a. Compute the ACE adjustment for the consolidated group.

b. Comment on the effects of the consolidation election on the companies’ AMT liabilities.
ANSWER:
a. 75 × ($2,500,000 Consolidated ACE – $2,200,000 Consolidated Pre-ACE AMTI) = $225,000
Consolidated ACE adjustment.
b. When the ACE adjustment is computed on a consolidated basis, BottomCo’s “unused” excess
AMTI is offset against TopCo’s adjusted current earnings, and the aggregate ACE adjustment
is reduced by $375,000 due to the consolidation. To the extent that this relationship continues,
TopCo and BottomCo are attractive consolidation partners.
• TopCo’s separate ACE adjustment = $600,000 = .75 × ($2,000,000 – $1,200,000)
• BottomCo’s separate ACE adjustment = ($375,000) = .75 × ($500,000 – $1,000,000), but
not usable to reduce AMTI because BottomCo has reported zero positive ACE adjustments
in prior years.
120. 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 ? ?
ANSWER:
Excess
Operating Stock Loss
Year Gain/Loss Basis Account
1 ($100,000) $400,000 $0
2 ($150,000) $200,000,
reflecting $50, $0
dividend paid
3 $300,000 $500,000 $0
121. LargeCo files on a consolidated basis with LittleCo. The subsidiary was acquired for $400,000 on January 1,
Year 1, and it paid a $75,000 dividend to LargeCo at the end of both Year 2 and Year 3.
a. Given the following information about the subsidiary’s operating results, derive the requested amounts as
of December 31 of each year. The group files using a calendar year.
LittleCo’s LargeCo’s
Operating Investment in LittleCo Excess Loss
Year Gain/(Loss) Stock Basis Account
1 ($125,000) ? ?
2 ($300,000) ? ?
3 $50,000 ? ?
b. LargeCo sold LittleCo to an unrelated competitor for $600,000 on December 31, Year 3. How will
LargeCo account for this sale?
ANSWER: a. Year 1 Stock basis $275,000; excess loss account $0

Year 2 Stock basis $0; Excess loss account $100,000, reflecting $75,000 dividend paid
Year 3 Stock basis $0; Excess loss account $125,000, reflecting $75,000 dividend paid
b. Capital gain income to the extent of the excess loss account plus the amount realized
on the sale = $725,000.
122. In the current year, Parent Corporation provided advertising services to its 100%-owned subsidiary, SubCo,
under a contract that requires no payments to Parent until next year. Both parties use the accrual method of
tax accounting and a calendar tax year. The services that Parent rendered were valued at $250,000. In
addition, Parent received $20,000 of interest payments from SubCo., relative to an arm’s length note
between them.
Including these transactions, Parent’s taxable income for the year amounted to $400,000. SubCo reported
$200,000 separate taxable income. Derive the group’s consolidated taxable income, using the format of
Figure 8-2.
Separate
Taxable Post-Adjustment
Income Adjustments Amounts
ParentCo Information
SubCo Information
Group-Basis
Transactions
Intercompany
Events
Consolidated Taxable
Income
NOTES
ANSWER: No eliminating adjustments are required of the group. The members’ deductions incurred offset
the income included by the other party to the intercompany transaction (e.g., consolidated
taxable income includes both ParentCo’s gross interest income and SubCo’s deduction
therefor), so a financial accounting-style elimination results from the use of the consolidated
taxable income computation itself. The services transaction is reported next year by both
parties, when the services are rendered.
Separate Post-Adjustment
Taxable Income Adjustments Amounts
ParentCo
$400,000 $400,000
Information
SubCo
$200,000 $200,000
Information
Group-basis
Transactions
Intercompany
Events
$600,000
Income
123. For each of the indicated tax years, compute consolidated taxable income for the calendar year Holloway
Group, which elected consolidated status immediately upon creation of the two member corporations in
January 2011. All recognized income related to the data processing services of the firms. No intercompany
transactions were completed during the indicated years.
Tax Year Holloway Corporation Olson Corporation

2011 $250,000 ($ 70,000)
2012 250,000 (120,000)
2013 250,000 (180,000)
2014 250,000 110,000
ANSWER: Consolidated taxable income

2011 $180,000
2012 $130,000
2013 $ 70,000
2014 $360,000
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 Figure 8.2. There are no consolidated NOL
carryovers in any of the specified years.
124. 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 2011. All recognized income related to the data processing services of the firms. No intercompany
transactions were completed during the indicated years.
Tax Year Whitman Corporation Draper Corporation

2011 $250,000 $ 90,000
2012 250,000 (170,000)
2013 250,000 (560,000)
2014 250,000 145,000
ANSWER:
It is assumed that the group does not elect to forgo the carryback of the 2013 consolidated net
operating loss.
Consolidated taxable income
2011 $340,000
2012 $ 80,000
2013 $ –0– ($310,000) NOL carryback to generate refund from 2011 group tax liability.
2014 $395,000
125. Parent Corporation, SubOne, and SubTwo have filed consolidated returns since 2013. All of the entities were
incorporated in 2012. None of the group members incurred any capital gain or loss transactions during 2012-
2015, nor did they make any charitable contributions. Taxable income computations for the members are
listed below.
Parent’s SubOne’s SubTwo’s Consolidated

Taxable Taxable Taxable Taxable
Year Income Income Income Income
2012* $100,000 $100,000 $260,000 N/A
2013** $100,000 $100,000 ($ 60,000) $140,000
2014** $100,000 ($80,000) ($250,000) ?
2015** $100,000 $120,000 $300,000 ?
* Separate return year.
** Consolidated return year.
a. How much of the 2014 loss is apportioned to SubOne and SubTwo? How is this loss treated in generating
a refund of prior tax payments?
b. Why would Parent consider electing to forgo the carryback of the 2014 consolidated NOL?
c. In this light, analyze the election to consolidate.
ANSWER:
a. Lacking an election by ParentCo to forgo the carryback of the 2014 consolidated net operating
loss of $230,000, both subsidiaries can carry losses back to the 2012 separate return years and
receive separate refunds.
• SubOne can carry back a $55,758 loss [(SubOne’s NOL $80,000 ÷ Aggregate NOLs
$330,000) × Consolidated NOL $230,000].
• SubTwo can carry back a $174,242 loss [($250,000 ÷ $330,000) × $230,000].
SubOne and SubTwo both would file for refunds of taxes that result from the carryback, and
they would receive directly the refunded tax dollars.
b. If ParentCo elected to forgo the carryback of the 2014 consolidated loss, the deduction
therefor would be preserved for subsequent consolidated years. Furthermore, any resulting tax
reduction or refund would be received by ParentCo, presumably to be shared by the entire
electing group, including ParentCo.
c. The election must be analyzed relative to the present value of the tax savings generated by the
purchased NOLs. The longer that one must wait to deduct the NOLs, the lower their present
value, and the less attractive is an election to consolidate.
126. The group of Parent Corporation, SubOne, and SubTwo has filed a consolidated return since 2013. The first
two entities were incorporated in 2012, and SubTwo came into existence in 2013 through an asset spin-off
from Parent. Taxable income computations for the members are shown below. None of the group members
incurred any capital gain or loss transactions during 2012-2015, nor did they make any charitable
contributions.
Describe the treatment of the group’s 2014 consolidated NOL. Hint: Apply the offspring rule.
Parent’s SubOne’s SubTwo’s Consolidated

Taxable Taxable Taxable Taxable
Year Income Income Income Income
2012* $200,000 $ 70,000 - $270,000
2013* $ 90,000 $ 20,000 ($ 40,000) $ 70,000
2014* $ 90,000 ($ 80,000) ($ 40,000) ?
2015* $ 90,000 $100,000 $210,000 ?
* Consolidated return year.
ANSWER: Lacking an election by ParentCo to forgo the carryback of the 2014 consolidated net operating
loss of $30,000, SubOne can carry back to 2012 its $20,000 apportioned loss ($80,000/$120,000
× $30,000 group NOL), to be deducted against previously computed consolidated taxable income.
SubTwo’s $10,000 share of the loss also can be carried back to 2012 and used by the consolidated
group. Under the Offspring Rule, SubTwo is treated as being a member of the group for the entire
group carryback period, because its existence is rooted in ParentCo’s assets.
127. Parent Corporation’s currentyear taxable income included $100,000 net profit from operations and a $30,000
net long-term capital gain. Parent also made a $22,000 contribution to State University. SubCo produced
$85,000 of income from operations and incurred a $25,000 net short-term capital loss.
Use the computational worksheet of Figure 8.2 to derive the group members’ separate taxable incomes and
the group’s consolidated taxable income.
Separate
Taxable Post-Adjustment
ParentCo Information
SubCo Information
Group-Basis
Transactions
Intercompany
Events
Income
NOTES
ANSWER: ParentCo’s separate taxable income amounts to $117,000.
Income from operations $100,000

Capital gain income 30,000
Less: Charitable contribution (10% TI limit) (13,000)
Separate taxable income $117,000
SubCo’s separate taxable income was $85,000, because the net capital loss is not deductible.
Thus, the aggregate separate taxable incomes for the group amounted to $202,000.
Upon consolidation, a greater amount of ParentCo’s charitable contribution becomes deductible,
and its capital gain is sheltered from currentyear tax by SubCo’s net capital loss.
The group holds a $3,000 charitable contribution carryforward. Aggregate taxable income is
reduced by $31,000.
Separate Post-
Taxable Adjustment
– $30,000 capital gain income**
ParentCo Information $117,000 + $13,000 charitable $100,000
contribution
SubCo Information $ 85,000 deduction**
$25,000 short-term capital loss** $ 85,000
$5,000 net long-term capital gain
$ 5,000
Group-Basis – $22,000 charitable contribution
Transactions (group’s 10% maximum ($ 19,000)
deduction)**
Intercompany
Events
$171,000
Income
NOTES
* Permanent Eliminations
** Group-Basis Transaction
† Matching Rule
128. Except for the § 199 domestic production activities deduction (DPAD), the members of an electing affiliated
group report the following data. Compute the group’s DPAD.
Taxable Income Qualified Production

Before DPAD ($ Activities Income W-2 Wages
Affiliate Million) [QPAI] ($ Million) ($ Million)
Rad, Parent 50 60 40
Sol (20) 40 30
Tat 15 20 10
Totals 45 120 80
ANSWER: The DPAD is computed at the group level, and then it is allocated to the affiliates based on the
relative amount of each corporation’s QPAI. [Reg. § 1.1997(c)(1).]
§ 199 deduction for the group ($ Million) = 9% × [Lesser of $45 or $120] = $4.05
Allocations of the DPAD among the affiliates are computed as follows.
Rad 60/120 = 50% Sol 40/120 = 33% Tat 20/120 = 17%
The DPAD is a group item on the consolidated return. Thus, although Sol reported an NOL for the
year, it is not separately subject to the taxable income limitation. Sol claims a $1,350,000 ($4.05
million × .33) DPAD.
The group’s deduction this year is not limited by the W2 wages amount.
129. How many consolidated tax returns are filed annually? What types of taxpayer do they represent?
ANSWER: Of the over 5.8 million corporations filing U.S. tax returns, fewer than 40,000 file consolidated
Federal income tax returns. These entities represent over 95% of the country’s assets and sales
revenues. Consolidated returns claim virtually all of the allowed foreign tax credits.
130. 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.
ANSWER: Conglomerates are formed to reduce overall tax liabilities, but also to:
• isolate the assets of some affiliates from the liabilities of others,
• preserve intangible assets such as trade names,
• accomplish estate planning objectives, and
• expand into global markets.
131. 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?
ANSWER: Most of the rules controlling the use of consolidated Federal tax returns are found in the extensive
Regulations under IRC §§ 1501-1504. The rules are designed to limit the tax advantages that
otherwise might be available to affiliated groups of corporations. The Treasury seems to want to
discourage profitable corporations from “trafficking” in the shares of businesses that generate
deductible net losses and tax credits.
132. The consolidated income tax return rules apply only for Federal tax purposes. Financial accounting rules can
be quite different from the corresponding tax rules, but the tax professional should be familiar with both sets
of requirements. Describe the major differences between the book and tax treatment for the conglomerate’s
reporting of:
a. The ownership levels required to consolidate.
b. Goodwill.
c. The entities included on the report.
ANSWER:
a. Generally, GAAP consolidation is mandatory when greater than 50% ownership is attained.
Tax consolidation is elective when 80% or greater ownership is attained.
b. For financial accounting purposes, goodwill is not amortized, but if the value of the goodwill
changes during the year, the impairment (a decrease in the value of the goodwill, an expense
item) or the reversal of a prior impairment (a revenue item) is recorded on the income
statement. Under the tax rules, purchased goodwill is amortized over 15 years.
c. A Federal consolidated tax return includes only U.S. corporations. Non-U.S. and non-corporate
entities can be included in the conglomerate’s financial statements. On page 1, the Schedule M-
3 for the group adjusts for the disparate list of included entities.
133. 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.
ANSWER: Assessing only the Federal income tax aspects of the consolidation election, the major advantages
include the following.
• Application of operating and capital losses of one member against the gains/income of others
• Elimination of all tax liabilities on intercompany dividends
• Deferral of gains from certain intercompany transactions
• Optimization of the group’s § 199 domestic production activities deduction
• Optimization of other deductions, losses, and credits computed on a group basis
• Optimization of the group’s AMT attributes
• Optimization of the group’s estimated tax payments
• Creation of basis in subsidiary stock when net gains are recognized by the group
Major Federal income tax disadvantages relative to the consolidation election include the
following.
• The binding status of the election, and the five-year cooling-off period after termination
thereof
• Deferral of losses from certain intercompany transactions
• Loss of basis in subsidiary stock when net losses are recognized by the group
• Standardization of the tax year, perhaps resulting in income bunching and loss of flexibility
• Additional costs incurred to meet compliance and administrative requirements, which can be
burdensome
134. The U.S. states apply different rules in treating Federal consolidated groups for corporate income tax
purposes. Describe at least three different approaches that the states currently use to allow or restrict
conglomerates’ use of consolidations.
ANSWER: Various states apply a number of different approaches to treating Federal consolidated
groups that do business in the state. These currently include:
• Allowing the Federal group to elect to consolidate

• Allowing any member of a Federal controlled group with nexus to the state to consolidate
• Allowing consolidation only with specific state approval
• Allowing consolidation only for entities that generate net taxable income in the state
• Requiring a separate state election to consolidate
• Not allowing consolidation, such that all corporations file separate returns
• Limiting the election to members of a unitary filing group of affiliates
• Allowing taxpayers in certain industries to apply special rules in computing consolidated
taxable income
135. Consider AB, a brother-sister group of U.S. corporations, and CD, a parent-subsidiary group of U.S.
corporations. Which of these could comprise a controlled group? An affiliated group?
ANSWER: Either group could be a controlled group, depending on various ownership rules. Only CD could
be an affiliated group, wherein a parent corporation must be identified.
136. 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.
ANSWER: These are some of the entities ineligible for membership in a consolidated group.
• Non-U.S. entities
• Tax exempt entities
• Insurance companies
• Partnerships, trusts, estate, and limited liability entities
• Any non-corporate entity
137. When a corporate group elects to file Federal income tax returns on a consolidated basis, it is subject to several
tax return filing requirements for its first and subsequent tax years. List the most important of those requirements.
ANSWER: The major filing requirements for a Federal consolidated group include the following.
• File the Form 1120 using consolidated taxable income.
• File Form 1122 listing the group members consenting to the election to consolidate, with the
first consolidated return.
• File Form 851, another less-detailed listing of the affiliates joining the return, with all
subsequent consolidated 1120s.
138. Gold and Bronze elect to form a Federal consolidated group. Gold, the parent entity, uses a calendar tax year,
while Bronze’s tax year ends on March 31. Which tax year(s) does the new consolidated group use?
ANSWER: Affiliates must switch to the parent’s tax year, but they can continue to use their existing tax
accounting methods. Often, a short tax year is created when a new affiliate joins the parent’s
group.
139. 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.
ANSWER: All affiliates are responsible for the total Federal corporate income tax liability of the group, on a
joint and several basis. This rule applies to income tax penalties and interest, as well as to any tax
audit settlements that are completed during the year.
Starting with the third tax year of an electing consolidated group, estimated income tax payments
are made on a consolidated basis.
In assigning shares of the total Federal corporate income tax liability among group members, say
for purposes of computing an affiliate’s E & P balance, the “relative taxable income” and “relative
tax liability” methods often are used. Other methods also are allowed by the regulations.
140. Discuss how a parent corporation computes its stock basis for a subsidiary that joins in a Federal consolidated
income tax return.
ANSWER: The initial basis of the subsidiary is recorded at its acquisition price. If the acquisition takes place
as part of a tax-deferred reorganization (see Chapter 7), the amount may be computed as a
carryover or substituted basis. The basis is adjusted for the operations of the group. For instance,
stock basis is increased by the following items.
• An allocable share of consolidated taxable income.
• An allocable share of the unused portion of the subsidiary’s NOL or net capital loss.
Negative adjustments to stock basis include the following.

• An allocable share of a negative consolidated taxable income.
• Dividends paid by the subsidiary to the parent out of subsidiary earnings and profits.
• An allocable share of deductible carryover NOLs and net capital losses.
The parent must maintain detailed documentation as to the stock basis of each of its subsidiaries.
141. 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.
ANSWER: The parent’s tax basis in the stock of the subsidiary cannot be a negative amount. If excessive
taxable losses are incurred to the point that stock basis is zero, the tax law might hold that no
further losses can be deducted. This is the case with flow-through losses of an S corporation or
partnership.
The consolidated return rules do not work this way. Subsidiary losses can continue to be deducted,
and an excess loss account is generated to account for these amounts. If the parent disposes of the
subsidiary stock when an excess loss account exists, capital gain is reported by the parent to the
extent of its balance.
142. Describe the general computational method used by a Federal consolidated group in computing taxable
income.
ANSWER: Consolidated taxable income is determined in the following manner.

• Taxable income is computed for each group member on a separate basis.
• Certain transactions are accounted for on a group basis, using group floors, ceilings, and other
computational limits. These items include capital gain/loss and charitable contributions.
• Realized gain/losses from most intercompany transactions are deferred until later tax years.
• A few intercompany transactions (such as dividend payments) are eliminated from all
computations of taxable income.
143. ParentCo owns all of the stock of both SubOne and SubTwo. List three “intercompany transactions” that
might occur among the three members of the consolidated filing group.
ANSWER: Illustrative intercompany transactions include the following.

• SubOne purchases accounting and data processing services from Parent.
• SubTwo pays a regular cash dividend to Parent.
• SubOne pays a regular dividend to Parent, using an asset with a realized gain to SubOne.
• Parent sells to SubTwo an asset with a realized loss to Parent.
144. A Federal consolidated group reports a net operating loss for the year. How is this amount allocated to the
various group members? Why is this allocation important?
ANSWER: Each year, the total consolidated loss is allocated as follows:
Member' s separate NOL

Consolidated NOL × = Member’s apportioned NOL
Members' aggregate NOLs
This allocation of a consolidated operating loss among the affiliates is important when an affiliate
is disposed of or leaves the group. In such cases, it takes its share of the loss to its next tax return.
145. The consolidated tax return regulations use “SRLY” limitations with respect to losses of a subsidiary that can
be deducted on the consolidated return. Describe the various SRLY rules that might apply to a consolidated
group member’s losses.
ANSWER: The SRLY limits generally work this way.

Loss Year Deduction Year Applicable Rules
Regular NOL rules—Carryback 2 years,
Consolidated Consolidated carryforward
20 years. Can elect only
Carryback/forward the member’s
to forego carryback.
apportioned loss to its separate return.
Consolidated Separate
Departing member takes its apportioned loss
with itmember’s
New to the separate return.
NOL carryforward is available
to the group only to the extent of the new
member’s cumulative positive contribution to
Separate Consolidated consolidated taxable income. Section 382
rules also may apply.
146. The “SRLY” and § 382 limitation rules for Federal consolidated tax returns are designed to keep corporations
from “trafficking” their net operating losses. These rules are restrictive and somewhat complex. Explain why
these rules exist, and how they interact if both apply in the same tax year.
ANSWER: The separate return limitation rule (SRLY) rules are designed to keep Federal consolidated return
members from acquiring new affiliates chiefly to obtain tax loss and credit carryovers. When, for
instance, an NOL is carried forward from a separate return year onto a consolidated return that
now includes an acquired loss corporation, the consolidated return can include the loss
corporation’s loss from pre-consolidation (separate-return) years only to the extent of the lesser of
its (1) current-year, or (2) cumulative positive contribution to consolidated taxable income.
The SRLY rules never apply to the consolidated group’s parent corporation. When both the SRLY
rules apply and there is a § 382 limitation on carryovers, the § 382 rules prevail.
147. Certain tax return items are computed on a group basis when a Federal consolidated return election is in place.
List five or more of these group-basis items.
ANSWER: The following items are among those that are computed on a group basis for a Federal corporate
consolidated income tax return.
• Net long-term capital gain/loss
• Net short-term capital gain/loss
• § 1231 gain/loss
• AMT adjustments and preferences
• Domestic production activities deduction
• Casualty/theft gain/loss
• Charitable contributions
• Dividends received deduction
• Net operating loss
148. Gold, Silver, and Tin are the affiliates in a Federal consolidated group. Each of the members conducts
traditional manufacturing activities. Is a domestic production activities deduction (DPAD) available to the
group members? Who can claim it? How is each member’s DPAD, if any, computed?
ANSWER: The § 199 deduction is computed for the expanded affiliated group (EAG). The DPAD is
computed on the basis of the EAG’s consolidated taxable income; it is not the sum of the
affiliates’ separate DPADs. The taxable income and W-2 wages limitations also are used for the
EAG. The DPAD then is allocated to the group members based on the relative amounts of their
qualified production activities income (QPAI).
149. Members of the ABCD Federal consolidated group conduct various transactions with each other during the
tax year. These include the purchase/sale of land and depreciable assets, the licensing of intangible assets, and
the conduct of service arrangements. How does the tax law account for these intercompany items? In your
answer, be sure to use the terms matching rule and acceleration rule at least once each.
ANSWER: Gain or loss realized on property transactions between affiliates may not be recognized
immediately. If more than one tax year is involved, the recognized gain or loss is deferred under
the matching rule until the sold asset leaves the affiliated group, i.e., by a subsequent sale to a
non-affiliated third party. This prevents group members from manipulating consolidated taxable
income merely by moving assets among the members.
The acceleration rule works with respect to a deferred gain/loss when one of the affiliates
involved in the transaction leaves the group, or if the consolidation election is terminated. At that
time, full gain or loss recognition is triggered.
150. Forming a Federal consolidated tax return group is a discretionary action by eligible affiliates. List several tax
attributes and situations that might make a subsidiary an attractive partner for a parent corporation on a
ANSWER: Taxpayers should optimize their overall tax benefits when choosing consolidated return partners.
Within the limitations of the Code and of the nontax parameters of the corporation’s business,
target corporations might include those with appropriate amounts of the following.
• Loss and credit carryovers
• Passive activity income, losses, and credits
• Gains that can be deferred through intercompany sales
• Contributions to corporate ACE adjustments
• Excess limitation amounts (e.g., concerning charitable contributions).
• Section 1231 gains, losses, and look-back profiles.
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
151. Tax compliance deadlines and recordkeeping
ANSWER: b
152. Offsetting gains against other members’ losses
ANSWER: a
153. Loss deferral on intercompany transactions
ANSWER: b
154. Gain deferral on intercompany transactions
ANSWER: a
155. A new affiliate uses the LIFO method for inventories
ANSWER: c
156. Binding nature of election over multiple tax years
ANSWER: b
157. Tax treatment of operating losses when the basis of the payor’s stock is zero
ANSWER: b
158. Joint and several liability for Federal income tax
ANSWER: b
159. Choice of tax year-ends by affiliates
ANSWER: b
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.
a. Increases stock basis of subsidiary
b. Decreases stock basis of subsidiary
c. No effect on stock basis of subsidiary
160. Member’s operating loss
ANSWER: b
161. Member’s operating loss, when stock basis = $0
ANSWER: c
162. Member’s operating gains/profits
ANSWER: a
163. Increase in affiliate’s E & P
ANSWER: c
164. Dividend paid to parent out of affiliate’s E & P
ANSWER: b
165. Member’s capital gain
ANSWER: a
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
166. Ownership level of parent at which a subsidiary can join the consolidated group.
ANSWER: b
167. Parent owns 100% of a U.S. partnership and wants the entity to join the consolidated group.
ANSWER: b
168. Parent owns 100% of a Brazil corporation and wants the entity to join the consolidated group.
ANSWER: b
169. Joining the consolidated group is mandatory if ownership requirements are met by the entities.
ANSWER: b
170. Sales amounts (after returns and allowances) are combined in the consolidation process.
ANSWER: a
Match each of the following items with the appropriate description, indicating whether the item is computed
on a group basis on a consolidated tax return.
a. Group item
b. Not a group item
171. Compensation deductions
ANSWER: b
172. Domestic production activities deduction
ANSWER: a
173. Net operating loss
ANSWER: a
174. Charitable contributions
ANSWER: a
175. Dividends received deduction
ANSWER: a
176. Interest income from Detroit School District bonds
ANSWER: b

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South-Western Federal Taxation 2015

Corporations Partnerships Estates and

Purchase price for SubCo, initial basis $1,000,000

Sales Proceeds $150,000

ParentCo’s SubCo’s Taxable Consolidated

The 2014 consolidated loss:

ParentCo’s SubCo’s Taxable Consolidated

The 2015 net operating loss:

Junior' s separate NOL $600,000

Parent' s separate NOL $400,000

ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

ParentCo SubOne SubTwo

ParentCo’s SubOne’s Taxable SubTwo’s Taxable Consolidated

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

ParentCo’s ChildCo’s Taxable Consolidated

ParentCo’s ChildCo’s Taxable Consolidated

ParentCo’s SubCo’s Taxable

Compute ParentCo and SubCo’s consolidated taxable income or loss.

ParentCo’s SubCo’s Taxable

ParentCo’s SubCo’s Taxable

Compute ParentCo and SubCo’s consolidated taxable income or loss.

ParentCo’s SubCo’s Taxable

ParentCo’s SubCo’s Taxable

Compute ParentCo and SubCo’s consolidated taxable income or loss.

ANSWER: regulations, Code

90. Deferring recognition of an intercompany gain is one ____________________ (advantage/disadvantage) of

92. A parent-subsidiary controlled group exists where there is percent ownership of

ANSWER: 80, parent

ANSWER: dividends received

ANSWER: AMT exemption

98. All members of an affiliated group have and liability for

ANSWER: joint, several

ANSWER: excess loss

ANSWER: separate return limitation year

Maxi’s MiniCo’s Low Brackets Low Brackets

Maxi’s MiniCo’s Low Brackets Low Brackets

Consolidated tax liabilities are shared in the following manner.

Parent SubOne SubTwo SubThree Consolidated

Parent SubOne SubTwo SubThree Consolidated

Consolidated tax liabilities are shared in the following manner.

Separate Taxable Separate Tax Allocation Allocated

TopCo’s adjusted current earnings $2,000,000

a. Compute the ACE adjustment for the consolidated group.

ANSWER: a. Year 1 Stock basis $275,000; excess loss account $0

Tax Year Holloway Corporation Olson Corporation

ANSWER: Consolidated taxable income

Tax Year Whitman Corporation Draper Corporation

Consolidated taxable income

Parent’s SubOne’s SubTwo’s Consolidated

Parent’s SubOne’s SubTwo’s Consolidated

ANSWER: ParentCo’s separate taxable income amounts to $117,000.

Income from operations $100,000

Taxable Income Qualified Production

Allocations of the DPAD among the affiliates are computed as follows.

Rad 60/120 = 50% Sol 40/120 = 33% Tat 20/120 = 17%

• Allowing the Federal group to elect to consolidate

Negative adjustments to stock basis include the following.

ANSWER: Consolidated taxable income is determined in the following manner.

ANSWER: Illustrative intercompany transactions include the following.

ANSWER: Each year, the total consolidated loss is allocated as follows:

Member' s separate NOL

ANSWER: The SRLY limits generally work this way.

151. Tax compliance deadlines and recordkeeping

160. Member’s operating loss